of the Act or in the alternative for exemption as holding companies under Section 3 (a) (3) (A) of the Act. H. M. Byllesby & Company owned 75 percent of the common stock, series B, of Standard Power and Light Corporation, a registered holding company, which in turn owned a majority of the voting stock of Standard Gas and Electric Company, also a registered holding company. The ownership of this common stock, series B, entitled H. M. Byllesby & Company to elect a minority of the Board of Directors of Standard Power and Light Corporation and further to influence the affairs of Standard Power and Light Corporation in such a manner that a majority of the Board of Directors of Standard Gas and Electric Company would be persons who could fairly be said to be representatives or appointees of H. M. Byllesby & Company. The Commission held that the ownership of the certificates in a voting trust formed just prior to the filing of this application constituted ownership of "voting securities" within the meaning of the Act. The Commission found that a "controlling influence" over the affairs of Standard Power and Light Corporation had been exercised by H. M. Byllesby & Company and that the existence of such a controlling influence was not dependent upon the possession of the majority of the voting stock of the company. It was further held that the existence of this controlling influence was not affected by the creation of the voting trust.

H. M. Byllesby & Company, however, would be entitled to an exemption under Section 3 (a) (3) if it could show that it was only incidentally a holding company being primarily engaged in a business other than that of a public utility company and not deriving directly or indirectly any material part of its income from one or more of its public utility subsidiary companies. It was found in this connection that from 1930 to 1937, 46 percent of the investment banking business of H. M. Byllesby & Company had been received from companies in the Standard Power and Light Corporation system. Since the underwriting fees received therefrom represented a material part of its income, the application for exemption under Section 3 (a) (3) (A) was denied.93

Another case, involving the question of control of one company over another, was that of the application of Manchester Gas Company for an order under Section 2 (a) (8) of the Act asking that it be declared not a subsidiary of The United Gas Improvement Company. About 45 percent of the common stock of Manchester Gas Company was owned by The United Gas Improvement Company at the time the application was filed, but, due to default in the payment of preferred stock dividends, exclusive voting rights were vested in the preferred stock of which The United Gas Improvement Company owned about 9 percent. This case was consolidated with a proceeding which the Commission

"Holding Company Act Release No. 1882.

had instituted pursuant to paragraph (B) of Section 2 (a) (8) to determine whether or not the management and policies of the Manchester Gas Company were subject to a controlling influence by The United Gas Improvement Company so as to make it necessary or appropriate that the Manchester Gas Company be subject to the provisions of the Act. The record showed that although The United Gas Improvement Company owned but a small amount of the securities presently entitled to vote, it had been instrumental in changing the manager of the company from one who had been with the company since 1915 to a man whose sole operating experience had been with acknowledged subsidiaries of The United Gas Improvement Company; that the minutes of the Board of Directors of Manchester Gas Company had always been and were still being prepared by the secretarial department of The United Gas Improvement Company; that the Tax Department of The United Gas Improvement Company regularly prepared the various tax returns of the Manchester Gas Company; that the plant of the Manchester Company was regularly inspected by The United Gas Improvement Company engineers in an exhaustive manner; and that the reports of such engineers and their recommendations were followed by the operating officers of the Manchester Gas Company. The Commission held in this case that it constituted a situation in which substantially every phase of the management and policies of the operating company were subject to a controlling influence by a large proprietary company and that, even though The United Gas Improvement Company did not at that time own more than 10 percent of the voting securities of the Manchester Gas Company presently entitled to vote, Manchester Gas Company was subject to such a controlling influence that it was in fact a subsidiary.9

The Union Electric Company of Missouri, which owns substantially all the voting securities of six public utility companies operating in territory contiguous to its operating area in Missouri, Illinois, and Iowa, filed an application for exemption as a holding company under Section 3 (a) (2) of the Act claiming to be predominantly a public utility company whose operations as such do not extend beyond the State in which it is incorporated and States contiguous thereto. In its opinion denying the application 95 on the ground that the company is not "predominantly" an operating company, the majority of the Commission emphasized the fact that the aggregate book value of the company's subsidiaries was 85 percent of that of its directly owned properties. The Commission further pointed to the substantial amount and proportion of the assets and earnings of the holding company system represented by the subsidiaries and the substantial public holdings of the senior securities of the subsidiaries, and held

Holding Company Act Release No. 2002.

Holding Company Act Release No. 1621

that the unified operation of the property of the parent and subsidiary companies was without significance relative to the company's application.

The following table indicates the number of applications under Sections 2 and 3 relating to exemption from the provisions of the Act, received and disposed of during the past fiscal year.

MUTUAL AND SUBSIDIARY SERVICE COMPANIES

An important phase of the Commission's duties is the regulation of service, sales, and construction contracts pursuant to Section 13. The primary purpose of this section of the Act is to prevent the charging of excessive or unearned fees and other charges which holding companies or their controlled service companies have exacted in the past from the controlled operating companies. Under Section 13 of the Act, registered holding companies are prohibited from servicing for a charge their associate public utility or service companies, except under special or unusual circumstances, while subsidiary or mutual service companies are required to perform service, sales, and construction contracts for associate companies so as to insure the efficient and economical performance of such contracts for the benefit of the serviced companies at cost fairly and equitably allocated. The Commission has enforced these provisions by rules and regulations and by proceedings pursuant to the statute.

Two types of system companies are engaged in the performance of such contracts, namely, subsidiary and mutual service companies. Both of these types of companies must operate at cost and the basic requirements as to their standards for and method of operations are, for all practical purposes, similar.

The program of the Commission in the administration of Section 13 tends to fall in two major parts. The first part may be termed organizational and involves the original qualification of the mutual and subsidiary service companies. The second and perhaps more important part involves the continuing office and field studies of these companies which are operating under Commission jurisdiction.

Under the first part of the program, the Commission has passed on a majority of the service companies which have filed. Prior to Commission action many changes have been required in the methods of

operation and functions of these companies in order to comply with the standards of the Act and the rules and regulations issued thereunder. A reasonable amount of standardization has been accomplished, particularly with respect to accounting and the elimination of investments and functions not related to the performance of service, sales, and construction contracts. There are, however, two major companies which the Commission has not passed on as yet with respect to their organizational features, namely, Ebasco Services, Inc., in the Electric Bond and Share System and The Utility Management Corporation in the Associated Gas and Electric System. During the past year, public proceedings have been conducted in connection with these two cases and some improvement and progress has resulted. In the case of The Utility Management Corporation, certain major changes have already been effected in the operations of this company during the past year, resulting in substantial savings in its cost of performing contracts for associated companies.

Because, however, of the difficult problems encountered and the apparent necessity for further material changes with respect to these companies, they are still operating under the temporary exemption provided for in the rules and regulations. This same general situation also applies with respect to certain of the other service companies whose applications or declarations are still pending. The procedure followed by the Commission does not prejudice the rights of the service companies which have filed with the Commission, since the rules and regulations adopted by the Commission permit these companies to continue operations under temporary exemption until the Commission acts.

The cumulative experience obtained over the past several years in dealing with service companies has been very helpful in passing upon the organizational features of service companies.

During the past year, progress has been made in the second and perhaps the most important aspect of service company regulation, namely, the continuing office and field studies of service companies which have been previously passed upon by the Commission. Since there is no real uniformity in the functions and activities of the various service organizations, each case must be treated separately in order to obtain an effective analysis of the functions performed and the necessity for the services rendered. Such office and field studies have resulted in the withdrawal of approval of two service companies since the record indicated there appeared to be no further necessity for the continuance of their operations. Office and field studies have been undertaken in other situations which may result in further action by the Commission in these cases. The Commission is also

engaged in determining whether some holding companies are directly or indirectly shifting holding company expenses upon the operating companies through the medium of controlled service companies or otherwise.

The orders of the Commission have in many instances been conditioned to require, if necessary, a reallocation or reapportionment of service company charges. One proceeding 96 was conducted during the past year as a result of which a reallocation of past charges was required.

The Commission also had the occasion in the Ebasco Services, Inc. case to question the profits obtained from the servicing of foreign companies. These profits were drawn up to the top holding company, Electric Bond and Share Co. As a result of the proceedings all profits obtained through servicing foreign associate companies must be turned back to the intermediate holding company, American and Foreign Power Company, Inc.,97 for the benefit of all its security holders.

The Commission, during the past year, amended its annual report form to require departmental analyses in the salary account of service companies. This information, contained for the first time in the annual reports for 1939, will be very helpful in connection with future studies of the functions and benefits of service companies. Additional information has also been required in the Form U-5S, Annual Supplement to Registration Statement, in order effectively to appraise and analyze the necessity for further regulations of service, sales, and construction contracts between the companies in utility systems and outsiders so that the Commission may prescribe such additional rules and regulations as may be necessary.

The Act, in its definition of service, sales, and construction contracts, gives the Commission complete jurisdiction over intercompany transactions and covers necessarily many and varied activities in the day-to-day operations of holding-company systems. The Commission's studies have brought to light certain methods and procedures whereby companies have contended that the transactions involved were beyond the sphere of Commission regulation. These and other problems are carefully studied in the light of the present rules and regulations in order to insure a more effective control of the transactions which appear to warrant regulation.

The following table indicates the number of applications under Section 13 relating to mutual and subsidiary service companies, received and disposed of during the past fiscal year:

In the Matter of Northeastern Water and Service Corporation, Holding Company Act Release No. 1867, "Holding Company Act Release No. 2255.