THE ELECTRIC AND GAS INDUSTRIES

It may be well to outline very briefly a few salient facts about the electric and natural-gas industries so as to emphasize what I know must be very much in your minds, viz, the tremendous implications to the national well-being involved in this bill and the equally tremendous responsibility which is thus imposed upon you in your consideration of it.

Directly and indirectly these industries provide employment for at least 1,000,000 people and through wages alone furnish the support for many times that number.

No other industries have provided more stable employment during the depression years either as to number of persons employed or as to compensation paid and few, if any, others have maintained so high a yearly average wage. Millions of investors have invested billions of dollars to make possible the useful public service which they provide for more than 100,000,000 people in this country.

They have done so good a job that America is the envy of the world as regards the quality, universality, and cheapness of its public utility services.

Directly and indirectly these two industries are estimated to provide our Federal, State, county, and municipal governments with taxes of nearly half a billion dollars a year.

If taxes be considered, no municipal, State, or Federal light and power system in this country including Seattle and Tacoma or in Canada, the home of the now financially decrepit Ontario hydro system, is providing electric service at rates which compare favorably with correspondingly situated private systems in this country.

Their business is in the main not monopolistic but highly competitive. Only as to residential lighting service representing less than one-sixth of the revenues of electric companies can the element of competition be properly considered absent.

It is both interesting and significant that these services are the smallest items of the family budget, that while the prices of all other items of household expenses are rapidly mounting the cost of these services is steadily decreasing.

These industries normally spend over $2,000,000,000 a year in wages and for the purchase of materials and supplies.

In 1930 they spent, at Government request, more than a billion dollars on construction alone, in an effort to help stem the depression.

Today, if accorded fair treatment and the cooperation instead of the competition of Government, they could be one of the leaders in the drive for business recovery.

I want to submit to you that the way back to prosperity is through the reestablishment of business confidence which will permit private, taxpaying capital to go to work again.

If this could be brought about, the next 5 years, instead of seeing the demoralization and destruction under this bill of these great industries as private enterprises, would see them again engaged in constructive expansion. The same 5 years instead of bringing about the ruin of millions of investors, would bring recovery to their investments and the restoration of their income, from which in turn, new taxes would accrue to Government.

The alternative is the expenditure of immense sums of public money to accomplish something private capital can do better, the further destruction of the sources of Government taxes out of which such public money must be raised and serviced, the imposition upon the people of a new social order under the guise of regulation and the wanton destruction of investors and investment alike.

I should like to illustrate these points by reference to charts 1 to 8, inclusive, in the folder you have before you.

THE EBASCO GROUP

Electric Bond & Share Co. was organized in 1905 by General Electric Co., which, however, for many years past has had no interest in our company, to take over and attempt to salvage public-utility securities accepted by the manufacturing company in part payment for electrical apparatus from companies, locally owned and operated, which had been unable to make a success of their undertakings. From that day to this almost every situation that Electric Bond & Share Co. has gone into has been in response to the need for financial help.

A great many of the properties which it has made into sound and successful operating units it took out of receivership. In most other cases we were asked for help either because receivership threatened or because the financial needs

of the properties had grown beyond the capacity of their owners, or the people of the local communities, to supply.

In this connection it may not be amiss to remark that the electric and naturalgas industries and in fact all growing public utilities require immense amounts of new capital. These amounts vary from $5 to $10 of new capital for each new dollar of annual gross earnings, so that the inability of local capitalists to provide the money needed for such enterprises is not remarkable.

ELECTRIC BOND & SHARE CO. NOT A "PAPER" COMPANY

Electric Bond & Share Co. is not and never has been a "paper" company. It is not something of recent creation. It was not superimposed on operating companies as a device" for financial or corporate control. It is and always has been a working organization. It has from the beginning provided the initiative, done the planning, and found the money for the creation, development, and support of the group which bears its name.

The growth of our group has been not fortuitous but organic. This is the explanation of the relative simplicity of our corporate set-up as shown on chart 9. First came Electric Bond & Share Co., itself, in 1905. Its first undertaking was the assembling of the properties for and the formation and financing of the American Gas & Electric Co. In that company, we still hold a minority interest but we do not in any way supervise its operations nor have we ever done so. Its business and operations are, therefore, not included in such facts and figures as I may here present for your consideration.

Later, and from time to time as new operating properties were assembled by Electric Bond & Share Co. initiative and money, a holding company was organized to hold their common stocks, thus making possible the sale of the bonds and preferred stocks of the operating subsidiaries on attractive terms to them and so providing a sound finncial set-up under which every company in the group is solvent today.

The Electric Bond & Share Co. plan has been developed on the idea that its associated holding companies are merely investment companies through which equity money could be raised for the financing of the operating subsidiaries.

These associated holding companies have no pay rolls, receive no fees, hold no outside investments, and serve no functions except the very important ones of providing the equity money for and the cash advances needed from time to time by their own operating subsidiaries.

The continuous financing necessary to the growth and development of operating companies is, contrary to popular opinion, a far more important factor in the public interest than is even the technical end of the business, important as that is, and as to all but the few companies operating in the largest cities, this financing can best be done, and in many cases can only be done, through holding companies. Under our plan we have sought safety for each holding company through diversity of investment risk in location and character of territory served and efficiency and economy of management through the supervisory organization of Electric Bond & Share Co.

The result is a simple corporate set-up which may be outlined as follows:

Local operating companies, regionally situated, locally operated, locally managed, subject to local regulatory authority and interconnected wherever economically and physically feasible with adjoining systems.

Central service organization, similarly subject to effective local regulation set up on a regionalized basis which provides the operating companies with many classes of necessary expert services of greater scope and at lower cost than could be provided by the operating companies themselves.

Holding companies, the function of which is to provide money for the creation, existence, and expansion of the operating utility systems. They, like all other financial institutions, are already subject to the jurisdiction of the Securities and Exchange Commission. Their "holdings" in the common stocks of their subsidiaries have been so selected as to offer the benefits of diversity of risk to those who invest in their securities.

THE PROOF OF THE PUDDING

The proof of the pudding is in the eating. After 30 years of operation, in spite of the recent years of depressed business conditions and notwithstanding increased taxes, subsidized Government competition and continued political attack, we are able to make the following statement:

"No operating company is in default of interest, sinking fund, or bond maturity, as to any obligation created while a member of our group.

"All but six are earning and paying preferred dividends on stocks held by the public, most of them in full.

"No operating company has any borrowings, other than funded debt, payable to anyone except its own holding company.

"No company is in default on taxes.

"Every company is meeting all service demands, maintaining first-class service and progressively reducing rates.

"Only two companies in our group (both holding companies) owe money to any bank. In both cases, the debt was contracted to meet "depression" expenditures. "Electric Bond & Share Co. and associated holding companies have today net cash resources of approximately $75,000,000, which have been held in reserve so that solvency may be maintained."

Such a record could not have been obtained through over-capitalization and bad management, particularly when it is remembered that our companies operate principally in sparsely settled territory and in States whose prosperity depends mainly on agriculture or the heavy industries. Notwithstanding this record of accomplishment and in spite of a rising volume of business, the market prices of our securities are being progressively forced down by the uncertainties brought about by continued political attack, as is shown graphically in charts 11, 12, and 32. This in turn will make difficult the raising of the new capital (see chart 20) which otherwise could be expended by our companies for new construction.

CRITICISMS OF EBASCO GROUP

No criticism has been directed against our group alleging poor service, inadequate facilities, failure to respond to legitimate demands for extensions, or lack of adequate financial resources. We have no up-stream loans or stock holdings between operating companies and their holding companies and no cross-stream loans or holdings. It is a matter of fixed policy with us not to engage in market operations as to any of the securities of our group. No individual or combination of individuals and no "insiders" control any company in our group. On the contrary our group is the perfect example of 100 percent public ownership as is indicated by chart 10.

We could enlarge the list to include exemption from every criticism save two. These are that so-called "write-ups" have inflated the rate bases and that service fees have inflated the expenses of operating subsidiaries and hence increased the cost of service to the rate-payers. We believe that neither of these statements is true.

WRITE-UPS

Let us first take the now familiar charge of write-ups. While the Federal Trade Commission does not attempt to distinguish between them, there are, of course, write-ups and write-ups; legitimate and illegitimate ones. We believe

those for which we have been criticized are of the legitimate kind. The following can be said for them:

(a) No write-up occurred except when new operating systems were being organized or at the time of some proper and necessary corporate reorganization requiring a determination of the value of corporate assets.

(b) The figure then placed on the books reflected an honest belief as to value at the time.

(c) Not only did no rate increase result from such appraisal but rate reductions invariably followed, in many cases immediately and in all cases at an early date. (d) Total securities outstanding with the public are less than total book assets after deducting all so-called "write-ups.”

In all fairness, I should state that the Federal Trade Commission has made it clear in the present investigation that book values are not determinative as to rates for service. The following statement is quoted from the record:

"The Commission recognizes that the fair value of assets and liabilities may be much greater than the books of account disclose or that they may be less. The determination of fair value is one for which provision had been generally made under existing statutes by administrative and judicial authorities when such issue arises in particular cases. Some of the facts brought out in these hearings regarding the growth of capital assets and liabilities may have a bearing on questions of fair value, but, according to the law, they are not the only factors to be considered. They will be informative chiefly regarding the cost of investment and the extent of increases in book value over and above such cost. If the Senate had intended any such inquiry, i. e., as to values and appraisals to be made, it would have been a simple matter to express its wishes, as the Congress

has already done with regard to railroads. It would have also recognized that such an undertaking would require an appropriation of many millions of dollars and that it would involve an inquiry extending over a considerable number of years."

I offer this quotation because I want to make sure that no one shall have the impression that the Federal Trade Commission investigated the value of our properties and found such value to be overstated on our books. No such investigation was made.

Write-ups, or write-downs either, can have no effect on rates so long as the law of the land remains as it has been announced by the Supreme Court of the United States as its interpretation of the Constitution-viz, that rates are to be determined on the basis of the fair value of the used and useful property employed in the service of the public at the time.

In support of my statement regarding the lack of effect of the so-called "writeups" on rates for service, I offer charts 35 to 51, inclusive in the folder which you have before you.

WHY A SERVICE ORGANIZATION

You have been told that service organizations exist for the purpose of "milking" the operating utilities for the benefit of the holding companies. This is certainly not true as to our group.

Our fee averages 1.1 percent of the gross earnings of the operating companies. We believe that no similar arrangement, whether "mutualized" or not, has been devised whereby equal service has been made available to operating companies at less net cost than our fee represents. It should be mentioned that our fee represents all the cost of general supervisory service to them, and that all group savings, such as from mass-purchasing and group insurance, and from consolidated tax returns when these were permitted, have all been passed along in full to the operating companies and none retained by Electric Bond & Share Co. or any associated holding company. These savings have often exceeded the entire A recent example of such savings to three of our operating companies may be of interest.

fee.

These three companies have bonds maturing during the first half of this year aggregating approximately $25,000,000. None of them can meet its obligation at maturity. I think, if they stood alone, none of them could extend its obligation beyond the due date. However, as a part of the Electric Bond & Share Co. system, helped and advised by our service organization without compensation, one of the issues has already been extended for 15 years, 85 percent of the bonds of another have already been deposited for extension to 1942, and 72 percent of the bonds of the third have been deposited for extension to 1945. The important point is that this has been accomplished by us without compensation. If 4 percent would be a fair fee if these transactions had been handled by disassociated agencies, the saving to these companies is $1,000,000

You have been told fantastic and utterly untrue stories as to the profits alleged to be made by us on this supervision service.

Electric Bond & Share Co. which provides the supervisory service under discussion has believed that a profit on its supervision service is justified because it does not directly or indirectly own or control all the voting stock of its operating companies. We must admit that a fee which represents, on the average, less than one-fortieth of a cent per kilowatt-hour sold has not seemed a burden upon our operating companies nor upon their customers; provided it could be shown that the services rendered are valuable and necessary, or that the cost was no more than similar service could be had for elsewhere, and less than it would cost the operating company to enlarge its own organization to do the same work for itself. I presume it is unnecessary to prove the necessity of some such service organization as ours, for the need of it is expressly recognized in the bill we are discussing. The bill, however, provides that such service must be made available through a "mutualized" company. The real question it seems to me is not one of method but one of results.

The fact that our operating companies were initially `very small and remain even today comparatively so, made it, and still make it, out of the question for them to provide themselves with such organizations as the large metropolitan companies can and do maintain. We, therefore, have provided such an organization as a part of the Electric Bond & Share Co. Today, our organization consists of some 500 people, including trained and seasoned executives, operators, engineers, accountants, sales and rate specialists, lawyers and others, each of

whom has had extensive training and experience particularly fitting him for the job he performs in the domestic or foreign field. Most of those holding responsible positions are men of years of practical experience and of outstanding accomplishments with operating companies. As I said before, ours is no "paper" company. Perhaps I may be pardoned if I quote briefly from the report of the Federal Trade Commission engineer-examiner, who in the present investigation of our affairs by that body said:

"This great organization is consistently cooperating by the combined technical knowledge and executive skill of its staff and management to reduce the actual costs of construction and operation, to conduct operations as efficiently and economically as can be done, and expand the business by extensions, enlargements, and improvements of service, by rate policies and promotional parctices as far as such will produce the profit necessary or desired on the financial structure which has also been devised and built up by the same management.

"This examiner must testify that as a working organization the Electric Bond & Share Co. is highly efficient."

This is the kind of service organization (see chart 19) which the bill now before you would break up or force into some new form not suited to our type of business requirements. As now constituted, it represents, as I previously said of our group as a whole, not a fortuitous but an organic development. It has a background of some 25 years of continuous experience of the problems, financial, managerial, and technical, of the operating companies in our group.

GEOGRAPHIC AND ECONOMIC DIVERSITY

The proponents of this legislation have stated in these hearings that economic diversity is desirable but that geographic diversity as a means of accomplishing such economic diversity is unimportant and even nonexistent. They said because the public utilities are engaged in the same kind of service everywhere there could exist no such thing as geographic diversity.

Nothing could more vividly illustrate a lack of appreciation of this Nation's industrial affairs in general or the public-utility business in particular.

Consider first the insurance companies. They are required by law to limit themselves strictly to the insurance business. Their business is based on the fundamental principle of diversity of risk. Consider, for example, the San Francisco fire. Which were the companies that paid their losses promptly and fully? Those of large size and widely diversified geographic risk. Would you insure your property in a "geographically and economically integrated" insurance company? Of course you would not. You would instinctively seek the protection of wide geographic diversity of risk.

Consider also the nature of the public-utility industry. Like the insurance companies it is limited to one line of business. Evidently it must have economie diversity if it is to survive. How is that to be obtained? Only through the diversified interests and activities of its customers. I don't need to enlarge upon the economic vicissitudes of the one industry State or the one industry town. If ever there has been a time when the importance of diversity of risk should be evident to any who have eyes to see, it is now. It should be evident too that the smaller the communities served and the more sparsely settled the States in which these communities are situated, the greater is the need for geographic diversity as an essential element in the economic diversity upon which the continued existence of any large business rests. Charts 21 to 26, inclusive, are offered in support of these statements.

DI VERSITY IN THE EBASCO GROUP

In the case of the Ebasco group both diversity of risk and the extent of our operations have been brought about by that very feature of our business which we had been encouraged to believe was our principal contribution to social progress, viz, the providing of metropolitan service to small communities and the extension of that service to village, hamlet, and farm.

Our domestic companies, to which, unless otherwise specified, this statement is limited, serve about 8 percent of the people of this country. None of them operates in the major centers of population. Our group serves some 3,200 communities, practically 2,900 of which have less than 3,000 population each. More than 1,800 of these places had no service and many only partial service until we made first-class and continuous service available. Our advent in any situation was promptly followed by rate reductions, property extensions, and service improvement. These things are still going on and are illustrated by charts 13 to 18 inclusive.