originally issued for valid capital purposes, and in no part for purposes reasonably chargeable to operating expenses or to income; and so far as it involved exchange for overdue coupons, it could not be approved because such coupons, merely evidences of debt for interest, cannot be classed as property by the debtor company, and so do not come within the limitation of the statute. Permanent obligations cannot either properly or legally be issued to fund non-capital current obligations or the evidences thereof. The consequences resulting from a disregard of this principle, as affecting the public interest, have been repeatedly set forth in legal decisions as well as in economic discussion, and the histories of public utility failures provide innumerable examples of the outcome of such financing. While there are exceptional cases which call for exceptional remedies which are provided for in the statute, that provision does not include the issue of stocks.

Another part of the plan which could not be approved by the Commission for both statutory and economic reasons was the provision for disposing of $1,730,000, par value, of the proposed issue of new 6 per cent first and refunding 5-year mortgage bonds. It was proposed to use $230,000 of this issue by exchanging them for $270,000 of outstanding 4 per cent bonds of the Richmond Light & Railroad Company, which were not to be cancelled, and $1,500,000 were to be sold at 94 and the proceeds used in discharging floating debt accumulated chiefly in the operation of the Richmond Light & Railroad Company, and leaving $264,000 as new capital for betterments. The Commission decided that the funding of the floating debt could be approved only so far as the debt itself had been incurred for purposes which might be properly capitalized, that no evidence had been offered that even a part of this debt had been so incurred, and that the amount to be expended for replacements should be capitalized, if at all, only under such conditions of amortization as would be practically prohibitive in the case of 5-year bonds.

The favorable feature of the plan, to which the petition called particular attention, was the reduction of 15 per cent, or $580,750 par value, in outstanding common stock. The decision, however, does not recognize a reorganization as meritorious simply because it effects a moderate reduction in the stock which never repre

sented property. The annual reports of these two companies show that they carry on their balance sheets as assets, organization expenses and franchises valued at $1,650,000. As the New York State law constituting the Public Service Commission expressly denies that body the power to authorize the capitalization of any franchise in excess of the original fee actually paid to the State or some political subdivision thereof, the Commission in the circumstances of this case had no right of discretion regarding the approval of the plan. In conclusion the decision reads, "With capable management the earnings of the property should be sufficient to provide adequate compensation to investors, but a conservative plan must be adopted which does not burden income with securities issued to take up past. losses and deficits. Public service companies must be mindful that floating debts incurred for operating expenses and losses must be taken care of by some other means than the easy-going and disastrous financial methods frequently adopted in the past.

FIXED CAPITAL OR PROPERTY INVESTMENT ACCOUNTS The relationship between the supervision of security issues and the definition and classification of capital outlays is necessarily close and for that reason reference may properly be made in this chapter to the important modifications effected in 1917 to those provisions of the Commission's uniform systems of account for gas and electrical companies relating to capital expenditures. The evils resulting from the continued capitalization of replacements in the past, partly because of the lack or the inadequacy of corporate records of the cost of individual pieces of property, prompted the Commission to include in the original systems of account as adopted in 1908 stringent regulations respecting records of cash cost of all property acquired and a division of all expenditures for property into four classesoriginal capital, additions, betterments and replacements. Experience proved that the required subdivision of capital expenditures imposed an unnecessarily heavy burden upon the bookkeeping departments of the utility companies. It was found that capitalization of replacements may be prevented if securities. are authorized only for the net growth in the total property invest

ment after proper deduction has been made of all property worn out or retired from service and also for the accruing depreciation on property still in service.

At the conclusion of a series of conferences between representatives of the Commission and the gas and electrical companies, which began in 1916, there was presented to the Commission a unanimous report embodying a revision of the requirements relating to fixed capital or property investment accounts. For the old division of capital expenditures there was substituted a new method of procedure, technically known as the work-order or joborder system, where all of the costs of each particular unit of property or piece of construction are segregated and completely identified with the work to which they relate. According to the committee's report—

The essential provisions of the procedure recommended by the committee for the classification of capital outlay or the cost of fixed capital, are the following:

(1) Complete identification of expenditures with property,

(2) A clear statement of the total cost of each job or construction project,

(3) The exclusion from fixed capital account of all duplications (replacements or substitutions) arising out of reconstruction work.

"We believe that these objects will be achieved by the requirements stated in the proposed Paragraphs 17 and 18 describing a job or work order system and the controlling accounts to be carried in the general ledger. The provisions that a list of work orders shall be filed with the Commission weekly will keep the Commission informed as to the location and general character of all construction work going on. The provision of Paragraph 18 that material and labor charged to work orders involving the removal or retirement of any fixed capital shall be carried on the ledger in a suspense account rather than a capital account will prevent the inclusion of replacements in the cost of fixed capital as stated on the balance sheet.

"Drafts embodying much greater detail of the work-order system have been discussed by the committee but have been discarded on the ground of inflexibility, which would restrict their adaptability to the various circumstances of different

companies. The procedure herein outlined embraces the fundamentals, and detailed instructions or suggestions may preferably be embodied in a special pamphlet. Representatives of the Commission have undertaken the preparation of such a pamphlet containing full particulars as to methods and forms and representatives of the companies will be glad to coöperate in the perfection of these suggestions prior to publication by the Commission."

New York is the first of the state commissions to prescribe the work-order system and its procedure has been endorsed and recommended for general adoption by the Committee on Statistics and Accounts of Public Utility Companies of the National Association of Railway Commissioners.

The consideration of the accounting requirements concerning depreciation or consumption of capital had not been completed in June, when the Commission adopted the rules concerning capital expenditures which, in accordance with the law requiring six months' notice in advance, became effective January 1, 1918. The Commission, however, did not fail to record its matured conviction of the intimate relationship existing between accounts recording the cost of property and accounts recording the gradual wastage or consumption of depreciable property. In a preliminary statement included in the modifying order, the Commission said: "While it is not at present required that the depreciation reserve ‘Accrued amortization of capital' shall be subdivided into the various classes of fixed capital hereinafter scheduled, the Commission recommends that such subdivision be made and entered year by year in the 'Plant Ledger' or 'Register of Fixed Capital.""

The opinion adopted by the Commission June 29, 1917, in connection with the modified order, goes on to say:

"In order that there may be no mistake as to the scope and purpose of the accounting rules contained in the Uniform System of Accounts prescribed by the Commission, it seems desirable to insert therein, as has been done by some of the other state commissions, a preliminary statement that the Commission does not bind itself to approve any item set out in any account, either as to amount or character, for rate fixing purposes or when authorizing the issuance of securities. Such preliminary statement might also point

out the difference between an addition' as defined in the accounting rules and an 'addition' from the point of view of the corporate investment in its entirety. The accounting definition of addition,' 'betterment,' etc., has to do with a specific expenditure only. When a company, for example, adds an automobile to its vehicle equipment, the car represents an addition to its equipment and will be so recorded on its books. It does not follow, however, that additional stocks or bonds may properly issue to pay for the car. The company may have sold or otherwise disposed of other property or it may have on hand funds derived from an earlier issue of stocks or bonds. Before acting upon an application for additional securities, the Commission must therefore have information not only as to specific additions but also as to the entire property investment and the portion of such investment already capitalized through the issue of stocks, bonds, and other permanent obligations.

"If the company is to keep its original investment unimpaired, as it is in duty bound to do under the ruling of the United States Supreme Court and the state courts, it will always possess funds set aside out of revenue which will be available for the acquisition of property. The accounting rule of this Commission, like that of the Interstate Commerce Commission, does not contemplate the retention of these reserve funds until they can be expended for the replacement of the identical property upon which they accumulate." The statement referred to is included in the following section in the order:

"Ordered, That in addition to such amendment there be inserted as an introduction to the definitions of capital in said Schedule A the following statement:

"In prescribing this uniform system or method of keeping accounts, records and books to be observed by such corporations, the Commission is not undertaking that any item set out in any account will have the Commission's approval either as to amount or character in fixing a rate or authorizing the issue of securities. The system or method of accounts prescribed is designed to set out the facts in connection with the income, outgo, etc., and the Commission will determine in any proceeding involving the fixing of a rate or authorizing an issue of securities just what consideration shall be given to items in the several accounts.

The following definitions of capital relate to the cost of productive property, which is one of the items of informa