The Securities and Exchange Commission submits these comments to express its views on the Comptroller General's Report to the Congress on the Commission's administration of the Public Utility Holding Company Act of 1935. Although these comments are directed principally to material contained in the Comptroller General's Report, we set forth first certain background information regarding the events and circumstances which led to the passage of the Act, the evils in the holding company structures which the Congress sought to eliminate, and the extent of federal regulation of public utility holding companies contemplated when the Act was adopted. This information, which is not set forth in the Comptroller General's Report, is essential both to an understanding of the complexities and structure of the Act and also to a meaningful analysis of the Commission's current efforts in the administration of the Act.

A. The Comptroller General's Report Reflects a Misunderstanding
of the Statute and Its Administration by the Commission.

Under the Public Utility Holding Company Act of 1935, the Commission regulates interstate public utility holding company systems engaged in the electric utility business or the retail distribution of gas. The Act was adopted in response to the control exercised by a relatively few large financial corporations of a major part of the utility industry in this country. This situation was aggravated by the unsoundness of financial structures created to effect that control, and the lack of meaningful economic or operational relationships among the constituent parts of the resultant holding company systems. Congress was particularly concerned that effective state regulation of utility service was seriously impaired by such use of the holding company device.

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Under the Act, the Commission's jurisdiction extends to all companies in a registered holding company system, including companies that are not classified as utility companies under the Act. But, as we note below, in many circumstances holding company systems were exempted from regulation. The Commission was directed to regulate the physical integration of public utility companies and functionally related properties of registered holding company systems, and to effect the simplification of intercorporate relationships and financial structures of such systems. The Act also directed the Commission to pass upon the financing operations of holding companies and their subsidiary companies, the acquisition and disposition of securities and properties, certain accounting practices, servicing arrangements, and intercompany transactions. Most of these powers relate only to companies in registered holding company systems, however, not to utility companies or holding companies not required to register under the Act.

The dominant themes throughout the Comptroller General's Report relate to the issues of the size of utility systems and the Commission's application of the exemptive provisions of the Act. As to size, the Report generally notes that the Commission has not developed criteria relating to how large a holding company or utility company should be in order to operate efficiently. With regard to the Act's exemptive provisions, the Report is critical of the fact that the Commission has granted exemptions to a large portion of the utilities industry. The Report also questions the adequacy of the efforts and resources devoted to administration of the Act in recent years by the Cammission. The concerns expressed in the Comptroller General's Report reflect, in large measure, a misunderstanding of the purpose of the Act. Accordingly, our substantive comments are directed to the major issues which are focused upon in the Comptroller General's Report.

With respect to the issue of size, the Act expressly recognizes that the size of utility systems depends on technological requirements and the character of the region served. In contrast, the Comptroller General's discussion focuses on size measured in absolute terms of dollar values in assets and revenuesstandards which the Congress did not include in the Act. Since the Act was adopted, there has been a tenfold nationwide increase in capital invested and in generating capacity for electric service which reflects a corresponding increase in the physical size of efficient generating units and in demand for energy. Such growth is not related to holding company status because the size of individual utility companies has grown accordingly. Virtually all of this growth has been internal.

The Commission's alministration of the Act has effectively limited mergers and consolidations to those which can be affirmatively justified by the goals set forth in the Act. The Commission substantially completed the reorganization phase of its mandate about 20 years ago. The utility industry today consists mostly of the strong, independent local systems which the Act sought to achieve. The reduction in the coverage of the Act reflects attainment rather than abandonment of its purpose. The Commission has also carefully and vigorously supervised the activities of companies in registered holding campany systems, relating to financing, the acquisition of securities and properties, accounting practices, servicing arrangements, and intercompany transactions.

In this connection, the Comptroller General's Report considerably understates the information resources applied to administration of the Act. It overlooks the use of evidentiary hearings in administration of the Act, the fiela inspection program undertaken by the staff with respect to new problems arising in the fuel area, and the very extensive information available about the industry, whether or not subject to the Act, from filings under the securities laws and

from other regulatory sources. More fundamentally, it fails to recognize the specialized knowledge and experience of those assigned to administer the Act. No inference can fairly be drawn that data submitted by those regulated is accepted without meaningful review. And the areas in which the Report suggests that further audit and verification are needed are, for the most part, matters in which available data is ample.

The utility industry became substantially involved in the financing and ownership of fuel sources and related facilities in response to the energy crisis. This reaction was industrywide and was not a phenomenon related to holding company status. The Commission has directed particular attention to the economic and technical justifications for this development in passing on the applications of the companies subject to the Act.

The Comptroller General's Report appears to be critical in that the Commission has not exercised power over exempt holding companies. But the Congress determined that those holding companies which were entitled to a Section 3 exemption would be virtually free of substantive regulation under the Act and would not be required to conform to the Act's provisions and standards applicable to registered holding company systems, and the Cammission has no jurisdiction over independent operating companies that, pursuant to its administration of the Act, have been spun-off from registered holding company systems.

The Comptroller General has recommended that the Commission conduct an extensive study of the developments in the gas and utility industry and has suggested four specific subject areas which should be examined in the recommended study. Our views with respect to each of these specific areas are set forth infra at Point VI.

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B. The Commission Has Substantially Effectuated the Statutory Aims and Continues To Do So.

1. Historical Perspective

During the 1920's the utility industry was marked by the two-fold experience of the increased growth of utility companies and the expansion of holding company empires through the acquisition of utility companies. 1/ In addition to controlling the nation's supply of electric and gas energy, these holding companies had expanded into such diverse fields as coal mining, foundries, textiles, agriculture, transportation, ice and cold storage, real estate, finance and credit, theaters, and amusement parks. 2/

As a result of the growth of holding company systems, finance rose to a position of prominence in this vital field of electrical and gas energy. Concentration of control was accompanied by the creation of unsound and topheavy financial structures; holding companies were pyramided on top of each other, and within each company there were often multi-levels of securities. These mountains of paper rested on the common stock of the operating companies. Because holding companies tended to borrow as heavily as possible, their securities were highly speculative and they were marked by excessive leverage. 3/ As a result of leverage, small changes in the earnings of the underlying companies had dramatically explosive effects on the earnings applicable to holding company securities. During the boom years up to 1929, book profits of holding companies appeared huge.

1/ Securities and Exchange Commission, Report for the SEC Subcommittee of the House Committee on Interstate and Foreign Commerce on the Public Utility Holding Company Act of 1935, 1-20 (Oct. 15, 1951).

2/ Id. at 15.

3/ Id. at 9.