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Nevada, Arizona, or New Mexico, to say nothing of those in a large part of his

a own State of Texas?

Hundreds of these properties are too small to be financed independently in the capital markets and yet the communities they serve are not able to provide adequate capital from local sources. By grouping 10, 20, or 100 under common ownership in a holding company they can be adequately financed and can be given the benefits of engineering and management supervision and advice which they could not afford as independent units. I ask you, in what possible way does common ownership of such small scattered properties by a holding company adversely affect any user of service or any holder of securities? On the contrary, I can assure you that every community served by those small scattered companies and every user of their service is immeasurably benefited by the fact of holding company onwership and if the members of Congress, particularly those from the Western States, will consult their constituents in the small scattered communities served by holding company subsidiaries instead of paying any attention to the academic theories of the “logic” or lack of “logic" of grouping companies serving small scattered communities under holding company ownership they will find that those communities have been uniformly benefited by holding company ownership and that the forced returns of these properties to independent ownership through the passage of this bill would be definitely contrary to the best interests of these communities.

Gentlemen, this theory that holding company ownership of operating utility properties is illogical except possibly in the case of a few large regionally integrated systems is simply a lot of academic bunk!


NEW YORK, April 24, 1935. Hon. BURTON K. WHEELER, Chairman Senate Committee on Interstate Commerce,

Washington, D. C. DEAR Sır: We are advised that Carnegie Natural Gas Co., a wholly owned subsidiary of the United States Steel Corporation, probably comes under the dehnition of a gas utility company" under the Wheeler-Rayburn public utility bill as at present written (H. R. 5423), and therefore the United States Steel Corporation might be regarded as a "holding company” within the terms of the bill. The primary purpose of this subsidiary is to supply gas for the steel-produeing processes of certain other subsidiaries of the United States Steel Corporation. As a matter of convenience to persons along the line, a small amount of the gas is furnished to domestic consumers and a small amount not required in the steel operations is also sold to public-utility corporations. For example, during 1934 the division of consumption of gas furnished by this subsidiary was approximately as follows: 85 percent of gas was furnished to other United States Steel Corporation subsidiaries for steel-making operations; 12 percent was sold to public-utility corporations, contractors, etc., and 3 percent to domestic consumers.


A somewhat similar situation exists in the case of another wholly-owned subsidiary, the Illinois Steel Co. That company at its Gary plant produces electric energy and gas for itself and affiliated manufacturing companies for their own use in conducting their manufacturing operations, the construction of the generating facilities of the Illinois Steel Co. having been specially designed and installed for economically supplying electric current and gas to contiguous manufacturing plants owned by its affiliated companies. However, it does sell a small portion of its surplus capacity to a public-utility company. During 1934, over 94 percent of the electric energy and over 96 percent of the gas produced by the Illinois Steel Co. was consumed by the United States Steel Corporation subsidiaries in their manufacturing operations, and less than 6 percent of the electric energy and less than 4 percent of the gas was sold to the public-utility company.

We think it obvious from a reading of the purposes recited in the bill that the proponents of the bill do not intend that it shall apply to such cases. We therefore request that an appropriate amendment be made to the bill to make certain that it does not include such cases. In order to accomplish this result, we sug. gest that sub-subsections (3) and (4) of subsection (a) of section 2, of title I, appearing at lines 3 to 17, inclusive, at page 6, be amended to read as follows, the proposed additional words being underscored:

(3) electric utility company' means any company which owns or operates facilities for the generation, transmission, or distribution of electric energy and which transmits, sells, distributes, or furnishes electric energy for a charge, but does not mean a company which sells or distributes electric energy solely for the use of its tenants and not for resale; and does not mean a company which itself uses or distributes to other companies in the same affiliated group for use in their own manufacturing processes at least 75 percent of the total electric energy it produces.

“(4) 'gas utility company' means any company which owns or operates facilities for the production, transportation, or distribution of natural or manufactured gas, and which transports, distributes, sells, or furnishes such gas for light, heat, or power for a charge; but does not mean a company whose gas business is confined solely to the production, transportation, sale, or distribution of gas in enclosed portable containers; and does not mean a company which itself uses or distributes to other companies in the same affiliated group for use in their own manufacturing processes at least 75 percent of the total natural and manufactured gas it produces. As used in this and the immediately preceding sub-subsections, an'affiliated group' means one or more chains of corporations connected through stock ownership with a common parent corporation, if (1) at least 95 percent of the stock of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations; and (2) the common parent corporation owns directly at least 95 percent of the stock of at least one of the other corporations. As used in the preceding sentence, the term 'stock' does not include nonvoling stock which is limited and preferred as to dividends."

Copies of this letter are enclosed herewith for distribution among members of your committee and such other use as you deem proper. Respectfully submitted.

W. A. IRVING, President.

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New York City.
Chairman Committee on Interstate Commerce of the Senate,

Senate Office Building, Washington, D. C.
MY DEAR SENATOR: Under date of March 30 I addressed to Hon. Sam Ray-
burn, as Chairman of the Interstate and Foreign Commerce Committee of the
House of Representatives, a communication wherein I made certain suggestions
for the revision of the proposed bill regulating public utility holding and operating
companies, and wherein I gave very briefly the reasons for my conviction that the
bill is too drastic in some of its provisions. I attach hereto a copy of that com-
munication and I respectfully ask that your committee give it consideration.

As a result of my attendance at the hearings which your committee has accorded the proponents of the bill and representatives of the utility industry, I desire to direct your attention to certain phases of this proposed legislation which were not specifically discussed in my letter to Mr. Rayburn.

Nearly 20 years ago I publicly pointed out the important part which the public utility holding company was destined to play in the development of the industry which this country was about to experience, and at the same time I voiced my firm conviction that the best interests of both the investor and the consumer would be served by regulation.

The passage within the last few years of the Securities Act and the Securities Exchange Act will unquestionably prevent a recurrence of many of the more flagrant abuses that have occurred in the public utility industry, but I still believe that Congress should enact at this time legislation which will preserve the value of the holding company to the industry and the public, and prevent the recurrence of old abuses or the development of any new ones.

May I direct your attention to the fact that a generally accepted method of financing operating utility companies, and one which has proved highly successful in their great development, has been to provide approximately one half of the cash required for construction, extensions and betterments by the sale of first mortgage bonds. The purchaser of such securities is willing to accept a lower rate of interest because there are $2 of actual investment representing every dollar of his loan. Preferred stock of the operating company provides approximately one half of the balance and the sale of this stock is rendered possible at comparatively low dividend rates because the purchaser realizes that the value of the common stock of the operating company affords a substantial margin to protect his investment.



During the development of the industry experience conclusively proved that where there was a large number of comparatively small holders of the common stock of a utility company there was no certainty that such holders either could or would be willing to subscribe to additional issues of common stock should the growth of the property or other company requirements demand additional capital and the holding company provided the only certain means by which this absolutely essential junior financing could be assured either by loans made by the holding company to the operating company (which frequently could not have been secured from any other source) or by the purchase of new common stock of the operating company.

The statement that the passage of the bill eliminating holding companies would not prove harmful to the operating companies is based on an entire misunderstanding of the facts. The damage to all except the largest operating companies would be very great. Their costs would be greatly increased through the loss of unified holding company management, engineering, and technical service, and their financial position would be gravely endangered. Should an operating company be divorced from its holding company and its common stock dispersed into the hands of a large number of private investors, the prospective purchaser of its first-mortgage bonds would hesitate to invest because of the uncertainty as to the junior financing, and when the demands of the public for extensions and improvements required that the operating company raise additional capital it would then be obliged to resort to the banks, which would normally only make comparatively short-term loans--a highly dangerous method of financing for any utility company.

Experience clearly indicates that such a state of affairs might readily lead to s condition where public utility operating company bonds now held as high-grade investments by savings banks, insurance companies, and other fiduciaries, would fail to qualify as a continuing investment for such institutions. The junior financing provided for the operating companies by the holding companies is vital to their existence and growth, and there is no other agency which can provide that financing in proper measure, as I have indicated in the attached letter to Mr. Ravburn.

Based on my more than 40 years' experience in the public-utility field, I have the profound and sincere belief that the abolition of the utility holding company will have a most disastrous effect, not only on its security holders but on those of the operating companies which it controle.

I might also direct your attention to the fact which, as I recall it, was not touched upon in the hearings before you, that investing institutions, in purchasing bonds of operating utility companies, consider the character, ability, and esperience of the management of the holding companies which control the common stocks of such utility companies as of prime importance, as has been many times demonstrated by the higher prices which the operating company's securities commanded where the management of the holding company was held in high esteem and respect.

On a number of occasions the question was asked witnesses before your committee why the operating subsidiaries of holding companies could not be consolidated, and why there should be a number of subsidiary operating companies in s single group. In this connection, I call your attention to the fact that in many States the laws require an operating utility to be incorporated under a charter granted by the State in which the utility operates. This is not a matter over which the utility companies have any control. In addition, it is frequently found to be of advantage to the consumers of electricity that various operations which by law must be carried on by independent companies should be in effect owned by the operating company. I may cite in passing such companies as coal companies, transportation companies, bus companies, bridge companies, and a great variety of corporations performing functions all of which are both important and related to the main operating company.

I agree with the statement made by one of the witnesses before your committee that if a reasonable regulatory bill were adopted the intrinsic value, and only the intrinsic value, of the securities of both operating and holding companies would ultimately be reflected in the market value. Of course no action that Congress should or could take can validate or make good securities issued to pay for utilities at excessive and unwarranted prices, but there would seem to be little excuse to destroy by confiscatory legislation the legitimate and proper value these securities would otherwise have. Respectfully submitted.

H. HOBART PORTER, President.


New York City.
Chairman Committee on Interstate and Foreign Commerce,

House Office Building, Washington, D. C.
MY DEAR SIR: I present herewith a brief statement of my views concerning the
nutility bill now pending before your committee and I make what I hope may be
constructive suggestions as to modifications in the scope and substance of the

So that you may know something of my experience in the utility business, I may say that I have been active therein for

over 40 years. Upon the organization in 1914 of the American Water Works & Electric Co. (succeeding the former holding company, American Water Works & Guarantee Co.) I was elected its president and have been its active executive head ever since. The group of properties comprising this company has been assembled during a period of some 50 years and the soundness of its corporate and financial structure is testified to by the fact that its subsidiaries now have a gross annual income of approximately $15,000,000 out of which over $5,000,000 of taxes must be provided in 1935; with over $300,000,000 of securities in the hands of about 100,000 security holders, the Company serves some 750,000 customers. The stability of its organization and the efficiency and prudence of its management are I think demonstrated by the fact that no unit in the waterworks or electric power systems has ever defaulted on an obligation, and that the company has for many years earned and paid dividends on its preferred and common stocks, even through the present period of depression. This record has been accompanied by constant rate reductions. Since the organization of the company the cost per kilowatt hour to its average domestic consumer has been reduced more than one-half.

I have for many years been an outspoken advocate of the regulation of public utility holding companies, having recognized the grave abuses in both organization and management by some units in the industry. While the Securities Act and the Securities Exchange Act have gone a long way toward preventing a recurrence of these abuses, I still believe that a bill should be enacted providing specifically for the regulation and control of public utility holding companies, and I will enumerate in this letter the provisions which I believe are necessary for this purpose.

Before doing so, may I make a brief summary of the facts which show what the real holding company functions have been and why holding companies must be permitted to continue those functions if government ownership is to be avoided and if the electric industry is to continue to develop in accordance with the needs of the American people.

The outstanding characteristic of the electric-utility industry is its inordinate demand for new capital. This demand is based on two factors--the fact that for every dollar of annual gross earnings several times as much money is required to be invested as for the ordinary industry, and the insatiable demand of the American people for extensions of service and reduction of rates. To meet this demand the industry was compelled to double its plant investment every 5 years up to 1929. In the last 5 years of the period it had to find nearly a billion dollars of new capital every year.

When recovery comes again much more than a billion dollars annually will have to be provided to meet the accumulating demands for additional electric service, even if no new major uses, such as air conditioning, are developed. The total connected load of the industry is even now 30 percent higher than it was in 1929, and with the return of prosperity the sales to all consumers, industrial and domestic, should increase enormously by 1940.

The holding company was the only agency which could have provided the capital needed for the expansion of the industry in the past, and it is the only agency which can provide it in the future. Common-stock capital must be secured for all operating companies in substantial ratio to preferred stock and bond capital in order to induce investors to buy operating company preferred stocks and bonds. Except in the case of a very few of the operating companies in the largest metropolitan centers, investors will not buy an operating company's common stock in the proportions necessary to enable it to sell its senior securities on reasonable terms, and they will not buy common stocks of operating companies in most of the smaller cities and towns, or in the rural sections of the country, at all.

The reason is, of course, that the risks are too great. These risks are primarily those arising from unknown, inefficient, and changing local managements, from local and regional economic vicissitudes and political attacks, and from the

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fact that the investment is necessarily “frozen", since most of such stocks cannot be listed on a national exchange.

In the face of these hazards neither local nor outside investors will provide the junior equity money necessary to the proper financing of local and regional utilities, except through the agency of the holding company. The investing public will buy the holding company's own securities because they can thereby spread the risk over a number of communities and regions in which the holding company has operating subsidiaries, because the investing public recognizes the holding company as a competent organization which provides efficient management, and because the holding company's securities, usually listed on a national exchange, are always salable and offer a liquid investment not provided by the common stocks of the operating companies.

The money realized by the holding company from the sale of its own securities is used to buy the common stocks and other junior securities of its operating subsidiaries, and to make them temporary loans when required, and at times to purchase their senior securities, when they are not saleable to the banks or the public on fair terms. The holding company thus maintains the ability to furnish an uninterrupted flow of capital to its operating subsidiaries at any time and in any amount they may require to meet the demands of the public for constantly increasing service, at decreased rates.

I can understand and, in a measure, sympathize with the ideals of those who want to decentralize the holding company systems and place control of the local operating companies in the communities in which they are located. But this is a practical world, and that ideal runs squarely into the hard and insurmountable fact that it is not possible to procure the capital necessary for the maintenance and development of this industry by any means other than the holding company with centralized management. Almost invariably the reason the local owners of the operating companies' common stocks have sold them to the holding companies is because the local owners found it impossible to provide the technical management and the capital funds necessary to meet the demands of their local communities for improvements and extensions of service and reductions of rates. The holding companies have been able to meet those demands through their centralized managements, and they cannot be deprived of the control of their operating subsidiaries and thus converted into mere investment trusts if they are to continue to perform their indispensable functions of raising the capital and providing efficient management for the local utilities.

Investment trusts are based upon the principle of diversification of risk, and they carry that diversification far beyond any possibilities open to the utility holding companies. They buy, sell, or hold Government and municipal bonds, listed securities, the bonds, debentures, and preferred stocks and common stocks of railroads, utilities, manufacturing companies, and chain and department stores, scattered throughout many industries and sections of the country. Those that invest in unlisted securities at all do so only in exceptional and minor instances. Because their investments are so widely diversified among industries and companies it is impossible for them to provide management for the companies in which they own securities, and because they confine themselves mainly to the purchase of listed securities and minority interests; they do not need management control of the companies whose securities they buy. If they lose confidence in the management of a company in which they are interested, they have a ready market for such of its securities as they may own, and they can sell them with only such loss as open-market conditions may require.

But from the very nature of the case a utility holding company cannot thus protect itself, and it must therefore have the power to insure efficient management of the operating companies in its system. In order to perform its necessary funtion of providing the junior capital for the operating companies, it must buy and hold their common stocks, which in the main are not and cannot be listed, and therefore cannot be sold on the open market. To get the money to buy those common stocks it must sell its own securities. It cannot sell its own securities unless it can assure those who purchase them that it is so organized and conducted that it can at all times provide sound and efficient management for the operating companies whose junior securities it owns and must continue to own. It cannot insure such management without maintaining the voting control of its subsidiaries so that it can determine their policies and remove executives who may prove to be inefficient. In the utility business, just as in all other business, control must be vested in the owners who provide the junior capital. They take the principal risk and they will not take that risk unless they have the power to control the conduet of the business which they own and thus protect themselves as far as possible against loss.

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