not issue securities of any amount without obtaining authority from the Public Service Commission of Wisconsin. Conflict might arise between the State and the Federal commissions as the State commission is controlled by a very comprehensive statute which is in such drastic form that it is difficult to make any new developments under the law.

If you have time, I trust you will give me the benefit of your views on the questions suggested.

Respectfully, yours,

JOHN H. ROEMER.

Mr. HAUGEN. Mr. Hall, your contention is that if the license is granted to a concern which is going to operate in a certain State, it should operate its plant under the laws of that particular State?

Mr. HALL. Yes, sir; as to the issuing of its securities and rates and service.

Mr. HAUGEN. If the law is a proper one, and leaves it in the lease, it ought to be satisfactory to the bond holder?

Mr. HALL. That was the view of the committee.

Mr. HAUGEN. And the State should not be deprived of its rights in administering it fairly.

Mr. HALL. That was the belief of the committee.

Mr. HAUGEN. You stated you were interested in the legislation in Washington. In what respect, as a consumer?

Mr. HALL. No, sir. The company I represent is interested in water-power companies which are near the public domain, and which can only extend their development to take care of the now pressing needs by using public lands.

Mr. RAKER. Mr. Chairman, Mr. Britton has prepared in very concrete form, in the shape of a pamphlet, the amendments he had suggested, and I have spoken to a couple of other gentlemen who have appeared before the committee in reference to that same matter, and I suggest that those who have spoken and who have offered suggested amendments might file them, and, if possible, prepare them in the shape that Mr. Britton has prepared his, and leave with the committee such statements in regard to their amendments as Mr. Britton has, and then we will have them in concrete form, and we could print them along with the hearings.

The CHAIRMAN. All gentlemen who have made statements to the committee have permission to extend their remarks, and make any suggestions they see fit in reference to amendments.

Mr. RAKER. The particular thing I am calling attention to is the form in which this pamphlet of Mr. Britton has been gotten up. Mr. ESCн. They have permission to present their amendments in any form they see fit.

66

AMENDMENTS SUGGESTED BY MR. E. K. HALL, OF NEW YORK, TO PROPOSED HOUSE SURSTITUTE FOR SENATE BILL 1419."

Amend section 6 as follows:

WASHINGTON, D. C., March 25, 1918.

Page 12, line 5, strike out the word "such" before the word "duration"; after the word "of," insert the words "not less than thirty nor more than fifty years"; after the words “under such," insert the word "other."

As amended, section 6 would read as follows:

"SEC. 6. That each license under this act shall be issued for an original period of fifty years, unless a shorter time is agreed upon between the applicant and the commission or is necessary in order that licenses for parts of the same project shall terminate on the same date. Licenses for subsequent periods of

not less than thirty nor more than fifty years' duration and under such other conditions as may be prescribed by then existing law and regulations shall be tendered as provided in section fi ́teen hereof. unless and until at the termination of the original, or of any subsequent period, the properties are taken over and compensation made as provided in sections fourteen and fifteen hereof. After the termination of the original or of any subsequent period, the licensee upon application of a new license shall continue in undisturbed possession and use, under the conditions prescribed in the license last held, until a new license is tendered. or, if the properties are taken over as provided in sections fourteen and fifteen hereof, until so taken over and compensation made as provided therein. Each such license shall be conditioned upon acceptance by the licensee of all the terms and conditions of this act and such further conditions, if any, as the commission shall prescribe in conformity with this act. which said terms and conditions and the acceptance thereof shall be expressed in said license. Licenses may be revoked only for cause and in the manner prescribed in sections thirteen and twenty-six thereof."

Amend section 15 as follows:

Page 22, line 21, after the word "projects," insert the words "or the right of the said licensee to earn a fair return on said investment."

As amended, the section would read as follows:

"SEC. 15. That if the United States does not, at the expiration of the original license or of any license subsequently issued, exercise its right to take over, maintain, and operate any project or projects of the licensee, as provided in section fourteen hereof, the commission is authorized to issue a new license to the original licensee upon such terms and conditions as may be authorized or required under the then existing laws and regulations, or to issue a new license under said terms and conditions to a new licensee, which license may cover any project or projects covered by the original license, and shall be issued on the condition that the new licensee shall, before taking possession of such project or projects, pay such amount for the property taken, and assume such contracts as the United States is required to do, in the manner specified in section fourteen hereof: Provided, however, That if any project or projects shall not be taken over by the United States or by a new licensee, the terms and conditions imposed upon the original licensee in any new license tendered shall not be such as to impair the net investment of the licensee in said project or projects or the right of the said licensee to earn a fair return on said investment.

The CHAIRMAN. Mr. Krauthoff is here from New York, and we will be glad to hear him at this time.

STATEMENT OF MR. P. C. KRAUTHOFF, REPRESENTING HARRIS, FORBES & CO., OF NEW YORK, N. Y.

Mr. KRAUTHOFF. Mr. Chairman and members of the committee, I am a member of the public utility corporation bond buying department of the investment bond house of Harris, Forbes & Co., of New York.

The CHAIRMAN. You desire to make a statement to the committee from the standpoint of the investor?

Mr. KRAUTHOFF. Entirely from the standpoint of the investor. I do not wish to have my remarks considered as being from any other standpoint.

The CHAIRMAN. You may proceed in your own way to discuss the bill.

Mr. KRAUTHOFF. Hydroelectric properties, in common with every other type of public utility corporation as a class, must be financed ultimately very largely through the sale of bonds. These bonds must be protected by every possible safeguard in order to make them salable to the investor, because there is invariably a much greater demand for the funds of investors than there are funds to be had. In other words, everybody is after the investor's funds,

and he has a wide choice. If a proposition is not sound in every respect, he will divert his funds to other channels and will not touch the unsound proposition.

The organization of which I am a member has been in existence for over 37 years, and was one of the pioneers in public utility bond financing. We have placed with investors during that period over two billion and a half of bonds, which on a "before the war" or pre-Liberty loan basis, would be considered a very large amount, and which includes a very substantial amount of public utility bonds. Between $250,000,000 and $300,000,000 worth of bonds based entirely or in part on hydroelectric developments have been placed by us, in some cases together with associates. These hydroelectric bonds, needless to say, were bonds of properties located practically altogether on private lands because under the existing revocable permit law. no development has been possible to any important degree on public lands.

The principle of our house in dealing with investors is, first and above all, safety of principal and interest. The principal must be kept intact and the interest paid promptly as due. The question of the rate of return is secondary, although this, of course, must be in accordance with general current market conditions. The safety of the principal is paramount. The speculative feature is nil. If a project turns out an exceptional success, perhaps the bonds may go up four or five points; if, on the other hand, the project should by any chance fail, the bonds may lose 40 points, or, in an extreme case, possibly be wiped out altogether. It is needless to say our projects do not fail, due to the very great care and conservatism which we exercise in our investigations prior to going into them.

I may say in this last connection that data assembled several years ago indicated that during the then thirty-odd years of existence of our organization the aggregate loss to investors on bonds which we had sold them totaled less than two days' interest on the bonds distributed by us over this entire, say, 35-year period. This is, of course, a very unusual record. Our customers include not only banks, insurance companies, estates, and institutions throughout the country which represent, in the last analysis, the funds of hundreds of thousands of small investors, but also the small investor himself direct. In the last analysis the conservative investor is the backbone of the business of this country, particularly with regard to the great public utility undertakings, for it is to him, ultimately, that the developer of these enterprises must go for the capital with which to carry them on. In a $10,000,000 bond issue, for instance, put out within the last three months by our house and certain associates, the average distribution of the bonds of this issue which our organization sold was less than $3,300 per investor, which, of course, in a bond issue of this size. is very broad distribution.

We have sold bonds in every section of the country and have handled bonds of public utilities in practically every State in the Union, and also in Canada.

I would like to give you, very briefly, some idea of the care with which we go into a public utility situation prior to our undertaking any bond financing thereon. In the first place, the property, of course, has to be on an established and going basis. We do not

finance so-called construction propositions in any stage. They have to have a record of operations and of earnings before we are interested at all. The construction-money stage has to be financed by the junior people, who get back some of their money later on through the sale of the bonds.

The first phase of our investigation is to send out an engineer to make a report on the property, including a very conservative valuation or appraisal of the purely physical property, because this physical-property valuation is what, in the last analysis, we base our bond issue on. In other words, we figure that if our bonds are well within that valuation they are safe, other factors being equally favorable. The legal phases of the situation are gone over most carefully by our attorneys, a detailed report on its business aspects is made by a member of our organization, and the earnings are reported on and verified by our accountant.

Then these various expert reports and opinions are taken together and discussed by the house in order to determine, in view of the facts brought out in the reports and opinions, whether it is conservative to loan on that property at all, and, if it is, what is a conservative amount for the proposed bond issue, and by what restrictions such a bond issue should be safeguarded. We have never handled a share of stock in our entire career, and we have no personal interest at stake in the junior end or any other end of the situation except, of course, from the broad standpoint of the economic advantages which will accrue to this country from the development of its enormous water-power resources, an advantage which was never more obvious than under the conditions which exist to-day. There will be plenty of other business coming to us if we do not care to take hold of any particular proposition-hydroelectric or otherwise. There is always a far greater demand for our funds than there are projects that we are willing to go into. In fact, out of all the projects that come to us I do not suppose that we handle one in ten, which means there is not one in ten that will meet all our requirements.

The foregoing explanation of the character of bond financing undertaken by my house, which I have endeavored to make as brief as possible, gives whatever value there may be to my criticisms to this bill, because it is by houses such as ours that the bonds of these properties must be placed with the investors if the properties are going to be financed at all in the broad and ultimate sense. I may take occasion to say that the present bill affords the basis of what I think will be a workable plan to finance these properties. It has, however, in its present form, certain vital defects from the bond investor's viewpoint, but these I do not believe you will hesitate in eradicating from the standpoint of the practicability and feasibility of the

measure.

The first one of these defects is found in section 15, on page 22, where it provides that the terms of any new license granted at the expiration of the 50-year original license shall not be such as to impair the net investment of the licenses. When you say it shall not be such as to impair the licensee's net investment, you very obviously imply that it shall also not be such as to impair the licensee's ability to earn a fair return on its said net investment, since the minute the ability to earn a fair return on an investment is impaired, the investment itself becomes impaired. The bill as it now stands and without

amendment would in my opinion be construed in the courts to have the meaning in the foregoing respect which is so clearly implied. But what is the use of creating the necessity of a fundamental point in the bill having to be interpreted at some future date by the courts? I am sure you want the bill to mean what it unquestionably implies, but why deal in implications-why not make the phraseology cleancut and direct? Do not leave loopholes for lawsuits; one of the last men in the world who would buy into a law suit is the investment bond buyer.

Mr. RAKER. What is your suggestion in connection with that? Mr. KRAUTHOFF. In section 15, page 22, line 21, the last word in the section is" projects." I would suggest that these words be added, nor the ability of the licensee to earn a fair return on its said net investment."

66

Mr. RAKER. That is the amendment you suggest to cover that defect?

Mr. KRAUTHOFF. That is all. I think that meaning is directly implied, and I think it would be construed by the courts to exist as the bill now stands. I am sure that is what you mean. It is impossible not to impair an investment and at the same time impair the ability to earn a fair return on it, because the two are in effect synonymous. The other point I had in mind is in reference to the provision in section 6 of the present draft of the bill, line 4 on page 12, where it is provided that

Licenses for subsequent periods of such duration and under such conditions as may be prescribed by then existing law and regulations shall be tendered as provided in section 15 hereof unless and until at the termination of the original or of any subsequent period, the properties are taken over and compensation made as provided in sections 14 and 15 hereof.

Speaking from a bond standpoint, I think that I would be willing to trust the Federal Government to prescribe fair conditions in respect to subsequent licenses. I do not think, however, that the prospective bondholder would be willing to trust anyone, and I further do not feel that he could fairly be asked by any investment banker having a high sense of personal responsibility in his client's interests to trust anyone, to prescribe the term of duration of subsequent licenses. This is a matter of very vital concern to the bondholder. You must bear in mind that the bondholder is the man-oftentimes the woman-who has no speculative interest in the proposition. He gets, say 5 per cent or less on his money through the period of 30 years, and he is entitled to expect his bond to be paid at its maturity. It can only be so paid at maturity by being refunded by another bond issue. That is standard financial practice, and that can not be accomplished on a permanent long-term basis (which is the only economic basis for bond financing) under a short term franchise or license. Let us say a new property was started to-day to be developed under a 50-year license. It would go along possibly 10 years before it is ripe for a bond issue that we would handle, and that will leave 40 years to the life of the original 50-year license. The standard 5 per cent bond issue in normal times runs 30 years, and you would thus have here a 30-year bond issue maturing 10 years before the expiration of the grant. So far so good, but how is that 30-year bond issue going to be taken care of unless it can be refunded by another issue at the end of that term, and who is going to buy the refunding