Evening star., 1935-01-13
STAR WASHINGTON D..
LETTER ON POWER
HELD MISLEADING
Writer Believes Roosevelt
Can Eliminate Doubt by
Stating Rate Policy.
BY DAVID LAWRENCE.

BY DAVID LAWRENCE.
A notable example Of how the ad-
sometimes gives out only
one side Of the story-the side that
makes a favorable impression for its
but does not give the public
all the facts in a controversy-was
revealed last week in the letter written
to President Roosevelt by the Federal
Power Commission.
The letter undertakes to say that
holders Of life insurance policies and
deposit0rs In savings banks have no
cause for concern regarding the Sc
curity Of that part Of such institutions
invested in electric utility bonds"
Even the President at his press con-
ference told the newspaper men that
he had been impressed by the state
ment of the Federal Power Commis-
sion and that it proved that operating
company bonds are not affected by
the Governments policy on utilities.
But what are the facts? Inquiry
Of leading savings banks and life in
surance companies discloses that the
laws of the States, and particularly
the State Of New York, require that
bonds cannot be retained for legal
unless earnings are main-
tanned in q certain percentage or
ratio.
Would Force Dumping.
Thus, If the Government insists on
cutting the electric rates down to the
point that operating companies can
simply earn the interest on their
bonds and there is nothing with which
to pay dividends on outstanding pre-
ferred or common stock, the savings
banks in New York State, for in
stance, would be compelled to dump
their bonds on the market because
they would cease to be legal for in
vestnent of savings bank funds.
As for life insurance companies,
they cannot invest In debentures or
preferred stocks of operating COM
panies unless these companies shall
have earned for the preceding five
years at least per cent on their
total capitalization.
The latest figures show that about
81 600 100000 Of life insurance COM
pany assets are invested in utility
securities and that virtually all Of
these are bonds in operating COM
panies and not preferred stocks. The
Federal Power Commission statement
confirms this.
Expansion Blocked.
As for savings banks. 3 per cent OF
their assets are in utility bonds OF
operating companies and the figure
has been estimated at $4,000 600. 900.
The Federal Power Commission state
ment emphasized that the market
values OF these securities had held up
very we'll The real reason is that
other securities at the same or better
yields have not been available for in
vestment because the securities law
and the Governments own financing
operations have prevented the normal
expansion of the investment market.
Another reason Is that the decisions
of the courts have heartened the
holders of utility securities and caused
them to feel that the Government S
policy of competition or attempts at
confiscation would not be upheld.
Law Would Have Effect.
II, however, the Government does
force electric rates down to the point
of permitting interest charges to be
earned only once, then the follow
ing extract from the New York State
law will have plenty Of effect on oper-
ating company bonds:
"For q perior of five fiscal years
next preceding such investment the
net earnings of such corporations shall
have averaged per year not less than
twice the average annual interest
charges on its total funded debt ap-
plicable to the period for the last f1s-
cal year preceding such investment.
Such net earnings shall have been not
less than twice the interest charges for
q full year on its total funded debt
outstanding at the time Of such in
vestment. And for such period the
gross operating revenues Of any such
corporation shall hive averaged per
year not less than 81 100000 and such
corporations shall have for each such
year either earned an amount avail
able for dividends or paid in divi-
dends an amount equal to per cent
upon a sum equivalent to two-thirds
of its funded debt.
"The outstanding full paid capital
stock Of such corporation shall be
equal to at least two-thirds of the
total debt secured by mortgage lien
on any part or all Of its properties
provided, however, that in case Of q
corporation having non-par value
shares, the amount Of capital which
such shares represent shall be the
capital as shown by the books OF the
corporation.
Bonds Will Depreciate.
The foregoing shows how the capt.
tai structure must be set up and II
the Government undertakes to say
that all preferred and common stocks
are watered and that only the bonds
are good, and that rates must be based
wholly on the bond investment, then
the bonds will depreciate and become
ineligible for investment in savings
banks.
Mr.. Roosevelt has intimated that
he himself believes In a fair return
on an agreed-upon rate base, but the
yardstick in the Tennessee Valley
especially in the Knoxville transac-
ton, would not permit twice the in
terest charges on the private COM
pany's investment to be earned If the
promised rates were established by
the T. v. A.
In the case of life insurance COM
panies the various State laws merely
require that bonds shall be adequately
secured, but investments cannot be
made in debentures or preferred
stocks of operating companies unless
they shall have earned for each of
the preceding five years at least 4
per cent on their total capitalization.
In New York City taxes have now
reached about % cents on every dol
lar of gross revenues and II rates are
forced down to point which prevents
interest charges from being earned
twice, there will be lot of hitherto
gild-edge operating company bonds
dumped on the market.