design of project works; to construction, maintenance, and operation, and to retirement and replacement of project works and property; to the creation and maintenance of depreciation and amortization reserves; to the expropriation of excessive profits; to valuations of property; to the submission of reports by licensees; to accounting practices; and to the regulation of rates, service and securities. With respect to all these, except the last two named, the requirements of the Act are mandatory on all licensees. The requirements with respect to the approval of project works, to their construction, maintenance, operation and retirement and to the creation of necessary reserves are also made express conditions of any licenses issued. The ultimate responsibility for the enforcement of these requirements rests upon the Commission, and the Act makes provision for such enforcement and for penalties for lack of compliance.

In the preparation of regulations and procedure for the administration of the Act it has been the intention to limit Federal supervision and control to those matters for which the Commission must itself assume responsibility under the provisions of the Act; and within this limit to leave, in general, initial responsibility to the States in those matters where the States also have jurisdiction under their own statutes, reserving in the Commission the right to take initial action in any matters not covered by State statutes, and also reserving the right to add to State requirements if such requirements do not substantially meet those imposed by the Federal statute.

In carrying out those provisions of the Act which require applicants for license to present satisfactory evidence of compliance with State law with respect to the appropriation and use of water, to the right to do business within the State, and to engage in the generation, transmission and distribution of power, the Commission notifies all interested State agencies, as well as neighboring municipalities, of all applications filed; publishes in a local newspaper for a period of eight consecutive weeks notice of each application received; and on its own initiative checks all applications for compliance with the preliminary requirements of State law. The Commission also is developing further co-operative relations with the various state agencies for the purpose of

more effectively and expeditiously administering these provisions.

The Act provides that licenses shall be issued only on the condition "That the project adopted, including the maps, plans, and specifications, shall be such as in the judgment of the Commission will be best adapted to a comprehensive scheme of improvement and utilization for the purposes of navigation, of water-power development, and of other beneficial public uses; and, if necessary, in order to secure such scheme the Commission shall have authority to require the modification of any project and of the plans and specifications of the project works before approval". It also provides that licensees "shall maintain the project works in a condition of repair adequate for the purposes of navigation and for the efficient operation of" the "works in the development and transmission of power" and "shall make all necessary renewals and replacements".

While many States through their laws regulating public utilities have provided means for requiring adequate maintenance and replacement of public utility properties, few appear to have taken any effective measures toward requiring the full economic development of the resources of their streams or toward passing upon the adequacy of the plans proposed for such purposes. The responsibility for assuring reasonable compliance with this requirement of the Act will, therefore, for the present at least, rest largely with the Commission. To what extent it will also be necessary for the Commission to assume responsibility over adequate maintenance and replacement of project works, only the future can determine. It is hoped, however, that State agencies will take such action as will relieve the Commission of this responsibility. There is more involved in this matter than mere continuity of service or ability to supply power demands. The United States either on its own behalf or on behalf of States and municipalities has the option of acquiring the properties of any licensee at the end of the license period for a price represented by the unamortized cost of the properties. It has, therefore, a special interest in their design and construction and in the manner in which they are maintained. It has also a general interest in the full utilization of the national power resources. Both interests require it to reserve the authority to enforce where necessary these provisions of the Act.

In close association with the foregoing are the requirements of the Act with respect to the creation and maintenance of depreciation reserves which shall be adequate for making the necessary renewals and replacements of project property; and the same special interests of the United States place upon the Commission ultimate responsibility for determining the adequacy of such reserves. There is wide variation in the requirements of various States in this respect, and there are considerable differences of opinion regarding the extent to which such reserves should be accumulated, the basis upon which they should be computed and the degree to which they should be made mandatory. It would appear, however, that the trend of opinion and of practice is toward requiring the creation of reserves which will fairly reflect, as nearly as it is practicable to estimate, the depreciation that has accrued on property remaining in service or the loss in service value, or in the capacity for service, that has taken place in such property.

The licensees of the Commission will be largely public utilities subject to rate regulation by their several States and subject to varying requirements with respect to accounting for depreciation reserves. The Commission recognizes that these variations exist and recognizes also the relation that must necessarily obtain between rate allowances and depreciation requirements. It proposes, therefore, when any licensee is a public-service corporation subject to the jurisdiction of a State commission, that it may account for depreciation on project properties in the manner and to the extent required by the State Commission, but that if such accounting for depreciation does not show that adequate reserves have been established and are being maintained on such property the licensee shall be subject to and shall comply with any reasonable order of the Commission in relation to accounting for depreciation and to the creation and maintenance of adequate reserves for such project property. While in case of disagreement between State and Federal Commissions with respect to depreciation the procedure proposed may appear only to postpone the day of conflict, it is believed, since the Federal Commission will concern itself only with the properties for which it grants licenses, that State authorities could hardly, in view of the provisions of the Act, refuse to accept, in determining the rates of licensees, any reasonable order of the

Commission with respect to depreciation reserves for project property; and it is not believed thay they would have any disposition to do so if they could.

It is not required that amounts credited to depreciation reserve accounts shall be represented by actual cash set aside into a fund, thereby becoming idle capital, but the amounts so credited may be employed in extensions or betterments either of project property or of other property, or used for such other legitimate purposes as the licensee may choose. The licensee will, of course, be held liable for the amount carried in the depreciation account and will, if he uses it for purposes other than replacement, be required to supply funds from other sources when needed for purposes of replacements. If the properties are taken over at the end of the license period the credit balance in the reserve account, not cash in bank or elsewhere, will determine what deduction, if any, should be made from the original cost to determine the net investment; but deduction will be made only if and to the extent that the earnings of the licensee during the period of the licensee will have, in addition to such deduction, produced a fair return upon the investment in the project. All credits to depreciation reserve accounts, and all losses in service value of property, including in the absence of negligence extraordinary losses as well, whether or not provided for currently, are permitted to be included in operating expenses as a charge against the earnings from operation.

The provisions with respect to depreciation are among the most important contained in the Act and in the regulations of the Commission. They involve not only the integrity of properties in which the United States has the interest of a potential ownership, and the capacities of such properties to render efficient service, but also, and more important, the financial stability of the undertakings of which they form a part. Far too many public utility enterprises have been in financial straits because of failure to provide sufficient reserves for future replacements. This failure has sometimes been due to a policy on the part of the utility of maintaining dividend payments at the expense of adequate reserves; and sometime, to a policy on the part of public regulating agen cies of maintaining low rates at the expense of these same reserves. Both policies are short sighted; both, only too likely to result in financial distress and in inability to supply adequate service at reasonable cost.

Adequate depreciation should be taken up currently and charged against operating expenses; for structures and equipment, even though they do not disappear as visually and as rapidly as fuel and other materials currently consumed, are just as surely used up through the processes of physical deterioration and obsolescense. To fail to show all such losses in the current accounts is to make a misstatement of financial conditions to show net revenues which do not properly exist. To substitute for current charges against operating expenses occasional charges against surplus, as is frequently done, is a dangerous as well as a questionable financial practice; for the time is almost sure to come when accumulated and unprovided for replacements will seriously strain, if not permanently impair, the resources of the utility.

The Act authorizes and empowers the Commission to prescribe rules and regulations for the establishment and maintenance by licensees of a system of accounts. While the provisions of the Act in this respect are not mandatory, it can hardly be assumed that Congress granted such authority except in the expectation that it would be exercised. Furthermore, a uniform treatment of items of fixed capital and of earnings, particularly in their relation to the net investment, to the rate base, and to surplus earnings for purposes of amortization, is indispensable to a consistent administration of certain features of the Act and to the uniform application. of its provisions to all licensees.

In respect to accounting the Commission will deal with. three classes of licensees-public utility corporations under State regulation, similar corporations not under regulation, and industrial corporations. The first class will be the most important, both in point of numbers and in point of horsepower developed.

As in the matter of depreciation, considerable variation exists between the requirements of the several States with respect to accounting for public utilities. If the Commission should, therefore, prescribe a system of its own and make such system mandatory upon all licensees, duplicate books of accounts would be required in many instances. This the Commission wishes to avoid. It has, therefore, provided in its general regulations that any licensee which is subject to State regulation and is thereby required to maintain a system of accounts prescribed by a State regulatory body, may follow