This distinction between earned and capital surplus has been clearly made in books and published statements of the Engineers Co., and no dividends have been declared out of capital surplus.

(11) "Deceptive or illusory methods of dividing, or pretending to divide, earnings, or profits."

There is no complication or deception in the Engineers set-up and the rights of senior securities are clearly set forth.

(12) "Including imaginary (or 'putative') interest in construction costs of a public utility and counting it as a part of earnings.”

The company has never made "imaginary or putative" charges or included them in construction costs or in earnings. It has been the policy of including a proper charge to construction accounts for interest during construction, as provided in the standard classification of accounts and by certain State commissions. Such charges cease when the construction is completed. The propriety of the policy is attested by the regulations of the Federal Power Commission under whose jurisdiction one of the constituents, Puget Sound Power & Light Co., recently constructed a water power plant and made such charges.

(13) Deceptive or unsound methods of accounting for assets and liabilities, costs, operating results, and earnings, including write-ups, unrealized or fictitious profits, stock dividends, etc."

The company believes that it has an especially fine record with respect to the soundness of its accounting principles and practices and to the clarity and completeness of its reports. Attached is a copy of the last monthly statement and last annual report (exhibit H (p. 105) and exhibit I).

(14) "Corporate organization which gives powers inconsistent with a just division of responsibilities and emoluments as between various groups or parties furnishing capital by loan or by contribution, either directly or indirectly by purchase, succession, or otherwise."

Criticism is not warranted on this score except as to the voting powers of the preferred stock of the Engineers Co. This stock does not vote except after the default of eight quarterly preferred dividends in which case it is entitled to elect one less than a majority of the board of directors.

(15) "Issuing special voting or management stock giving control at small cost in order to promote the interests of selfish cliques, against the interest and safety of the general stockholders.'

We have shown that Engineers Co. owns practically all the common stocks of its subsidiaries and that there has been a substantial investment in such stocks. In no case is control held by a small investment.

(16) "Unsafe or mischievous methods of securing loans to the detriment of the lender."

Bonds of subsidiary companies are in general secured directly or indirectly by liens on physical property, and there have been no defaults on the funded debt. The Engineers Co. itself does not have funded debt.

(17) "Intercompany financing on a basis disadvantageous to operating company borrowers or lenders."

This matter has been fully covered in the foregoing text, particularly page 3. We feel that the company's policies in this respect are above reproach. (18) "Evasion of State laws in effecting sales of security issues."

The company has not indulged in such improper practices.

(19) "Effecting corporate reorganizations principally for the purpose of evading the payment of Federal income taxes."

The company has made no such corporate reorganizations and while, like any other taxpayer, it has attempted to keep its income taxes as low as is proper, it has not resorted to any improper practice to this end. A proper saving resulting from the filing of a consolidated Federal income-tax return in 1932 was mentioned on page 4 and is also more fully discussed on page 66 of exhibit C. The benefit of this proper saving from consolidation went largely to subsidiaries which, except through the holding company, could have made no such saving.

Two other criticisms of the holding company have been made which are not specifically included above. The first of these has to do with the complications of corporate structure, piling holding company upon holding company. Primarily this was done for the purpose of controlling a large company by a relatively small investment, and to that extent this criticism is answered in charge no. 1 above. There may, however, be criticism of the corporate structure of Engineers Public Service Co. (see corporate chart, p. 11 of exhibit I). It will be noted that there are 3 steps, in the worst case from an operating company to the Engi

neers Co., and the addition of Stone & Webster, Inc., makes 4. The following facts in regard to this situation should be noted however:

(1) That Engineers Public Service Co. did not set up any intermediate holding company. It acquired two companies which were primarily holding companies, namely, Eastern Texas Electric Co. (Delaware) and El Paso Electric Co. (Delaware), which were in existence years before Engineers was incorporated. (2) There is a specific reason in each case for the continuation of the complications existing in the present set-up, either through difficulties of State laws or through outstanding securities which cannot be easily and economically removed. Let us examine the case with the greatest number of steps existing in the Engineers system, namely, the case of the Missouri Service Co., which is a subsidiary of the Western Public Service Co., primarily an operating company. The latter, in turn, is a subsidiary of Eastern Texas Electric Co. (Delaware), a holding company which in turn is a subsidiary of Engineers Public Service Co. The Missouri Service Co. is a separate corporation because the laws of the State of Missouri require public-utility corporations operating in the State to be Missouri corporations; otherwise this business would be transacted by the Western Public Service Co. itself. The securities of the Missouri Service Co. are pledged under the mortgage of the Western Public Service Co., making it impractical to have the Missouri Service Co. as a subsidiary of either the Eastern Texas Co. or Engineers Public Service Co. The Western Public Service Co. is obviously a proper operating company. There is now no compelling reason for the maintenance of the Eastern Texas Electric Co. (Delaware), except the cost of removing the company. It has been the purpose of the Engineers Co. to eliminate this company for some time, and with this in mind the preferred stock of the Eastern Texas Co. was called in in 1931. However, there still remains the expense of transfer and other taxes necessary in the final removal of this company which are estimated at approximately $50,000. The Engineers Co. has not felt justified in making this expenditure since the cost of maintaining the company is small. Even if the Eastern Texas Co. were removed, we would have three steps to Stone & Webster, Inc. It should be noted that these steps were not created for the purposes covered in the 19 charges above, but were, rather, incidental results of the development of the Engineers system.

The second criticism not included above is objection to the size of the operations controlled. Mere size in itself is feared by certain people because they fear wide-spread wrongdoing on the part of large organizations whose policies may not be sound. We can only point out that the reverse argument is equally good— that when the management policies are sound, a larger company is a greater force for good to both the ratepaying and investing public.

RESULTS OF DISMEMBERMENT OF ENGINEERS PUBLIC SERVICE COMPANY

Proposed public-utility holding company legislation purports to eliminate all utility holding companies within a 5-year period.

Let us consider what effect such a policy would have with respect to the Engineers Co. The precise effect would depend on a number of circumstances at present indeterminate, including the nature of the final provisions contained in the legislation for this purpose. It is most logical that the common-stock interest would do everything in its power to preserve the value of what it has shown in this brief to be a very proper investment.

However, this report shows how 40 percent of the investment in the company was raised through the issue of stocks having a preferred position in liquidation and in dividends. These preferred stocks were issued in full conformity with accepted customs of the times and in compliance with the spirit of existing laws. The common-stock holders authorized the issue of these preferred securities in the full confidence that the Government would never attempt arbitrarily to destroy the system under which such a set-up was legally sound and proper.

If the only outstanding securities of the Engineers Co. were common stock, it would be relatively easy to distribute the holdings of the company. If, however, an attempt were made to sell, under present market conditions, the securities which constitute the assets of the Engineers Co. such a forced sale would undoubtedly produce less than $100 per share, to which the preferred stock is entitled in liquidation, thus completely wiping out the common stock. On the other hand, the owners of the common stock are fully entitled to believe that when the political upheaval antagonistic to holding companies has subsided, when all abuses in them have been made impossible, and when the announced policies of the administration to preserve the proper investment in sound operating properties has been

made effective, the common stock which they own, representing 60 percent of the investment, a large proportion of which was in cash, will have a substantial value. Knowing the propriety of their investment as indicated throughout this brief, they feel they have a just right to consideration in case of a forced distribution of Engineers assets.

Such a forced dismemberment of the company would cause a substantial economic loss to innocent investors in the preferred and common stocks of the Engineers Co. inimical to the national interest.

In addition, the elimination of the support of the Engineers Co. to its subsidiaries would be detrimental to their credit and would deprive them of many of the advantages shown in this brief, and would therefore be adverse rather than beneficial to the interests of the consuming public. For example, there can be no doubt that the senior securities of the Savannah Co. would suffer as a result of the withdrawal of the holding company support-the company might even be thrown into receivership through inability to obtain money to repay the Engineers Co. for its present loan, which would be necessary in case of dismemberment.

It is an established fact that the senior securities of all of the subsidiary companies have sold on a better basis because of the existence of the holding company, and we have already illustrated that this backing was more than an intangible thing-it was represented by actual loans to support the subsidiary and by investment in the common stock to give the senior securities more backing.

We believe that the removal of this support would again represent an economic loss and would increase the cost of service by our constituent companies over a period of time due to the increased cost of money.

SUMMARY

We conclude from the foregoing paragraphs that

1. The securities of the company were not improperly issued; that they were issued strictly in conformance with existing laws and for good consideration, including substantial amounts of cash; and that the preferred stock is now held by investors over a wide area, including 17 percent by trustees and fiduciary investors, and 20 percent by women.

2. The company has used large amounts of the cash it has reised, for both temporary loans to its subsidiaries and for permanent investment in the common stocks, thus furnishing substantial financial assistance to its subsidiaries in the development of service to customers and enabling the operating companies to obtain senior money more economically.

3. The company is furnishing at cost, through its central organization, many essential services to its subsidiaries making for sound and economical operation and for the promulgation of fair public utility principles.

4. The controlling policies of the company with respect to the rate-paying public, to its employees and to investors, both in subsidiaries and in the parent company, have been reasonably fair and sound.

5. The operating subsidiaries of the company, either singly or in groups, constitute geographically and economically integrated public utility systems. The ability of the Engineers Co. to furnish an investment medium more stable through diversity has enabled it to support the credit of its individual subsidiaries. This backing has provided these subsidiaries with capital needed to extend their lines into thinly populated areas and by reducing their cost of securing capital has made possible lower rates to their consumers.

6. The facts contained in the Federal Trade Commission report show that the company has been guilty of a few abuses such as are charged against the industry in general, and that when any such abuse has been recognized by the company, steps have been taken, wherever possible, to remove such abuse.

7. The dismemberment of the company would cause unnecessary loss to investors in securities of both the company and its subsidiaries, would constitute an unnecessary destruction of useful wealth, and would offer no advantage that could not be as well obtained by strict regulation. Neither would it be in the interest of the public served.

CONCLUSION

Engineers Public Service Co. is in existence. It was legally formed. Ninetynine millions of dollars have been invested in it, most of which was originally invested by those who were in no way affiliated in fact or in interest with the company. Both fairness and the welfare of the nation suggest that the Government encourage preservation rather than the destruction of this useful wealth.

The record of this company, as outlined above and as reported in the Federal Trade Commission's investigation, certainly does not warrant its destruction punitively or otherwise. Such destruction would serve no useful purpose. It would inflict needless and irreparable injury on many innocent investors and entail a needless economic loss. Such a course would serve notice on the Nation that any of its most respected traditions are subject to vengeful abrogation. Economic uncertainty would be fomented. Fairminded investors can accept philosophically losses resulting from changing conditions and even from injudicious management on the part of corporation officials, but naturally they would be panic-stricken at the idea of deliberate destruction through the actions of their Government. When they invest in any enterprise, they recognize the possibility of loss from changing conditions and feel that through governmental regulation authorities and courts, they can ameliorate the harm of injudicious management, but they recognize they have no defense against governmental destruction, and that all invested wealth would be subject to like treatment based on an important precedent that might be established in the present instance.

Engineers Public Service Co. does not intend to attempt to condone any past mistakes it may have made, nor would it wish in any manner to attempt to justify abuses or bad practices of which other holding companies might be guilty. Its officers are thoroughly convinced that abuses and bad practices must be corrected and then made impossible. We cannot have any valid objection to corrective legislation; on the contrary, we fully recognize our obligation to cooperate in arriving at effective legislation for the purpose of proper regulation of holding companies, but we feel it is our public duty to emphasize the undesirable and dire consequences of legislation designed to destroy.

Throughout the entire fabric of American business runs the holding company. The electric industry is not the only one affected by this device. If their very nature is iniquitous, holding companies should be eliminated from all business. Although in the past they might have been subjected to abuse, we believe we have shown that, nevertheless, they are capable of serving some very useful purposes. We hope that it will be agreed from the facts presented here describing the development of Engineers Public Service Co. that this company has rendered some real useful services to its constituent operating companies. If you think it has also erred, should not the legislation developed be designed to eliminate the improprieties and preserve for the public the possible useful functions of these companies?

No other nation is so adequately served electrically as is the United States. The enormous electrical development of the past two decades would never have materialized but for the holding company. The fact that these companies might have been used also for exploitation does not detract from the fact that because of them and in spite of glaring instances of exploitation they have caused this to become the best served nation electrically. The possibility of exploitation should certainly be removed, but their ability to advance the art should be carefully preserved.