The Bridgeport evening farmer., 1909-06-15

| Association, spoke in part as follows: | Tie two questions which have been | most discussed before this committee are: 1st, Ought the issue of bonds and | stock by public service corporations to i be supervised in any manner by a 1 state commission? 2nd, Ought a state
 commission to be given any power to | regulate or examine the rates charged
 by public service corporations?
 The answer to the first question can l be determined best by seeking the
 purposes of over-capitalization, or | "sky-rocket financing"
 | The purpose is usually either the de- sire to make an illegitimate value by
 curities of doubtful value, or the de-
 sire to conceal net earnings.
 Illegitimate and large profits are ob-
 tained from the over-capitalization of
 manner: Jones, Smith and Jones ob- l tain a charter for a street railway l coinpany; this charter contains the | usual provision that the company may | issue stock and bonds in payment for | the construction of its road. Jones, | Smith & Jones then form construc- | ton company. The street railway com rany, consisting of Jones, Smith and Jones. contracts with the construction
 company, also consisting of Jones,
 Smith and Jones, to build and equip
 it's road in return for $1, ,000, 900 to be
 paid by $500,OO0 in bonds and $500, 900
  1 then sub-lets the contract for $450, 900. | The road is built and the street rail- way company delivers the bonds and stock to the construction company. | The construction company then sells | the bonds to the investing public. This is not difficult; to the average | investor, and the farmer who wishes | the road, the investment appears safe and conservative. Are not the bonds secured by first mortgage on the property? Are they not protected by
 the equity represented by so00,000 of capital stock? Do not the statutes provide that no street railway com pany shall issue bonds for more than half the sum actually expended upon
 the road as certified by the companys officers under oath? And is not a false certifcation perjury? The investor
 does not know of the little transac-
 ton between the street railway com
 pany and the construction company
 by which the road, constructed for They also possess $500, 900 of capital stock. What is the next step?
 sThe plant is new; no expenditures for repairs or maintenance is neces-
 sary for several years. By making no | allowance for depreciation it is easy
 to make the plant appear to be earn ing a fair profit; the street railway company, controlled by Jones. Smith and Jones. declares a dividend of per cent. It does this for two or three years. The plant is running down, but the small investor knows nothing about that. The one fact which he does know is that the stock has paid a dividend of per cent. for three years; conse quently it is easy for Jones, Smith and Jones to put their stock on the market gradually and sell approx imately at par on the basis of earn ing capacity. Thus Jones, Smith and Jones make net profit of 1000 w whhout investing cent of their own money; and the small investors, who now own the road, have run down system upon which the increasing re- pairs will eat up the earnings formerly used for dividends unless some large philanthropic system abSorbS the road, or rates are increased or ser vices diminished. Jones, Smith and Jones obtain a new charter for a new lCraIity and commence like operations again.
 r Tbis is more or less the history of the Interborough-M Metropolitan scandal in New York. Is it strange that the receiver of the Third Avenue elevated found a gone" instead of going concern? But the opposition says nothing of this kind has ever occurred in Connecticut. The Waterbury Trac- miles of road in 1896, and probably costing about $400 900, issued bonds and stock aggregating s1,20O, 900. Why? A little later this company, with few others, was consolidated into the Consolidated Railway & ighting Company. The combined funded and floating debt and capital stock of all the consolidated companies then az Railway & Lighting Company. with out any apparent increase of plant or equipment, issued se,350, 900 of bonds and s15.0O0.0O0 of stock. It has since added six miles to it's road, S4, 165, 700 to its bonds and g, ,12O, 900 to its stock. What is the explanation?
 Similar facts exist in the case of several lighting and other public ser a,.ia fo%a Tc { possible that this explains in small measure why trolley roads in Connec- ticut are capitalized on an average Of over $12S,0OO a mile, while in Massa- chusettS they average under $50,000 a mile?
 The opposition has repeatedly stated that the interest of the management | and of the stockholders was a com mon interest Was the interest of Jones, Smith and Jones identical with 1 that of those to whom they sold their securities?
 The second apparent reason for ov- er-capitalization is the concealment of net earnings. The public is super fcial. If a company is paying only per cent or per cent or per cent | on its stock, the public is not so like ly to feel dissatisfied with the rates or service rendered. as if the percentage were higher. The Consol- idated Railway Company prior to it's merger with the New York, New Ha-
 
 was bonded for ss9. $50 per mile of road owned and has issued stock to the amount of s33. .555 per mile. The actual cost of construction and equipment probably did not exceed $50.0O0 per mile. But per cent on SS9.300 of bonds and per cent on s33, 555 of stock does not sound unreasonable. Would the public contentedly submit to the present charges and service if it knew that this really represented a payment of 12.5 per cent on the actual invest ment?
 to pay the city per cent of it's net earnings after paying its per cent. Was the ex- cesSive ca Ditalization designed to avoid the fulfilment of this contract 
 The opposition claims that capital cannot be obtained for public service unless over-ca pitalization is allowed. This is completely dis proved by experience. Connecticut