Since early in 1929, customer savings from rate reductions by our group in this country have aggregated over $64,000,000. Disregarding 1930 when at the request of the Federal Government the public utilities spent approximately one billion dollars, of which our part was about $97,000,000, in an attempt to help stem the depression, our construction expenditures for the depression years have averaged more than $25,000,000 a year. This compares with approximately $100,000,000 in normal times.

The average rates for residential service in our group are lower and the average consumption higher than the country-wide averages. If only like territory of similarly low population density is considered the standing of our companies both as to low average rates and high average use is emphasized.

SOME EFFECTS OF THE PROPOSED LEGISLATION AS APPLIED TO OUR GROUP

Among other things, the proposed legislation provides that no public utility may be interested both in the electric and natural gas business. The enforcement of this provision would make it necessary for us to divest ourselves, doubtless at great loss, of all our investments in the natural gas business. (See chart 28.) The injustice and unwisdom of such a requirement are apparent to anyone who knows how we, through our associated holding company, Electric Power & Light Corporation, went into the natural gas business in Texas, Louisiana, and adjoining States in 1930 and what has been accomplished during the worst years of the depression; in taking disorganized and financially unstable units and putting them together into an interconnected system; in simplyfing the corporate structure; in protecting investors who but for our intervention would have suffered irreparable loss; in greatly extending service and in contributing through the tremendous sums spent for labor and materials in such extension, to the relative prosperity of the territory served; all with no harmful effect, as respects competition or otherwise, to electric or gas consumers or investors.

The actual cash investment of Electric Bond & Share Co. and its associated holding companies in this natural-gas system approximates $130,000,000 of which more than $45,000,000 represents cash supplied by Electric Bond & Share Co. itself. Within this period approximately $50,000,000 has been expended for new construction, interconnections, extensions, etc. The number of communities served at wholesale and retail now totals 315, an increase of nearly 50 percent under our ownership. The number of customers served at retail has increased from 88,000 to 122,000 and the number of miles of pipe line from 5,697 to 9,141. (See charts 30 and 31.)

During the same depression years a similar result was accomplished in Montana, where natural gas has been developed and is now served for the first time to 15 communities in that State, including Butte, Anaconda, Bozeman, and Helena. This work was planned by our company and the approximately $14,000,000 of capital required has been provided by our associated holding company, American Power & Light Co.

These developments represent real and outstanding contributions to social stability and business recovery during the worst years of the depression. But for the efforts and resources of our company and its associated holding companies these programs could not have been carried out and these systems now in successful operation could not have been created.

It would seem that this record is a sufficient answer to statements recently made that, although in the past companies such as ours have rendered a useful and even indispensable service, they no longer do so. Here are two financially successful, socially desirable, and regionally interconnected public-utility systems, assembled, extended, and placed in successful operation in the depression years when most people had lost their vision and their courage and were keeping their money in the bank. The money we put in these new ventures is still in them, and the reward now offered to our stockholders is that their property rights shall be taken from them.

WE MUST SELL OUR FOREIGN PROPERTIES

In the same way we must sacrifice our investments in foreign countries. Our operations in foreign countries were initiated, like those in this country, by Electric Bond & Share Co. The first property, Panama, was acquired in 1917. Now we are operating in 13 foreign countries. Here again the principle of diversity was sought and obtained for the greater protection of the investor (See map, chart 29). When the initial period of assembly was taken over, American & Foreign Power Co., Inc., was organized to take them over. Just as in the United States, so also first-class modern electric service at reasonable rates has been introduced

and developed by the foreign subsidiaries in these 13 countries so that citizens of these countries have also reaped a real benefit from the pioneering work which

has been done.

It is a sad commentary on the mutability of human affairs that our Government, which now would force us to divest ourselves of these foreign holdings, years ago urged us to enter the foreign utility field as a means of creating closer ties and relationships between the United States and various foreign countries, and as a means of creating new markets for American-made goods.

It is almost inconceivable that in the present state of our national industrial life it can seriously be proposed that American investors should be compelled to divest themselves of their interest in this foreign pioneering enterprise. The only possible purchaser, under this proposed law, of such an investment, if indeed any could now be found, would be some foreign interest. That would effectively close the present market to American goods, now purchased here by our group of foreign properties.

TWO FUNDAMENTAL MISCONCEPTIONS

I should like permission to file for the record a pamphlet which we have prepared, which analyzes certain features of the bill as relating to electric operating utilities and to discuss very briefly two of the many important provisions of the bill therein presented in greater detail.

The first of these provisions is that which would make electric companies common carriers.

This committee is familiar with the operations of common carriers as exemplified by railroads, telephone lines, and oil pipe lines. In every case there are involved the possibility of storage or of delayed delivery of the commodity or service to be carried. In other words, a common carrier must be able to require the person using its facilities to accommodate his use to the common carrier's reasonable convenience.

Neither electricity nor natural gas may be either stored or delayed in delivery. In each case the use by the customer creates an immediate and nonpostponable demand on distribution system, transmission line, and source of supply. Their systems are designed and built as a coordinated whole to accomplish an uninterrupted service. Neither common carrier nor common purchaser obligations can be imposed on electric or natural gas utilities except as a means of forcing them to make their facilities available to others who would seek to use them as common carriers for the purpose of raiding their existing markets or of forcing them to purchase from others electricity or natural gas to be sold to their own customers at the expense of the shutting down of their own sources of supply.

Any competent engineer familiar with the electric and natural gas industries will confirm this obvious statement and will be able to distinguish between the important possibilities of joint use by means of carefully considered and economically feasible interconnection between systems of diverse ownership and the thoroughly impracticable idea of applying common carrier and common purchaser requirements to services which by their nature can be made subject neither to storage nor to delayed delivery.

The extent to which the practice of interconnection has been followed by our companies in indicated by chart 27, which consists of a map on which these interconnections are shown and contrasted, to the same scale, with the British "grid" system.

The other provision of the bill to which I desire to direct your especial attention is that which provides that the rate base of an electric utility shall be actual legitimate prudent original cost. It is admitted that such a definition sounds plausible and persuasive. It happens to be neither sound economics nor the law of the land.

It should be evident that such an unchanging and unchangeable method of determining a rate base must presuppose a similarly unchanging and unchangeable value of money. It is no doubt this simple and fundamental fact that has caused the United States Supreme Court to affirm and reaffirm that "fair value at the time, of the property used and useful in the public service" is the lawful rate base. In a time of severe deflation "cost" might greatly exceed "value." In a time of extreme inflation the reverse would doubtless be true.

Can it be supposed that if this bill provided for the regulation of street railway utilities, original cost would have been selected as the appropriate rate base? On such a basis the rates of every street railway in the country would have to be increased out of reason and beyond any possibility of holding even the present unprofitable business. It is a poor rule, economic or otherwise, which does not work both ways.

These two, out of many, impracticable ideas contained in this bill are mentioned here as examples of lack of even an elementary acquaintanceship with the simple fundamentals of the industries to be regulated to the point of domination under this bill. They are submitted to you as examples of the pressing need for intelligent factual analyses and approach in your further consideration of these far-reaching proposals.

STATE REGULATION IS NULLIFIED TO ESTABLISH FEDERAL CONTROL

In order that Federal control may be unhampered with respect to these common-carrier and regional coordination provisions, all matters relating to rates (including under H. R. 5423, retail rates), service, accounting, securities, etc., for the companies involved, are placed under the jurisdiction of a Federal bureau. Even if the State commissions are permitted to retain authority to regulate retail rates in local distribution, they would have merely the empty shell of their present regulatory powers. Federal authority would control everything up to the "gateway" to a local community, and the State commissions would inevitably become only minor bureaus, dominated by Federal authority and functioning merely to carry through policies laid down by it.

As I have already said, State regulation can be, and I believe is, more intelligently responsive to local conditions than would be possible with Federal control, even aside from the fact that Federal control may have other than local objectives. I have a short statement by counsel which, among other things, shows that when the Federal Government once provides for regulatory jurisdiction in a field constitutionally open to it, State regulatory power in that field is automatically terminated. I would like to tender that statement for the record.

THE OPERATING COMPANY WILL LOSE THE CONTROL AND USE OF ITS PROPERTY

Among the astounding features of the bill are those by which it provides that a privately owned electric company

Now subject to effective State regulation shall be made subject to the overriding control of Federal bureaus.

May be compelled by a Federal bureau, under terms dictated by that bureau, to make its facilities available to an electric Federal agency.

May thus be subjected to Federal competition on unequal and destructive terms.

May lose the use and ultimately the possession of its property without adequate, or perhaps any compensation.

May even be required to construct, at its own expense, new facilities by which its destruction will be hastened.

OPERATING COMPANIES WHICH HAVE SUBSIDIARIES ARE SUBJECT TO ALL OF THE DISABILITIES AND PENALTIES IMPOSED UPON HOLDING COMPANIES

Under this proposed legislation, an electric or gas operating utility, which has any operating utility subsidiaries, as many of them necessarily do, becomes a holding company and must comply with all of the holding company provisions of the bill. Among other things it must cease to provide any managerial or other service to its own subsidiaries and must divest itself of these subsidiaries by 1940.

THE FUTURE FINANCING OF OPERATING COMPANIES WILL BE HANDICAPPED OR

PREVENTED

Financing by an operating company affected by the provisions of this bill will be practically out of the question for the next 5 years. There are various evident reasons for this. I mention only a few by way of illustration:

1. Until the regrouping plans have been completed it will not be known who will own and manage the company, or, indeed what part of its properties it may continue to own and operate. There will necessarily be a general demoralization of the industry. Who would buy refunding or new securities under such circumstances? If an investor were to put up money in 1936 to build transmission lines, he might find the property shifted in 1937 to another company in the Nationwide regrouping. Moreover, I question whether the directors would feel justified to attempt financing in face of possibility of having such extensions turned over to a competitor at some later date.

2. Senior financing under the bill may be accomplished only with first-lien bonds. Many companies have underlying bond issues outstanding not callable at all or callable only at a prohibitive premium. These companies could offer first-lien bonds in no case without refinancing existing bonds.

3. Preferred stocks are flatly prohibited and this important section of the investment market is closed.

4. Common-stock financing is an expensive method if all, or an unnecessarily large proportion, of the utility's funds are to be obtained in this manner. Furthermore, when a prospective investor knows that the present common stocks of the company are shortly to be dumped on the market, he is not likely to be interested. For the future, after the holding-company group is broken up, the operating company must finance as an isolated enterprise. Most of the companies in our group serve territories which are primarily dependent upon agriculture or upon a single key industry. Hence their revenues are subject to periodic fluctuation while their expenses and fixed charges are nearly constant. The net income available for return on their common stock is thus highly unstable and uncertain. From an investor's standpoint these common stocks would be unattractive. The economic stability heretofore given by the diversification of investments in a holding company will be lost.

Most of our operating companies are enterprises too small in size for their common stocks, as an independent investment, to have a standing in the general investment market. Unless securities are readily marketable, the cost of funds is greatly increased.

Over and over in this bill, we find the conception of "a geographically and economically integrated system." As applied to a holding company, with relatively small operating subsidiaries, it is economically unsound. It will increase the costs to users for the simple reason that it will increase the risk of investors and hence increase the cost of the funds necessary for continuance and expansion of the utility business.

It is my opinion that, if this bill is passed, investors generally will regard it as the first step toward ultimate nationalization of the industry. Many believe that its purpose is to accomplish Government ownership, or at least Government management, without compensation. Even if the ultimate nationalization carried with it compensation to the owners of the properties, the amount thereof would be highly speculative and uncertain.

In view of present intense Government activities affecting the electric light and power industry as shown on chart 33 and of the extent of the various Federal and major Federal-aid hydroelectric projects now under construction or proposed as shown by chart 34, it is not to be wondered at if the investors in the industry are thoroughly alarmed at the prospect.

These considerations will have an important psychological effect on investors and accordingly will have a depressing effect upon the market for operating company securities.

With this weakening in the investment position of utility securities, bonds as well as stocks, with the discouraging future outlook for utility enterprises under Federal control and operation, and with the devastating effect on utility credit of the dumping of securities owned by holding companies, I see little hope that private enterprise can survive in this field if this bill be enacted. I think the plan of this bill, if carried out, must look inevitably to Government finance, and just as surely, to Government ownership.

WHAT THIS BILL DOES TO THE HOLDING COMPANIES

I now want to direct your attention to some of the liquidation and dissolution features of the bill and some of their consequences.

The first thing that would happen to us under the bill would be that Electric Bond & Share Co. and its holding companies would cease to be "going concerns." The directors would immediately be put in the position of liquidating trustees. Since our holding companies have been set up to afford diversity of risk to the security holders, none of them could qualify as "regional" holding companies which might be permitted to exist under the bill.

As they could not be reorganized to carry out the purposes of the bill, they would have to be liquidated.

The suggestion of some proponents of this measure for "sterilization" of the voting stocks of holding companies when actually publicly held seems both unnecessary and improper on any other basis than as another way to effectively destroy the holding company altogether. The alternative proposal made by other proponents of the present bill that debt, including even the mortgage bonds of the operating companies, should be given a vote on a dollar for dollar basis with the equity stock is equally inadmissible except as a doctrinaire conception contrary both to law and experience.

Extend the idea to the equally preposterous one of giving the farm or homemortgage company the right to tell who the solvent householder shall invite home to dinner or the solvent farmer how to run his farm.

The really important thing is that the legislation to be enacted be so drawn as to give the present investor a chance to share in the recovery we all hope is soon to be with us and to prevent the occurrence of those evils which past experience has disclosed or wise forethought may suggest.

IMPOSSIBILITY OF LIQUIDATION WITHOUT DOING GREAT INJURY

I have already discussed the requirements of the bill which would compel Electric Bond & Share Co. by the end of 1936, to divest itself of all interest in its foreign companies, and would compel it and its associated holding companies, to rid themselves of their natural gas investments.

As a practical matter the liquidation of our other assets would also have to be started soon and be completed by 1940.

These combined assets belong to approximately 300,000 persons scattered throughout the country and abroad.

The varying rights of these 300,000 persons to the assets of these companies make impossible any distribution in kind of such assets even if it were otherwise feasible. How then are we to satisfy these rights?

Our available net cash resources would provide less than one-eighth of the amount necessary to satisfy the outstanding debt and preferred stocks. In addition to this cash, there are other assets consisting of bonds, demand loans, preferred and common stocks of operating companies, as well as miscellaneous other investments.

These holding companies are solvent and the contract rights of their approximately 300,000 security holders may not be ignored.

These assets would have to be disposed of at forced sale, for what amount cannot be conjectured, but undoubtedly for much less than their real value, because

Every other holding company in the United States would be forced to dump on the market tremendous amounts of similar assets.

The number of purchasers of securities and obligations of operating companies would be very limited because such purchasers in turn might become holding companies under the bill.

The holders of debt would be entitled to be paid out of the assets.

Next the preferred-stock holders would be entitled to receive whatever was left up to par of their stock.

Probably the preferred-stock holders would get but little and the commonstock holders nothing.

For simplicity of expression, I have given you this picture as though the assets and securities were all of one company. There are, of course, several companies involved and the problem in reality would be much more difficult than here indicated and, in my opinion, impossible of solution.

FALSE CLAIMS THAT REAL VALUES WILL BE RETAINED

I understand the statement has been made that owners of securities of holding companies will lose nothing of what they now have if this bill is passed.

Also that it has been said that the value of their securities rests solely on the value of the underlying operating properties and that upon dissolution of the holding companies they will still have that value through a distribution of the securities of these operating properties. I submit that these statements are incorrect and hence misleading to our security holders.

In the first place, these statements ignore the values attached to the securities because our companies are solvent "going concerns."

Secondly, they assume that the securities owned by the holding companies can be easily distributed in kind.

The proponents of the bill, I understand, have heretofore promised to take some holding-company group as an example and submit a concrete plan by which the group could be reorganized in accordance with the terms of the bill and in such a way that the holders of the securities will lose nothing.

If such a plan has been prepared I should like to see it. The vague generalizations which have been submitted by the proponents are of no value unless and until they are actually applied to a specific situation and their workability thereby demonstrated.

We have been unable to formulate any such plan for our group. I do not see how a plan, tied to realities, can be drawn.