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method for the manufacture of artificial gas, whieh up to that time had been manufactured by the carbonization of coal. While the Lowe-Water gas process was a distinct advance in the art, the company faced the usual difficulties of introducing a new process to a skeptical industry, which in those pioneering days was not only competitive but of a highly speculative character.

Existing gas companies throughout the country were by and large small units with restricted credit, unable to raise the capital necessary to introduce the new process. In order to overcome these difficulties, it was necessary for U. G. I. to accept securities in payment for its water gas sets, to lease or to buy control of companies in order to install the Lowe process. This resulted in U. Ĝ. I. becoming the owner of a large number of gas companies scattered throughout the country, from the Atlantic coast to the Pacific, and from Maine to Florida.

It was about this time that electricity entered the field as a competitor with gas as an illuminant and U. G. I. largely aided the gas industry in postponing for several years the inevitable loss of the lighting business by the introduction in this country of the Welsbach gas mantle, at the same time undertaking the development of electric apparatus and appliances, and the acquisition of electric properties.

It should be remembered that in these days both the gas and electric companies were very small units, even in the larger cities where there were many companies with franchises for restricted areas, or for lighting specific streets. U. G. I. continued the perfection of processes through research and the expansion of areas in which its companies operated. Finally, as the electric, and, to a lesser extent, the gas industry, developed from an urban to a suburban and rural service, U. G. I. undertook the formation of larger units and the disposal where possible of scattered and distant properties. Occasionally these properties could be sold for cash, but in the majority of cases this was not possible and it was necessary to take securities in the holding companies thus formed. Many of these securities have been disposed of from time to time, principally the senior securities, but many are still retained, there being no market in some cases, and in other cases such large blocks of stocks being held as to render them practically unmarketable, although such stocks are dealt in on the exchanges.

So U. G. I. finds itself today with investments, principally common stocks, carried on its books at some $332,000,000-somewhat less than cost-of which $210,000,000, or 63 percent, are investments in subsidiary companies, and $122,000,000, or 37 percent, are investments in noncontrolled companies. $ 158,000,000, or 75 percent of its investment in subsidiary companies is in the State of Pennsylvania and integrated territory in Delaware, and $39,000,000 in the State of Connecticut, the balance being in four scattered utility companies and also companies engaged in the related and necessary businesses of real estate holding, by-product disposal, and other similar activities, including the Welsbach Co. which manufactures gas mantles, water heaters, and other appliances.

The largest single development owned by this company is the Philadelphia Electric System, which now provides electric service in Philadelphia and gas and electric service in over_2,000 square miles of contiguous and integrated territory, extending from the Delaware River on the north

and east to the Susquehanna River on the south, including the Conowingo Power Development in Maryland, with an aggregate population of 2,800,000. That company also serves with electricity and gas a U. G. I. subsidiary, Delaware Power & Light Co., serving a population of 160,000 in the northern part of Delaware including the city of Wilmington. The Philadelphia Electric Co., as now constituted, represents some 60 original companies, mostly under different ownership, which have been brought together by U. G. Í. over a period of some 45 years, with corresponding benefits to consumers of reliability of service, decrease in rates, and extensions to outlying territories previously without service. Rates have been reduced from 40 to 60 percent and service extended to 70 percent of the farms in the territory.

The largest nonsubsidiary investment_$60,000,000—is in the Public Service Corporation of New Jersey, serving a territory contiguous to that of the Philadelphia Electric Co.

There are substantial investments in such companies as Niagara Hudson Power Corporation and The Commonwealth & Southern Corporation, the investments having originated in U. G. I.'s ownership of operating companies which, as mentioned before, were exchanged for securities of the holding company under whose auspices the territory was being developed. Not to have turned in these companies would have defeated one of the very purposes wherein the holding company has been of the greatest service in the constructive development of the industry into territorial groups. In addition to these investments,

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U. G. I. operates the Philadelphia Municipal Gas Works under a service-at-cost agreement. From 1836 to 1897 the city gas works were operated by the city, but for the past 35 years have been operated by U. G. I.

Another activity of U. G. I. is its research work. For 50 years the technical problems of the gas industry have passed through the company's laboratories and have been solved for the benefit of individual companies, the industry as a whole, and the public in general.

Starting with the development of equipment for the manufacture of water gas, and continuing with the refinement of the coal gas process, almost every advance in the art has been the result of extensive research fostered by U. G. I.

The companies which U. G. I. controls have had the use of these processes and discoveries resulting in annual savings since 1930 of approximately $2,200,000, besides which they have been made available to the industry in general upon the payment of reasonable royalties. Such outside companies as have adopted these processes are saving $1,500,000 a year.

Now as to the effect of the Wheeler-Rayburn bill on this company, as I see it. First, reorganization:

Assuming U. G. I. would be authorized to retain its $158,000,000 investments in Philadelphia Electric Co. and other gas and electric companies in Pennsylvania (which is not clear), and the integrated Delaware companies, representing approximately 50 percent of its total investments; assuming it was further authorized to retain its $60,000,000 investment in the contiguous

Public Service Corporation. of New Jersey, there would still remain $114,000,000, of other investments in noncontiguous territory to be disposed of. Of these, the largest interest is represented by $39,000,000'investment in the Connecticut Electric Service Co., New Haven Gas Light Co., and minority interests in other Connecticut operating companies. Disposal of this large investment for cash would be out of the question. Should these companies be merged with other operation companies in Connecticut, U. G. I. would still have its $39,000,000 investment, represented by a minority interest in such new company which would in turn have to be disposed of.

Operating companies that are owned in scattered localities would presumably be sold—the question is to whom? There would be only one possible purchaser in most instances—the local utility serving electricity or gas, as the case might be. If they could not be sold for cash, U.G.I. would again find itself the owner of stock, to a lesser percentage, in a disassociated gas, electric, or combination company which would in turn have to be disposed of.

A more serious difficulty would be found in the disposal of U.G.I.'s nonsubsidiary investments. Such of these investments as consist of small interests in operating companies might be sold to reorganized local groups at whatever price could be obtained.

For the substantial investments in other holding companies, such as Niagara Hudson, $16,000,000, and Commonwealth & Southern, $10,000,000, there is no group to which these stocks could be sold. These holding companies would themselves be in process of reorganization or dissolution, and it is inconceivable that such large blocks of securities could be sold on the market even at present depressed prices. Of still greater difficulty would be the disposal of the company's $60,000,000 investment in the Public Service Corporation of New Jersey, should it not be authorized to retain it.

Second, dissolution: The difficulties of disposal or distribution of the assets of a company with such wide interests as U.G.I. are very real. The loss to investors lies in the fact that under the bill this action is forced; that the mathematical procedure is too complicated to permit the distribution of U.G.I. holdings pro rata among the stockholders; or that, alternatively, the raising of cash for distribution within a specified time, even if it could be accomplished at all, would entail the loss of much of the value of the company's assets.

There is also the question of prior obligations, such as guarantees that exist in connection with issues of bonds and preferred stock of subsidiary companies and companies no longer in the system. Moreover, there exist the company's obligations to operate the municipally owned Philadelphia Gas Works and the Northern Liberties Gas Co. There is the further right of the company's preferred stockholders to receive in dissolution $100 per share in cash. It is difficult to consider a method of distributing assets remaining for the common stock, when the principle upon which the prior obligations are to be met is so impossible of determination. However, assuming prior obligations could be taken care of, the complications involved in the distribution of the balance of its assets, particularly those of other holding companies which would themselves be in process of reorganization or dissolution, is so great as to baffle solution.

Third, difficulties of operation under the bill:

The enormous practical difficulties in the way of the reorganization or dissolution of a holding company such as U.G.I. are equalled by the obstacles to efficient management imposed by the bill on the conducting of the business of new regional "operating-holding" company.

The interjection of regulation by Federal agencies would cover four phases of the system's business, namely, finance, business parctices and methods, engineering, rates, and services to customers.

All of the restrictions put on the corporate management of the existing type of holding company would continue on the new functional “operating-holding' company necessary in the operation of a geographically integrated system serving more than one State the use of corporate funds and the nature of the financial structure, the payment of dividends and fees between companies in the system, intercompany loans, the investment of funds, the purchase and sale of securities, and change in the terms of securities—all would be under Federal regulation, despite the integral character of the new regional utility, which would be one single company in all but name.

To secure the economies of unified operation, it would still be necessary for the new “operating-holding" company to supply the smaller companies in its group with business services of many kinds. The simplest kind of management service, in the sale, accounting, and engineering fields, might, under Commission rules, have to be withheld until approval was secured as to the usefulness of the service, the price, and the conditions of performance of the contract. Likewise the bill would subject the company to dual regulation, by State and Federal agencies, with regard to all accounting practices.

Under the bill, the Federal Power Commission would be given complete jurisdiction over the physical property necessary for producing and transmitting electricity. While the Commission is only given jurisdiction over the facilities used in interstate production and transmission, in an interconnected system such as is here contemplated, virtually all equipment, except that used strictly in retail distribution of electricity, would be thus supervised, even though jointly used in inter- and intrastate business.

The Commission is authorized to draw up & "superpower” plan and the company can by forced to alter its generating and transmission facilities to conform with such plan. The purchase, sale, or abandonment of property, the extension, repair, or change of facilities, could only be undertaken with Commission approval. The bill also establishes the utility as a common carrier, virtually under the management of the federal agency. The present interchange agreements can be entirely altered, and the generating and transmission facilities used as the Commission, rather than the company, sees fit.

The bill apparently gives the Federal Power Commission jurisdiction over rates and services of a purely interstate nature. Taken at its face value, this includes only the intersystem sales of electricity, plus the exchange of power with neighboring utility systems. The imposition of Commission supervision over such interchange of electric energy will not tend to the economic use of generating stations. The essence of exchange arrangements is timeliness, and engineers in charge must have full power to authorize the interchange of electricity at proper prices, depending upon operating conditions prevalent at the moment.

Under the bill, the Federal Power Commission could in effect fix the gateway cost of electricity, i. e., the cost at the substation. By the determination of gateway cost to different classes of service, the Commission is virtually in a position to dictate the rates charged, not only to wholesale power users such as municipalities and raliways, but also to retail customers, depriving the State commission of this local control.

RECOMMENDED REGULATION OF HOLDING COMPANIES The problem is considerably simplified if we break down the business of holding companies into its two component parts, namely, those functions which have to do with the supplying of service to consumers and which may incidentally affect the service and rates of the operating companies; and, second, the phases of its business which concern its relations with investors, that is, the financial aspects of the business, including the character and sale of the holding company's securities, and the problems of accounting and reporting of operations.

Considering first the holding company, as it affects the consumer, it is important to realize that this relationship is not a direct one, but involves a local

operating company. Even if it were legally possible for one company to operate in several States, the sheer size of such an organization would make it unwieldy and control and management would have to be decentralized in recognition of the local nature of the business. It is this local character of utility service which determines the type of business organization necessary to supply it. Equally, it should govern the type of regulation best adapted to foster the consumer's interests.

The product which the customer buys is made, on the average, within 20 miles of the point of consumption. The conditions under which he buys it, and the price, are determined by the characteristics and requirements of his particular community. He buys not only a product, but what is just as important, be buys a continuous household service, which must be fashioned after his particular needs. To be satisfactory in this respect, it cannot be directed from a distant point.

This characteristic caused the utility, in the first instance, to be regulated by the municipality in which the service was rendered. Subsequently, with the spread of electric service to suburban and rural districts, and the economies of combining larger areas under one system of operation, the States largely took over the functions of regulation and in nearly all the States this function is now lodged with the State regulatory commission. In addition, in a rapidly increasing number of States the commissions have been given jurisdiction over holding company relations with the operating companies. An analysis of recent trends in State legislation on this subject demonstrates the lack of necessity of any permanent assumption of Federal authority in this field. Since 1930, almost half the States in the Union, representing far more than half of the consumers, have passed modern effective regulatory measures which lodge with the State commissions powers to regulate the dealings between the operating companies and the holding company which have been the subject of criticism in the past. Specifically, either by court rule or by statute, virtually all States may question the amount of service charges or commodity charges to operating companies, and may go beyond State lines to determine the fair level of such charges. More than that, under recent statutes in most of the populous States, advance approval must be secured from the State commissions on transactions between operating and holding companies having to do with service and commodity charges, loans, or transfers of property or stock, all of this latter type regulation coming within the last few years.

We have then a growing trend toward entirely effective regulation of that phase of the business of the holding company which is related to service to the consumer. It is true that in many States legislation is as yet needed, but the correction of this condition does not require the supercession of the regulatory measures in those States which have well-developed legislation, but rather the encouraging of similar legislation in the other States. For instance, certain relations between holding and operating companies where State regulation is not effective might temporarily be lodged with a Federal commission, thus inducing such States to set up adequate regulation. The aim should be to raise the level of local regulation-an easily obtainable end, as has been demonstrated in many local instances.

Now the regulation of those phases of the holding company's business which concern the investor, as distinguished from the consumer, is more difficult to effect through State regulation. It is true that in the case of holding companies which are predominately intrastate, State commissions can properly regulate the holding company itself, in all its aspects. However, most holding companies operate in more than one State and have securities held throughout the nation and are, therefore, claimed to be the proper concern of the Federal Government.

Criticism of certain public-utility holding companies along these lines—that is to say in connection with the issuing of securities and other financial transactions—could equally well be directed at corporations in other lines of business. This was recognized in 1933 and 1934 by the passage of the Federal Securities Act and the Securities Exchange Act, which apply to public-utility companies as to other corporations. Under the terms of these acts, the Securities and Exchange Commission has or should be given authority to regulate the issuance of securities by registered holding companies other than those regulated locally, and in connection with this power, and its authority in connection with the regulation of exchanges, already has broad powers to correct abuses in financial management. It may be that the time has come to amend these acts to force under them all utility-holding companies, whether their equity securities are listed on an exchange or not, and to affirmatively provide for control of the

issuance of their securities rather than through the existing requirements for proper descriptive matter in prospectuses and registration statements.

To sum up, a holding company, as it affects the consumer through its control of operating companies, should be, can be, and largely is regulated by State commissions and the trend in this direction should be encouraged rather than impeded. The holding company's relations with its investors will in the future be regulated by the Securities and Exchange Commission and gaps in this regulation should be corrected by amendatory legislation.

THE UNITED GAS IMPROVEMENT CO.--ITS HISTORY AND THE

POSSIBLE EFFECT OF THE WHEELER-RAYBURN PUBLIC UTILITY BILL

As It Is TODAY The United Gas Improvement Co. is a utility holding company founded June 1, 1882, having total assets in excess of $343,000,000, of which investments, primarily of a permanent nature and costing some $332,000,000,consist of:

Investments in subsidiary companies, $209,600,529, 63 percent of total investments.

Other investments, $122,244,768; 37 percent of total investments.

INVESTMENTS IN SUBSIDIARY COMPANIES Investments in subsidiary companies consist principally of common stocks of operating companies engaged in the production, distribution, and sale of electricity and gas, with a small interest in other utility services. Including the operated but municipally owned Philadelphia Gas Works, 65 percent of the operating revenues of these companies are derived from the sale of electricity. 30 percent from the sale of gas, and the remaining 5 percent from ice and cold storage, transportation, water, steam, and other activities. There are among these subsidiary companies certain subholding companies, nonoperating of themselves but owning stocks of operating companies. These subholding companies were necessarily acquired in the process of bringing together operating companies in the same geographical areas. It has not been possible, as yet, to dissolve them because of legal complications, outstanding guarantees, or excessive cost of dissolution.

The major investment in subsidiary companies consists of common stock of Philadelphia Electric Co., 91 percent of which is owned directly, and over 6 percent through a subholding company of the type mentioned, the American Gas Co. Philadelphia Electric Co. and its subsidiaries provide electric service in Philadelphia and gas and electric service in over 2,000 square miles of a contiguous and integrated territory extending from the Delaware River on the north and east to the Susquehanna in Maryland and in Pennsylvania to the south and west, with an aggregate population of 2,800,000. Served with electricity and gas from the Philadelphia Electric Co. is the Delaware Power & Light Co., serving a population of 160,000 in the northern part of Delaware, including the city of Wilmington, which company is a subsidiary of the Delware Electric Power Co., owned by U. G. I., which operates traction and bus service in Wilmington and vicinity.

U. G. I. operates under lease the Philadelphia Gas Works, owned by the city: Only a nominal investment is represented on the company's books on account of this activity, the U. G. I. functioning as agent and operating manager on a fixed fee basis, through the medium of a subsidiary, the Philadelphia Gas Works Co.

U. G. I. controls manufactured gas companies serving the cities of Allentown, Bethelehem, Harrisburg, Lebanon, and Reading in eastern Pennsylvania with an aggregate population of 575,000; a company supplying electricity and gas in the Hazleton-Kingston anthracite mining region with a population server of 210,000; and a company supplying a large part of the electric requirements of Erie and its suburbs, with a population of 130,000.

Outside of Pennsylvania, the subsidiary investments include the Connecticut Electric Service Co., which, through its subsidiaries, serves electricity and gas directly and indirectly to a population of 1,100,000 in cities, towns, and villages of Connecticut. U. G. I. also controls the New Haven Gas Light Co., serving a population of 240,000 in that city and surrounding territory.

1 Map on file with the committee.

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