included among the sponsors of this act and even some of them have admitted that a certain amount of destruction of value is the necessary consequence of the act. To the losses which the people may have suffered from mismanagement or abuse of power by financial interests and from the general decline in values incident to the business depression, there are now to be added the losses due to the action of government itself. The movement of public-utility security prices on the markets since the last phase of the attack on this industry began is conclusive evidence as to what the investor expects. Although statements and charts prepared by the Federal Power Commission and made public by Chairman Rayburn of the Committee on Interstate and Foreign Commerce of the House of Representatives have tried to make it appear that no substantial losses in security values can be attributed to fear on the part of investors concerning the effect of the pending measure, the fact of the matter is that the market value (Dow-Jones averages) of light and power company securities, both of holding and operating companies, declined precipitately in relation to the Dow-Jones average price for industrials from the time when the Holding Company Act of 1935 was introduced for about 6 weeks, recovered somewhat while the opinion was gaining ground that the act would not be passed, or at least would be shorn of its more destructive features, and, according to the latest available figures (up to about the middle of April) is now declining again.

Absolute comparisons of the market values of a few selected stocks such as are used in the statement given to the press by Representative Rayburn to show that utility values have increased since the introduction of the act are, of course, wholly misleading. The trend of the Dow-Jones averages, however, in its relation to the trend for similar average prices of securities not directly affected by the act is an unmistakable indication of the fear which the proposed legislation has inspired in the minds of investors.

This act places the Government in position to destroy by compulsory liquidation and reorganization of the industry, under most unfavorable circumstances, a large part of what remains to the investor. Such willful destruction of much of the remaining value of holding-company securities destroys the last chance to which so many people have hopefully clung, namely, that when general economie conditions improve, some measure of their investment values will be restored. To be forced to liquidate at this or any early date destroys the value of things hoped for the remaining worth of such securities is largely today based on such hopes and expectations. The prospect of reorganization and the liquidation requirements of senior securities will no doubt generally destroy the remaining value of equity securities. The public benefit from such arbitrary redistribution of wealth is not apparent-the loss is entirely disproportionate to any possible gain. Wholesale reogranization under pressure, threat, and bureaucratic dietstion will afford most unusual opportunities for the sharp and the clever. The small investors' chances are substantially less than nothing.

Wholesale liquidation of public-utility equities is justified in the name of simplification. To the end that holding company systems may be simplified more rapidly than appears necessary or desirable to those most intimately acquainted with the situation, it is proposed to substitute the authority and discretion of Federal bureaus for the interest of private management. Consolidation and rearrangment of properties is at best always a threat to established rights and relationships. Under bureaucratic dictation interested, under the direction of this act, in simplification as an end, individual equities need expect little consideration. The 3-billion-dollar decline in the market valuation which public-utility investors place upon their holdings is most dramatic evidence of what they believe they ought to expect under this proposed program. If one could rely on every other consideration and protection being given the public-utility investor, the pressure under which such readjustments would have to be made to be completed by 1940, of and by itself could not help but work out to highly inequitable treatment and substantial destruction of values.

Simplification presumably means also simplification of capital structures. Here more absolutism of attitude is in evidence, for simplification of structures may or may not be economical. A capital structure composed of different classes of securities well proportioned is more valuable than any simple structure can be. That means also that money can be secured more cheaply by offering a variety of securities than it can by the issue of one class of security alone. Lower cost of capital means better service and lower rates to the consumers than would otherwise maintain. As a financial institution the holding company is a device for carrying on this process of effective bargaining for capital for companies of such size as to preclude them from the money markets at favorable rates.

It is safe to assume that on the average the gains obtained from financing according to this principle of "least over-all cost" are divided between the companies and the providers of capital. Destruction of such capital structures in the name of simplification means a destruction of values very real and very significant for the holders of public-utility securities of all classes.

To point out that the public-utility plants will still be there exhibits a strange and even primitive understanding of economic behavior. That has been true of most industries throughout the depression, but no amount of pointing to that fact has improved our economic circumstances a particle. The conclusion is unavoidable that no matter how legitimate or how conservative a capital structure may be it is worth less demolished than assembled and organized. If the aim of simplification is not an end in itself but is intended to protect the investor, it seems that what is to be protected must first be destroyed.

The Public Utility Holding Company Act of 1935 is strangley interested in the investor who is certain to be damaged by its operation. Already under Federal regulation of security issues or of their sale and distribution, the investor is presumably so well protected that no burden of this character should devolve upon the public utility holding company legislation. Past investors certainly stand to gain nothing from this proposed action. Already they have paid a terrific price for the Government's interest in their welfare. The future publicutility investor, if of such there should subsequently be any, can properly look to these other forms of protection against his ignorance, carelessness, or indifference. It might be worthwhile recalling that no capital structure can be made so simple as to protect the most simple investor. He must be and has already been given more positive protection.

The destruction of the public-utility holding company, as a device for bringing capital into this industry, can only be justified in the opinion that these industries will need no more capital of the class and type which was thus secured or that Government will meet the capital needs of public service for the future. The record of the past seems tolerably clear. It is impressive about in proportion to the degree to which individuals actually know what the holding company has done in accumulating capital for public service in regulated industries. Even the most casual study of the performance of the holding company and the history history of American utility development is convincing of this, (1) that investment capital would not have gone to the frontier of economic development to be invested in a regulated industry under any other conceivable device of private enterprise, (2) that only by combining the security of established situations with the prospects of developing situations could the large sums have been raised in so short a period at as low an average cost, and (3) that because of the financial suitability of the holding company to the financial task to be performed, all of the more remote portions of the country had utility service earlier, at lower cost and of better quality.

V. POLITICAL PRESSURE REORGANIZATIONS

Reorganization of the electric and gas industries under pressure and against the dead line of 1940 cannot result in the most economical organization of the public-utility industries. One of two results may reasonably be expected; holding companies will liquidate and leave a lot of orphaned operating properties, or within State boundaries there will be organized an Ichabod gangling type of operating organization. Possibly the first is intended. Forced liquidation will no doubt create an opportunity for picking up bargains at depressed prices. Those who look to a further expansion of public ownership no doubt can see the advantageous opportunities for acquisition by public authorities at distress prices, a distress created by Government itself. In private enterprise such knocking down of values has been called racketeering.

Insofar as operating organizations succeed holding companies the new corporation will be owning assets rather than securities. For some concerns, fortunately located, this will not constitute a major disruption. For others the readjustment may well be legally and financially impossible. In any case, operating companies created for no reason except to succeed a holding company are not likely in any significant sense to be an improvement upon the predecessor situation. In fact they may have new and more difficult problems to face. Highly diverse territories under a unified operation will be disposed to ask for uniform rate treatment even though the cost of rendering the service may vary widely. The difficulties in dealing with local problems according to local needs and circumstances will be increased. The operation will often be less local.

VI. FEDERAL AND STATE REGULATION

Because of the strange and unusually drastic proposals of title I of the proposed act, titles II and III have apparently escaped without much careful consideration. Thus while the feature part on this act is being played by the "holding-company evil" yet probably from many points of view the steps proposed to be taken toward Federal regulation are even more significant. An open direct move to supplant the States in the regulation of the "local service undertakings" would probably be resisted. The people might correctly anticipate that Washington would prove to be a much longer way from Main Street than Wall Street ever was. Irrespective of the merits of Federal assumption of the powers of the State to regulate businesses within their boundaries which they consider burdened with a public interest, the condition of overlapping jurisdiction, which would be created by this legislation, is indefensible. We have had experience with such conflicts of control in connection with the regulation of railways. Those who view with alarm any further restraints upon home rule might also well understand the lesson of history that where the Federal Government begins to regulate the State will soon be displaced. If the use of mails makes an industry subject to Federal regulation, no one will ultimately be exempt, certainly no electric and gas utility undertakings. This legislation, not so openly, but nonetheless definitely appears to aim at extreme centralization of authority over the "local service" utilities.

VII. HOLDING COMPANY PRACTICES AND THE CONSUMER

If we may assume finally that this proposed legislation will be considered on its merits, that the weight of evidence pro and con rather than political commitment will determine the decision, then the effect of holding company practices, methods, and policies on the consumer must be the matter of very large final concern. In spite of the misdeeds alleged and possibly perpetrated by "some" or even "many", no conclusive evidence has been offered that on net balance the holding company has injured the consumer. The evidence with respect to rate reductions upon acquisition of control by holding companies seems to show conclusively that holding company acquisition brought prompt rate reductions. Hardly would anyone dare raise the issue on the question of the quality of the service. But certain holding company financial practices are alleged to have injured the consumer. Write-ups in the value of property on holding company books have been given publicity, wide-spread and entirely out of proportion to the significance properly attached to them. It would be interesting to discover a case where a regulatory body increased rates or failed to reduce them because of the figure at which a holding company carried its investment in the operating company's securities. If such has ever happened there certainly was no necessity for it in regulatory law. After most careful investigation, the total write-ups in operating company properties were not found by Federal agencies to represent significant percentages for the electric industry as a whole. Here also it has not been established that any customer has been injured thereby. Presumably the law of the land still is that a public utility is entitled to a fair return upon the fair value of the property used and useful in the public service and no more. No such simple device as changing figures on corporate books of record can conceivably or significantly have altered such findings.

VIII. ON NET BALANCE

It should be needless to say that an analysis of the useful functions of the holding company is in no sense a defense of any particular abuse of the holding company. That there were abuses is obviously a fact. That such or similar abuses were common if not in fact more common in many other quarters of American industry is no defense. Neither is that an excuse for not doing what is necessary to prevent such abuses from recurring in the future. It appears however that even the most reprehensible of practices could be curbed by regulation. It has not been shown that destruction is necessary. The death warrant feature of the Public Utility Holding Company Act of 1935 is gratuitous. In spite of the fact that millions of public money have been spent to rake the electric industry and that probably all the negative evidence on the holding company that could be unearthed was thus made available yet the holding company on net balance has not been shown to have caused the consumer any significant injury. The holding company represents in the scheme of economic evolution a specialized instrument useful and usable for socially desirable purposes. To destroy it means

economic atavism. No logic has been advanced to convince a yet hopeful people that the end of the electric era is at hand, that there doesn't remain a large opportunity for useful service by the public utility holding company. The case against the holding company is not convincing of the proposition that it is necessary to deny ourselves the advantages of this form of business organization in order to avoid its abuse.

CONTRIBUTIONS OF HOLDING COMPANIES TOWARD DEVELOPING THE USE OF ELECTRICITY

During the past dozen years when utility holding companies became major factors, twice as much new capital was invested in the power industry as in the preceding 40 years.

Twice as many miles of transmission lines were built as in the preceding 40 years, and domestic customers increased their use of electricity twice as fast as they had done previously.

Statement by Daniel Starch

Gentlemen, I appreciate the opportunity of presenting this statement to you. I wish to use this opportunity to present to you some facts with regard to what has been done by holding company managements to increase the use of electricity throughout the length and breadth of this land.

May I state by way of introduction that I was born and brought up on a farm in Wisconsin, that I largely worked my way through college and that I am a graduate of the University of Iowa. Many of my relatives are living on farms in the Middle West. I am interested in the proposed legislation because of the effect it may have upon the electrification of farms and the standard of living in this country. For many years I have been engaged in commercial research work as a consultant. My organization and I have conducted many researches and investigations in the marketing, distribution, and advertising of many different products, including studies on electrical appliances and the use of electricity. For some 8 years I was director of research of the American Association of Advertising Agencies, during which time I made extensive studies of the circulations of many of the larger newspapers and magazines in the United States.

Because of my interest in rural life and in the compilation of facts, I have prepared some data which I wish to present.

Much of the time and attention of this committee has been taken up in criticism and in pointing out shortcomings in the industry. No fair-minded person would deny that there have been shortcomings and mistakes. What business or what field of human activity, even including the making of laws, is there in which mistakes have not been made? Such mistakes as have occurred, have resulted largely from errors of judgment rather than from malicious intent. Furthermore, they have been mistakes which are now evident from hindsight, but which were not evident even to the best and most conscientious minds through foresight before the events. Who is not wiser in hindsight than in foresight?

I wish to present to you some facts, not opinions or generalities, but facts concerning the tremendous increase in the use of electricity far greater through the energetic efforts of holding company management than would otherwise have been attained in the same period of time. It is my firm belief that without such management, the necessary capital required for the development of the industry could not have been obtained. I have no interest in discussing this problem in relation to the pending legislation other than on its merits.

WHAT THE HOLDING COMPANY MEANS TO CAPE COD

I wish to present first of all, some concrete facts which I know from my own knowledge and observation. On August 10, 1923, occurred President Harding's funeral. It was a Friday and a national day of mourning by proclamation of President Coolidge. I was then living in Boston. After the memorial services were over, my family and I motored to Cape Cod for the week-end. When we arrived at Falmouth in the evening, we found the town pitch dark-not a light anywhere. Electric service which had been inaugurated 34 years before had broken down. We went to the office of the electric company. There they had a few candles lighted. We drove to a hotel-still there was darkness. After an hour or so of darkness, electric lights came on dimly. Soon they failed again so that we had to eat our dinner by candlelight. Such interruptions had been occurring frequently.

Electric service was so poor that customers never could be sure of lights or sure of proper voltage to operate toasters or flatirons. Whenever complaints from customers became too numerous and vociferous, the management previously in charge would move a transformer into that area to bolster up the service. Pretty soon, the same transformer would be moved to another area to quiet complaints in that section. The management simply could not raise the funds with which to buy the necessary equipment, maintain its facilities, and improve the service.

$3,300,000 SECURED THROUGH THE HOLDING COMPANY TO IMPROVE SERVICE ON CAPE

COD

About this time, the Associated System acquired the management of the Cape & Vineyard Electric Co. The first thing this management did was to raise money to build an additional 40-mile transmission line to guard against interruptions in the service.

Through the greater credit and managerial ability of the holding company, the money was raised and the lines and generating facilities improved. In the course of the next several years, some $3,300,000 were expended in improving and extending the facilities for service in this area, all of which was secured through the holding company. Today, the service is on a par with that of any good-sized city. Not only was the service improved, but new lines were built out into the other communities in the area which had no service before, so that today three times as many people are served as in 1923, when the Associated System acquired the management.

The following editorial appeared in the March 23, 1935, issue of the Yarmouth, Mass. Register:

Apropos of the President's strong opposition to the electric holding companies and his determination to exterminate them by legislation, we of Cape Cod must acknowledge our debt to them for benefits received. Our electric service some years ago was poor. A storm would usually mean the stopping of machinery, loss of light and power for pumping water. It was the entrance in the field of the Associated Gas & Electric System, a holding company backed by more capital than could be raised locally, that has given us the present excellent service."

I cite this intance which I have known and observed personally as an example of what has been done under holding-company operation in scores, yes, hundreds and thousands of communities in the United States.

MOST CAPABLE EXECUTIVES MADE AVAILABLE TO WHOLE GROUP

What has happened with regard to personnel when a holding company acquired local companies or groups of companies? It proceeded to select the most capable men in these operating companies and put them at the service of the entire group. In the case of the Associated System, Mr. R. D. Jennison, one of the most capable utility operators in the country, connected with one of the companies acquired by the system, was brought into the holding-company management. Mr. E. M. Gilbert, an engineer, recognized throughout the world for his ability and accomplishment, likewise was made available to all the Associated System properties. Under his supervision was built, 3 or 4 years ago, what engineers regarded, up to that time, as one of the two most efficient electric-generating plants in the world. Mr. L. D. West, widely expericened in developing the use of electricity among industries, was placed in charge of new business development for the entire system. And so on, I could name a score of men whose services became available to the entire system.

"BEST SERVICE AT THE LOWEST COST COMMENSURATE WITH SOUND BUSINESS"

Now, let me say a word about sincerity of purpose. I have heard Mr. J. I. Mange, head of the Associated System, say repeatedly, at meetings of general managers, that they have only one purpose and that is to provide the best service at the lowest cost commensurate with sound business. When anyone says, as has been said before this committee, that holding companies exist only for the purpose of making money through security manipulation, he is speaking generalities without a basis of facts. Let us grant that utility officials are not pure altruists, that they are motivated by self-interest, just as lawyers, doctors, business men, professors, legislators, and public officials are motivated by self-interest. But enlightened self-interest dictates that furnishing the best service at the lowest reasonable cost is nothing more than sound business.