"Colonel CHANTLAND. Surely. They had to balance the books."

To my knowledge the record of 8 years' testimony does not disclose a single instance where such a transaction was recorded on the books of any company examined.

It may be emphasized that the issuance of no-par stock is a widely accepted business practice.

Common stock represents a proportional interest in the assets of a company after the satisfaction of prior claims. To give such stock a "par" figure is to attach an entirely fictitious value to it. It is appraised by the public only upon its actual merits, its worth in case of liquidation, and its potential earning power. None of these have any relation to "par" and cannot either be improved or impaired by giving the stock a fixed value. It is only necessary to look at the stock market tables to note how little relationship there is between prices and the bookkeeping "par" values of those common stocks which were originally issued in this manner.

66

"PRUDENT INVESTMENT" AS A BASIS FOR ALLEGING WRITE-UPS" Colonel Chantland proclaims the acceptance by the Federal Trade Commission of the "prudent investment" theory of valuation. "We believe in honest prudent investment." (P. 112.)

The Federal Trade Commission has never been empowered to place a value upon the properties of the utilities. Despite that fact, it has adopted the theory of the Interstate Commerce Commission and some others contending for prudent investment.

It has been by the use of the "prudent investment" formula that the Federal Trade Commission has been able to arrive at some of the figures of its alleged "write-ups" and by the use of these "write-ups" to being discredit upon the integrity of the entire public utility industry.

Inasmuch as the adoption of "prudent investment" as the basis of valuation has become one of the features of the Public Utility Act of 1935, it is of the greatest importance to point out the wide divergence of the theory of "prudent investment" with the actual accepted methods of valuation as determined by the various regulatory commissions and upheld by the courts over a long period of years.

The language of the present act stated that the basis of value shall be "actual legitimate prudent original cost as defined and interpreted in the classification of investment in road and equipment of steam roads,' issue of 1914, Interstate Commerce Commission" (Sec. 201 (13), p. 80). In ascertaining this cost, the Commission may require a company "to file an inventory of all or any part of the property of the utility and the original cost thereof, as defined by this rule." (Sec. 211b, p. 117.)

The "prudent investment" theory has yet to win judicial approval. It should be obvious that over a long period of time fair value, including all the elements that enter into it, constitutes the only sound basis for rate making. The courts have always so held. Up to the present time "prudent investment" has largely constituted a vague and ill-defined method seized upon by critics of the industry as an excuse for disregarding the fact that construction costs during the World War rose sharply to a new general level which has largely been maintained since that time.

No matter how desirable in the minds of regulatory bodies in Washington, the "prudent investment" theory is in conflict with the law of the United States. The Supreme Court of the United States, in its decision in the Indianapolis Water Co. case, decided in 1926, quotes from the case of Smyth v. Ames. It states that:

"The decision of this court in Smyth v. Ames (169 U. S. 466, 547), declares that to ascertain value 'the present as compared with the original cost of construction' are, among other things, matters for consideration. But this does not mean that the original cost or the present cost or some figure arbitrarily chosen between these two is to be taken as the measure. The weight to be given to such cost figures and other items or classes of evidence is to be determined in the light of facts at hand." (McCardle v. Indianapolis Water Co., 272 U. S. 410.) The United States Supreme Court, in the Minnesota rate cases (230 U. S. 352, 454), Mr. Justice Oliver Wendell Holmes, speaking of the law.of present value said:

"It is clear that in ascertaining the present value we are not limited to the consideration of the amount of the actual investment. If that has been reckless or improvident, losses may be sustained which the community does not under

write. As the company may not be protected in its actual investment, if the value of its property be plainly less, so the making of a just return for the use of the property involves the recognition of its fair value if it be more than its cost. The property is held in private ownership and it is that property, and not the original cost of it, of which the owner may not be deprived without due process of law."

The Federal regulatory bodies have continuously fallen into the bad habit of asserting their opinions, theories and wishes into their findings, opinions and proposed legislation despite the fact that such opinions and theories are contrary to established law as defined by the highest judicial tribunal in the land. That the drafters of the present bill followed this habit of flouting the decisions of the Supreme Court when contrary to their plans is best attested by the decision of the United States Supreme Court in the O'Fallon case, (279 U. S. 461) wherein the court said:

"In Southwestern Bell Telephone Co. v. Public Service Commission, supra (287), we said: 'It is impossible to ascertain what will amount to a fair return upon properties devoted to public service without giving consideration to the cost of labor, supplies, etc., at the time the investigation is made. An honest and intelligent forecast of probable future values made upon a view of all the relevant circumstances, is essential. If the highly important element of present costs is wholly disregarded such a forecast becomes impossible. Estimates for tomorrow cannot ignore prices of today.

"The doctrine above stated has been consistently adhered to by this Court. "The report of the Commission is long and argumentative. Much of it is devoted to general observations relative to the method and purpose of making valuations; many objections are urged to doctrine approved by us; and the superiority of another view is stoutly asserted. * * *

"In the exercise of its proper function, this Court has declared the law of the land concerning valuations for rate-making purposes. The Commission disregarded the approved rule and has thereby failed to discharge the definite duty imposed by Congress. Unfortunately, proper heed was denied the timely admonition of the minority-'The function of this Commission is not to act as an arbiter in economics, but as an agency of Congress, to apply the law of the land to facts developed of record in matters committed by Congress to our jurisdiction'."

It would appear that the Interstate Commerce Commission, acting in the same manner, had spent 20 idle years and an expenditure of $200,000,000 of public money in furtherance of its will-o'-the-wisp theories. At the time the Interstate Commerce Commission commenced its valuation, the law of the land, as declared by the United States Supreme Court, was known to all familiar with the decisions of the court. The O'Fallon case decided in 1929 but reaffimed the law of the land on the matter of so-called "prudent investment" theories, yet the drafters of this bill fall into the same error as did the Interstate Commerce Commission and if the provisions of title II are made effective, it is evident that fallacies of the Interstate Commerce Commission will be carried into the electrical field, resulting in large expenditures of the taxpayers' and consumers' money in a futile attempt to establish and maintain a false theory of valuation. SERVICE CONTRACTS AND FINANCIAL ASSISTANCE TO SMALLER COMPANIES

Speaking of the matter of contracts, Colonel Chantland said (p. 109): "In my judgment, our record disproves that claim (that holding companies were of assistance in the matter of financing). While it may be true that in some instances, original loans of money or financing, were proposed at a little lower rate than a local company might have obtained, there is first the question of whether the financing was needed to the extent that it was made; and there is second, the serious proposition that when the additions for fees and commissions by the holding company, and the expenses in calls before due at premium, and reissues were made, we find that the money cost to the operating companies was you might say, from the going rate right up as high as 20 percent."

In this regard, the following quotation constitutes one of the most effective

answers:

"THE ECONOMIC BASIS FOR HOLDING COMPANIES

"fundamental theory of the holding company is that a single large central organization can furnish more efficient and economical management and service in financing, construction and operation

"The pressing need has generally been for capital. * * * The means by which these needs have been met is the holding company. * * * The acquisition by such corporations of the control of operating companies made it possible to consolidate previously independent operating units to obtain the benefits of larger distribution systems necessary to utilize the production of larger generating stations

*

*

"The individual operating company, with nothing behind its securities but its own developed or prospective earning power, lacks diversity of resources. When it applies to the investment banker for assistance its security issues are comparatively small and relatively unknown to the investing public. Consequently it is in a poor position to bargain for loans on favorable terms. The holding company meets this situation by substituting for the securities of its individual operating subsidiaries its own stocks, bonds, and debentures, backed by the diversified earnings of its underlying holdings."

This statement is from a Federal agency when it was called upon to render an economic study of the industry. Contrast the foregoing statement with the statements issued by the same Federal body today; to wit, the Federal Trade Commission.

In connection with service contracts, it would seem that neither Colonel Chantland nor the Federal Trade Commission are in a position to reliably report on the benefits, advantages, or disadvantages of the service contracts because its investigation has confined itself to bookkeeping and accounts, which records do not reflect a true evaluation of the accomplishments of the industry, nor the economic conditions which existed at the time many of the things complained of transpired, nor the difficulties of an engineering and technical nature encountered in the development of the business. The figures in the books of account are meaningless in contrast to the great good that was accomplished. So far, the Commission's examination shows how much money was paid to the service companies, but it does not show the value nor the extent of the services rendered to the operating companies and the public for the money so received. It was hoped that the Commission in its investigation would make a full, complete, and thorough report of the industry, so that the good done would be set forth as well as the bad, which the Commission so strenuously and voraciously reminded us of. Only one report, to my knowledge, has dealt with the scope of these contracts and the value of the services to the operating companies under the provisions of these contracts and that report, though delivered to the company over a year ago, has never seen the light of day. It is not a part of the official record and in fact it has been expressly excluded from the public record on the ground that the report is too favorable to the private company and reflects discredit upon municipal ownership. The fact is that these service corporations were set up as separate corporations in order to comply with the laws of the several States and, in the vast majority of instances, such corporations were of small capitalization and organized for convenience and necessity to perform an incidental function and have been defined by the Federal Trade Commission as the construction, service or purchasing departments of the holding companies ("corporate departments"). No proper evaluation of these services can be obtained by merely reciting the cost of such service without a thorough economic and engineering study of the benefits, which, it would seem that the commission has purposely avoided doing.

One conversant with the facts surrounding the operations of the electric light and power companies realize the advantages and necessity for this type of supervision and the resulting economies, all of which are passed on to the rate payer. That these contracts in and of themselves are not as vicious as the Commission would have you believe is best attested by the fact that the following State commissions have exhaustively examined and reported upon the efficiency of these contracts and allowed the charges made as reasonable and fair: Arizona, California, Colorado, Georgia, Illinois, Indiana, Maine, Maryland, Michigan, Missouri, Montana, New Hampshire, New York, North Dakota, Ohio, Pennsylvania, Oregon, Tennessee, Vermont, Virginia, West Virginia, and Wisconsin.

Of particular interest is the opinion of Commissioner Thomas of the State of Oregon, whom no one could ever say was favorable to the utilities. In his examination of the relationship existing between an operating company and the holding company under the service contracts he has said (Nov. 1, 1934):

"The claim of Byllesby Engineering & Management Corporation that it is in every true sense a management concern, and that it gives valuable services under its contracts, is supported by the record (mimeographed opinion, p. 13). That the plan design and construction work of these utilities has been improved and operating benefits and economies have resulted from the services rendered under these contracts is hardly open to question (p. 9). * (In regard to

purchasing of materials and supplies through the Management Corporation) this practice results in obtaining quantity discounts and other concessions not obtainable by the operating companies if acting independently (p. 6) * *ታ

The principal complaint against the service contract is that the terms of it are not arrived at at arms-length. This criticism is not justified, because the United States Supreme Court and the supreme courts of several States have repeatedly held that where the contract is not at arms-length the Commission may proceed to inquire into the terms of the contract and to disregard corporate entities to the: same extent that a court of equity might under like circumstances.

TRANSMISSION OF ELECTRICITY

Colonel Chantland's dialogue with the chairman is obviously designed to give some measure of justification to that part of the Public Utility Act which makes transmission lines common carriers.

The act makes it the duty of "every public utility to furnish energy to, exchange energy with, and transmit energy for, any person upon reasonable request therefor" (sec. 202a, p. 104). This makes common carriers of all transmission lines which cross State boundaries or which connect with other lines which do so. It would make it possible for the Government to use any or all of such existing lines to transmit power from Federal hydroelectric projects to any municipality which might desire to distribute electricity at any point along the interconnected system. Inasmuch as many of these Federal projects are in desert places far away from any markets for their power it evidently requires either some new invention or else a great improvement in the art to justify their construction.

"Chairman WHEELER. I do not know whether you have gone into this phase or not, but my understanding is that at the present time with the new inventions that have taken place they can transport, if that is the proper word for it,. electricity to a much greater extent than they previously could.

"Colonel CHANTLAND. They can transmit it, yes. When we started our investigation 8 years ago, now-it seems longer-the then effective distance was regarded as 125 to 150 miles. Now 300 miles is not at all out of the way" (p. 136). Colonel Chantland's statement that "8 years ago the effective distance was regarded as 125 to 150 miles" is not in accordance with the facts.

The long-distance transmission lines of California are now nearly 20 years old. Some of them are 200 miles long and one is 300 miles. While there have been some technological improvements tending to slightly increase the effective length of transmission, the question is largely an economic one of balancing costs of transmission against the costs of generation at the point where the power is to be used.

ERRONEOUS CONCEPTION OF IMPORTANCE OF POWER MOVING ACROSS STATE LINES

Colonel Chantland stated that:

"For example, the fact that 17 percent of the electricity and 15 percent of the gas is all that moves interstate is not any test, because when you look at different parts of the country you will find very different situations" (p. 134).

"Certain citizens are dependent entirely on electricity or gas very largely from across State lines, so it is not fair to say that it is not a Federal question" (p. 135). It is entirely true that many cities of the United States are located on waters. which form State boundaries. Consequently, although the supply of power is inherently a local matter, in the search for the best location for power generating sites, a number of stations have been located across State lines. To say, however, that this constitutes a Federal question, is, however, incorrect. Practically all interstate sales of power are at wholesale rates. Retail transactions amount to a negligible fraction of 1 percent.

Expressed in terms of total power generated in the United States, 821⁄2 percent of the total supply is intrastate, 161⁄2 percent is transmitted over State boundaries but the transaction remains within the same company or is between affiliated companies, and only 1 percent of the total is transferred between nonaffiliated companies across State lines.

The total amount paid for this interstate power between nonaffiliated companies amounts to less than $5,000,000 per year, or about one-quarter of 1 percent of the gross revenue for the entire electric light and power industry.

The Supreme Court of the United States has laid down very definite rules defining the rights of the individual States to control the industry and to protect the consumer.

A. The generation of electricity has been held to be intrastate and subject to regulation (taxation) by the State in which the generating plant is located, even though the electricity produced is automatically transmitted in interstate commerce. (Utah Power & Light Co. v. Pfost, 286 U. S. 165 (1932).)

B. The distribution of electricity to the consumer has been held to be intrastate commerce and subject to the regulation of the State in which the consumer receives the electricity; and this is true even though the power is produced by the distributing company outside the State and imported for the purpose of distribution. (Pennsylvania Gas Co. v. Public Service Commission of New York, 252 U. S. 23 (1919); East Ohio Gas Co. v. Tax Commission of Ohio, 283 U. S. 465 (1931).)

C. The charges paid by the distributing company to an affiliated source for services performed in the course of interstate commerce and for current received in interstate commerce are subject to the supervision of and rejection by the regulatory body of the State in which the distributing company operates. (Smith v. Illinois Bell Telephone Co., 282 U. S. 133 (1930); in Western Distributing Co. v. Public Service Commission of Kansas, 285 U. S. 119 (1932).)

D. This leaves only 1 percent of the total generated electric output not subject to effective State control. And as to this 1 percent there is obviously little need for regulation. Common business judgment should direct the local distributor to make the best hargain possible with the unrelated producer and to secure the best rate the market offers. But if the commercial instincts of the management should not be thought to afford sufficient protection to the ultimate consumer, there is the further safeguard in the power of the State commission to disregard excessive operating expenses in fixing the rate to the consumer. (St. Joseph Gos Co. v. Barker, 243 Fed. 206. See also Chicago & Grand Trunk Railway Co. v. Wellman, 143 U. S. 339.) If, on the other hand, the costs were not demonstrably excessive and the contract was made in good faith, a Federal commission or regulatory body would have no more authority to override the business judgment of the management in making the contract if an interstage rate, or charge, were involved than would the State commission in case of a State rate.

SUPERIORITY OF STATE REGULATION OVER FEDERAL BUREAUCRACY Colonel Chantland quotes from page 8 of F. T. C., volume 71A:

"In the campaign there inhered persistent efforts to prevent effective, or any, regulation of utilities for the protection of the public, either of the consumers as to service and rates, or of the investor as to character and bases of securities issued" (p. 93).

Again on page 150 he states

"It is, of course, possible to say for the balance of the States that the authority of the Commission to regulate rates and matters affecting the financial status or service of the operating company now gives implied authority to scrutinize contracts and commercial dealings with 'affiliate' controlling or holding companies, but as a general proposition it cannot be said that the commissions of these States have exercised any authority or jurisdiction beyond the express mandate of their laws."

Throughout its recent press releases, the Federal Trade Commission has consistently sought to prove that "write-ups" and other alleged unethical practices of holding companies have increased rates to the public.

Many of these statements, reflecting upon the character and integrity of the officers of the various State public utility commissions, are unreservedly and unqualifiedly false. It presupposes on the part of the State commissions the same attitude attributed by the Federal Trade Commission to the utility companies themselves; namely, that if an opportunity to do wrong was presented, this opportunity has been availed of and the wrong has been done.

That Colonel Chantland's observations and the Commission's recent statements are at variance with what the Commission itself found in its previous investigation is shown by the 1928 report of the Federal Trade Commission under Senate Resolution 329 (under which it was directed to investigate the report upon the activities of the General Electric Co. and its relationship to the supply of electric energy). In this report the Commission said:

Page 196, chap. XII: "All but one of the States have laws providing for some form of public utility regulation. The extent to which regulation is applied to electric public utilities, however varies widely. States having the most extensive and effective regulation have power with respect to local operating companies doing business within their boundaries to secure reports, subpoena records and