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Such transactions obviously have no place in a sound economy. They do not serve orderly investment of the Nation's capital in the utility industry. Instead they inject a temporary and unhealthy stimulation into the securities markets which discourages intelligent permanent investors. Real development springs from stable and predicable markets. But stability in the investment market does not very often make a $2.97 stock worth $531.04, nor does it bring old era profits to investment bankers and brokers. Fundamentally the holding company prob lem always has been and still is as much a problem of regulating investment bankers as a problem of regulating the power industry. As the Federal Trade Commission states in its report:

"Professional managements apparently often give greater attention to the counsel of bankers than to the interest of widely scattered security holders who are the equitable owners of the company so managed * In the heyday of holding company exploitation just prior to the depression, investment bankers not only furnished financial aid when requested by holding companies, but solicited it and came to depend upon holding companies for business.”

It is little wonder that these financial holding-company securities have so frequently turned out to be poor investments, for which many investors were induced to exchange their relatively well-secured obligations and stocks of operating utility companies. Too late the investor discovered the difference between the regulated operating companies and unregulated holding companies, and learned how much of his money had been wasted in feeding the hopes and greed out of which rast utility empires were conjured, and how little used to build up the utility enterprise.

Determination of the actual investment in utility properties is the very foundation of any intelligent public regulation of the rates of privately owned and operated utilities. No realistic determination of that kind can be made while holding companies may acquire properties and securities and engineer their transfer through many corporate conduits at fictitious prices. While Federal legislation does not try to regulate intrastate consumers' rates, it can help create conditions under which State legislation can establish rate structures based upon an objective and administratively workable standard of the “prudent investment” in the properties rather than upon the grossly unfair and unreliable variables of "fair value" and " reproduction cost.”

We accept the view expressed in the minority report of the New York Commission on Revision of the Public Service Commissions Law that the decisions of the Supreme Court do not preclude State legislatures from working out a rate policy for the future, which, as to new properties and additions, will be based on the prudent investment in the properties. That has been the accepted policy in Massachusetts and California and was the policy adopted by Congress in the Federal Water Power Act. In the case of properties already dedicated to the utility industry at the time of the adoption of such a policy, the investor and consumer may have to accept “fair value”, which, realistically, is nothing more than negotiated or arbitrated value. But in our judgment Congress and the States, within their respective jurisdictions, are free to determine once and for all the "fair value” of existing properties at a particular time and protect both the investor and consumer by providing a definite and predicable rate base for the future.

Substantial strides in this direction can be made now by Federal legislation which will control the accounts, security transactions, and investments of holding companies in relation to the actual prudent investment in the underlying utility properties. The ultimate effect of such legislation should be to encourage holding companies thus freed from excessive capital burdens to adopt a lowrate policy for their operating companies in their own interest. Lower rates and the greater and more economic use of gas and electricity by agricultural, domestic, and industrial consumers implied by lower rates are a necessity for the continued growth of a great industry and for the realization of its full possibilities.

Attempts by State commissions to protect the consumer from the burdens which holding-company practices have imposed upon him have been, and practically always must be, largely unsuccessful. The public-utility holding companies have become Nation-wide institutions. Their subsidiary operating companies are located in every State. Electric Bond & Share Co. has operating companies in 36 States and 8 other systems have units in 11 to 29 States. Many holding companies have affiliations, sometimes amounting to control, with banking interest, construction companies, coal mines, newspapers, and other interests. Their securities are widely marketed by use of the mails and the instrumentalities of interstate commerce to investors throughout the country. Holding-company operations are too extensive, State commission powers and funds too limited, to make thorough and effective State action possible. And usually the holding companies have purposely arranged their organization and operations to keep out of reach of State regulation; their lawyers have challenged the jurisdiction of such regulation.

Generally a holding company itself is incorporated outside the States in which its operating companies are located and carefully does not do business within those States in a manner which will give State commissions technical power to reach the books and records of the holding company. Even if obtainable, however, such books and records will be comparatively unintelligible and even misleading until uniform accounting methods are made compulsory, There is the further difficulty of allocating the appropriate proportion of the cost of holding-company activities to its subsidiaries in a particular State, coupled with needless waste in having the process duplicated in State after State. These difficulties of State agencies are so fundamental that not even interstate compacts-assuming they could be evolved-can make State regulation practically effective without supplemental help from a Federal law.

The only practical control over public-utility holding companies will be one which can directly reach the holding company itself and supervise its security structure and its use of capital and make possible over a period of time the elimination of the holding company where it serves no demonstrably useful and necessary purpose. Only in that way can Government protect the investors who supply that capital and the consumers who must bear its cost. The need of Federal control is no less imperative because all holding companies have not been guilty of all the abuses that have been indulged in under the holding form. The abuses have not been spasmodic only, but sufficiently widespread to necessitate legislation to protect the public against an inherently dangerous corporate device, which, unregulated, reflects unjustly on guilty and innocent alike.

We therefore recommend Federal legislatio regarding public-utility holding companies. Such legislation should eradicate disclosed abuses, prevent the use of the holding company and affiliated interests to obstruct State regulation of operating companies, and make possible the elimination of the holding company where it serves no demonstrably useful and necessary purpose without undue dislocation of investment or the loss of operating economies which flow from economically and geographically integrated public-utility systems.

1. The ultimate purpose of the legislation should be the practical elimination within a reasonable time of the holding company where it serves no demonstrably useful and necessary purpose. But the amount of reorganization, transfers of assets, and distributions in dissolution required for the dismantling of our huge holding-company systems is so great that the task of elimination cannot be accomplished in a year or two without possibly too great sacrifice of apparent values. Furthermore, it seems administratively advisable that every opportunity be offered the owners of holding-company securities to work out their own processes of dismantling. That opportunity should, of course, be vigilantly guarded to protect the average investor from the exploitation threatening him almost as a matter of course under our usual methods and modes of corporate reorganization. In destroying the abuses of the holding companies the Government must not leave great groups of helpless investors to the certain abuses of extensive hurried corporate reorganizations. The dominant groups who have ruthlessly plucked the investor in promoting some of these huge holding companies must not be allowed to pluck him again as reorganization managers.

On the other hand, if the disappearance of the holding-company excrescence is to be realistically expected at the end of a given period, there must be a constant pressure on the managers of holding company enterprises persistent from the very beginning of that period to insure a continual process of whittling down complicated capital structures and of disassociating operating properties not related to each other geographically or economically. Only such a continual process can guarantee that at the end of the given period the holding companies will have been dismantled into organizations simple enough in structure to be readily dissolved if they are to dissolve, or sufficiently shrunk and integrated for operating purposes so that they may readily be transformed into operating companies. Without such a dismantling process holding-company liquidation at

the end of the period may well cost the same sacrifice of investors' interests as would be required to effect their liquidation a year from today. The devices recommended below are devices to effect that continual pressure to compel that continual dismantling process.

2 To attain the flexibility desirable for the handling of this complicated problem in a realistic and prudent way, Federal control should be vested in an administrative commission. Every holding company should be required to register with this commission if, either directly or through subsidiary companies, it employs the instrumentalities of interstate commerce to distribute securities, to transmit or transport electric energy or gas, to perform contracts, or to carry on any business. Furthermore, every holding company should be required to register if it has outstanding securities which were distributed to the public through the channels of interstate commerce, since by such distribution it has set into motion forces which are still active and are Nation-wide in their effect upon both consumers and investors. At the time of registration, the companies should be required to file with the Commission detailed information concerning their financial condition and operations, their security structure, their control over and relations with subsidiaries, and their affiliations with other interest of whatever kind. The definition of a holding company should be broad enough and flexible enough to reach every company which in fact controls public-utility companies, whether or not that control be dependent upon a specified security ownership. Federal registration provides the legal mechanism for controlling the activities of registered holding companies and their associate interests.

3. The issuance of new securities by holding companies should be adequately supervised by the commission so that in reorganizations and rearrangements of properties an uninformed investing public shall not have foisted upon it securi. ties which are in no sense secure and carry little or no voice in management. Security issues should be limited to purposes necessary in the public interest, which accords with the ultimate purposes of the legislation; and each security issued should bear a proper relation to the capital of the company, its existing securities, the securities of the companies in a geographically and and economically related system, and, above all, to the prudent investment in the properties of the issuer and its underlying companies. There should be an end to the pyramiding of holding-company securities. Except for necessary discretionary power in the commission in the case of refunding issues, new securities should be limited to par value common stock, with appropriate voting rights, and to first-lien bonds, i. e., bonds having a first lien either on physical assets of the issuer or upon first-mortgage bonds of operating subsidiaries. In this as in almost every phase of the holding-company problem the ultimate interests of consumers and investors are identical. In a system burdened with overcapitalized and debt-ridden holding companies, the consumers of operating subsidiaries have to support the topheavy structure by paying high rates and by enduring poor service from inadequately maintained plants.

4. The commission should have complete control over the acquisition of new securities and properties by holding companies and others in holding-company systems in the course of reorganizations and rearrangements of properties. New acquisitions should not be allowed unless the applicant can clearly demonstrate a resultant economy and efficiency from the connection of naturally related and interdependent properties. The commission should have power to prevent acquisitions at prices which do not bear a proper relation to the capital prudently invested in the underlying utility properties, or if the acquisition would tend to create monopoly or restraint of trade in the exercise of control of public-utility companies.

5. Holding companies should be restricted as soon as practicable to the business of operating and of owning the securities of public-utility properties; they should not be permitted to engage in nonutility or speculative ventures. Electric utility and interstate gas transmission or production should be divorced from common control. Similarly, domestic and foreign utilities should be separated. Unless approval of a State commission be obtained, the commission should not permit use of the holding-company form to combine a gas and an electric utility serving the same territory where local law prohibits their combination in a single company.

6. Holding companies should immediately be prevented from borrowing from sub holding companies or from operating companies in the same holdingcompany system. The commission should have power to prevent holding companies and their subsidiaries from paying dividends out of capital or unearned surplus, or from paying any dividend on a security or acquiring or retiring their own securities if such action would endanger the financial integrity of the system or impair the working capital of operating companies. The commission should have authority to prevent the sale of utility assets and securities at prices unfair to investors or in situations where separation of the properties would imperil the efficient interconnection of companies within the group.

7. All other loans and transactions within the systems and with affiliated interests, and the fees paid in connection with such transactions, should be carefully scrutinized and publicized. To prevent the continuing of present abuses and the sheltering of new ones in even subtler and more elusive forms of intercompany, relationship that that of holding company control, it will be necessary, in handling intercompany transactions, carefully to define affiliations amounting to less than control. In speaking of these relationships, the Federal Trade Commission has said “the inquiry early disclosed the fact that such companies (affiliates) were frequently used as vehicles whereby certain deals dictated by certain holding companies could be given the appearance of straightforward conservative business transactions, and whereby only a few company executives would know their true significance."

8. The holding company should immediately be required to divest itself of any interest in the business of issuing, underwriting, and creating new security issues for itself or controlled companies, and should not be allowed to derive fees or commissions from security transactions. The holding company in the role of banker is in dangerous conflict with the interests of its investors and consumers.

9. All service, sales, and construction contracts not performed by independent companies should be performed by companies or associations organized on a strictly mutual basis to insure the performance of their work at cost. The commission should have continuous supervision over these mutual organizations to require adequate reports, uniform accounts, the maintenance of equitable allocations of costs among the companies served and the assurance of efficient and economical operation. The commission should make a study and recommendations to State commissions and public utilities concerning the nature, costs, and economies of various kinds of services rendered to different types and sizes of utilities. The provisions on service, sales, and construction contracts and those regarding other intercompany transactions should put an end to profits from intercompany transactions in a holding-company system. The returns of holding companies would be limited thereby to dividends from their holdings in economically and geographically integrated utility properties.

10. Holding companies should be required to make periodic and other reports concerning their own and their subsidiaries' financial condition and operations. Such reports should be based upon uniform methods of accounting prescribed by the commission, with due regard for the power of the States to prescribe the accounts of operating companies. The requirements concerning reports and accounts should extend to affiliates regarding their transactions with affiliated operating and holding companies. With uniform accounts available to the commission, to State commissions, and to the public, misleading and unsound accounting practices should lessen appreciably, and it should be possible to make intelligent comparisons of performances and to ascertain the investment be hind holding company securities.

11. The commission should study existing systems so that they may be simplified by the elimination of unnecessary corporate complexities and of properties which do not fit into an economically and geographically integrated whole. Simplification and reorganization of holding-company structures, making possible within a reasonable period the practical elimination of the holding company, should be conducted under the commission's supervision over a period of time to prevent undue losses to security holders from investment dislocations. Voluntary action by the companies should be encouraged as much as possible, but the commission should be empowered to issue orders compelling necessary divestments, dissolutions, and reorganizations. Such orders should be enforceable in the courts, and the commission should act as trustee to etfectuate necessary divestments, reorganizations, or dissolutions.

The commission should have power to institute proceedings for the reorganization of holding companies under section 77B of the Bankruptcy Act, as amended, and to act as trustee in any proceeding concerning such companies under said section 77B, or receiver in any Federal equity receivership of such companies. No reorganization plan under the Bankruptcy Act, or otherwise, should be effective unless it has been prepared or approved by the commission.

Solicitation of proxies, consents, or deposits in connection with a reorganization plan should be prohibited until after a hearing on the plan before the Commission. Such solicitation should also be barred unless accompanied by such information regarding the plan, the Commission's report thereon, and the interests of the persons sponsoring the plan as will inform the investor adequately of his rights and the effect of the plan on his position.

12. The exemption, under the revenue act, for dividends received by corporate holding companies and affiliates on the securities of public-utility companies and other holding companies might be partially removed. The increased tax occasioned by such a partial removal of this exemption might stimulate active cooperation by holding companies in eliminating intermediate corporate layers and will discourage the use of the holding company as a device for the control of electric and gas utilities except where its use will result in clearly demonstrable economies sufficient to compensate for the tax. Respectfully submitted.

HAROLD L. ICKES, Chairman.
FRANK R. McNINCH.
ELWOOD MEAD.
T. W. NORCROSS.
MORRIS L. COOKE.
ROBERT E. HEALY,
DAVID E. LILIENTHAL.

EDWARD M. MARKHAM.
Attest:

JOEL DAVID WOLFSOHN, Executive Secretary.

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[S. 1725. 74th Cong., 1st sess.) A BILL To provide for the control and elimination of public-utility holding companies

operating, or marketing securities, in interstate and foreign commerce and through the mails, to regulate the transmission and sale of electric energy in interstate commerce, to amend the Federal Water Power Act, aud for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

TITLE I

SHORT TITLE

SECTION 1. This Act may be cited as the “ Public Utility Holding Company Act of 1935."

NECESSITY FOR CONTROL OF HOLDING COMPANIES

SEC. 2. (a) Public utility holding companies and their subsidiary companies are affected with a national public interest in that, among other things

(1) Their securities are widely marketed and distributed by means of the mails and instrumentalities of interstate commerce;

(2) Their service, sales, construction, and other contracts and arrangements are made and performed by means of the mails and instrumentalities of interstate commerce;

(3) Their subsidiary public utility companies sell and transport gas and electric energy by the use of means and instrumentalities of interstate commerce;

(4) Their practices and control over subsidiary companies materially affect the interstate commerce in which those companies engage; and

(5) Their activities extending over many States are not susceptible to effective control by any State and make difficult, if not impossible, effective State regulation of public-utility companies.

(b) The national public interest requires the exertion of Federal control over the transactions and practices of public utility holding companies and their subsidiary companies and affiliates, where such companies or subsidiaries or affiliates operate or market securities, in interstate commerce or through the mails, because as disclosed by the reports of the Federal Trade Commission and otherwise

(1) The securities of such public utility holding companies, subsidiary companies, and affiliates are sold to a large number of investors in different States;

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