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these companies operates on an interconnected basis and enjoys the benefits of the large experience obtained in the major group in the efficient generation of electric energy. The jointly owned generating station, which makes possible for a small load the benefits of the low capital cost of a much larger plant than would be justified for such a load, and makes possible corresponding economies in operation, has been developed both in the case of Atlantic City Electric Co. and the Scranton Electric Co. Each of these companies has a most modern and efficient steam generating station, of which, however, it owns only one-half, the other half being owned by a neighboring company.
These developments were made possible only because there was the necessary, experience available in the American Gas & Electric Co. organization in the method of operating such plants and in the method of obtaining the maximum economies. It is no accident, therefore, that the most efficient anthracite plant in the United States is the plant of the Scranton Electric Co., nor an accident either that the most efficient straight steam cycle electric plant in the world is the Deepwater plant of the Atlantic City Electric Co. The pioneering of the parent company and the experience obtained with its other subsidiaries was made available in the design and construction of these plants just as the experience in the operation of numerous other plants is being made available from day to day to obtain the maximum of efficiency in their operation. This large integrated experience is needed if efficient generation in the present plants is to continue, and if efficient and economical growth is to be provided for the future.
& ELECTRIC CO.
3. ENGINEERING ACCOMPLISHMENTS OF THE AMERICAN
Among utility engineers, managers, and operators all over the world, the engineering accomplishments of no electric utility organization are better, 'if as weil, known as those of the American Gas & Electric Co. The progressiveness of the organization and its accomplishments in bringing to a successful actuality centralized high pressure, large scale, electric generation is but one of the things it is noted for. In the field of transmission the intensive research carried out for many years, extending over more than a decade, to bring about the solution of that most pestiferous problem, namely, lightning, is not only known all over the world, but, more important, was carried through with comparatively modest expenditures and with very remarkable results.
Lightning which 10 years ago threatened to disrupt the entire plan of centralized generation and transmission, so essential in the economical serving of scattered small rural communities and medium-sized towns which form the American Gas & Electric Co. system, has within this decade, as a result of research and combined effort, been, while not quite entirely solved, yet sufficiently tamed as to present no serious problem in the day to day operation of the system. It is therefore possible to take on a load anywhere on the system, requiring the utmost refinement in quality of service, without fear of our being unable to meet such high standards of service. Further, the damage accompanying lightning and similar disturbances, has, in the process of solving this problem, been minimized, thus greatly reducing maintenance.
In the field of transmission-system communication the original research and developments carried out over the last 16 years on the American Gas & Electric Co. system are again well known. Other notable developments made more were economical methods of distribution; original and advanced methods of relaying and service protection; developments of faster oil circuit breakers, etc. All of these have contributed to the lowering of cost of the service and to the improving of its quality. In the field of electronics (vacuum tube) development work has been carried out intensively for the last 10 years, all with the idea of finding ways of improving the methods of generation, transmission, and distribution. Highly satisfactory results have so far been obtained but the work is still almost in its infancy. In other directions, such as in the extending of the field of electric service by reducing costs of wiring, original work has been carried out. All of this has enabled the properties to expand the load and reduce rates.
In the same connection work is being carried on at the present time to make possible the electric heating of homes on an economical basis; this is a field of application for electricity which may increase twentyfold the sale of electricity to the homeowners. Definite progress has been made in that field, but a great deal more needs to be done; the work is being continued.
4. CONTINUATION AND INTEGRATION OF EFFORT NEEDED FOR THE FUTURE
It is to be noted in this connection that the work being carried out by the American Gas & Electric Co. for its subsidiaries is being carried out at actual cost and that the cost is allocated among the various companies. This work has resulted and is resulting in annual savings that exceed many times the actual cost of services. Thus, for the group of properties comprising the American Gas & Electric Co. system, during the year 1934 it is estimated that the actual savings over and beyond the value of the services rendered in the form of furnishing of plans, drawings, information, etc., amounted to $1,125,000, against the total cost of such services of approximately $330,000.
Even if it were possible for each of the subsidiary companies to carry out independently, at practically the same cost, the services rendered to it by the cooperative and coordinated group, very few, if any, of the savings mentioned above would have accrued as a result of such work, primarily because it takes the work of a large group of companies, integrated through a single organization, to bring it to the high state of efficiency of the present American Gas & Electric Co. organization. That is a point too frequently overlooked; too frequently sight is lost of the fact that the central organization itself, with its present efficiency, needs for its functioning the field presented to it by all its various companies to continue as an efficient organization. The diversity of problems, conditions, and applications that the combined companies offer are an essential part of the whole, since, frequently it is only one company of the group that has a local condition that permits trying out a particular new or novel idea or development in its experimental stage. Later, when the idea becomes more commercial, many of the other companies are more than likely to find applications open for the newly developed idea, but if the original application had not presented itself, the whole idea would never have had the benefit of trial and development. Thus, the large group of properties helps the integrated and centralized engineering staff and, in helping it, makes it possible in turn for it to help them.
There is still a great deal of work to be done in the future. Many of the problems outlined above, which have already been solved, have obviously not been solved for all time; economical generation of today will not be considered economical generation 5 years hence. The high grade of service today will undoubtedly not be adequate to meet the more complex and complicated civilization and the industrial system that we will have 5 or 10 years hence. Many of our practices today are admittedly unsatisfactory. Thus, it is recognized that cost of transmission is too high and that the field of transmission is limited to comparatively short distances. Distribution costs are admittedly very high and many of the foremost engineers are concerning themselves with this problem. A great deal has been accomplished in general, and on the American Gas & Electric Co. system in particular, to bring these costs down, but the aim is to further reduce these costs to possibly one-half of what they are today. Costs of wiring are too high. This in turn blocks the more extensive use of electric service.
To all of these fields a great deal of research and investigation will have to be devoted. Our subsidiaries, who have taken so leading a part and have done so much to spread reasonable and reliable electric service in the communities in which they operate, hope and will strive to extend this service by reduction of costs. They will thus do their part toward a more extensively and more thoroughly electrified America. But to do all that, they need all the help and all the experience and the integrated effort that has been available to them in the past, and to an even greater extent than was possible in the past. It ought to be clear that tnere is no better way of bringing this about, and that nothing can contribute more toward that end, than the continuation of the relationship that has existed during the past 28 years between the American Gas & Electric Co. and its subsidiaries.
March 6, 1935.
STATEMENT OF John E. ZIMMERMANN, PRESIDENT OF THE UNITED Gas
IMPROVEMENT Co. Senator Wheeler and gentlemen of the committee, I am president of the United
I Gas Improvement Co. of Philadelphia, an engineer by profession, and reside in Philadelphia where the home office of the company is located.
U. G. I., although said to be the oldest public utility holding company in the country, dating from 1882, was initially conceived and organized for the purpose of the manufacture and sale of Lowe-Water gas production machinery, a then new
method for the manufacture of artificial gas, which up to that time had been manufactured by the carbonization of coal. 'While the Lowe-Water gas process was a distinct advance in the art, the company faced the usual difficulties of introducing a new process to a skeptical industry, which in those pioneering days was not only competitive but of a highly speculative character.
Existing gas companies throughout the country were by and large small units with restricted credit, unable to raise the capital necessary to introduce the new process. In order to overcome these difficulties, it was necessary for U. G. I. to accept securities in payment for its water gas sets, to lease or to buy control of companies in order to install the Lowe process. This resulted in U. Ġ. I. becoming the owner of a large number of gas companies scattered throughout the country, from the Atlantic coast to the Pacific, and from Maine to Florida.
It was about this time that electricity entered the field as a competitor with gas as an illuminant and U. G. I. largely aided the gas industry in postponing for several years the inevitable loss of the lighting business by the introduction in this country of the Welsbach gas mantle, at the same time undertaking the development of electric apparatus and appliances, and the acquisition of electric properties.
It should be remembered that in these days both the gas and electric companies were very small units, even in the larger cities where there were many companies with franchises for restricted areas, or for lighting specific streets. U. G. I. continued the perfection of processes through research and the expansion of areas in which its companies operated. Finally, as the electric, and, to a lesser extent, the gas industry, developed from an urban to a suburban and rural service, U. G. I. undertook the formation of larger units and the disposal where possible of scattered and distant properties. Occasionally these properties could be sold for cash, but in the majority of cases this was not possible and it was necessary to take securities in the holding companies thus formed. Many of these securities have been disposed of from time to time, principally the senior securities, but many are still retained, there being no market in some cases, and in other cases such large blocks of stocks being held as to render them practically unmarketable, although such stocks are dealt in on the exchanges.
So U. G. I. finds itself today with investments, principally common stocks, carried on its books at some $332,000,000—somewhat less than cost-of which $210,000,000, or 63 percent, are investments in subsidiary companies, and $122,000,000, or 37 percent, are investments in noncontrolled companies. $158,000,000, or 75 percent of its investment in subsidiary companies is in the State of Pennsylvania and integrated territory in Delaware, and $39,000,000 in the State of Connecticut, the balance being in four scattered utility companies and also companies engaged in the related and necessary businesses of real estate holding, by-product disposal, and other similar activities, including the Welsbach Co. which manufactures gas mantles, water heaters, and other appliances.
The largest single development owned by this company is the Philadelphia Electric System, which now provides electric service in Philadelphia and gas and electric service in over 2,000 square miles of contiguous and integrated territory, extending from the Delaware River on the north and east to the Susquehanna River on the south, including the Conowingo Power Development in Maryland, with an aggregate population of 2,800,000. That company also serves with electricity and gas a U. G. I. subsidiary, Delaware Power & Light Co., serving a population of 160,000 in the northern part of Delaware including the city of Wilmington. The Philadelphia Electric Co., as now constituted, represents some 60 original companies, mostly under different ownership, which have been brought together by U. G. I. over a period of some 45 years, with corresponding benefits to consumers of reliability of service, decrease in rates, and extensions to outlying territories previously without service. Rates have been reduced from 40 to 60 percent and service extended to 70 percent of the farms in the territory.
The largest nonsubsidiary investment_$60,000,000—is in the Public Service Corporation of New Jersey, serving a territory contiguous to that of the Philadelphia Electric Co.
There are substantial investments in such companies as Niagara Hudson Power Corporation and The Commonwealth & Southern Corporation, the investments having originated in U. G. I.'s ownership of operating companies which, as mentioned before, were exchanged for securities of the holding company under whose auspices the territory was being developed. Not to have turned in these companies would have defeated one of the very purposes wherein the holding company has been of the greatest service in the constructive development of the industry into territorial groups. In addition to these investments,
U. G. I. operates the Philadelphia Municipal Gas Works under a service-at-cost agreement. From 1836 to 1897 the city gas works were operated by the city, but for the past 35 years have been operated by U. G. I.
Another activity of U. G. I. is its research work. For 50 years the technical problems of the gas industry have passed through the company's laboratories and have been solved for the benefit of individual companies, the industry as a whole, and the public in general.
Starting with the development of equipment for the manufacture of water gas, and continuing with the refinement of the coal gas process, almost every advance in the art has been the result of extensive research fostered by U. G. I.
The companies which U. G. I. controls have had the use of these processes and discoveries resulting in annual savings since 1930 of approximately $2,200,000, besides which they have been made available to the industry in general upon the payment of reasonable royalties. Such outside companies as have adopted these processes are saving $1,500,000 a year.
Now as to the effect of the Wheeler-Rayburn bill on this company, as I see it. First, reorganization:
Assuming V. G. I. would be authorized to retain its $158,000,000 investments in Philadelphia Electric Co. and other gas and electric companies in Pennsylvania (which is not clear), and the integrated Delaware companies, representing approximately 50 percent of its total investments; assuming it was further authorized to retain its $60,000,000 investment in the contiguous Public Service Corporation. of New Jersey, there would still remain $114,000,000, of other investments in noncontiguous territory to be disposed of. Of these, the largest interest is represented by $39,000,000'investment in the Connecticut Electric Service Co., New Haven Gas Light Co., and minority interests in other Connecticut operating companies. Disposal of this large investment for cash would be out of the question. Should these companies be merged with other operation companies in Connecticut, U. G. I. would still have its $39,000,000 investment, represented by a minority interest in such new company which would in turn have to be disposed of.
Operating companies that are owned in scattered localities would presumably be sold-the question is to whom? There would be only one possible purchaser in most instances—the local utility serving electricity or gas, as the case might be. If they could not be sold for cash, U.G.I. would again find itself the owner of stock, to a lesser percentage, in a disassociated gas, electric, or combination company which would in turn have to be disposed of.
A more serious difficulty would be found in the disposal of U.G.I.'s nonsubsidiary investments. Such of these investments as consist of small interests in operating companies might be sold to reorganized local groups at whatever price could be obtained.
For the substantial investments in other holding companies, such as Niagara Hudson, $ 16,000,000, and Commonwealth & Southern, $10,000,000, there is no group to which these stocks could be sold. These holding companies would themselves be in process of reorganization or dissolution, and it is inconceivable that such large blocks of securities could be sold on the market even at present depressed prices. Of still greater difficulty would be the disposal of the company's $60,000,000 investment in the Public Service Corporation of New Jersey, should it not be authorized to retain it.
Second, dissolution: The difficulties of disposal or distribution of the assets of a company with such wide interests as U.G.I. are very real. The loss to investors lies in the fact that under the bill this action is forced; that the mathematical procedure is too complicated to permit the distribution of U.G.I. holdings pro rata among the stock, holders; or that, alternatively, the raising of cash for distribution within a specified time, even if it could be accomplished at all, would entail the loss of much of the value of the company's assets.
There is also the question of prior obligations, such as guarantees that exist in connection with issues of bonds and preferred stock of subsidiary companies and companies no longer in the system. Moreover, there exist the company's obligations to operate the municipally owned Philadelphia Gas Works and the Northern Liberties Gas Co. There is the further right of the company's preferred stockholders to receive in dissolution $100 per share in cash. It is difficult to consider a method of distributing assets remaining for the common stock, when the principle upon which the prior obligations are to be met is so impossible of determination. However, assuming prior obligations could be taken care of, the complications involved in the distribution of the balance of its assets, particularly those of other holding companies which would themselves be in process of reorganization or dissolution, is so gres as to baffle solution.
Third, difficulties of operation under the bill:
The enormous practical difficulties in the way of the reorganization or dissolution of a holding company such as U.G.I. are equalled by the obstacles to efficient management imposed by the bill on the conducting of the business of new regional “operating-holding" company.
The interjection of regulation by Federal agencies would cover four phases of the system's business, namely, finance, business parctices and methods, engineering, rates, and services to customers.
All of the restrictions put on the corporate management of the existing type of holding company would continue on the new functional “operating-holding' company necessary in the operation of a geographically integrated system serving more than one State—the use of corporate funds and the nature of the financial structure, the payment of dividends and fees between companies in the system, intercompany loans, the investment of funds, the purchase and sale of securities, and change in the terms of securities-all would be under Federal regulation, despite the integral character of the new regional utility, which would be one single company in all but name. To secure the economies of unified operation, it would still be necessary for the
"operating-holding" company to supply the smaller companies in its group with business services of many kinds. The simplest kind of management service, in the sale, accounting, and engineering fields, might, under Commission rules, have to be withheld until approval was secured as to the usefulness of the service, the price, and the conditions of performance of the contract. Likewise the bill would subject the company to dual regulation, by State and Federal agencies, with regard to all accounting practices.
Under the bill, the Federal Power Commission would be given complete jurisdiction over the physical property necessary for producing and transmitting electricity. While the Commission is only given jurisdiction over the facilities used in interstate production and transmission, in an interconnected system such as is here contemplated, virtually all equipment, except that used strictly in retail distribution of electricity, would be thus supervised, even though jointly used in inter- and intrastate business.
The Commission is authorized to draw up a "superpower" plan and the company can by forced to alter its generating and transmission facilities to conform with such plan. The purchase, sale, or abandonment of property, the extension, repair, or change of facilities, could only be undertaken with Commission approval. The bill also establishes the utility as a common carrier, virtually under the management of the federal agency. The present interchange agreements can be entirely altered, and the generating and transmission facilities used as the Commission, rather than the company, sees fit.
The bill apparently gives the Federal Power Commission jurisdiction over rates and services of a purely interstate nature. Taken at its face value, this includes only the intersystem sales of electricity, plus the exchange of power with neighboring utility systems. The imposition of Commission supervision over such interchange of electric energy will not tend to the economic use of generating stations. The essence of exchange arrangements is timeliness, and engineers in charge must have full power to authorize the interchange of electricity at proper prices, depending upon operating conditions prevalent at the moment.
Under the bill, the Federal Power Commission could in effect fix the gateway cost of electricity, i. e., the cost at the substation. By the determination of gateway cost to different classes of service, the Commission is virtually in a position to dictate the rates charged, not only to wholesale power users such as municipalities and raliways, but also to retail customers, depriving the State commission of this local control.
RECOMMENDED REGULATION OF HOLDING COMPANIES
The problem is considerably simplified if we break down the business of holding companies into its two component parts, namely, those functions which have to do with the supplying of service to consumers and which may incidentally affect the service and rates of the operating companies; and, second, the phases of its business which concern its relations with investors, that is, the financial aspects of the business, including the character and sale of the holding company's securities, and the problems of accounting and reporting of operations.
Considering first the holding company, as it affects the consumer, it is important to realize that this relationship is not a direct one, but involves a local