PUBLIC UTILITY BONDS

Distinctive Features
In the preceding chapter a brief description was given of the different classes of railroad bonds, such as debenture bonds, collateral trust bonds, and equipment trust certificates. The classification and descriptions apply equally to public utility bonds, since these securities are issued under similar conditions and for the same purposes as the railroad obligations. The subject matter of the present chapter, therefore, will be limited largely to the distinctive features of the public utility companies. It is a question whether in the grouping of investment securities, public utility issues should be separated as a distinct class from railroads. A railroad is a public service corporation as much as a gas company or a telephone company. There are several considerations, however, in connection with public service corporations other than railroads which in discussions of bond investment deserve to be treated separately.

1. Franchise

In the first place a public utility company must generally obtain from some local public authority a franchise, which is defined as a right to use a public highway or public property in common with the public. Of course, a railroad operates under franchise too, but it is usually incorporated under a general legislative act and there are no specific grants other than those contained in the legislation. Railroads, therefore, are not concerned primarily with local authorities in securing their franchises.

Moreover, public service corporations as a rule operate on street surfaces and under public streets, i.e., on public property, whereas a railroad operates on its own right of way and for the most part uses its own property exclusively. There are cases, however, where railroads operate through streets. In obtaining this grant, the railroad may be obliged to operate under the conditions laid down in a local franchise, or in accordance with special contracts made with political bodies sanctioning the use of public property.

The acceptance of a franchise by a public utility company is generally considered as placing the company under the regulations imposed by the authority granting the franchise. Therefore, it should always be borne in mind in studying public utility bonds as investments that the activities of the issuing companies are subject to severe public regulation.

2. Localized Operation

A second point of distinction between public utilities and railroads lies in the fact that the former are usually localized in their operations, whereas railroads extend over a large geographical area. A gas company, for example, is usually restricted in its operations to one city or section of a city. Its interests are bound up with the municipality. If the municipality declines and disappears, the public utility passes away also. If economic conditions become very bad in the municipality, the public utilities operating there are likely to suffer in some way. There is not a wide geographical area of operation and a consequent wide distribution of investment risk as there is in the case of railroad companies.

A railroad company operating through an extended territory does not usually suffer a severe loss if one or more branch lines are abandoned or an important industry within its territory ceases operations. Moreover, a company operating over a large area is not likely to suffer an irreparable loss if it experiences an earthquake or if its buildings are damaged by fire or a local disaster. Public utility companies with localized operations do not enjoy the same freedom from the possibility of total collapse. A good illustration is the effect of the earthquake at San Francisco in 1906. In this calamity the railroads did not suffer as much damage relatively as the other public service companies.

To eliminate the risks of localization there have been organized within the last two decades public utility holding companies, whose purpose it is to own, control, and operate public service corporations in a number of different localities. Because such holding companies operate through corporations whose properties are scattered in different geographical sections and over wide areas, the development of an unfavorable political attitude on the part of the public, unexpected damage, or any other bad turn in the affairs of one locality may be offset by favorable developments in the affairs of other localities.

3. Independent Units

There is yet another quite important distinction between railroads and public utility companies. The latter are usually operated independently of one another. Their business originates with themselves, and they distribute their services or products directly to consumers. Railroads are not independent units. Each of them forms but a part of one vast transportation system. Consequently, railroads have a continuous interchange of traffic with each other, which leads to standardization of their properties. Thus, there is a uniform track gauge and the same kinds and classes of cars and locomotives, constructed with interchangeable parts, so that each railroad may operate closely with other railroads. This is not true of the local public utilities, except perhaps power plants and telephone and telegraph companies. One big corporation largely controls the telephone business in the United States, and in this instance there is more or less uniformity and standardization throughout the industry. In some cases, it is true, traction lines interchange services and equipment, but such interchange is more an exception than the rule.