the lease. It provides an absolute and determinable basis upon which rates may be based. We have had enough experience with railroad rate making, undertaken without any basis at all, to appreciate the necessity of beginning now, when we can enter upon the books every element of cost, to require the keeping of the accounts of these licensees in such a way that the Government may know at any moment just what amount the licensee has invested in the plant. That can not be possible under any other plan than the one proposed in this bill." (Mr. Anderson of Minnesota, idem., p. 9966.)

By section 14 of the act the United States at the termination of a license, if at that time it has constitutional power to do so, may acquire" recapture "-the properties of a licensee upon the payment of "the net investment of the licensee in the project or projects taken," plus reasonable severance damages. If the United States can not or does not wish to exercise the right of recapture on its own behalf it may, under the provisions of section 15, authorize recapture by another public agency on the same terms as apply to itself.

Section 3 of the act defines "net investment " as "actual, legitimate original cost," plus cost of additions and betterments, and less certain reserves to the extent accumulated in excess of a fair return; and paragraph (a) of section 4 provides that—

In order to aid the commission in determining the net investment of a licensee in any project the licensee shall, upon oath, within a reasonable period of time, to be fixed by the commission, after the construction of the original project or any addition thereto or betterment thereof, file with the commission, in such detail as the commission may require, a statement in duplicate showing the actual legitimate cost of construction of such project, addition, or betterment, and the price paid for water rights, rights of way, lands, or interest in lands. Section 20 confers upon the Federal Power Commission authority to regulate the rates of its licensees engaged in interstate transmission of electric power; and section 19 gives the same authority in intrastate transmission, if there is no State agency with power to act. The first-named section provides that:

In any valuation of the property of any licensee hereunder for purposes of rate making, no value shall be claimed by the licensee or allowed by the commission for any project or projects under license in excess of the value or values prescribed in section 14 hereof for the purposes of purchase by the United States, but there shall be included the cost to such licensee of the construction of the lock or locks or other aids of navigation and all other capital expenditures required by the United States, and no value shall be claimed or allowed for the rights granted by the commission or by this act.

Since these fundamental requirements can be carried out only if correct, records are made of all current transactions affecting the plant investment accounts and the earnings of licensees, Congress, in paragraph (f), section 4 of the act authorized and empowered the commission:

To prescribe rules and regulations for the establishment of a system of accounts and for the maintenance thereof by licensees hereunder; to examine all books and accounts of such licensees at any time; to require them to submit at such time or times as the commission may require statements and reports, including full information as to assets and liabilities, capitalization, net investment and reduction thereof, gross receipts, interest due and paid, depreciation and other reserves, cost of project, cost of maintenance and operation of the project, cost of renewals and replacements of the project works, and as to depreciation of the project works and as to production, transmission, use, and sale of power; also to require any licensee to make adequate provisions for currently determining said costs and other facts.

There are two general groups of expenditures incurred in the development of power projects licensed by the commission: (1) Those incurred prior to the issuance of license-that is, during the promotion period-and (2) those incurred subsequent thereto; that is, during the construction period. Since all licenses are subject to the accounting regulations of the commission which, among other things, require preservation of vouchers or other evidence of expenditures, audit of "post-license" claims is primarily concerned with determining whether expenditures actually made are a proper charge against plant investment account. With "prelicense" claims, on the other hand, it is necessary to determine not only whether the claims are a proper charge against plant investment account, but also to what extent they represent actual expenditures.

Many projects for which applications for license are filed have been under promotion and in the process of development for many years; in some cases by individuals and in others by corporations. Expenditures have been made for preliminary surveys and tests. Payments have been made to lawyers and engineers for services. Properties in the way of lands, water rights, and flowage rights have been acquired. There have in some cases been lawsuits, receiverships, proceedings in bankruptcy, reorganizations, and transfers of ownership. Individuals have sold their rights and interests to other individuals or corporations, or, after acquiring property as individuals, have organized a corporation and transferred the property to it. Securities, particularly stocks, have been issued in payment for preliminary surveys and lands and other property have been acquired in connection with the proposed development, only a part of which is finally subject to license. Not infrequently these "prelicense" claims aggregate millions of dollars, no small part of which is for interest accrued but not paid, running backward over many years and compounded to date. Records against which claims must be checked are frequently located in several States and involve not only the books of the licensee corporation but also those of affiliated corporations and of holding companies. The most difficult feature encountered, however, is the lack of records showing what has been expended, when and by whom, and for what purpose. In many instances thousands of dollars are

claimed to have been expended for preliminary development and for investigations, and valuable rights, lands, and other properties have been acquired with no dependable record, and in some cases with no record at all of the items or amounts of expenditure.

The projects which were completed when license was issued, and those completed under license or now in course of construction, will have an ultimate installation of over 4,500,000 horsepower, and, if costs are estimated at only $150 per horsepower, a considerably smaller figure than has actually been found, will involve aggregate costs of some $675,000,000. Nearly 2,000,000 horsepower more are under license with construction not yet started. The total costs to be audited will be, therefore, approximately $1,000,000,000. Every dollar entered in the fixed capital accounts of a project is a potential public liability, and would become an actual liability in case the project at termination of license should be taken over by the United States, or by any State or municipality. It is of fundamental importance, therefore, that only actual legitimate costs be permitted to be entered on project fixed capital accounts. Unless the commission is given an adequate force, it cannot be expected that it can dispose of accumulated work, adequately enforce the law, or properly protect the public interest.

That function of the commision which is of great importance in the safeguarding of the disposition of our water-power resources is the exercise of sufficient supervision to insure correct maintenance of investment accounts. It was the lack of means for exercising adequate supervision which led the commission to state in its latest annual report:

Such audits as the commission with its limited force has been able to make have disclosed in several instances what appears to be overcharging of investment accounts, and questionable items in charges, made by some holding companies to their subsidiaries under license. The commission can not with its present personnel make the investigations and conduct the hearings necessarily preliminary to the issuance of appropriate orders in these cases and, in consequence, millions of dollars may be improperly entered in fixed capital accounts of licenses.

RELATION BETWEEN THE FEDERAL GOVERNMENT AND THE STATES IN MATTERS OF ELECTRIC UTILITIES REGULATION

Congress had two distinct purposes in view in conferring upon the Federal Power Commission authority to establish a system of accounts for its licensees and to require its maintenance by them; the first, in order that there might be available a current record of investment, expenses, and earnings of licensees sufficient to include the various items which go to make up the "net investment" and to determine the price to be paid if at the end of the license period the renewal license should be issued to a new licensee or the properties

should be taken over by the United States. A correct record can be had only if it is currently maintained, examined, and checked while the vouchers upon which it is based are in existence. The establishment of such a system of accounts, the requirement of its maintenance by licensees, the examination of books and records to determine whether such system is being maintained in accordance with the requirements of the law, and the correction of errors or enforcement of requirements; in fact, all the provision over matters of accounting exercised by the commission or authorized by the act would be necessary for this purpose only, even if there were not other purposes which require it.

The second purpose in requiring the maintenance of an adequate and correct accounting system has direct relation to the regulation of rates, services, and securities by whatever agency exercised. This is a purpose in which the States are more directly concerned. A majority of the States have created regulatory commissions with jurisdiction over electric utilities, and these commissions have in turn established systems of accounting to be maintained by such utilities. The examinations which the Federal Power Commission has undertaken have so far as possible been made in cooperation with State public-service commissions, and the results of all such examinations are made available to such commissions. It would be a distinct aid to the States if the Federal Power Commission were better equipped to perform those duties which are required under the Federal statute and which it performs for distinctly Federal purposes.

When we turn to the matter of regulation of rates, services, and securities we find that in the majority of cases the transactions involved in the production and distribution of power fall wholly within State lines and are, therefore, within the jurisdiction of the States; but where electric energy is transmitted across State lines, such transmission becomes interstate commerce, over which the States may have either a temporary and limited jurisdiction or no jurisdiction at all. The nature of interstate power transmission was defined by the United States Supreme Court in the Attleboro case where it said: "The transmission of electric current from one State to another, like that of gas, is interstate commerce, and its essential character is not affected by a passing of custody and title at the State boundary not arresting the continuous transmission to the intended destination." (273 U. S. 83.)

Interstate commerce in electric energy may occur under either one of two sets of circumstances. It may consist in the transmission and sale of energy produced in one State and transported and furnished directly to consumers in another State by the company so producing and transporting, or it may consist in the transmission and sale in

wholesale quantities to a distributing company for subsequent distribution and sale by such company.

The latter set of circumstances is represented in the Conowingo project which is operated under license of the Federal Power Commission. The generating plant and the greater part of the project property are located in the State of Maryland. The power as generated is sold and delivered to The Philadelphia Electric Co. at the Maryland-Pennsylvania State line. Similar circumstances were involved in the Attleboro case, where the Narragansett Electric Lighting Co., a Rhode Island corporation, developing power within the State of Rhode Island and supplying customers in that State, also delivered under contract to the Attleboro Steam & Electric Co. at the Rhode Island-Massachusetts State line electric energy for distribution and sale by the latter company to its consumers in the State of Massachusetts. On a finding that the current delivered to the Attleboro Co. was delivered at a loss; and that the contract rate was unreasonable, would be detrimental to the public welfare and would prevent the Narragansett Co. from performing its full duty to its local customers, the Rhode Island Public Utilities Commission approved by order a new rate schedule proposed by the Narragansett Co. for the purpose of amending the contract rate. On appeal of the Attleboro Co. the question was brought to the Supreme Court of the United States. That court after comparing the circumstances in the case with those existing in the Kansas Gas Co. case (265 U. S. 298) and in the Pennsylvania Gas Co. case (252 U. S. 23) said:

It is clear that the present case is controlled by the Kansas Gas Co. case. The order of the Rhode Island Commission is not, as in the Pennsylvania Gas Co. case, a regulation of the rates charged to local consumers, having merely an incidental effect upon interstate commerce, but is a regulation of the rates charged by the Narrangansett Co. for the interstate service to the Attleboro Co. which places a direct burden on interstate commerce. Being the imposition of a direct burden upon interstate commerce, from which the State is restrained by the force of the commerce clause, it must necessarily fall, regardless of its purpose. It is immaterial that the Narragansett Co. is a Rhode Island corporation subject to regulation by the commission in its local business, or that Rhode Island is the State from which the electric current is transmitted in interstate commerce, and not that in which it is received, as in the Kansas Gas Co. case. The forwarding state obviously has no more authority than the receiving state to place a direct burden upon interstate commerce. . Furthermore, if Rhode Island could place a direct burden upon the interstate business of the Narragansett Co. because this would result in indirect benefit to the customers of the Narragansett Co. in Rhode Island, Massachusetts could, by parity of reasoning, reduce the rates on such interstate business in order to benefit the customers of the Attleboro Co. in that state, who would have, in the aggregate, an interest in the interstate rate correlative to that of the customers of the Narragansett Co. in Rhode Island. Plainly, however, the paramount interest in the interstate business carried on between the two companies is not local to either state, but is essentially