« ForrigeFortsett »
During the development of the industry experience conclusively proved that where there was a large number of comparatively small holders of the common stock of a utility company there was no certainty that such holders either could or would be willing to subscribe to additional issues of common stock should the growth of the property or other company requirements demand additional capital and the holding company provided the only certain means by which this absolutely essential junior financing could be assured either by loans made by the holding company to the operating company (which frequently could not have been secured from any other source) or by the purchase of new common stock of the operating company.
The statement that the passage of the bill eliminating holding companies would not prove harmful to the operating companies is based on an entire misunderstanding of the facts. The damage to all except the largest operating companies would be very great. Their costs would be greatly increased through the loss of unified holding company management, engineering, and technical service, and their financial position would be gravely endangered. Should an operating company be divorced from its holding company and its common stock dispersed into the hands of a large number of private investors, the prospective purchaser of its first-mortgage bonds would hesitate to invest because of the uncertainty as to the junior financing, and when the demands of the public for extensions and improvements required that the operating company raise additional capital it would then be obliged to resort to the banks, which would normally only make comparatively short-term loans—highly dangerous method of financing for any utility company:
Experience clearly indicates that such a state of affairs might readily lead to a condition where public utility operating company bonds now held as high-grade investments by savings banks, insurance companies, and other fiduciaries, would fail to qualify as a continuing investment for such institutions. The junior financing provided for the operating companies by the holding companies is vital to their existence and growth, and there is no other agency which can provide that financing in proper measure, as I have indicated in the attached letter to Mr. Rayburn.
Based on my more than 40 years' experience in the public-utility field, I have the profound and sincere belief that the abolition of the utility holding company will have a most disastrous effect, not only on its security holders but on those of the operating companies which it controls.
I might also direct your attention to the fact which, as I recall it, was not touched upon in the hearings before you, that investing institutions, in purchasing bonds of operating utility companies, consider the character, ability, and experience of the management of the holding companies which control the common stocks of such utility companies as of prime importance, as has been many times demonstrated by the higher prices which the operating company's securities commanded where the management of the holding company was held in high esteem and respect.
On a number of occasions the question was asked witnesses before your committee why the operating subsidiaries of holding companies could not be consolidated, and why there should be a number of subsidiary operating companies in s single group. In this connection, I call your attention to the fact that in many States the laws require an operating utility to be incorporated under a charter granted by the State in which the utility operates. This is not a matter over which the utility companies have any control. În addition, it is frequently found to be of advantage to the consumers of electricity that various operations which by law must be carried on by independent companies should be in effect owned by the operating company. I may cite in passing such companies as coal companies, transportation companies, bus companies, bridge companies, and a great variety of corporations performing functions all of which are both important and related to the main operating company.
I agree with the statement made by one of the witnesses before your committee that if a reasonable regulatory bill were adopted the intrinsic value, and only the intrinsic value, of the securities of both operating and holding companies would ultimately be reflected in the market value. Of course no action that Congress should or could take can validate or make good securities issued to pay for utilities at excessive and unwarranted prices, but there would seem to be Îittle excuse to destroy by confiscatory legislation the legitimate and proper value these securities would otherwise have. Respectfully submitted.
H. HOBART PORTER, President.
AMERICAN WATER WORKS & ELECTRIC Co.,
New York City. Hon. Sam RAYBURN, Chairman Committee on Interstate and Foreign Commerce,
House Office Building, Washington, D. C. MY DEAR SIR: I present herewith a brief statement of my views concerning the utility bill now pending before your committee and I make what I hope may be constructive suggestions as to modifications in the scope and substance of the bill.
So that you may know something of my experience in the utility business. I may say that I have been active therein for over 40 years. Upon the organization in 1914 of the American Water Works & Electric Co. (succeeding the former holding company, American Water Works & Guarantee Co.) I was elected its president and have been its active executive head ever since. The group of properties comprising this company has been assembled during a period of some 50 years and the soundness of its corporate and financial structure is testified to by the fact that its subsidiaries now have a gross annual income of approximately $45,000,000 out of which over $5,000,000 of taxes must be provided in 1935; with over $300,000,000 of securities in the hands of about 100,000 security holders, the Company serves some 750,000 customers. The stability of its organization and the efficiency and prudence of its management are I think demonstrated by the fact that no unit in the waterworks or electric power systems has ever defaulted on an obligation, and that the company has for many years earned and paid dividends on its preferred and common stocks, even through the present period of depression. This record has been accompanied by constant rate reductions. Since the organization of the company the cost per kilowatt hour to its average domestic consumer has been reduced more than one-half.
I have for many years been an outspoken advocate of the regulation of public utility holding companies, having recognized the grave abuses in both organization and management by some units in the industry. While the Securities Act and the Securities Exchange Act have gone a long way toward preventing a recurrence of these abuses, I still believe that a bill should be enacted providing specifically for the regulation and control of public utility holding companies, and I will enumerate in this letter the provisions which I believe are necessary for this purpose.
Before doing so, may I make a brief summary of the facts which show what the real holding company functions have been and why holding companies must be permitted to continue those functions if government ownership is to be avoided and if the electric industry is to continue to develop in accordance with the needs of the American people.
The outstanding characteristic of the electric-utility industry is its inordinate demand for new capital. This demand is based on two factors—the fact that for every dollar of annual gross earnings several times as much money is required to be invested as for the ordinary industry, and the insatiable demand of the American people for extensions of service and reduction of rates. To meet this demand the industry was compelled to double its plant investment every 5 years up to 1929. In the last 5 years of the period it had to find nearly a billion dollars of new capital every year.
When recovery comes again much more than a billion dollars annually will have to be provided to meet the accumulating demands for additional electric service, even if no new major uses, such as air conditioning, are developed.
The total connected load of the industry is even now 30 percent higher than it was in 1929, and with the return of prosperity the sales to all consumers, industrial and domestic, should increase enormously by 1940.
The holding company was the only agency which could have provided the capital needed for the expansion of the industry in the past, and it is the only agency, which can provide it in the future. Common-stock capital must be secured for all operating companies in substantial ratio to preferred stock and bond capital in order to induce investors to buy operating company preferred stocks and bonds. Except in the case of a very few of the operating companies in the largest metropolitan centers, investors will not buy an operating company's common stock in the proportions necessary to enable it to sell its senior securities on reasonable terms, and they will not buy common stocks of operating companies in most of the smaller cities and towns, or in the rural sections of the country, at all.
The reason is, of course, that the risks are too great. These risks are primarily those arising from unknown, inefficient, and changing local managements, from local and regional economic vicissitudes and political attacks, and from the fact that the investment is necessarily “frozen”, since most of such stocks cannot be listed on a national exchange.
In the face of these hazards neither local nor outside investors will provide the junior equity money necessary to the proper financing of local and regional utilities, except through the agency of the holding company. The investing public will buy the holding company's own securities because they can thereby spread the risk over a number of communities and regions in which the holding company has operating subsidiaries, because the investing public recognizes the holding company as a competent organization which provides efficient management, and because the holding company's securities, usually listed on a national exchange, are always salable and offer a liquid investment not provided by the common stocks of the operating companies.
The money realized by the holding company from the sale of its own securities is used to buy the common stocks and other junior securities of its operating subsidiaries, and to make them temporary loans when required, and at times to purchase their senior securities, when they are not saleable to the banks or the public on fair terms. The holding company thus maintains the ability to furnish an uninterrupted flow of capital to its operating subsidiaries at any time and in any amount they may require to meet the demands of the public for constantly increasing service, at decreased rates.
I can understand and, in a measure, sympathize with the ideals of those who want to decentralize the holding company systems and place control of the local operating companies in the communities in which they are located. But this is a practical world, and that ideal runs squarely into the hard and insurmountable fact that it is not possible to procure the capital necessary for the maintenance and development of this industry by any means other than the holding company with centralized management. Almost invariably the reason the local owners of the operating companies' common stocks have sold them to the holding companies is because the local owners found it impossible to provide the technical management and the capital funds necessary to meet the demands of their local communities for improvements and extensions of service and reductions of rates. The holding companies have been able to meet those demands through their centralized managements, and they cannot be deprived of the control of their operating subsidiaries and thus converted into mere investment trusts if they are to continue to perform their indispensable functions of raising the capital and providing efficient management for the local utilities.
Investment trusts are based upon the principle of diversification of risk, and they carry that diversification far beyond any possibilities open to the utility holding companies. They buy, sell, or hold Government and municipal bonds, listed securities, the bonds, debentures, and preferred stocks and common stocks of railroads, utilities, manufacturing companies, and chain and department stores, scattered throughout many industries and sections of the country. Those that invest in unlisted securities at all do so only in exceptional and minor instances. Because their investments are so widely diversified among industries and companies it is impossible for them to provide management for the companies in which they own securities, and because they confine themselves mainly to the purchase of listed securities and minority interests; they do not need management control of the companies whose securities they buy. If they lose confidence in the management of a company in which they are interested, they have a ready market for such of its securities as they may own, and they can sell them with only such loss as open-market conditions may require.
But from the very nature of the case a utility holding company cannot thus protect itself, and it must therefore have the power to insure efficient management of the operating companies in its system. In order to perform its necessary funtion of providing the junior capital for the operating companies, it must buy and hold their common stocks, which in the main are not and cannot be listed, and therefore cannot be sold on the open market. To get the money to buy those common stocks it must sell its own securities. It cannot sell its own securities unless it can assure those who purchase them that it is so organized and conducted that it can at all times provide sound and efficient management for the operating companies whose junior securities it owns and must continue to own. It cannot insure such management without maintaining the voting control of its subsidiaries so that it can determine their policies and remove executives who may prove to be inefficient. In the utility business, just as in all other business, control must be vested in the owners who provide the junior'capital. They take the principal risk and they will not take that risk unless they have the power to control the conduet of the business which they own and thus protect themselves as far as possible against loss.
From this brief discussion I believe you will see that the holding company is essential to the proper functioning and growth of the utility industry. If the holding companies are destroyed, the weaker operating companies will be driven into bankruptcy and the remaining companies will be seriously crippled and deprived of their only economical means of growth. If the holding companies are permitted to maintain only a nominal existence but with their powers of management and control over their operating subsidiaries impaired or destroyed, the results will be almost equally disastrous. In either event ruinous losses will be inflicted upon millions of innocent investors in the securities of both holding and operating companies, and the process of recovery will suffer an immediate and staggering reverse.
In all the discussions which have taken place before this committee, and in all the reports which have been submitted to it, no proponent of this bill has attempted to say why all holding companies must be destroyed or dismembered, or deprived of their essential powers, in order to remedy the absues which have developed in a few of them. No one has ever pretended to say why proper regulation and control would not cure every evil charged against any of the companies.
To those of us in the utility business, who know what the soundly organized and managed holding companies have accomplished and how necessary they are to the health and growth of the industry, it is inconceivable that this committee, in the face of the evidence which has been presented to it, will recommend for passage those sections of title I which would destroy the holding companies or fatally cripple them.
In the belief that the committee will desire to preserve the holding companies, with the powers essential for their proper service to the industry, but subject to such regulation and control as will prevent abuses, I suggest the following revision of title I in the best interests of both consumer and investor. Since I am not a lawyer, my suggestions will be confined to matters of general substance, without any attempt to indicate the form of the revision.
i. Strike out all provisions which call for the destruction of the holding companies, or for their dismemberment into single "geographically and economically integrated systems”, or for the destruction of their essential powers of control over their operating subsidiaries.
2. Define an operating company as a company whose principal business is the furnishing of gas and/or electricity and whose principal income is derived from its furnishing of gas and/or electricity. Define å holding company as a company which controls an operating company or companies through the ownership of a majority of the voting stock therein, such ownership being either directly in the holding company or in one or more of the holding company's subsidiaries, or agents. Define an intermediate holding company as a company whose principal income is derived from its ownership of the securities of another company or companies, and which is a subsidiary of a holding company or an intermediate holding company, and which in turn has either an operating company or companies or an intermediate holding company or companies, or both, as its subsidiary or subsidiaries. Define a subsidiary as a company the majority of whose voting stock is owned by a holding company either directly or through one or more of such holding company's subsidiaries or agents.
3. Give the Federal Securities and Exchange Commission the power of regulation and control over the organization, corporate structure, security issues and accounting of the holding companies and their subsidiaries substantially as follows:
(a) Give the Commission the power to force the simplification of the existing holding-company systems by requiring, under reasonable regulations and limitations of time, the elimination of such intermediate holding companies as serve no proper purpose, particularly those intermediate holding companes which have no immediate operating subsidiaries and which are designed merely to concentrate control in the hands of the holders of special and limited issues of voting stocks, without substantial investment in the junior capital needed and used in the operating system.
(b) Require all holding companies to register their securities with the Commission, whether they are listed on a recognized stock exchange or not, and require all holding companies to have the word "holding” in their corporate names.
(c) Provide that no additional securities may be issued by any holding company or intermediate holding company without the approval of the Commission, and that no additional securities may be issued by an operating subsidiary of a holding company without the approval of the Commission, unless such' issue has been approved by a State commission having jurisdiction over the operating company. In this connection, companies which are primarily operating companies, with their security issues regulated by State commissions, should continue to be treated as operating companies under State commission regulation, and not as holding companies under additional Federal regulation, even though they incidentally hold some stocks of subsidiaries. Give the Commission the specific power to require that all new stocks issued, except true preferred stocks, shall have the same voting rights as all outstanding stocks, in proportion to their par or declared values, and that all now outstanding stocks, except true preferred stocks, shall have voting rights in proportion to their par or declared values. I do not believe it is wise to lay down an absolute requirement that true preferred stocks, which have real preference and security over common stocks which have provided the capital subject to the greatest risk, shall have equal voting rights with such common stocks. But I do not believe that there would be any vital objection to vesting in the Commission the power to require such voting rights, in its discretion, when approving the issue of new preferred stock.
(d) Provide that no holding company may purchase the stock of another holding company or intermediate holding company except with the approval of the Commission, and that no director or officer of a holding company may be an officer or director of another holding company, or of an intermediate holding company in a different holding-company group. This will prevent the so-called 'alliances and interlocking directorates” between holding-company groups which have excited so much popular suspicion.
(e) Provide that no holding company or intermediate holding company may purchase the securities of an operating company unless the operating company is a subsidiary of such holding company or intermediate holding company, without the approval of the Federal Commission, or of the appropriate State commission.
( Provide that holding companies now owning minority voting stock, interests in other holding companies, or in the subsidiaries of other holding companies may be required by the commission to divest themselves of such stock interests, or may be forbidden to vote such stocks, when the commission finds that such stock holding or voting is detrimental to the public interest.
(9) Prohibit the use of operating-company employees in the sale of holdingcompany or intermediate-holding-company securities.
(h) Give the Federal Commission the power to set up a uniform system of accounting for holding companies. Provide that holding-company books shall be open to inspection by both State or Federal Commissions
and that periodic information along the lines of form 10 under the Securities Exchange Act shall be given out by all companies, whether listed on a recognized exchange or not.
(2) Provide that upon the request of any State commission, the Federal Commission shall have the right to investigate the accounts and records of any holding company or intermediate holding company and report their findings to the State commission making the request.
(1) Provide that all management and service contracts shall be subject to the approval of the Federal Power Commission, except where they are approved by a State commission having jurisdiction of the operating company, such contracts to be without profit where the holding company or intermediate holding company rendering the service owns 90 percent or more of the common stock of the operating company, and in cases where less than 90 percent of the common stock of the operating company is so owned, such service shall be performed at no more than a reasonable profit and in no event for any sum in excess of the fair value to the operating company or that for which similar service can be secured elsewhere.
(k) Prohibit the making of upstream loans by any operating company unless specifically approved by the State regulatory commission having jurisdiction of the operating company, or in cases where there is no such State jurisdiction, unless specifically approved by the Securities and Exchange Commission.
(1) Provide that no operating utility which is a subsidiary of a holding company may issue new securities except with the express approval of the commission having jurisdiction in the State in which such utility company operates; if State laws do not provide for such State commission approval, then such securities may not be issued without the express approval of the Securities and Exchange Commission.
(m) In all holding-company systems, require that the majority of the directors of each operating company and the principal officers of such operating company shall be residents of the territory served.
I believe title I of the bill should be confined in substance to the provisions necessary to give effect to the regulations suggested above.
I believe title II of the bill should be confined to such provisions as are necessary to vest in the Federal Power Commission the authority to regulate the rates