It must be recognized, however, that the practice of holding companies has, as a rule, been very clean. The increase of the wealth and population of Ameri can cities has created such a demand that even struc tures originally very weak have become prosperous. The standardization of operating processes has pro ceeded rapidly and that of accounting practices more slowly. Growth has created such a demand for new capital that the mortgage limitations of subsidiaries, and the dislike of the investor for junior issues, have been felt keenly. A movement to simplify the struc ture of liens similar to that in railway finance is under way. The purpose of this is to refund local underly ing issues with broad open-end mortgages. This will allow new financing, under a lien identical with the old, as rapidly as extensions and improvements are required. There is some movement to dissolve sub sidiaries, as illustrated by the Pacific Gas and Electric Company which owns in fee all the properties it operates. In some cases, the creation of large units which take the place of the subordinate ones is made impossible by state laws which require that utilities within the limits of the state shall be owned and operated by domestic corporations.
Of the eight billion dollars invested in public utili ties, it is estimated that nearly five and a half billions are controlled by holding companies and their sub sidiaries.
The advantages of this form of organization are very analogous to the advantages of railway systems and of consolidated corporations in industry. Among other things, supplies may be purchased at wholesale, equipment may be standardized, the service of special ists in each branch of service may be obtained, and funds are available to rehabilitate a local company after a storm or flood or other disaster. Extensions may be made as public demand requires, regardless of local deficits, and cheaper power may be bought from larger central stations or from distant water powers.
A portion of the problem of peak load may be solved by coupling-up individual power units into a system. The investors' risk is averaged by spreading the effect of local misfortunes upon a larger consolidated bal ance sheet. Larger issues of securities, securities better known and more actively dealt in, with a con sequent lower price of capital borrowed, result from these conditions.
It should be understood that public utility holding companies do not aim at the stifling of competition as do many consolidations in the industrial field. They absorb selected businesses in different localities but fight shy of competitors in the same locality, and even of corporations which have been formed from the con solidation of competitors if the capitalization has been materially swelled by the costs of trade warfare.
3. Escrow conditions.—The open-end mortgages involve the authorization of a large bond issue, the drafting of a general mortgage to include not only the property now owned but any to be acquired in the future, the issue of whatever part of the bonds may be required immediately, and the deposit of the re mainder of the bonds in escrow with a trustee to be issued only as prescribed conditions are complied with. Such conditions are the building of extensions or im provements or the purchasing of new property. These conditions are certain to appear more and more frequently in future bond issues. The usual ones are, that the face value of the bonds shall not exceed a certain percentage (from 75 to 90) of the cost of the extensions or additions, and that no bonds shall be issued unless the net earnings of the corporation for a designated past period have been at least a given number of times (from to 2 ) the interest on the total funded debt, including the bonds it is proposed to issue.
The Des Moines City Railway Company author ized an issue of $15,000,000 general and refunding mortgage 5 per cent twenty-year gold bonds on Jan uary 1, 1916. Of this issue $3,478,000 were executed and issued at once. The $11,150,000 remainder was deposited with the trustee to be certified and de livered only as follows: (a) One million dollars ($1,000,000) par value of said bonds may be issued to an amount or amounts not exceed ing the actual and reasonable expenditures made subsequent to January 1, 1916, for the construction, reconstruction or rehabilitation of or for permanent extensions, enlargements and additions of and to the plants and properties of the Company, as the same existed on January 1, 1916.
(b) Ten million one hundred and fifty thousand dollars ($10,150,000) par value of said bonds may be issued from time to time, not to exceed, in the aggregate, eighty per cent (80% ) of the actual and reasonable expenditures made subsequent to January 1, 1916, for permanent extensions, en largements and additions of and to the plants, properties and equipment of the Company as the same existed on Jan uary 1, 1916.
No bonds shall be certified and delivered under the pro visions of this Section (4), unless and until the net earnings from the plants and properties owned by the company and subject to the lien of this indenture at the time of its appli cation for such certification, for a period of twelve (12) consecutive months ending not more than sixty (60) days prior to the date of the filing of such application, shall have been in each case equal to at least one and three-fourths (1%) times the total annual bond interest charge.