Colonel CHANTLAND. May I say this-and perhaps thus keep within the propriety of my duty both to the Commission and to this committee: It would seem rather obvious that some of the structures, from the practices through which they have gone, are not in good condition.

Senator MINTON. One of them was recently taken over by the Reconstruction Finance Corporation.

Colonel CHANTLAND. Yes; the Utilities Power & Light.
Senator MINTON. Yes.

Colonel CHANTLAND. Speaking of this rise in prices, I might inject here just one thing, and that is probably all I shall say about it; the reports are here.

Do not understand that the inflated prices that came on in 1928 and 1929 were all just boom prices. In our report we have two very illuminating studies on marketing-really rigging the market, to be plain spoken-one, on the Cities Service Securities Co., of the Doherty group; and the other on the Corporation Securities Co., of the Insull group.

Both of those studies are by Dr. T. W. Mitchell and, I think, quite completely and thoroughly demonstrate the point, by showing the dealings in their own securities, of the forcing up of prices, and the pushing out of securities, during that process.

And, of course, that kind of a stimulated increase in prices must have had a powerful effect all along the line, when people were acting as crazily, in speculating and investing, as they did in 1929. So, how much this, in and of itself, added to the whole inflation that occurred, and damage from the collapse which followed, it is hard to estimate.

The CHAIRMAN. The Cities Service practically made a house-tohouse canvas, did they not, to sell their securities; and at the time they were doing it, they were buying their own stocks, to move up the prices?

Colonel CHANTLAND. Yes; sometimes they were even short in their own stocks. The company asserts that this shortage was only "technical" because of the power lodged in the directorate to issue unlimited stock. Probably that statement is correct, but also in quite a "technical" sense. At the same time the power of unlimited issue to correct immediately any such shortage illustrates the power of retention or recapture of control at any time, when and if necessary.

And when you say "house-to-house canvas", you are speaking literally. We have had information sufficient to show that that canvas was from the Canadian line to the Gulf, and from the Atlantic to the Pacific, literally. And the strange thing about that as that what they were selling was not always stock; that was not the thing.

What they were selling at times, and giving to the purchaser, was a commission to a company, in the group, to buy for them, from some other company, the Cities Service Co., some of its stock; and you paid partial payments on that, and that money went in. But you could not get your stock until you paid for all of it, either by partial payments to the end of the period or during the period. So, in the interim, your money was with them, to do with as they wanted; and

you had nothing. The company asserts that only a small portion of these transactions was on partial payment.

The CHAIRMAN. Did the Commission make an investigation with reference to the Cities Service, or any of these companies that were actually rigging the market, as to whether or not they were putting out advertisements in the newspapers, or using the mails in any way for the purpose of carrying on their fraud?

Colonel CHANTLAND. I do not believe I can say.

The CHAIRMAN. They used the mails, did they not?
Colonel CHANTLAND. Oh, they all used the mails.

The CHAIRMAN. Well, let me ask you this: It was a fact that they did perpetrate a fraud upon the so-called "investors" in their stock, by putting up the price and making a statement that the price was voluntarily going up; when, as a matter of fact, it was going up only because of the fact they were buying their own stock?

Colonel CHANTLAND. Or, at least, partly because of that.

Let us assume that the boom was putting it up, but they certainly were pushing it along.

The CHAIRMAN. Now, I have never been able to understand, in a situation of that kind, why the Department of Justice did not prosecute them for using the mails to defraud-which the Department of Justice probably could have done.

Colonel CHANTLAND. May I be excused for a few minutes?
The CHAIRMAN. Yes.

(Following a brief pause:)

Colonel CHANTLAND. I think I shall accept the chairman's judgment on that matter, and say that I know that they referred one such matter to the Department of Justice, or the Postmaster General. Senator SHIPSTEAD. What was your answer?

Colonel CHANTLAND. I know of one such matter that has been referred to the Department of Justice or the Postmaster General. We have no further information.

The CHAIRMAN. How long ago was that?

Colonel CHANTLAND. I find on inquiry this was in October 1934 and that it was sent to the Postmaster General.

May I pass, now, to the proposition of jurisdiction in the Federal field?

In the hearing before the House, on the Wheeler-Rayburn bill, statements have been again repeated as to the small percentage of electricity and gas which moves interstate, or which is not, supposedly, capable of State regulation.

The popaganda campaign shows very clearly that part of it was to make the public believe that there existed adequate State regulation-of course, when they found out that they had to have some regulation, they preferred to have State regulation-when the fact was, as shown in our study, 73-A, that the companies were repeatedly defeating regulation, under the plea of interstate commerce. You will find that in the appendix, L-1.

The CHAIRMAN. What did you find with reference to the State commissions, if you care to say?

In other words, it seems to me that the general impression, as received by a great many, is that in many of the States, at least, the State regulation has broken down; and instead of the commission be

ing set up to regulate the utilities, they have been more or less regulated by the utilities.

Colonel CHANTLAND. That statement has been made; but I am rather inclined to put it this way: I think the general history would indicate that, in many places, the State regulation had never taken much hold. In some places, there were quiescent commissions; that is quite true.

I think it is also true that, at the present time, whether we can claim some credit for it, and for the disclosures, or for the whole situation, nevertheless I think that the commissions are more alive than they were. That is illustrated by the fact that in various States, they are attempting to pass, and are passing, some legislation that is going toward real regulation.

But of course the proposition of regulating the holding-company groups is largely beyond State power. All the regulation that a State can give, in that line, is very largely indirect.

And I might probably just as well say, at this point, that that indirect process of regulation has been helped some by two recent decisions of the Supreme Court of the United States: Smith against the Illinois Bell Telephone Co., and the Western Distributing Co. against Kansas, under which the Court held that the State commissions had a right to inquire into costs of services by holding companies to the local operating companies.

Well, that is that much; but how much is it, after all?

What my associate Mr. Tingley wants to call to my attention is that it is only the costs as to those holding companies affiliated with those operating companies the commissions are examining that can be looked into by the States under those decisions. It does not go outside the narrow field of the ones the State commissions have in hand.

And in the second place, it cannot get very far for this reason: You get the books of the particular company that you are given access to, and all its accounts are spread in that book. What are they? The accounts with the entire system. How are you going to. be able to segregate or allocate what belongs to your particular problem? So it is a power without so very much result.

Senator COUZENS. Could you made a general statement as to the effect, if any, that the holding companies have had upon the operating companies, upon the physical properties and services?

Colonel CHANTLAND. Yes; I think I can.

Let me get, clearly, what you want me to cover.

Senator COUZENS. Well, the propaganda has indicated a general fear that this legislation with respect to holding companies has or will affect the operating companies. And that is the basis of my query, the query being: Has this agitation with respect to the holding companies-and have the holding companies, in and of themselves had any effect upon the earnings or physical value of the operating companies?

Colonel CHANTLAND. I think I can answer that if you are directing your inquiry to the effect of this legislation.

Is that where you want me to take it up?

Senator COUZENS. Yes; and also to cover what passed before this legislation was introduced.

Did the holding companies, in and of themselves, have any effect upon the value of and the services rendered by the operating companies?

Colonel CHANTLAND. Yes.

Senator COUZENS. If you would answer that, first, and then take up the other, later, please.

Colonel CHANTLAND. Yes; we have that. It was variable. They did some good things; but the things that they imposed upon the operating companies, forcing their control upon them, according to the Commission's conclusions and findings, far exceeded what they did for their benefit.

I think the better way to answer what you ask, now, until I reach that subject, further in my statement, is to say this: You know, of course, that the direct means of charging things up to operating companies was through what their series of contracts imposed upon them, for supervision, service, management, accounting, purchases, financing, and so on-even to the point of writing up their minutes, if need be, and furnishing all the officers, and all that.

Well, as the Commission's investigation progressed, and it became apparent that many of these services that were charged for, as a fixed percentage on the gross receipts, were at times nominal, at times of some value, but the fees went on, of course-there came this response from the utilities: "But there is one field in which we have been of service, that you cannot question. And that is in the field of helping finance."

They insisted that they were able, as a group, to get financial terms which the local companies could not get.

In my judgment, our record disproves that claim. While it may be true that, in some instances, original loans of money, or financing, were procured at a little lower rate than a local company might have obtained, there is first the question of whether the financing was needed to the extent that it was made; and there is, second, the serious proposition that when the additions for fees and commissions by the holding company and the expenses in calls before due at premium and reissues were made, we find that the money cost to the operating companies was, you might say, from the going rate right up as high as 20 percent. And that is not a financial service to the operating companies, who get their money from the rate

payers.

Senator HASTINGS. Did you find any exception to that general statement that you have made?

Colonel CHANTLAND. I think so. I said, at the opening, that it must be understood-and Dr. Splawn called attention to that yesterday in his statement-that no statement that we make can be considered to be 100 percent. Because this is not a mathematical problem; it is a problem of varying interests and different conditions. So, while we say that something occurred, I would not sit here and say that there was not an instance where the financing might actually have been temporarily, at least, obtained at a benefit, or possibly at a permanent benefit. But, also, you have the proposition there, again, that there are several other things that come in. In the first place, I wonder how much of this financing was really

needed by this local company; or in the second place, I wonder whether they found that they got what they did need.

You have the absentee ownership and landlordism factors in there, in the case of these people at a distant headquarters passing upon your needs out there.

Now, perhaps you would prefer to join with your neighbors, and pass on your own needs.

Senator HASTINGS. I was wondering whether, in your investigation, you had found any holding company that had been of real service, and had not imposed upon the operating companies.

Colonel CHANTLAND. Oh, well, if you put it that broadly, I think it is fair to say that the holding company does not exist for philanthropic purposes; and it has only one place where it can reach out and get what it gets its dividends from-and that is from the operating company.

So that everyone of them bore on the operating company, but to a varying degree, and by varying methods.

Senator HASTINGS. No; you do not quite understand my point: I am wondering whether, in your investigation, you found any instance that justified, 100 percent, the existence of any holding company.

Colonel CHANTLAND. My answer to the question, as you stated it, is "No."

Senator HASTINGS. All right.

Senator BONE. Were all of these expenses, to which you have referred-such as the cost of refunding operations and all these services and service charges-carried into the operating overheads of the operating companies?

Colonel CHANTLAND. Most all servicing charges were. Discounts on issues, and things like that, were also sometimes carried in as current expenses.

Senator BONE. Were they classified as maintenance; or how were they carried?

Colonel CHANTLAND. Usually as cost of capital.

In some instances, they were not amortized in that way. They should be, of course; a percentage of it should go in there.

Senator BONE. Was some of it charged to capital expenditures, and put into the capital account?

Colonel CHANTLAND. Oh, yes.

Senator BONE. They went, then, into the prudent investment of the company?

Colonel CHANTLAND. Yes-you said "prudent"?

Senator BONE. Well, perhaps we can obtain some other term for it. Colonel CHANTLAND. They went, anyway, into the capital struc

ture.

Senator BONE. That is the most euphonious term I can think of

now.

Colonel CHANTLAND. Well, we believe in honest, prudent investment.

Senator COUZENS. Following further in my inquiry

Senator HASTINGS. Pardon me, Senator. I had thought you had completed your previous inquiry.

Senator COUZENS. Yes; that is entirely all right.

Following further in my inquiry, have you found in any case where the holding companies have charged sufficient fees and