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The statement that security holders of General Gas & Electric Corporation were deprived of the benefits from a “fine group of prosperous operating properties" and as a result of a "most complicated series of seven different transactions and exchanges

found themselves owning and holding only nonvoting securities and debentures of

& top holding company several times removed from any earning operating companies” is likewise a distortion of facts into such form that they appear to support an argument whereas the truth would not serve the same purpose. One phase of this statement is interesting, and that is, that at the time Associated Gas & Electric Co. acquired control of General Gas & Electric Corporation, the latter owned "a fine group of prosperous operating companies.”

When commenting on the transaction whereby this control was secured Judge Healy tried to make it appear that all that Associated Gas & Electric Co. acquired in the Barstow purchase was control of an engineering company. Apparently it was "a fine group of prosperous operating companies” for the purposes of Colonel Chantland's argument and something unworthy of mention for the purposes of Judge Healy's argument. Colonel Chantland either overlooked, or, at any rate, failed to point out to this committee that no changes were made in the holdings of General Gas & Electric Corporation following the acquisition of its control by Associated Gas & Electric Co. until the latter had acquired substantially all securities of all classes of General Gas & Electric Corporation. The holders of the small amount of securities of General Gas & Electric Corporation, which were not acquired by Associated Gas & Electric Co., were afforded an opportunity to sell their holdings to Associated Gas & Electric Co. at a higher price than those securities had ever sold in the open market. The issues of General Gas & Electric Corporation preferred stocks, which were later marketed by the company, were made subsequent to the sale of certain operating subsidiaries by General Gas & Electric Corporation and the sale of such subsidiaries can therefore in no true sense be said to constitute a change of assets without the knowledge or consent of the stockholders. Sometime after General Gas & Electric Corporation had disposed of certain of its operating subsidiaries, and after the fact of that sale was a matter of general public knowledge, General Gas & Electric Corporation marketed, through investment bankers, two new issues of its preferred stock. Inasmuch as these preferred stocks were issued subsequent to the sale of certain operating subsidiaries by General Gas & Electric Corporation, and inasmuch as the bankers' circular, issued in connection with the sale of these issues of prefererd stock, clearly showed just what operating subsidiaries were then owned by General Gas & Electric Corporation, it cannot be truthfully said that the sale of certain operating subsidiaries constituted a change of assets without the knowledge or consent of the stockholders, or that the purchasers of the preferred stocks were in any way affected by a sale of assets which had taken place before the stocks which these investors purchased were issued. Most of the common stocks of General Gas & Electric Corporation now outstanding were likewise marketed after the sale of stocks of certain of its operating subsidiaries by General Gas & Electric Corporation and the interest of the holders of these common stocks likewise cannot be truthfully said to have been affected one way or another by a sale of certain of its assets by General Gas & Electric Corporation prior to the time that they became owners of the securities of that company. All of the transactions in connection with the sale of certain of its assets by General Gas & Electric Corporation were moreover entirely legal and proper in all respects, which fact was not challenged by Colonel Chantland. Only by a complete disregard of the chronology of events is he able to make it appear that the approval of security holders should have been obtained to certain transactions, when, as a matter of fact, a complete and accurate statement shows that there is absolutely no basis for such a contention.

The only interest upon which it can be said that any coercion was used by Associated Gas & Electric Co. was the Morgan-Bonbright, U. G. I. group, from the standpoint that they competed with Associated Gas & Electric Co. for control of General Gas & Electric Corporation, and which, at the time that Associated Gas & Electric Co. succeeded in obtaining control, had acquired a very large holding of General Gas & Electric Corporation securities. A settlement was made whereby Associated Gas & Electric Co. took over these holdings on a basis mutually satisfactory to both parties from a monetary standpoint although presumably not pleasing to the Morgan-Bonbright, U. G. I. group, which failed to obtain control of a group of operating properties that fitted in most admirably with certain other properties controlled by them. The question which of two groups competing for control of properties was successful in obtaining that control, hardly seems pertinent, however, to the subject before this committee.

Consolidated tax returns legal and proper.-Many of the proponents of this bil have taken occasion to comment adversely on the fact that utility holding companies which field consolidated income-tax returns often did not pass on to the operating companies any part of the savings which resulted from the computation of tax on consolidated income. Again and again this was referred to as though it were defrauding both the Government of taxes to which it had a right and the operating companies of savings to which they were entitled-entirely without recognition of the fact that the two charges are irreconcilable and that if the Government were not to be deprived of taxes which it should have received, the operating companies most certainly would have had to pay such taxes. "Dr. Splawn, in the course of his testimony before this committee, even went so far as to say that the public-utility holding companies had been guilty of “tricking" the Internal Revenue Department for a period of 10 years. When he made that statement Senator Wheeler made an observation to the effect that if there was any objection to filing consolidated returns, the criticism must be directed at Congress which provided for the practice when it passed the internal revenue laws and not at the corporations which filed their income-tax returns in accordance with the provisions of those laws... It is, moreover, distinctly misleading and unfair for proponents of this legislation to indicate that the practice of filing consolidated returns was one that was indulged in solely by public-utility holding companies, whereas, as a matter of fact, so long as the right to file consolidated returns was permitted by the law of the land it was availed of by all classes of corporations and taking advantage of it cannot in any way be truthfully charged and an evasion of law or as a “tricking” of the Internal Revenue Department.

On the other hand, the criticism of holding companies for failing to share with operating companies the tax saving incident to the filing of consolidated tax returns is wholly without justification. The saving possible when taxes are computed on consolidated income is a saving, which results wholly from the fact of common ownership. No part of such saving belongs by legal or mora) right to any member of the consolidated group, but solely to the owner of the group as a whole. The statement that utility holding companies by withholding some share of the consolidated tax savings are depriving the operating companies of something to which they have a right is precisely equivalent to saying that the tax liability of any particular member of a consolidated group should be misstated in its individual published statements; or, from another point of view and to use a concrete illustration, the criticism means that the cost of electric service in community A should be decreased because the owner of the operating company giving that service also happens to own a street railway in community B which is operating at a substantial loss and such loss in a consolidated returns offsets the taxable gain from the more profitable electric company. To state the criticism clearly is, in itself, a sufficient answer to it.

However, entirely irrespective of what the attitude of the members of this committee may be on the question of whether the filing of consolidated income tas returns should be permitted, and entirely apart from the utterly unjust charge that the operating companies should pay only a portion of the consolidated tax instead of the tax for which individually they were liable, it must be recognized that both questions at this time are entirely academic and have no bearing one way or another on the pending legislation inasmuch as the right to file consolidated income-tax returns has now been abolished by Congress.

Abolition of consolidated returns burdens equity security holders- also maka simplification harder.-It is nevertheless not out of place to point out here that in abolishing consolidated income tax returns Congress has certainly failed to benefit the users of electric service in any way, while it has substantially increased the heavy burden of taxation to the owners of public-utility equities. It should also be borne in mind that the elimination of the right to file consolidated returns placed a very definite barrier to the simplification of holding-company corporate struotures, inasmuch as a prohibitively burdensome tax would be incurred in many instances through the liquidation of certain holding companies, even though taxes would be payable on account of profits of a purely intercompany character.

A sociated System a sound economic conception.—The foregoing instances of misleading statements, containing half-truths or no truth at all, are typical of many that occurred throughout the testimony of proponents of this bill. The question arises in one's mind as to why, if the public utility industry is as black as the proponents of this bill would like you to believe it to be, would it not be sufficient for them merely to tell the truth instead of distorting the facts. Many other instances of this sort of presentation can be commented on. For instance, the statement has been made that the Associated Gas & Electric System was not built up as a sound economic conception and that it was not the operation of

properties in which the management was interested but the profits to be made from the sale of securities. Associated, as a matter of fact, has an enviable record in the development of territory, and where it has acquired properties or extended its lines, it has undertaken to immediately institute better service at lower rates and has consistently accomplished this aim. No economic conception has ever sprung into complete accomplishment over night. On the other hand, the critics who would have you believe otherwise do not themselves explain what ideal economic conception they have adopted as the standard for their criticism. It is sufficient to say, however, that in the case of the Associated System, it has set up certain goals to be attained in the geographical rounding out of its properties, in the field of management and operation, and in the simplification of the necessarily complicated financial structure which resulted from the welding together of over 500 separate companies, and that it has over a long period of years made steady progress in its aims. The quality of service throughout the system is high and tremendous strides have been made in the simplification of the financial structure.

Once having acquired a property the Associated management has never undertaken to dispose of it for the sake of profit. It is a fact, moreover, that only a small fraction of the properties once acquired have ever been disposed of and, in most instances, then only for the purpose of geographical integration by exchange for other properties lending themselves to that aim. The best answer which the Associated System can give to the statement that it is interested in profits from security sales rather than from development of the business of its subsidiaries and of the territories they serve, is to point out that the use of electric current has been developed throughout the Associated System so that since 1929 it has increased at a rate consistently higher than that prevailing in the rest of the industry.

Miscellaneous inaccurate statements by proponents.-Mr. Corcoran's belief that no lawyer can tell an Associated investor his rights with reference to the security he holds is unfounded. Many lawyers, as well as thousands of security dealers throughout the country, have been able to do this satisfactorily. The chances are that Mr. Corcoran himself has never tried to do it and is not interested in trying to it. In view of his own high professional standing, it is only fair to ask whether he admits a personal inability to do it or whether he was merely making the statement without having actually tried to do it. His remark, of course, is typical of the unfair kind of statements that have been constantly made by proponents of the bill. Dr. Splawn felt it necessary to go so far, in his attempt to show that the holding company was not only wholly bad but but was in no way good, as to say that it had not been responsible for any single invention or impprovement in the industry. No one has contended that the holding companies have under their control all the inventors in the world who might contribute to the improvement of the art, but the industry has been quick to pick up and use any useful invention or improvement.

When Dr. Splawn speaks of rates of electric companies as a perfect example of “monopolistic price” and goes on to say, that because rates are in the nature of a tax inasmuch as they heave Governmental approval therefore great care should be exercised in connection with them, he entirely overlooks the fact that the electric industry has been consistently subject to increasing competition from coal, gas, oil, and internal combustion engines. Furthermore, electric rates have consistently declined while the price of all other commodities has risen and this has been true over a long period of time. On the other hand taxes, to which Dr. Splawn refers so reverently, never decline.

Forced disposition of scattered properties detrimental to consumers. One feature with respect to public-utility holding companies that has been dwelt on at great length by most of the proponents of this bill is the ownership of various scattered disconnected properties. Without explaining wherein this constitutes any impropriety or how it adversely affects either the users of service or the owners of securities Dr. Splawn said it is “illogical.” In my statement to the House committee on April 3, 1935, I pointed out that the so-called "scattered”, properties of the Associated System only contributed 8 percent of the combined gross earnings of the system. I now want to go to step further and say to you that if as a result of the passage of this bill Associated was forced to dispose of those scattered properties it would not vitally affect Associated or its security holders. I do say, however, that the users of the service rendered by those "scattered” companies would be affected most adversely. Dr. Splawn speaks of only systems that can be regiona ally integrated and interconnected as being appropriate to be grouped under common ownership but I would like to ask how he would regionally integrate and interconnect the various small properties in such States as Kansas, Oklahoma, Nevada, Arizona, or New Mexico, to say nothing of those in a large part of his 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!

UNITED STATES STEEL CORPORATION,

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

Washington, D. C. DEAR SIR: We are advised that Carnegie Natural Gas Co., a wholly owned subsidiary of the United States Steel Corporation, probably comes under the definition 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.

APRIL 24, 1935. Hon. BURTON K. WHEELER:

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 suggest 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 corporalions 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 nonvoting 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.

AMERICAN WATER WORKS & ELECTRIC Co.,

New York City. Hon. BURTON K. WHEELER, 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 Rayburn, 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 communication 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.

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