PUBLIC UTILITY SECURITIES 1. utility corporations are those which operate under a franchise and furnish public service of any kind. They usually employ the streets for a portion of their permanent equipment. The California law includes under the term "public utili ties," companies operating railroads, street railroads; express service, sleeping cars, dining cars and fruit cars; vessels regularly engaged in transportation over regular routes between points within the state; pipe lines, gas plants, electric plants, telephone lines, tele graph lines, water systems; public wharves and ware houses conducted by common carriers. In investment circles, the term "public utility" practically includes only gas, electric light, power, heat, street railway and interurban enterprises. It does not include steam railways nor shipping concerns, and usually does not include the telegraph and telephone business. In 1914, it was estimated that public utility companies employed approximately eight billions of dollars as capital.
2. Types of securities upon the market include the bonds and stocks of isolated corn panies, and of subsidiary companies which have come more or less completely under the domination of hold ing companies, and the securities of holding companies. These holding companies may be divided into several classes. One type consists of pure investment com panies which simply hold the securities of subsidiary concerns without exercising control over operations. They are financing devices organized to standardize securities, average investment risks, bring out larger issues, and so reach a larger and more stable invest ment-market. Examples are the American Power and Light Company and the Electric Bond and Share Company. Another type of holding company is formed to control productive operations. This is done by bringing about joint purchasing, by coupling up plants as in natural gas supply or electric power gen eration, and by bringing all operations under the con trol of a staff of expert engineers, accountants and general managers. Such corporations are the sub sidiaries of the Public Service Corporation of New Jersey—the Public Service Railway Company, the Public Service Gas Company and the Public Service Electric Company.
The superimposition of company upon company and the complexity of the intercorporate relations which large systems involve, are shown in the follow ing schedule giving component parts of the United Gas and Electric Corporation. In order to save space the word "company" has been omitted in the names of the several corporations.
The formation of an intelligent opinion about the value of securities which are several stories above the ground, and which depend upon shares, based upon shares, is not easy.
Mr. Samuel Insull, President of the Commonwealth Edison Company of Chicago, has said: The great danger of the holding company proposition is the issue of junior securities of subsidiary companies, these junior securities being sometimes put into collateral trusts of the holding company for the purpose of creating col lateral for so-called prior lien securities of the holding com pany. If the deed of trust issuing the collateral trust se curities is rigid enough to protect the purchasers of those se curities against the creation of large floating debt in the operating company, and if the bond issue of the operating company is small and is a closed issue, there is no reason why the stocks of operating companies should not be put up as security for collateral trust bonds of holding companies.
It may be laid down as a safe rule that the securi ties of holding companies should not be touched as in vestments unless the reports contain consolidated bal ance sheets and income accounts which sum up the conditions of the subsidiaries. For a number of years during the early growth of holding companies it was not customary to buy subsidiaries by a strict process of valuation of assets. Instead of this a "situation" was bought for a lump sum by a general bargaining process. The secondary securities thus created obvi ously depended more upon the earning situation and the arts of management than upon the property and the science of property appraisal. As long as these securities were stocks no violence was done to market traditions, but when the name bond was used, even if it were "collateral trust bond" there was intro duced a chance of misunderstanding.