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THE PRESENT FUNCTION AND POLICIES OF THE COMPANY
RELATION TO SUBSIDIARY COMPANIES
U. G. I.'s administrative functions with respect to its subsidiary companies have developed and changed along lines parallel to the development of the operating companies themselves. In the earlier days of small isolated companies, none of sufficient financial strength itself to support a highly developed technical staff of specialists, U. G. I. provided each of them with such services. As the companies were gradually brought together into larger groups, these groups were developed into substantial, autonomous and self-contained units with their own local boards of directors representative of the consuming public in the localities served, and with fully manned staffs of specialists. However, even in the case of such large operating companies, there remain certain services that can be provided more economically by the central organization, such as group purchasing, stock transfer and other work. For the smaller operating companies there still remain many services to be performed by the central U. G. I. organization, such as operating problems, expert assistance on sales, technical advice on production, distribution, and construction; financial assistance, both in advice and in ad ncing temporary capital at proper rates; and commercial and accounting advice.
These services are provided at cost where any charge at all is made, but much of the work is done without cost to the operating companies. U. G. I.'s chemists, engineers, accountants, business managers, and technicians contribute to its companies a service far superior to that which could be possible through the limited resources of the individual companies themselves.
U. G. I. does not manage, it performs expert services when needed by its subsidiary companies at less cost than they could be obtained elsewhere, and with greater efficiency on account of its intimate knowledge of the properties, their personnel, and problems. Income from this source is relatively of no moment. For example: Dividends and interest received from subsidiaries in 1934, $23,725,000; charges for services to subsidiaries, $375,000.
Reference has been made to the important feature of research, which is going on continuously at the sole expense of U. G. I., and of the company's contributions to the art in the earlier years of its history.
Of the more outstanding developments in recent years are the U. G. I. process for using heavy oils in the manufacture of artificial gas; its process for the reforming of high British-thermal-unit hydrocarbon gases into gases suitable for mixture with ordinary blue gas, and its process for producing in carburetted water-gas sets a substitute for natural gas with a British-thermal-unit content approximating the latter.
The companies which U. G. I. controls have had the use of these processes and discoveries at no cost to them, which has resulted 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.
U. G. I.'s subsidiaries have consistently lowered their rates. In the annual report to the stockholders for the year 1930 the company's policy was stated as follows:
"Rates should be constantly adjusted so as to yield only a fair and reasonable return on the value of the property devoted to the public use. This return should be sufficient at all times to attract new capital and to include a reward for efficient, enlightened, and honest management. Economies resulting from efficient management and from mergers, consolidations, and interconnections should be shared with the consumer in reduction of rates."
During the past 10 years alone, the system companies have reduced rates over $18,250,000 on an annual basis. If the accumulated effect of such savings to customers is considered, the total figure is increased many times. Not one year has gone by without a rate reduction in one or more companies in the system. With the exception of the war period, when U. G. I.'s earnings were materially decreased due to higher costs, rate changes have always been in favor of the
During that period, when other industries were operated at tremendous profits, the net earnings of the U. G. I. fell far below the pre-war level, its companies absorbing much of the increased costs rather than pass them on to the consumers through increased rates.
CORPORATE SIMIPLIFICATION It is the policy of U. G. I. to simplify, corporate structure. This has been carried out to a major extent wherever the law.permitted in the case of its operating companies. Within the last 5 years, over 50 companies have been eliminated from U. G. I. corporate structure and it is contemplated that 10 companies will be eliminated in the near future.
Mention has been made of the great difficulty of eliminating some of the sub holding companies, on account of outstanding guarantees of securities or other legal obstacles. None of these sub holding companies has been organized by U. G. I. for the purpose of giving more vehicles for obtaining capital without loss of control by dilution of voting power. They are, on the contrary, the result of U. G. I.'s constructive work in bringing properties together in geographical areas.
THE COMPANY AND THE WHEELER-RAYBURN BILL
The Wheeler-Rayburn bill, title I, section 1 (b), indicts the utility-holding companies on 13 counts. These indictments, with U. G. I.'s answers, are given herewith.
(1) Wide distribution of securities:
"The securities of such public-utility holding companies, subsidiary companies, and affiliates are sold to a large number of investors in different States."
Guilty.--Stock of U. G. I. is held in every State of the Union by large numbers of small investors. Some 48,000 stockholders—47 percent of the total-each has an investment represented on the books of the company at $265 or less, an average of $130.
(2) Such investors cannot obtain necessary information:
"Such investors cannot obtain the information necessary to appraise the finan. cial position or earning power of such issuers because of the absence of uniform standard accounts.'
Not guilty.—U. G. I. issues full information, in great detail, to its stockholders, to the stock exchanges, to investment services and manuals, to insurance companies, and to all other investors or prospective investors in its securities and those of its subsidiary companies. To quote from Standard Statistics Co., Inc.—"The company's accounts are gratifyingly informative and detailed."
(3) Such securities are issued without approval of the States:
"Such securities are issued without the approval or consent of the States having jurisdiction over subsidiary public-utility companies.
Not guilty.The Public Service Commission Act of Pennsylvania became effective January 1, 1914. Since that date, this company has filed with the commission certificates of notification on every issue of its securities. Since the amendment of the act, effective July 1, 1933, the Public Service Commission of Pennsylvania has full jurisdiction over the issuance of securities of this company.
(4) Such securities are issued on the basis of fictitious values:
“Such securities are often issued upon the basis of fictitious asset values and of paper profits from intercompany transactions and do not accurately reflect the sums invested in underlying public-utility properties."
Not guilty.--Every share of stock issued by this company in the 53 years of its history has been issued in accordance with the provisions of the Constitution of the Commonwealth of Pennsylvania that “no corporation shall issue stocks or bonds except for money, labor done, or money or property actually received.”
As evidence of the fact that the books of this company fairly reflect the sums invested in subsidiary companies' properties, there is no excess cost over the aggregate par or stated value of subsidiary companies' securities. On the contrary, on a consolidated basis December 31, 1934, the aggregate par or stated value of subsidiary companies' securities actually exceeded by about $3,400,000 net, the amount at which such securities were carried on the books of U. Ġ. I. and its subsidiary holding companies.
(5) Such securities are issued in anticipation of excessive revenues from subsidiaries:
“Such securities are often issued in anticipation of excessive revenues from subsidiaries which if realized would burden consumers, and the reduction of which, in the course of State regulation of subsidiary public-utility companies, would cause loss to investors who have been led to believe that such revenues are a legitimate part of the issuer's income.”
Not guilty. The only revenue which U. G. I. receives from subsidiaries, other than dividends and interest on advances, is for professional services actually rendered, such income for 1934 being $375,000, as compared to dividends and interest received from subsidiary companies of $23,725,000.
As the stock of this company accurately reflects the sums invested in underlying public-utility properties, it cannot be said to have been issued in anticipation of excessive revenues from subsidiaries.
(6) Such securities subject subsidiary companies to the burden of supporting an overcapitalized superstructure and prevent voluntary rate reductions:
“Such securities, when improvidently issued, subject subsidiary public-utility companies to the burden of supporting an overcapitalized superstructure to the detriment of investors and consumers and tend to prevent voluntary rate reductions, which over a period of time might promote a greater and more economic use of gas and electric energy and thereby strengthen subsidiary public-utility companies.”
Not guilty as outlined above with respect to securities and as shown on page 12 with respect to rate reductions.
(7) Subsidiary companies are subjected to excessive charges for services, construction, and equipment:
“Subsidiary public-utility companies are often subjected to excessive charges for services, construction work, equipment, and materials to the detriment of investors and consumers."
Not guilty. This has been answered as to services, which, when charged for at all, are billed at cost.
While much of the construction work of the larger subsidiaries is done by their own engineering forces, United Engineers & Constructors, Inc., in which to. G. I. has a 50 percent interest, does major construction work for such companies as well as general work for the smaller companies. Such work is done on an agency basis, with competitive bidding for materials, apparatus, and some items of labor. Since its organization, United Engineers & Constructors, Inc., has done twice as much work for outside utilities, railroads, and other industries as it has for the system companies. Not only is this varied experience of great value to l. G. 1. companies, but, furthermore, continuity of service, familiarity with l'. G. I. system companies, their policies and methods of work, facilitates prempt and intelligent planning and execution with a minimum of effort and expense.
U. G. I. does not sell equipment or materials to its subsidiary companies.
(8) Subsidiary companies enter into transactions without the benefit of arm'slength bargaining:
“Subsidiary public-utility companies often enter into transactions with a filiates in which the absence of arm's-length bargaining operates to the detriment of investors and consumers."
Not guilty.-There are no transactions entered into with subsidiaries which might operate to the detriment of investors and consumers. Substantially all subsidiary companies have their local boards of directors, representative of te consuming public, U. G. I. representation generally constituting not inore than one-third of the total board membership.
(9) Control of subsidiary companies restrains free competition in construction work:
“Control of subsidiary public-utility companies throughout the United States has often been used to secure to holding companies, their affiliates, and subsidiary construction companies a substantial part of all construction work for publicutility companies in restraint of free and independent competition in that field."
Not guilty. As already stated, the method of agency agreement on a fee basis allows the purchase of substantially all apparatus and materials on a competitive basis. Some 80 percent of total construction expenditures are obtained under competitive conditions, the other 20 percent consisting of items which cannot advantageously be undertaken except by force account through employees on the operating companies' pay rolls, but under the direction of the supervising agent. Public-utility construction work is inherently different from home,
apartment house, office building, and similar work, where it is quite feasible and desirable to contract for 100 percent of the work under competitive conditions. (10) Management contracts cannot be dealt with effectively by the States:
Service, management, construction, and other contracts involve the allocation of charges among subsidiary public-utility companies in different States and present problems of regulation which cannot be dealt with effectively by the States without the assistance of the Federal Government."
Not guilty.—Under the Public Service Commission Act of Pennsylvania every operating company must file with the commission a copy of any service, management, or construction contract which it has with any holding company or other affiliate, and must likewise cause such affiliate to file with the commission a fuil statement of its costs in connection with the performance of services under such contracts. Similar legislation in other States would completely protect the consuming public.
(11) Control of subsidiary companies affects accounting practices, rates, and other policies of such companies and obstructs State regulation:
"Control of subsidiary public-utility companies materially affects the accounting practices and rate, dividend, and other policies of such companies, thereby in many instances complicating and obstructing State regulation of such subsidiary companies."
Not guilty.--The accounting practices and rates of subsidiary companies are generally under the complete jurisdiction of the State public-service commissions, and are in no way affected by holding company control.
(12) Growth of holding companies bears no relation to the integration and coordination of related properties:
“The growth and extension of holding companies in many cases bear no relation to the economies of management and operation or to the integration and coordination of related properties but have been influenced by a desire for economic power and security profits and have tended towards the concentration and monopolization in a few holding-company systems of control of gas and electric utility companies to the detriment of investors, consumers, and the general public."
This does not apply to U. G. I.-Its entire history is one of development of its properties in geographical areas, and the disposal or turning into larger groups of scattered properties in the furtherance of this policy. It is true that there remain in the system a few small scattered properties, mostly gas companies, which U. G. I. has been unable to sell to the groups controlling the electric properties in the same territory. There are no other purchasers.
(13) The above abuses necessitate legislation to control and eliminate the holding company;
"The abuses above enumerated are so commonly associated with the activities of public-utility holding companies and have been so persistent and so widespread that they necessitate legislation to control and eliminate the holding company as an artificial corporate device inherently injurious to investors, consumers, and the general public.
Not as to ihis company.-If the full story could be written of the pioneer spirit, the risks undertaken, and the constructive policies followed by this company in the 53 years of its life, it would be an epic of our industrial history. Ù. G. I. service to the public, its constructive influence in the communities in which it operates, and its contributions to the gas and electric industry, have been such that its permanency in industry should be protected, not destroyed. Such a company cannot be labeled “an artificial corporate device inherently injurious to investors, consumers, and the general public.”
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), together with its stock in the integrated Delware companies, representing approxinately 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 $121,000,000 of other investments in noncontiguous territory to be disposed of. Of these, the largest interest is represented by $38,000,000 investment in the Connecticut Électric 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 operating companies in Connecticut, U. G. I. would still have its $38,000,000 investment, represented by a minority interest in such new company.
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.
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.
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 stock. holders, 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 exists the company's obligation 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, there are shown in chart form examples of the complications involved in the dissolution or reor ganization of this company and the distribution of its assets, particularly those of other holding companies which would themselves be in process of reorganization or dissolution.
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 equaled by the obstacles to efficient management imposed by the bill on the conducting of the business of a new “regional” operating company.
The interjection of regulation by Federal agencies would cover four phases of the system's business: Finance, business practices and methods, engineering, and rates and services to customers.
Finance. --All of the restrictions put on the corporate management of the existing type of holding company would continue on the new functional holding company organized under the bill.
Broadly, these restrictions apply to 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. The effect is subject to Washington jurisdiction what in many cases amounts, for all practical purposes, to intracompany business.
Business practices and methods.-To secure the economies of unified operation, it would still be necessary for the new 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.