The Federal Trade Commission dug up a notable case-where men were sent out by the service company to render service; the operating company had to pay them for the service; that is, it was paid twice. There are some of the companies that will be before you who have not resorted to any such practice.

The CHAIRMAN. And we put Al Capone in jail for racketeering. Commissioner SPLAWN. It is hard to put a corporation in jail. A corporation is pretty hard to get at.

But there are some of the companies that have no such record as that. They have taken over these men who began early under the aegis of the supply houses; they have recruited good men; they have excellent people. They will make the defense that they render this service for less than the companies could get it for at arm'slength bargaining. Whether that be true or not, the service company has been tremendously profitable; and I think that is the explanation of the struggle to get so many properties. It is only to sell services to these operating companies, and the profits come directly from the operations into the service company, which is a subsidiary of the top holding company; and any charge that they may put on them, any profit that may come out of supplies, comes ahead of any dividend that the operating company can declare on its common stock. They sell them supplies. They say they can do a great deal of merchandising and do it more cheaply for the operating companies than they can do it for themselves.

The Federal Trade Commission has revealed the fact that one of these great outfits required the operating companies to furnish the space, to use their employees as the agents to put on campaigns for the sale of electrical appliances, and all the profits went back through the service organization into the holding company. The operating company that did the work and made the sales was not permitted to share in the profits.

Those are, I think, some of the principal sources of revenue of these companies, with the exception of the very profitable trades they made, such as I discussed awhile ago in connection with writeups.

They will say that they had these companies appraised, which they did. The Federal Trade Commission says that where it finds a write-up it is a write-up, that the appraisal was superficial and that there was no value according to their judgment and after their inquiry

Senator MINTON. They sometimes own their own appraisal companies, do they not?

Commissioner SPLAWN. Yes.

Senator MINTON. So that when they are employing somebody to make an appraisal of a property which they are taking over they are simply themselves appraising the property?

Commissioner SPLAWN. They declare what they think it is worth. These engineers are honest, good fellows; they are employed in a service company, and they have their orders. They make certain estimates after the matter is given to them by their master.

Senator MINTON. They are not operating engineers that operate properties; they are testifying engineers who testify in appraisal

cases?

Commissioner SPLAWN. That is correct.

There will be a great deal said to you about the advantages of ged. graphical diversification of risk. I mention that in trying to describe what you have to deal with in connection with these corporations through ownership of small equities, voting stock, and controlling operations widely scattered, with no possibility of physical interconnection. They say that is a very fine thing, because it represents a geographical diversification of risk, and that if there happens to be a panic or depression on the Pacific coast there is likely to be a fine prosperity in the central West or in the East.

For example, take the Standard Gas & Electric. Their big property is at Pittsburgh. They have a much smaller property away out in southern California. It is positively ridiculous to talk about one of those as representing geographical diversification of risk. The geographical diversification, it seems to me, is largely limited to these regional enterprises.

An integrated system is a company which owns its generating plant, transmission lines, and distribution companies serving a small area; and it has to be small, because they cannot send power very far. A number of little towns within that area may tie in with the transmission line and make it fairly profitable or, in some cases, a very profitable operation. But to go and acquire an independent operation off in Arizona and one in the State of Washington and another up in Maine, and then to have an integrated system in some other State and talk about that being geographical diversification of risk is absurd. That phrase appeals to investors-"diversification of risk." And when you think about diversification of risk for our investments you think about buying sound securities into each of several sound operating companies.

A power holding company does not perform the functions of an investment trust. It does not take this money which it brings in from the public and invest it around in various going concerns, getting a diversity as to industry, but they put all their eggs in the power basket and they gather into their portfolios the different equities, and then, having issued stock, either common or preferred, or both, if they get into a pinch they do not hesitate to issue debentures. And what does that do to the stockholder?

These holding companies have the power to put out debentures any time they want to. Many of them have. They are going to talk to you and tell you that in the elimination of these top holding companies there will be nothing left for the stockholders. It seems to me it is not for them to come to you and plead the confusion that they have made of their own corporate set-up as a defense for the elimination from this industry of something which I believe cannot be controlled. I do not see how you gentlemen can draw regulations reaching a holding company set-up that was smart enough to defeat the internal-revenue people for 10 years and collected taxes and retained taxes. The revenue people knew about that, but they had the rules that rendered income-tax people helpless.

The CHAIRMAN. That was really the fault of Congress, was it not? Commissioner SPLAWN. That particular thing.

The CHAIRMAN. That was really the fault of Congress in passing a law that permitted them to file consolidated returns, was it not?

Commissioner SPLAWN. It was not easy to get that thing corrected.
Senator LONERGAN. May I ask a question, Mr. Chairman?
The CHAIRMAN. Certainly.

Senator LONERGAN. Doctor, are you keeping in mind only companies engaged in interstate business in anything that you say here? Commissioner SPLAWN. Yes.

Senator LONERGAN. You are not including companies that operate solely within the territorial limits of a State?

Commissioner SPLAWN. I think that is not your big problem, Senator. There are some of those little intrastate holding companies that have done things just as bad as could be; but I think that where you have them close to the people and limited to the operation which they control and to the vicinity or that group of people who are their customers, perhaps something can be done about it through the local government. But these interregional companies want you to regulate them instead of taking them out of the management and control. You get a nest of a number of corporations with all these involved relationships, and I cannot see how you can draw rules as fast as they can devise schemes to do something else.

Senator LONERGAN. Do you feel that Congress has power to legislate and to regulate companies that operate solely within the territorial limits of a State?

Commissioner SPLAWN. I think you took some such position as that when you drew the Securities Act, the act regulating the issue of securities, so that you could reach certain of those situations.

The CHAIRMAN. I am assuming that what the Senator was asking was with reference to regulating the price that is fixed to the consumer or the rates to the consumer for electricity.

Senator LONERGAN. Yes; in the form of supervision over a company that operates solely within the territorial limits of a state.

Commissioner SPLAWN. Oh, I think that you would not want it, particularly at this time, if you had the power to exercise it over the rates of the local distributing company. I think if you regulate the wholesale rates in interstate commerce, that is as far as you will need to go in the regulating of the rates of these utility companies.

Senator LONERGAN. Is there any commission that has power over the issuance of securities by these companies now?

Commissioner SPLAWN. You have a commission that has power. You have drawn a bill, as I understand it-and it is a law nowrequiring certain information to be made available to the investing public.

Senator LONERGAN. You made a statement a few moments ago with reference to the issuance of debentures on the part of some of these operating or holding companies?

Commissioner SPLAWN. Yes.

Senator LONERGAN. Is there any actual supervision over such things?

Commissioner SPLAWN. Yes; and they could continue to issue them under your supervision.

Senator LONERGAN. They could?

Commissioner SPLAWN. I think so.

Senator LONERGAN. Do you mean without application?

Commissioner SPLAWN. I think they would have to file applications, but I think they would be approved in many instances.

The CHAIRMAN. I take it that your contention is that the Government has the right to regulate the issuance of stocks and bonds which are sold in interstate commerce, through the mails?

Commissioner SPLAWN. Yes. That, I believe, is the theory upon which you based your legislation.

Senator MOORE. In a State like New Jersey, that has a "blue-sky " law, these stocks and debentures would have to come before a committee that would decide.

Commissioner SPLAWN. I will say, Senator, that in certain communities in the densely populated East, many of these companies are rather conservatively organized financially. There was started a movement about 1929 that looked as though it was an effort to bring all such properties under a common corporate management, and that was through the use of a corporation called the "United Corporation." You will find a very excellent property in the State of New Jersey, the New Jersey Public Service Co. The working control is held by U. G. I., which is another good company. Then, that company has working control by friendly interest. The Niagara-Hudson has working control by friendly interest. There is the Commonwealth & Southern; the Consolidated Gas serves the city of New York, and so on around. Then you get up into the United Corporation. It is not more than 20 percent, or something around 20 percent-maybe 26 percent-in one of these companies. Then, the companies themselves own some interest in each other.

The United Corporation has about 14 million votes, half of them in the hands of the public and half of them trusteed with 250 nominees, with 5,000 shares or more in the hands of each nominee. That never did crystallize. They never quite accomplished what appeared to be their aim, to put under one corporate control the electric-power industry between the Atlantic Seaboard and the Mississippi River. But they went so far that these companies, about eight of them, serving these densely populated areas, and they are the more conservative of the holding companies in their corporate organization; and they will appear here through their executives, I think, for obvious reasons.

But these people have been brought into a community of interest. That is all brought out in part 1 of this report. It is made very clear. I cannot see why a company like the United Corporation should be voting any stock that would have anything to do with any control of any power operation in this country.

Senator MINTON. In reference to the question asked by the Senator as to the "blue-sky" law, is it true that utility securities in the past have been exempted from the "blue-sky" laws because the issuance of their securities was under the jurisdiction of public-service commissions?

Commissioner SPLAWN. I understand that is true in a great many jurisdictions.

Senator MINTON. And therefore this law would not apply to them?

Senator MOORE. They may come in, none the less, under the "bluesky" law of New Jersey.

Senator MINTON. I do not know about your State, but I think it is true in Indiana that they are exempted from the "blue-sky" law's

operation because they have regulation under the Public Service Commission.

The CHAIRMAN. Even though you have a "blue-sky" law in a State, these holding companies can go to another State. Assuming that you have a "blue-sky" law in the State of New Jersey and there is no "blue-sky" law in the State of Delaware-I do not know what the facts are, but I am just using that as an example for the purpose of my question-they could organize a holding company and then go into the State of New Jersey and buy a controlling interest in the Public Service Co. of New Jersey and then they could issue their debentures and their stocks, and so forth, that you have described, and sell them to the public throughout the country, could they not?

Commissioner SPLAWN. Yes.

The CHAIRMAN. So that the "blue-sky" law in New Jersey would not, of course, affect that holding company?

Commissioner SPLAWN. That particular kind of operation.
Senator MOORE. It would in New Jersey.

The CHAIRMAN. Yes; so far as New Jersey is concerned.

Commissioner SPLAWN. The power business is, in my judgment, Mr. Chairman, one of the soundest businesses in our Republic. There are 20 million users of electrical energy, approximately. The rates are fixed with the authority of Government, because this utility is a monopoly and has monopoly privileges.

There has been a great increase in the use of electric energy, and we are on the eve, I think, of a tremendous expansion in the use of it. We have seen come in recently the use of the electrical refrigerator. There are other appliances which I think will be commonly used and which will tremendously increase the consumption of electric energy. These operating properties are, in the very nature of the case, the soundest type of business. The operations are of necessity local, because interconnections, and so on, cannot get out very far from the generating plant. These companies have holding companies through their service organizations operating these properties locally. There cannot be a finer investment for local people than in their own power companies and power projects. If the local people want to go into it, they have to go into a company from two to five or six removed from it, and they cannot buy into any local property. They have to get into something that is away up the line, that is superimposed on a great many of those properties. The income from these operating companies is certain. The credit of these operating companies I believe is as stable as the credit of any business in our country. If it were not so stable it could not have suffered this tremendous superstructure of capitalization that has been built, company after company putting out securities against these operations down below. These companies could not have stood what has been imposed upon them if the power business had not been one of the soundest businesses in the country.

If you can relieve it of exploitation, which is inevitable if you leave these top holding companies in existence, the local people will get lower rates, in my judgment, and they will use the increased consumption because they will be able to buy it, and then the investors