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first obtained the approval of the Federal agency authorized to consider the value of such stock or properties with due regard to such partial or complete identity of buyers and sellers.

30. Prohibit the issue of securities or their sale and transportation in interstate commerce by a regulated corporation unless the issuing corporation shall have given full publicity in such manner as the appropriate Federal agency shall direct as to all capital issues of stocks, bonds, and other securities, fiabilities, capital, investment, gross and net earnings, surplus, and the ownership interests of all officers and directors.

31. Require approval by the licensing agency of all stock and security bonuses to officers, directors, and employees of any holding company or operating company within Federal jurisdiction.

32. Provide that any corporation exercising control over the acts or policies of such a utility corporation shall be deemed to be in the same business as the corporation thus controlled and subject to all laws and regulations applicable to said controlled corporation as fully as that corporation itself is, and the officers and directors of such controlling corporation shall be deemed to be trustees of and for the controlled corporation as fully as if they were officers and directors thereof.

NATURAL-GAS PIPE LINES

In the natural-gas industry there is a problem which does not exist in the electric field. Fuel-generated electric energy can be generated at reasonable cost at or near any point of use. This is not true of natural gas. Natural gas, like oil, is found only in limited fields in certain States. Large pipe lines already under control of a few interests carry this supply long distances across many State lines to the areas of industrial and population concentration. In some fields, especially the Appalachian, many smaller gathering lines have been built to assemble the supply for the main pipe lines.

The Commission in the course of the present inquiry has included a study of several of the most important companies engaged in the interstate transportation of natural gas by pipe lines and of companies engaged in the local distribution thereof to the consumers. The study of the conditions of naturalgas production has not yet had, however, adequate attention. The Commission plans during the current calendar year to make a comprehensive investigation and study' of all the aspects of the natural-gas industry from production to final consumption. At the conclusion of such investigation and study, the Commission will submit such further conclusions and recommendations as it deems appropriate.

So far as the Commission feels able to express an opinion at this time about the natural-gas situation, which involves special and extraordinary problems of regulation, its principal conclusions are: (1) that the major feature of the problem is the proper conservation of natural gas through Federal action, which begins with the control of gas-well drilling and the other primary activities of gas production; and (2) that pending formulation of Federal conservation policy and of methods of control for the entire business, the Congress may well give consideration to the enactment of legislation declaring all interstate gas pipe lines to the common carriers or public utilities subject to Federal control and regulation as to construction, operation, financing, and matters affecting the purchase, shipment, sale, and distribution of natural gas.

SUMMARY STATEMENT OF RECOMMENDATIONS

The Federal Trade Commission respectfully recommends utility holding company legislation along the lines hereinbefore discussed, pursuant to whatever general policy Congress may see fit to adopt. The order of presentation of the four groups of recommendations, namely (1) taxation, (2) direct prohibitive legislation, (3) compulsory Federal licensing, and (4) permissive Federal incorporation, represents the Commission's views as to their respective relative advantages.

The Commission primarily recommends the first two methods-first, taxation; and, second, direct prohibitive legislation. By direction of the Commission:

Ewin L. DAVIS, Chairman. JANUARY 26, 1935.

Colonel CHANTLAND. I do not want to quit, Mr. Chairman, without calling a little attention to the no-par stock situation and one other. Let me confess, to begin with, that when no-par stock was first issued I thought that was a good idea. Being from out in the agricultural region the matter of issuing no-par stock seemed to be a way in which we might buy an undivided share in a corporation as we do an undivided share in a piece of land at tax-title sale or in any other way, instead of calling something at par, where “par” didn't mean very much. I am sorry to say that like a lot of others I have been disillusioned on that. Writers who write about no-par stock, economists, and so on, have changed their minds in the same way.

The utility field, in my judgment, presents conclusive evidence why no-par stock should not be permitted under any circumstances; and I think that legislation which fails to take that into account fails in an essential matter, and for this reason.

I told you earlier, in answer to Senator Couzens' question, that the write-ups sometimes were based on the alleged reproduction new, sometimes on horseback appraisals, and sometimes on mere fiat.

When the utilities found out what they could do with no-par stock there was no need to worry any longer. I am talking, now, about the real speculators in the holding-company field. There was no reason any further to go to the trouble and expense of even having a horseback appraisal, because when they issued no-par stock originally they put it on their books at some figure and put a corresponding figure on the other side of the ledger so as to make it balance; and if they set it up as worth $20 a share, that was that. They could also put part of the result in one account and part of it in another. When they got ready to make a write-up, all they had to do was to write into the minutes, “ This stock is worth 40"-or 60, or 100, or whatever figure they wanted. And they did exactly that with no-par stock.

Senator MINTON. What did they do on the other side of the ledger then?

Colonel CHANTLAND. “Our assets are worth more ", don't you see?

Senator Minton. Did they attempt to support that by appraisal? Colonel CHANTLAND. I am saying they did not in this instance. They did not need an appraisal if they had no-par stock to juggle. It worked both ways. It depends on which side of the ledger you start. It was mere fiat anyway. That is a gross abuse of bookkeeping. Books of account should record only historic facts, not opinions, or arbitrary fiats.

The CHAIRMAN. If their stock was selling on the stock market for, say, $100 instead of $20, would they write on their books that their property was worth that much more?

Colonel CHANTLAND. Surely. They had to balance the books.
The CHAIRMAN. That is what I was wondering.

Colonel CHANTLAND. They might have put it into some other account, but it was on the intangible side.

The CHAIRMAN. When it came to rate making, would they ask for rates based upon the write-up in their books?

Colonel CHANTLAND. The holding companies were not asking for rates.

The CHAIRMAN. This was a holding-company proposition?

Colonel CHANTLAND. Yes. That is largely a holding-company proposition.

Senator BONE. That would mean, then, that they were capitalizing hopes rather than anything else—hopes that were unrealized, probably, in many instances ?

Colonel CHANTLAND. I think “hopes ” would be right. It would hardly be expectations.

The CHAIRMAN. When the stocks went down in the panic did they write them down?

Colonel CHANTLAND. That is the trouble with the whole proposition. You can always put them in, but you can't take them out. That is the inequity of the thing. To make an institution safe we put something into surplus. That is a safety valve. They do not do that any more; they shove it up to the limit.

The CHAIRMAN. Let me ask you a question to see if I understood you correctly a while ago: I understood you to say with reference to operating companies that they never have set aside a sinking fund to pay

off. Colonel CHANTLAND. In reference to capital charge I do not know

I of any instance. Well, they have written down some now, some of the inflation they put in. But they had to do it. The situation came along where they just had to do it. But in normal times I know of no instance where they voluntarily reduced their capital charge.

Senator BONE. That adjustment is not amortization of capital. That is more a bankruptcy transaction, an insolvency transaction.

Colonel CHANTLAND. Yes; at the present time some of it is done to save themselves.

Senator BONE. That does not amount to an amortization of the capital structure, however.

Colonel CHANTLAND. Not at all. It is just taking out some of the wind and water they put in.

Senator BONE. They never amortize their capital.
Colonel CHANTLAND. No.

The CHAIRMAN. Let us say that the bonded indebtedness of some electric-light operating company was $100,000 or $1,000,000 or $100,000,000, do you show in any instance that they set aside a sinking fund to pay off that bonded' indebtedness?

Colonel CHANTLAND. Oh! Bonded indebtedness; yes. I was talking more about capital stocks. In bonded indebtedness sinking funds were provided for for deferred long-term issues. Yes; at times that happened-oh, yes.

Senator BONE. How many times did the Federal Trade Commission run across a case where one of these private power companies amortized a bond issue instead of refunding it!

Colonel CHANTLAND. We found some.
Senator BONE. How many of them?
Colonel CHANTLAND. I would like to have that looked up.
Senator BONE. I should like to have the instances.

Colonel CHANTLAND. There have been some. There may not have been as many as I think, but I do know there were instances of that sort. My statement, of course, referred to the various classes of stock. And when I say “ various classes of stock", why, when we know that some of these institutions had as many as 22, or at least over 20 different classes of stock in the holding-company structure, you can see what it is that I refer to.

Senator BONE. But if a public utility were permitted by a regulatory board to charge rates based upon a bond issue which did not anywhere near reflect the real value of the system they could pay 30 or 40 percent to stockholders.

The CHAIRMAN. And they have had that very situation.

Senator BONE: Yes. But I am talking about an 8 percent return over and above taxes and overhead, that kind of situation would allow a great amount in dividends to be paid. You have on the other side of the picture a very enormous system.

If they paid off their bonds later the stockholders would have a good thing.

Colonel CHANTLAND. If a live commission would come in on them and say, “Here is your structure to deal fairly with ", it would protect the situation somewhat.

The CHAIRMAN. That is what should be done.
Colonel CHANTLAND. That is what a live commission should do.

Senator BONE. But that is not what has been done so far as outstanding bonds are concerned.

Colonel CHANTLAND. No.
The CHAIRMAN. Go ahead.

Colonel CHANTLAND. I want to say another thing, and it is on the proposition of rural electrification : Much has been claimed over there in our hearings and throughout by the holding companies by way of credit for the great rural electrification, which they say has been carried on by them.

I am sorry to have to say that the facts do not quite support the proposition of giving the holding companies the foresight or the credit for whatever has happened in rural electrification. Our record demonstrates that it was not foresight at all that put them into rural electrification. In fact our record shows that rural electrification started first as a sort of sop to the farmer. The judgment of the whole utility industry was that it could not be done extensively.

The truth of the matter is that rural electrification rather forced itself upon them, and has gone some distance. I cannot see anything in that matter from which you can give them any particular credit for foresight. It reminds me somewhat of the situation in the radio field, where the shrewd business men who first controlled radio patents, or who first bought up radio patents, bought up what they thought was the valuable part of them. I mean the ship-to-shore parts of the use of the patents and for commercial use, and were not much interested in the thing that was left, to the usually luckless inventor. Later on they saw the whole picture, and saw that the amateur and general public use of the radio was the big end, then they began to buy those up. Rural electrification is somewhat like that. Rural electrification came upon them, and they are not entitled to any special credit for that. Yet, they now talk much about it.

I want to add one other observation: Why these big groups, anyway! How did they come about? They have talked about the necessity of all these services and necessity for integration. I am inclined to think the way it happened is this: No one has told me this but it has rather forced itself upon us who have been in the study, and that is, that following the war, when the money that had been so easily earned was plentiful, that some of them, and some that did not have so much but who had nerve and a shoestring, began to look around, and with the rates then going for these utility services, the utility field seemed to be a profitable one. So a group started and picked up some of these utilities—and, of course, the only sheep that follow the Judas ram, as we have seen in the movies recently, are not of the world at large, but in the business world as well. And when it was seen that a certain number of people were starting into the utility game, others began to look at it, and it looked good to them. So they began to buy, and to pay at times high prices.

For instance, Insull paid a high price even after the crash. He started to pay Harley Clark $13,000,000 for a thing over in New Jersey worth $5,000,000, and the Clark people thought even then that Însull was so good that they did not take any security, and all that they have been able to collect on the $13,000,000 was $8,000,000, and still they collected $3,000,000 more than it was worth. But they paid big prices in those contests.

But they got those big groups together, described very aptly by Dr. Splawn yesterday in the various types in which they are. from the thing that seems to be the finest operating type in the United States, that set-up by Mr. George Tidd in the case of the American Gas & Electric Co., where they have been able to go through a comparatively thinly populated area, with a certain amount of industrials, and yet get a load factor of somewhere near, I believe, 70 percent, an unusual thing. That is wonderful. But they were not all that way by any means.

Some of them never had any excuse for existence. Anyway, when they got it it is perfectly obvious that the group sitting at the head knew that they could not personally superintend and actually operate these big, widely scattered, absent groups. So what? Well, naturally, they were not going to own these things and not get something out of them. So the scheme was devised of these contracts, by which they took toll of gross receipts and fees of every sort. That is how, I believe, these big groups came into existence. To speak of them as having come into existence as they are, or as they were first when they came into shape, and to say that was for economical reasons, in my judgment, is far from the facts.

Now, I do not think I should take up any more of your time unless you would like for me to say something about the natural-gas situation. I might say a few words about that, because while you do not have title III in your bill, I think you should be advised generally of the gas pipe line and natural-gas situation, because it already presents a field for Federal legislation. The Commission makes only a very brief recommendation in its conclusions for the obvious reason that we are in the middle of the study of that subject. But I want to present by just one step further than I have previously mentioned the need for Federal regulation.

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