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THE CITY OF St. Louis,
April 29, 1935. Senator Burton K. WHEELER, Senate Interstate Commerce Committee,
Washington, D. C. DEAR SIR: In the interest of the public, I am taking the liberty of sending you, for the consideration of your committee, five copies of a statement setting out my position in support of H. R. 5423, based upon the experience of the city of St. Louis with holding companies and interstate natural gas pipe lines. Yours respectfully,
Chas. M. Hay, City Counselor. THE EXPERIENCE OF St. Louis with HOLDING COMPANIES AND NATURAL GAS
PIPE LINES House of Representatives bill 5423 is of interest and concern to St. Louis both from the standpoint of holding companies and interstate natural gas pipe lines. The evils which this bill is designed to eliminate are matters of common knowledge, and have been brought home to the people of St. Louis in a very real and memorable way through the operation of our local utilities.
In the hope that our experience here may throw some light upon the question before you, I give you, in brief, the record:
The utilities operating in St. Louis, all controlled by foreign holding companies, are:
The Laclede Gas Light Co., Laclede Power & Light Co., Union Electric Light & Power Co., Southwestern Bell Telephone Co., and St. Louis Public Service Co.
The Laclede Gas Light Co, and the Laclede Power & Light Co. are controlled by the Utilities Power & Light Corporation, a Harley Clarke enterprise, with offices in Chicago.
The Union Electric Light & Power Co. belongs to the North American Co.
The Southwestern Bell Telephone Co. is a part of the American Telephone & Telegraph Co.
The St. Louis Public Service Co., our street railway and bus operator, is controlled by the City Utilities Co.
LACLEDE GAS LIGHT CO. This company is our most "horrible example” of holding company control. This is an old company, and until 1924 was under local ownership and management. The management was competent and considerate of the public interest, the rates were reasonably fair, and the service reasonably satisfactory.
In 1924, Mr. Charles A. Munroe, of Chicago, purchased a controlling interest in Laclede's common stock, and for 3 years thereafter dominated the situation here.
The history of the Laclede Gas Light Co. in St. Louis might well be divided into two eras, B. M. (Before Munroe) and A. M. (After Munroe). Before Munroe, as suggested, its history is the story of local ownership and management, good public relations, fair valuation, reasonable rates and reasonably satisfactory service. After Munroe, it is the story of foreign holding company control, inflated valuation, increasingly high rates, less satisfactory service and bad public relations.
Munroe's career in St. Louis may be summed up in a sentence: He came to the city in 1924, operated and manipulated for 3 years, organized a holding company and a flock of subsidiary companies, and left the city in 1927 with a profit of $14,000,000. During these 3 years the valuation of Laclede's property was boosted by the Public Service Commission, at the instance and insistence of Munroe, from $27,000,000 to $45,600,000.
Munroe not only placed the controlling interest of the Laclede Gas Light Co.'s common stock in the holding company, the Laclede Gas & Electric Co., but in 1926 he inaugurated “management charges" by the holding company for alleged management services rendered the Laclede Ğas Light Co. Munroe was the dominant figure in both companies. He was president of the holding company and chairman of the board of directors of the operating company. As chairman of the board of the Laclede Gas Light Co., the operating company, he drew a salary of about $40,000, but he had the Laclede Gas Light Co., pay the holding company more than $98,000 in 1926 to manage the operating company. In other words, Laclede Gas Light Munroe paid Laclede Gas & Electric Munroe to advise Laclede Gas Light Munroe how to run the Laclede Gas Light Co.
Munroe sold out to Harley Clarke, of the Utilities Power & Light Corporation of Chicago, who then became the dominant figure of the Laclede Gas Light Co. Clarke controlled both companies. The same management graft continued. Laclede Clarke paid Utilities Clarke $206,000 in 1927; the same amount in 1928; $217,000 in 1929; $256,000 in 1930; $204,000 in 1931, and $189,000 in 1932, to tell Laclede Clarke how to run the Laclede Gas Light Co.
As I have stated, Munroe organized a flock of subsidiary companies, and Clarke has continued and added to them.
The influence of holding-company management and manipulation upon the operations of an operating company is strikingly evidenced by Munroe's arrangement for the purchase of gas for the use of the operating company. He discovered that he could purchase oil still gas in Illinois. Instead of buying this for Laclede direct from the producing company in Illinois, he organized the Illinois-Missouri Pipe Line Co., and through this company purchased this oil still gas, and then sold it to the Laclede. Munroe testified before the Federal Trade Commission that through this arrangement he made a profit of approximately $1,000 per day. In other words, Laclede Munroe, on a salary from Laclede of $40,000 per year, paid Pipe Line Munroe a profit of $1,000 per day for gas which Laclede Munroe could have bought direct from Wood River, Ill., at the same price as paid by Pipe Line Munroe.
Since the injection of the Utility Power & Light holding-company management, the Laclede Gas Light Co. has bought its coal from the Utilities Elkhorn Coal Co. and United Collieries, Inc., and has sold its coke to and through the United Collieries, Inc., both subsidiaries of the holding company.
Transactions between the Laclede and these affiliate companies have run into many millions of dollars. Between 1927 and 1934, inclusive, the Laclede has paid these affiliates from which it has bought coal, the sum of $15,906,354; between 1930 and 1934, inclusive, it has sold coke through its affiliate in the sum of $5,254,000.
No one has ever contended that these transactions were without profit to the holding company.
In 1927 Utilities Power & Light, seeing the chance to sell Laclede coke oven gas from the St. Louis Gas & Coke Corporation at Granite City, Ill., acquired that company.
Prior to this time this Coke Co. was primarily engaged in the manufacture of coke, and the resulting gas, for the most part, was permitted to escape into the air. Accordingly, Utilities Co. caused a contract to be entered into between Laclede and Coke Co. for the purchase of this waste gas, at a cost in excess of Laclede's own cost of manufacture.
In addition to these devices, it is now so arranged that practically all of Laclede's construction and a great part of its maintencnce is done by the Management & Engineering Corporation, another affiliate. This noncompetitive work runs into hundreds of thousands of dollars.
Perhaps the most flagrant abuse of holding-company powers is shown in con. nection with the introduction of natural gas in St. Louis. After the Mississippi River Fuel Corporation's pipe line was extended in 1929, and when it became apparent that there was a public demand for natural gas in St. Louis, then, instead of the Laclede Gas Light Co. acquiring natural gas direct from the Mississippi River Fuel Corporation pipe line, the holding company caused to be organ, ized another affiliate, the Missouri Industrial Gas Co., which company entered into a contract with the pipe-line company for the purchase of natural gas to be distributed to industries in St. Louis in competition with Laclede.
It has been disclosed that Laclede actually advanced the construction money to its holding company, the Utilities Power & Light Corporation, to enable the latter to create the Missouri Co. for the purpose both of competing with Laclede and selling it gas at a profit.
In 1931, after much public insistence that the Laclede distribute natural gas generally, the contract between the Missouri Industrial Gas Co. and the pipe-line company was modified so that the Missouri Co. was permitted to buy natural gas for resale to Laclede, to be used for the sole purpose of mixing with Laclede's artificial gas. In this transaction, Laclede was required, among other things, to pay to this dummy affiliate company a return and depreciation allowance on the greatly overvalued Missouri Co.'s property. Strange to say, although the Laclede was not privy to the Missouri Mississippi contract, it was insisted that this supplemental contract of 1931 be, and it was, guaranteed in writing by Laclede. Then, to complete the contract picture, and in order for Laclede to obtain natural gas and make good its guarantee of the Missouri Mississippi contract, Laclede entered into a contract with its affiliate, the Missouri Co., for the purchase of natural gas for mixing purposes.
During all this time the Missouri Co. was holding itself out as a nonutility, and competing with Laclede, which was serving only mixed gas.
It appearing to the Public Service Commission of Missouri that this family arrangement should be looked into, the commission issued an order on it own motion for an investigation to determine whether the Missouri Industrial Gas Co. was a public utility, and could be made to serve the public generally with natural gas.
Before a hearing could be had on this matter, Laclede acquired the Missouri Co.'s property, at a price, according to an audit of the public service cominission's accountants, of $148,679.18 in excess of the recorded book figure, in addition to $44,295.56 for management and engineering services which the accountants recommended be disallowed. Laclede now distributes natural gas through this Missouri system, but to industries only. The general public are still pressing their demands for straight natural gas.
From exhaustive investigations we have made, it is apparent that one of the principal reasons for Laclede's refusal to distribute natural gas generally is the loss its holding company would sustain on its interfamily transactions, such as the purchase and sale of coal and coke.
It might also be noted, in connection with the so-called "financial advantages" of holding companies, that, contrary to the prevailing theory, Laclede is its parent's creditor, and not debtor. At the present time, and for quite some time in the past, Utilities Power & Light Corporation has been making monthly time payments to Laclede for arrears on the coke transactions, the balance due at one time (1932) being $1,175,647.
From this review it is clear, I submit, that holding company management and manipulation, insofar as the operation of our local gas utility is concerned, has meant, as suggested, the bleeding of the operating company by affiliate companies--all for the profit of the holding company.
The holding company has been of no help to Laclede on the financial side; $10,000,000 of Laclede's bonds were defaulted last year, and with them another $10,000,000 of collateral. In addition, $3,000,000 of notes came due this April. In the face of this the holding company, instead of coming to the rescue of Laclede in its financial distress, has, from year to year, been drawing down dividends on the common stock and exacting enormous holding-company fees. The combined record of common- and preferred-stock dividends and holding-company fees under the Harley Clarke management, most of which went to the holding company, is the grand and rather staggering total of $8,888,145. Meanwhile the holding company is unable to meet a $2,000,000 noté due the Reconstruction Finance Corporation.
A further result of the purchase of Laclede by the Utilities Power & Light Corporation, at a profit to Munroe and associates of $14,000,000, was the natural attempt to increase Laclede's valuation and rates. In this the holding company was temporarily successful, obtaining an increase in rates in 1929 of about $700,000, and retaining practically the same value. This case was reversed and remanded by our supreme court; the State public service commission revalued the property at $39,000,000 (a reduction of about $7,000,000) and decreased the rates $350,000 a year; and the case is now again on its way through the courts.
Interspersed here and there have been many controversies and constant turmoil under Laclede's present holding-company management, including a pending proceeding in the Federal court to restrain a rate reduction, ordered by the State public service commission in 1933, of $250,000 a year; a penalty and discount case; billing on the therm basis; charging for heretofore free service on consumers' premises; failure to serve straight natural gas instead of 800 British thermal unit mixed gas; and financial and management matters involving contracts and securities.
From all this, it appears clear to me that Laclede's holding company has been but a millstone about its neck, and that the most fortunate thing that could happen to this operating company is for the holding company to be forced to relinquish its holu.
ST. LOUIS PUBLIC SERVICE CO.
From 1919 to 1927 the predecessor of the St. Louis Public Service Co., the United Railways Co. of St. Louis, was in receivership. The St. Louis Public Serve ice Co. was organized and took it over on December 1, 1927.
On December 22, 1927, City Utilities Co., the holding company, filed application with the State Public Service Commission to hold legally a controlling block of stock.
Representations were made in the application that “petitioner is in position to and will extend, from time to time, such financial and other aid to Public Service Co. as may seem necessary and advisable; and such stock acquisition will, therefore, inure to the advantage of the public, in that Public Service Co. will have the benefit of the financial resources of petitioner and the aid of its competent official staff.”
Under the guidance of the City Utilities Co., the business has gradually gone from bad to worse, the operating company's combined bus and street railway revenue passengers and passenger revenues having declined from 257,064,588 and $19,542,077, respectively, in 1928, to 136,046,821 and $11,459,047 in 1934.
The range of sales of the St. Louis Public Service Co.'s common and preferred stock, and the United Railways Co.'s 4-percent bonds, for 1928 and 1934, is: Preferred Common
U. R. 4's 1928 $89.00 to $78. 00 $32. 75 to $19.00 $85. 50 to $80.00 1934
1. 50 to 0.25 0.35 to 0.05 28. 75 to 18.00 On April 15, 1933, the St. Louis Public Service Co. went into receivership, and more recently, on June 15, 1934, became a debtor in reorganization proceedings under the amended bankruptcy law, notwithstanding the promised financial aid of its holding company.
The real cause of the St. Louis Public Service Co. receivership was the failure of City Utilities Co., with realizable assets of perhaps $1,000,000, to prevent the default on a collateral 6-percent loan (from local bankers) of approximately $10,000,000, called April 12, 1933, and secured by $16,000,000 (par) of United Railwave 4-percent bonds.
SOUTHWESTERN BELL TELEPHONE CO. The control exerted by the American Telephone & Telegraph Co. over its operating Bell companies is notorious, and needs no elaboration. The exaction of arbitrary percentages of gross revenues (without regard to the cost of the service rendered, or whether the operating company made any net return at all), was the father of the holding company fee for so-called "managerial services.” Also, the American Co. is perhaps the pioneer of the device of purchasing from and selling equipment to itself, the use of the Western Electric in this connection dating back many years. At this moment there is a Federal investigation of all the ramifications of its business.
Perhaps the outstanding activity of this holding company was the elimination in 1922, through the Southwestern Bell, of the Kinloch Telephone Co., an active independent, a consequent increase in rates in 1924 of approximately $900,000, and the maintenance substantially of the then high schedule of rates throughout the whole period of this depression. We can recall no instance, through this long period of economic stress, when the Southwestern Bell has made any reduction in its basic rates applicable to its local business in St. Louis.
UNION ELECTRIC LIGHT AND POWER CO.
Here is a case where the holding company, although perhaps not subject to some of the criticism common to others, is wholly superfluous, and, to the extent that it influences local management, is, for this reason alone, undesirable.
Union Electric is a large and prosperous company, entirely capable of conducting its own affairs. In fact, it is itself a super holding company, controlling some twenty-five subsidiaries, including coal mines, street railways, electric plants, gas plants, a steam heating system, and other activities.
Illustrative of the practices of its holding company is the fact, recently brought out by the Senate Interstate Commerce Committee, that the holding company borrowed from Union at 3.9 percent interest while Union borrowed from the holding company at 6 percent.
Like other foreign-controlled but prosperous utilities in these times of depression, Union did not reduce its rates without a struggle; and while it did recently reduce them about $1,000,000 in St. Louis (and about $600,000 elsewhere), this reduction came only after 4 years of litigation instituted by the city of St. Louis before the State Public Service Commission, and only after a new Public Service Commission and a new city administration had publicly announced plans to press the rate hearings to a more speedy conclusion.
The situation of Union Electric with respect to rates and service is somewhat unique, in that it has active and effective competition from the Lacelede Power & Light Co., and this, in large measure, circumscribes the extent to which the holding company can ply its trade.
LACELEDE POWER & LIGHT co. This company was acquired by Munroe, and later by the Utilities Power & Light Corporation, in connection with the acquisition of Laclede Gas Light Co.
Like Laclede Gas, it is subject to the same manipulations and intercorproste transactions, such as the purchase of coal, power, and noncompetitive construction.
NATURAL GAS PIPE LINES
As heretofore noted, the Mississippi River Fuel Corporation's pipe line, which originates in the Munroe-Richland field in Louisiana, was extended to St. Louis in 1929.
This company not only sells natural gas to the Laclede Gas Light Co. for mixing purposes in connection with the 800 British thermal unit gas distributed generally by Laclede, but also sells natural gas to it for direct distribution to industries.
Certain industries have been reserved by this pipe-line company and through it are also receiving straight natural gas.
So far as Mississippi and Laclede are concerned, straight natural gas has been withheld from the general consumer. This has been accomplished through & series of contracts designed for this very purpose.
Another pipe line, that of the Panhandle-Eastern Pipe Line Co., extends from the Panhandle in Texas to within about 70 miles of St. Louis, at Bowling Green, and thence on to the Illinois Indiana State line.
Realizing the great advantages of natural gas, both from the standpoint of low rates and as a material factor in abating our smoke nuisance, a special committee of our board of aldermen has been conducting an exhaustive investigation to determine why this gas has not been made available to St. Louis, as it has to some one hundred other communities of our State, many of which are served by the Mississippi and Panhandle.
The evidence thus far adduced by our committee clearly shows that these companies have both an adequate supply and line capacity to meet all of the city's requirements. So far, however, neither has seen fit to serve us.
This natural-gas problem is of such moment to St. Louis that our State publie service commission recently undertook a similar inquiry on its own initiative, and hearings before it are still pending.
The outcome of the commission's investigation is a matter of doubt, as both pipe-line companies have denied its jurisdiction on the ground that they are engaged in interstate commerce.
In fact, these companies have consistently denied state authority. On December 6, 1933, the commission, on its own motion, cited the Mississippi River Fuel Corporation to show cause why it should not subject itself to State regulation. This order was vigorously resisted, and the case is still pending.
On September 14, 1931, the city of Fulton filed a complaint with the commission to compel the Panhandle-Eastern Pipe Line Co. to serve it. It seems that the city of Fulton, also appreciating the advantages of natural gas, voted bond for the construction of a municipal distribution system, the gas to be obtained from the Panhandle line, which actually extended to the city limits. The commission ordered the service, but the Panhandle appealed the case to our supreme court, where it is now pending.
It would appear from the above recitals that these pipe-line companies will not serve St. Louis unless compelled to.
If, in fact, our State commission has no power to compel this service, then the city of St. Louis will be at the mercy of these companies, unless Federal regulation is provided.
It is readily apparent that H. R. 5423 will be of invaluable assistance to us in solving our natural-gas problem
In conclusion, may I say that the purpose of the bill fills a crying need. Its spirit is the protection of the public. Its provisions are well designed to accomplish the ends in view. It has my endorsement as a representative of the publie.
Chas. M. Hay,
City Counselor, City of St. Louis, Mo. APRIL 29, 1935.