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3. Preferred stocks are flatly prohibited and this important section of the investment market is closed.

4. Common-stock financing is an expensive method if all, or an unnecessarily large proportion, of the utility's funds are to be obtained in this manner. Furthermore, when a prospective investor knows that the present common stocks of the company are shortly to be dumped on the market, he is not likely to be interested.

For the future, after the holding-company group is broken up, the operating company must finance as an isolated enterprise. Most of the companies in our group serve territories which are primarily dependent upon agriculture or upon a single key industry. Hence their revenues are subject to periodic fluctuation while their expenses and fixed charges are nearly constant. The net income available for return on their common stock is thus highly unstable and uncertain. From an investor's standpoint these common stocks would be unattractive. The economic stability heretofore given by the diversification of investments in s holding company will be lost.

Most of our operating companies are enterprises too small in size for their common stocks, as an independent investment, to have a standing in the general investment market. Unless securities are readily marketable, the cost of funds is greatly increased.

Over and over in this bill, we find the conception of "a geographically and economically integrated system.” As applied to a holding company, with relatively small operating subsidiaries, it is economically unsound. It will increase the costs to users for the simple reason that it will increase the risk of investors and hence increase the cost of the funds necessary for continuance and expansion of the utility business.

It is my opinion that, if this bill is passed, investors generally will regard it as the first step toward ultimate nationalization of the industry. Many believe that its purpose is to accomplish Government ownership, or at least Government management, without compensation. Even if the ultimate nationalization carried with it compensation to the owners of the properties, the amount thereof would be highly speculative and uncertain.

In view of present intense Government activities affecting the electric light and power industry as shown on chart 33 and of the extent of the various Federal and major Federal-aid hydroelectric projects now under construction or proposed as shown by chart 34, it is not to be wondered at if the investors in the industry are thoroughly alarmed at the prospect.

These considerations will have an important psychological effect on investors and accordingly will have a depressing effect upon the market for operating company securities.

With this weakening in the investment position of utility securities, bonds as well as stocks, with the discouraging future outlook for utility enterprises under Federal control and operation, and with the devastating effect on utility credit of the dumping, of securities owned by holding companies, I see little hope that private enterprise can survive in this field if this bill be enacted. I think the plan of this bill, if carried out, must look inevitably to Government finance, and just as surely, to Government ownership.

WHAT THIS BILL DOES TO THE HOLDING COMPANIES

I now want to direct your attention to some of the liquidation and dissolution features of the bill and some of their consequences.

The first thing that would happen to us under the bill would be that Electric Bond & Share Co. and its holding companies would cease to be "going concerns." The directors would immediately be put in the position of liquidating trustees.

Since our holding companies have been set up to afford diversity of risk to the security holders, none of them could qualify as “regional” holding companies which might be permitted to exist under the bill.

As they could not be reorganized to carry out the purposes of the bill, they would have to be liquidated.

The suggestion of some proponents of this measure for "sterilization" of the voting stocks of holding companies when actually publicly held seems both unnecessary and improper on any other basis than as another way to effectively destroy the holding company altogether. The alternative proposal made by other proponents of the present bill that debt, including even the mortgage bonds of the operating companies, should be given a vote on a dollar for dollar basis with the equity stock is equally inadmissible except as a doctrinaire conception contrary both to law and experience.

Extend the idea to the equally preposterous one of giving the farm or homemortgage company the right to tell who the solvent householder shall invite home to dinner or the solvent farmer how to run his farm.

The really important thing is that the legislation to be enacted be so drawn as to give the present investor a chance to share in the recovery we all hope is soon to be with us and to prevent the occurrence of those evils which past experience has disclosed or wise forethought may suggest.

IMPOSSIBILITY OF LIQUIDATION WITHOUT DOING GREAT INJURY

I have already discussed the requirements of the bill which would compel Electric Bond & Share Co. by the end of 1936, to divest itself of all interest in its foreign companies, and would compel it and its associated holding companies, to rid themselves of their natural gas investments.

As a practical matter the liquidation of our other assets would also have to be started soon and be completed by 1940.

These combined assets belong to approximately 300,000 persons scattered throughout the country and abroad.

The varying rights of these 300,000 persons to the assets of these companies make impossible any distribution in kind of such assets even if it were otherwise feasible. How then are we to satisfy these rights?

Our available net cash resources would provide less than one-eighth of the amount necessary to satisfy the outstanding debt and preferred stocks. In addition to this cash, there are other assets consisting of bonds, demand loans, preferred and common stocks of operating companies, as well as miscellaneous other investments.

These holding companies are solvent and the contract rights of their approximately 300,000 security holders may not be ignored.

These assets would have to be disposed of at forced sale, for what amount cannot be conjectured, but undoubtedly for much less than their real value, because

Every other holding company in the United States would be forced to dump on the market tremendous amounts of similar assets.

The number of purchasers of securities and obligations of operating companies would be very limited because such purchasers in turn might become holding companies under the bill.

The holders of debt would be entitled to be paid out of the assets.

Next the preferred-stock holders would be entitled to receive whatever was left up to par of their stock.

Probably the preferred-stock holders would get but little and the commonstock holders nothing.

For simplicity of expression, I have given you this picture as though the assets and securities were all of one company. There are, of course, several companies involved and the problem in reality would be much more difficult than here indicated and, in my opinion, impossible of solution.

FALSE CLAIMS THAT REAL VALUES WILL BE RETAINED

I understand the statement has been made that owners of securities of holding companies will lose nothing of what they now have if this bill is passed.

Also that it has been said that the value of their securities rests solely on the value of the underlying operating properties and that upon dissolution of the holding companies they will still have that value through a distribution of the securities of these operating properties. I submit that these statements are incorrect and hence misleading to our security holders.

In the first place, these statements ignore the values attached to the securities because our companies are solvent “going concerns."

Secondly, they assume that the securities owned by the holding companies can be easily distributed in kind.

The proponents of the bill, I understand, have heretofore promised to take some holding company group as an example and submit a concrete plan by which the group could be reorganized in accordance with the terms of the bill and in such a way that the holders of the securities will lose nothing.

If such a plan has been prepared I should like to see it. The vague generalizations which have been submitted by the proponents are of no value unless and until they are actually applied to a specific situation and their workability thereby demonstrated.

We have been unable to formulate any such plan for our group. I do not see how a plan, tied to realities, can be drawn.

DEMORALIZATION OF HOLDING COMPANIES WOULD FORCE OPERATING COMPANIES

INTO RECEIVERSHIP

A large number of operating-company receiverships would inevitably follow the passage of this bill.

As already indicated cash advances are constantly being made to operating companies in our group to take care of cash requirements which they are otherwise unable to meet.

Being placed in the position of liquidating trustees, no responsible board of directors of a holding company could do anything other than fully conserve its cash items. Receivership of operating companies now receiving our assistance would certainly follow and what is true in our group is, I believe, true in practically all other large groups.

Dissolution of the holding companies would place in other hands demand advances previously made by the holding companies to the operating companies and in many cases this, too, would mean receivership.

In addition to these receivership possibilities, there is the question of large operating-company bond issues maturing during the 5-year dissolution period.

THE PROPOSED LEGISLATION IS DISCRIMINATORY The bill now before you is as difficult to understand for what it excludes as for what it includes. Not all holding companies are affected but only public utility holding companies

Not all public utility holding companies are to be legislated against but only those engaged in the elctric or gas business, or both.

Not even all electric and gas holding companies are prohibited but only those whose operations extend into two or more States.

All this seems to be in the highest degree discriminatory.

The Congress must not be surprised if this evidence of discrimination leaves in the minds of those investors whose holdings this legislation singles out for destruction a feeling that they have been unjustly treated by those who should have protected them.

If wrong has been done there must be some better way of exacting punishment than that of sacrificing the innocent.

Surely regulation can prevent a recurrence of any such wrongdoing in the future.

THE PROPER FUNCTION OF THE PUBLIC-UTILITY HOLDING COMPANY In my opinion the public-utility holding company is important only as it is a necessary and effective link in the chain by which efficient and economical service is made available to the public.

It is for this reason that I, as an operating man, although now an officer in an important public utility holding company, have approached this problem entirely from the viewpoint of the industry as a coordinated organization engaged in s business affected throughout with a public interest, hence properly subject to fair and just regulation, but equally entitled to protection from superficial generalizations arrived at without adequate factual preparation and reflecting neither the business responsibility which is mine nor the legislative responsibility which is yours.

Others have more fully presented to you the utter impracticability, except at tremendous and unnecessary losses to present investors, of the methods proposed by the proponents of this measure to bring about the elimination of holding companies. I have limited myself principally to a discussion as to why, on the basis of the alleged purposes of the bill, such elimination is unnecessary and hence unwise in the public interest.

THE EFFECT OF THE PASSAGE OF THE WHEELER-RAYBURN BILL

ON OPERATION AND REGULATION OF UTILITIES (A presentation on behalf of Electric Bond & Share Co. to the Committee on Interstate Commerce of the Senate in public hearings on S. 1725.)

PURPOSE OF THIS PAPER The purpose of this paper is to summarize statements of local counsel * for various operating companies associated with Electric Bond & Share Co. and to supplement the same by statements of counsel for the company to the extent necessary in order to afford & composite presentation of views of counsel with respect to S. 1725.

Decisions and statutes cited and identified by small reference numerals throughout the following text will be found in the appendix.

PRESENT COMPREHENSIVE REGULATION OF OPERATING UTILITIES Operating utilities throughout the country are subjected to regulation by States and municipalities in varying degrees covering substantially all of their operations and activities including rates, service, security issues, extensions into new territories, discrimination, accounts, reports, mergers, sales, leases, purchases, or consolidations of properties, contracts, franchises, holding and affiliated company relationships, service and management contracts, merchandising, rebates, and other matters.

Regulatory powers of the States extend to practically every aspect of utility affairs. Actual regulation varies according to the extent to which the States and municipalities have deemed it necessary or advisable to regulate the operating companies and their relations with holding companies. This regulation may be extended whenever local authorities, with their familiarity with local matters, determine that the need exists.

The States and municipalities should be jealous of local control of their utilities for the reason that the exercise of the powers of regulation by the local authorities has been most effective. Their intimate contact with the local companies enables them to act quickly, avoiding the unwieldy procedure which is necessarily incident to regulation from distant points. The companies respond promptly to local authority, being constantly aware of the dangers arising out of bad public relations which may result in denial of new franchises, burdensome taxation, and erection of competing plants. Accordingly, there is rapid response to complaints of any character and the people are satisfied since the situation best serves their interests. Under the present comprehensive regulation by States and municipalities the power of management has not been usurped but has been allowed to remain with the companies' officials.

CONFLICT WITH LOCAL REGULATION An examination of the bill discloses that it would provide regulation of operating utilities to an extent never heretofore undertaken by any branch of this Government-National, State, or municipal—and that local regulation will be duplicated or superseded. The consumers of a company would be prevented, to a large extent, from regulating the business of the company through their authorized representatives in the State and local governments. Confusion in the industry must result from such duplication.

FEDERAL COMMISSION WILL SUPERSEDE LOCAL AUTHORITIES If the bill is enacted, the right of the State and municipal governments to regulate the local operating utilities will be superseded to the extent that the Federal Government has authority to regulate with respect to the same matters. It is clear, under the decisions of the United States Supreme Court, that once the bill becomes law, the power of the States to regulate the same matters is gone regardless of whether the Federal Power Commission exercises the authority

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conferred upon it or not. Once Congress manifests a purpose to enter a field of regulation, its occupation is exclusive, and local regulatory powers disappear. State or local action could not be sustained on the ground that it is merely complementary to and in aid of the Federal legislation. The Interstate Commerce Act has been held many times to have completely superseded the authority of the States with regard to such matters. Jurisdiction over extensions, abandonments, securities, and other important matters, would be vested in the Federal Power Commission and could no longer be exercised by the State commissions. When viewed in the light of the decisions of the courts, the suggestion that the Federal Power Commission will only use the powers conferred upon it to supplement the powers of the various State commissions, takes on an entirely different meaning.

Where the Federal power exists, it dominates to the exclusion of State and local powers and the bill will come as an abrupt shock to the citizens of the various communities who have long guarded their home-rule rights. Thus, a bureau of individuals, unfamiliar with local situations and far removed from the people who are most affected, will supersede the local utility controlling body or bodies familiar with the history of the company, its organization and needs. The possibility of prompt relief and action will disappear, and the long delay and disadvantage that must result from remote control of local matters cannot be avoided.

It appears that little is left to management, and that therefore the authority to control the future development of any particular local territory, insofar as it depended upon its power resources, would be transferred to Washington. The States have protested vigorously against the surrender of their powers to the Federal Government. The powers of local self-government are fundamental with the various localities and are too firmly imbedded to be lightly set aised or relinquished In many respects the State commissions would have no function other than to furnish a rubber stamp for the Federal Power Commission and, should disagreement occur, the operating utilities would be in a condition of serious uncertainty until the disagreement was dispelled. If the bill becomes law, the practical necessity for the existence of public-service commissions and other similar regulatory bodies will, to a great extent, disappear, and it could only be anticipated that local regulation would fall before the more highly organized and powerful regulation which would emanate from Washington.

The experience of the railroads will furnish an example of what may be expected. In that field Federal regulation has almost completely superseded State regulation. The electric utilities are entirely different from railroads and the question of whether or not Nation-wide railroad regulation is desirable has no bearing upon the electric industry.

Directly in point on this general question is the decision of the United States Supreme Court in 1913 in Northern Pacific Railway Co. v. State of Washington (222 U. S. 370). In 1907 Congress passed an Hours of Service Act for interstate carriers, but provided that it should not become effective until 1 year later. Shortly after the passage of the Federal act, the State of Washington passed a similar act and a penalty was assessed under the State act against the Northern Pacific before the effective

date of the Federal act. The State court upheld the penalty on the ground that while Congress had passed an Hours of Service Act, it was not in fact enforcing it at the time the State attempted to enforce its act and, therefore, there was no conflict between the exercise of the State and Federal powers. In overruling this contention and holding that the penalty could not stand, Mr. Chief Justice White said (p. 378):

"It is elementary that the right of a State to apply its police powers for the purpose of regulating interstate commerce, in a case like this, exists only from the silence of Congress on the subject, and ceases when Congress acts on the subject or manifests its purpose to call into play its exclusive power. This being the conceded premise on which alone the State law could have been made applicable, it resulta that as the enactment by Congress of the law in question was an assertion of its power, by the fact alone of such manifestation that subject was at once removed from the sphere of the operation of the authority of the State." (Emphasis ours.).

This clear holding by the Supreme Court has been consistently adhered to be it and this case has been often since cited with approval.

The Federal statute involved in the Northern Pacific case again came before the court in the case of Erie
Railroad Co. v. New York (1914) (223 U. S. 671), where the railroad bad been convicted of violation of the
New York hours of service law. The argument was made that the State legislation was supplementary to
the Federal legislation and was therefore not in conflict with it, the theory being that so long as the State
law did not provide for longer hours of service than did the Federal law, no conflict could exist. The State
court decision was reversed and, in the course of the opinion, Mr. Justice McKenna said (p. 681):

“Where there is conflict the State legislation must give way. Indeed, when Congress acts in such a way to
manifest its purpose to exercise its constitutional authority the regulating power of the state ceases to exist."
and in specific answer to the argument above mentioned, he stated (p. 683):
"We realize the strength

of these observations, but they put out of view, we think, the ground of decision of the cases, and, indeed, the necessary condition of the supremacy of the congressional power. It is not that there may be division of the field of regulation, but an exclusive occupation of it when Congress manifests a purpose to enter it."

? Southern Railway Co. v. Reid (1912) (222 U.S. 424, 441). Gildary v. Cuyahoga Valley Railway Co. (1831) (292 U. S. 57).

3 Railroad Commission of the State of California v. Southern Pacific Co. et al. (1924) (264 U. S. 331), and cases there cited.

Houston, East & West Teras R. Co. v. U. S. (1914) (234 U. S. 342, 350).

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