On and after March 23, 1912, public utilities became obligated, by virtue of chapter 14, Laws 1911, to obtain the approval of this Commission, under section 52 thereof to the issue of capital stock, bonds, notes and other evidences of indebtedness; under section 51 to the sale, lease or incumbrance of their properties, the merger or consolidation with other public utilities and the purchase of the capital stock of other such utilities; under section 50 to the exercise of franchise rights and privileges; and under sections 15 and 63 to revise their rate schedules. Also, under section 43, the construction of public highways and streets across railroads at grade and the construction of railroads across other railroads and streets and highways at grade likewise became subject to the approval of the Commission upon application of the constructing parties.

Subsequent to the above date, and for the three months remaining to the end of the fiscal year, June 30, 1912, 126 applications in the above matters were received, of which 24 applications were for permission to issue stock and bonds, the former in the aggregate amount of $1,916,500, the latter in the aggregate amount of $22,649,500; 8 were for permission to exercise franchise rights, 7 for the transfer of properties and the acquisition of capital stock, and the balance for miscellaneous purposes. The extent of the work arising under these provisions of the law is not fully indicated in this brief period, and while this report, as contemplated by the act, will be confined to the transactions of the Commission for the fiscal year we deem it proper and desirable to advert briefly to the mass of business of this character which has been presented over a more extended period and the disposition of which demands such a large measure of the Commission's time. For the six months ended September 23, 1912, a total of 235 formal applications, not including complaint cases, were filed under the above provisions of the law. Of these, 46 applications were for approval of the issue of capital securities; 16 were for exercise of franchise rights; 25 for the transfer of properties and the acquisition of capital stock; and the remainder of a miscellaneous nature. The capital stock for which approval of issue was sought reached, par value, to $2,283,150, the amount of bonds to $48,049,600.

The problems of regulation and control presented by such applications are varied and intricate, requiring almost without exception

careful examination and extended analysis. In disposing of these applications the Commission sits practically as a court, not bound by technical rules of evidence, and decides questions of fact. To establish uniform procedure in all such matters as well as for the guidance of applicants in the preparation of their petitions and accompanying papers, the Commission adopted Rules of Practice and Procedure, effective March 23, 1912, printed copies of which are distributed gratis. Upon the receipt of an application the papers first are examined by the legal department, and, if found satisfactorily to comply with the requirements, a date is appointed for a public hearing. All interested parties are informed of the appointment in writing by the Commission, and the applicant is required to publish notices of the time and place of the hearing. The hearings are held either in the office of the Commission, San Francisco, or in the locality in which applicant operates, dependent upon the character of the case and the interest of the community therein.

In cases involving the issue of capital securities, the applicant, through its engineers or others competent to testify, is required to give evidence in support of the purposes to which the proceeds will be applied. As an additional means of arriving at the reasonableness of the proposed expenditures, such evidence is minutely checked by the engineer of the Commission. In some of the more important matters, and particularly applications for transfer of property or purchase of capital stock, proceedings of this character are supplemented by a technical examination of the books and property of the applicant.

In order that the work may be expedited as much as possible, the Commission does not sit en banc where this may well be avoided, and it has been found to be entirely practicable and consistent with good practice to assign one Commissioner or less than a majority of the Commission to conduct a hearing or investigation. In this manner proceedings are had simultaneously upon different matters and with. less delay to applicants. The sitting Commissioner at the conclusion of a proceeding prepares his order, or order and opinion, and such becomes the order, or order and opinion, of the Commission when approved and adopted by a majority of the Commission in session. It is the custom of the Commission to give opinions in which the questions presented by each application are fully discussed and the general principles pointed out upon which the decision is made. The importance of this policy is obvious.

In section 52 of the Public Utilities Act are specifically enumerated the purposes for which may be issued, with the authorization of the

Commission, stocks and stock certificates and bonds, notes and other evidences of indebtedness payable at periods of more than twelve months after the date thereof. These purposes are (1) for the acquisition of property; (2) for the construction, completion, extension or improvement of facilities; (3) for the improvement or maintenance of service; (4) for the discharge or lawful refunding of obligations, and (5) for the reimbursement of moneys actually expended from income or from any other moneys in the treasury of the public utility not secured by or obtained from the issue of stocks or stock certificates, or bonds, notes or other evidences of indebtedness of such public utility within five years next prior to the filing of the application with the Commission for the required authorization for any of the aforesaid purposes except maintenance of service and replacements.

The same section of law further provides that the Commission (1) may grant permission for the issue of such securities in the amount applied for or in a lesser amount or not at all; (2) may attach to the exercise of its permission such condition or conditions as it may deem reasonable and necessary; (3) may authorize issues of bonds, notes or other evidences of indebtedness, less than, equivalent to or greater than the authorized or subscribed capital stock of the utility; (4) shall state in its order authorizing an issue of securities the amount thereof and the purpose or purposes to which the issue or the proceeds thereof are to be applied; and (5) may require utilities to account for the disposition of the proceeds of all sales of the securities permitted to be issued, and establish such rules and regulations as it may deem reasonable and necessary to insure the disposition of such proceeds for the purpose or purposes specified in its order. It is further provided in this section that no public utility shall apply the issue or the proceeds thereof to purposes other than those specified in the order, and that all issues made without the approval of the Commission shall be void.

Two important rules and regulations governing the procedure in these matters have been provided by the Commission as follows: RULE XVI. Stocks, Bonds, Notes and Other Evidences of Indebtedness — Applications for Order Authorizing Issue Of.

When application is made by any public utility for an order authorizing the issue of stock or stock certificates, or bonds, notes or other evidences of indebtedness payable at periods of not more than twelve months after the date thereof, under the provisions of section 52 of the Public Utilities Act,

1. The petition, in addition to the requirements of Rule IX, shall state:

(a) The financial condition of the applicant as defined in Rule I, 6, and a description of the railroad, street railroad, line, plant or system, and equipment of the applicant, with its original cost, where possible, and its cost to the applicant, and the amount of its stock held by other corporations and their names, and the kind of stock held by each. If it is impossible to state the original cost, the facts creating such impossibility shall be stated.

(b) The amount and kind of stock, if any, which the public utility desires to issue, and, if preferred, the nature and extent of the preference: the amount of

bonds, notes or other evidences of indebtedness, if any, which the public utility desires to issue, with terms, rate of interest, and whether and how to be secured.

(c) The use to which the capital to be secured by the issue of such stock or stock certificates, or bonds, notes or other evidences of indebtedness is to be put, with a definite statement of how much is to be used severally for the acquisition of property, the construction, completion, extension or improvement of facilities, the improvement of service, the maintenance of service, the discharge or refunding of obligations, and the reimbursement of moneys actually expended from income or from any other moneys in the treasury, as provided by section 52 of the Public Utilities Act.

(d) The property in detail which is to be acquired, with its value, a detailed description of the contemplated construction, completion, extension or improvement of facilities set forth in such a manner that an estimate of cost may be made, a statement of the character of the improvement of service proposed, and of the reasons why the service should be maintained from its capital. If it is proposed to discharge or refund obligations or to reimburse moneys actually expended, a statement of the nature and description of such obligations and expenditures, including the par value of the obligations and the amount for which they were actually sold and the application of the proceeds and of the moneys expended, showing when, to whom and for what paid or applied.

(e) Whether any contracts have been made for the acquisition of such property, or for such construction, completion, extension or improvement of facilities, or for the reimbursement of expenditures, or for the disposition of any of the stock or stock certificates, or bonds, notes or other evidences of indebtedness which it is proposed to issue or the proceeds thereof, and if any contracts have been made, copies thereof shall be annexed to the petition.

(f) Whether any of the outstanding stock or stock certificates or bonds, notes or other evidences of indebtedness of the public utility have been issued or used in capitalizing the right to be a corporation, or any franchise or permit, or the right to own, operate or enjoy any such franchise or permit, or any contract for consolidation or lease, and, if so, the amount thereof and the franchise, right, contract or lease so capitalized.

(g) If the stock or stock certificates are to be issued by a corporation formed by the merger or consolidation of two or more corporations, the petition shall contain a complete statement of the financial condition of the corporations so to be merged or consolidated of the kind required by subdivision (a) hereinbefore set forth, and of their capital stock at the par value thereof.

(h) Such other facts as may be pertinent to the application.

2. With the petition must be filed:

(a) A certificate or proposed certificate of proceedings at the meeting of directors and stockholders authorizing the issue of the desired securities with a copy of the mortgage, if any.

(b) A certified list of the certificates of stock already outstanding, with the shares of stock represented by each certificate, and the amounts paid to the public utility on each certificate as originally issued, either in money, labor or property, stating the amount of each.

(c) Maps, profiles, plans and plats of proposed property and construction showing

1. In the case of railroads, including street railroads, all information required by the Commission's General Order No. 14.

2. In the case of other public utilities, such certified maps and plans as will indicate to the Commission the property to be acquired and the location, extent and character of the proposed construction.

(d) Original deeds of property or certified copies thereof covered by proposed issue, with a detailed statement of its actual cost.

(e) Certified copies of all contracts for the acquisition of proposed property and equipment and for construction, with plans and specifications of such buildings and structures as may have been designed.

(f) Complete inventory of all property and equipment proposed to be acquired,

prepared upon or in accordance with blank forms and specifications prescribed by the Commission, and a statement of the cost thereof.

(g) A certified statement of all cash bonuses and other donations of property received, if any.

3. If the application is granted, in whole or in part, the Commission's order will: (a) Prescribe the purposes and amounts for which the issue authorized or the proceeds thereof may be used.

(b) Direct the applicant to report under oath the sale or sales of the securities or obligations authorized, the terms and conditions of sale and the amounts realized therefrom.

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(c) Require the applicant to make a verified report at least every six months, showing in detail the use and application by it of the moneys so realized until such moneys shall have been fully expended.

(d) Specify such condition or conditions and prescribe such terms as the Commisson may deem reasonable and necessary to the exercise of its permission.

RULE I. Definitions.

6. The term "financial condition," when used in these rules with reference to an application, means the financial condition of the applicant as shown by a schedule or schedules annexed to the petition and properly referred to therein, and showing: (a) Amount and kinds of stock authorized.

(b) Amount and kinds of stock issued and outstanding.

(c) Terms of preference of all preferred stock, whether cumulative or participating, or on dividends or assets, or otherwise.

(d) Brief description of each mortgage upon property of applicant, giving date of execution, name of mortgagor, name of mortgagee or trustee, amount of indebtedness authorized to be secured thereby and amount of indebtedness actually secured.

(e) Number and amount of bonds authorized and issued, giving name of the public utility which issued the same, describing each class separately, giving date of issue, par value, rate of interest, date of maturity and how secured.

(f) Other indebtedness, giving same by classes and describing security, if any, with a brief statement of the devolution or assumption of any portion of such indebtedness upon or by any corporation or person, if the original liability has been transferred.

(g) Amount of interest paid during previous fiscal year and rate thereof, with amount paid at each rate, if different rates were paid, upon each issue of indebtedness. (h) Rate and amount of dividends paid during the five previous fiscal years and the amount of capital stock on which dividends were paid each year.

(i) Detailed statement of earnings and expenditures for and balance sheet showing conditions at close of the last fiscal year, unless already filed with the Commission as part of the annual report, in which case a reference to the filing should be given. It is deemed to be of the utmost importance that the Commission should be fully informed, after permission has been given to the issue of securities, as to the precise disposition of the proceeds, in order that moneys authorized to be expended for one purpose may not be misapplied to some other purpose which would not have been approved. Rule XVI (subdivision 3) therefore has been supplemented with a general order reading as follows:

In the matter of the preparation of monthly reports showing Receipts and Disbursements from the sale of Stock, Bonds and other evidences of indebtedness of Public Utilities, which have been authorized to be issued by the Railroad Commission of the State of California, under section No. 52 of the Public Utilities Act.

On or before the twenty-fifth day of each month, the following statements for the