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 utįlity 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 will be putting their money into something that has a claim on real earnings and real assets.

I mentioned, I think, the other day in testifying before another committee, a company in Hartford, Conn. They have only one class of stock. It is practically all owned in that community. It is common stock. There is no preferred stock and no debt. They keep up their plant. They look after their depreciation and they pay divi. dends, and their rate matters are settled with the local authorities. The management is elected by the shareholders, most of whom live in the community and are customers of the company.

If you go into another community hard by you will find the operation is by such and such a company. You look into it, and it is a mere paper company. The stock is owned by some intermediate holding company. From a service company in a distant city come people who operate it. They are transients; they are in and out. They have to come and go at the beck and call of the service company in the big system. There are no local directors there. If there are, they are appointed by the top holding company. There is no opportunity for the local people to buy into that property which they sustain. If they have a rate controversy they have to fight an empire, instead of dealing with that local property.

Senator WAGNER. Doctor, in your study did you come across any cases like the “ blue-sky” question, where a State has attempted to prevent the sale of any of the securities upon the ground that the values are fictitious?

Commissioner SPLAWN. I think that some States have had controversies with those companies in connection with write-ups. The difficulty there, Senator, is this, that the company comes up to the State regulatory authority with a record. It says, “ We have our sworn testimony”; or they put people on the stand who say that this property is worth 'so and so. The local people have nobody there, and there is no opposition. The State commission is frequently underfinanced, and has not a large enough staff to check on the record, and the Commission approves the application. I think it works that way. The State commissions wrestle with these problems most heroically. In the first place, a State commission is usually suffering from malnutrition. It is an undernourished institution. It cannot get enough money to have an adequate staff. They try to deal with a local operation and they find that operation running off through three or four companies to some head company with offices in another jurisdiction; and the people who really know about the property and the operation are in the service organization and they are out of the State at the time of the lawsuit. The people who are called in connection with the local company do not know of their own knowledge the facts, and it is very difficult for those State commissions to handle the local companies that are tied into these big systems.

Senator WAGNER. I suppose that is also true with respect to determining the real value of the services which the holding company renders?

Commissioner SPLAWN. I think so.
Senator WAGNER. On a rate-making basis?

Commissioner SPLAWN. Yes; and in reference to that matter I would like to put into the record a little exhibit which was prepared by the Federal Power Commission at my request. The holding companies claim that they have been reducing rates, that rates have been coming down for å generation. That,

in my judgment, has been due to the improvement in the arts, something that has gone on in the laboratories and independently of these holding companies. They do not carry on these experiments. I believe that if there had never been a holding company we would have had the very same improvements in the arts that we have had. The same people who are operating these companies and who are now employed by the service organizations would be operating them and the rates, according to this compilation by the Federal Power Commission, would be lower. That is, they find that the rates of the subsidiaries of the holding companies are higher than the rates of municipally owned plants. Of course, they will say that the municipally owned plant may pass part of the costs on to the taxpayers, then we naturally look to the little independent company that is not municipally owned and not folded into a holding company. This statement by the Federal Power Commission shows that these little independent companies are rendering service at lower rates than subsidiaries of holding companies. I believe that the holding companies are correct in the position that an integrated company can generate and distribute power for less than a small detached company; but according to this exhibit, the holding companies are able to retain those benefits to themselves; and in spite of all the benefits and blessings that they say they bring to these subsidiary operations in the way of financing, borrowing money when they need it, helping them get modern equipment, and all that, it seems that the consuiner, the customer, has to pay a higher rate than to the independent company.

(The exhibit referred to and submitted by the witness will be found at the end of today's record.)

Senator MINTON. Is it not true that this company that you referred to at Hartford, Conn., has a good rate history Its rates are low, are they not?

Commissioner SPLawn. That is my understanding, that they are not in any unusual controversy with the authorities over their rates, with the local authorities in Connecticut.

Senator LONERGAN. Do the consumers receive discounts at stated periods?

Commissioner SPLawn. Yes; I understand they do.

Senator LONERGAN. That is the way we do business up there, Doctor.

Commissioner SPLAWN. At Hartford ?
Senator LONERGAN. Yes.

Commissioner SPLAWN. I went to a school in that State when I was a boy. I greatly admire the thrift and foresight and determination of the people who made that little Commonwealth. The people in the community of Hartford, Conn., refused to trade during this epidemic of trading, when it looked like they were getting two dollars for one in exchanging one security for another security that carried twice the denomination. They refused to trade, and during the depression they have had dividends right along, while some of their friends who did trade out in other sections of the country are writing to you gentlemen at the request of the holding companies.

Senator LONERGAN. That reputation for fine qualities is found in all of New England. Senator White is here, and we want that to apply to all of the New England States, which it does.

Commissioner SPLawn. I think you will have no difficulty with the New England situation, insofar as carrying out the policies of this bill is concerned. Your difficulty is going to be with these great socalled “empires” that sprawl' all over the map, trying to own operations in from 10 to 30 States.

Senator LONERGAN. How many such companies are there in the country?

Commissioner SPLAWN. There are only about half a dozen of the very large ones, and there are a few that shade off and that have rather scattered properties. They are not so large and they will give you no particular trouble.

Senator LONERGAN. Did you study the subject of valuation when you were employed by the House Committee on Interstate and Foreign Commerce

Commissioner SPLAWN. And also when I was a member of a State commission.

Senator LONERGAN. What percentage of water is there in the stock structure of these large holding companies ?

Commissioner SPLAWN. The Federal Trade Commission found that the write-ups of the operating companies that they investigated were about 22 percent. That was $840,000,000. They found write-ups in the sub holding companies of $350,000,000; that is, of those that they investigated. I do not know what percentage that is of the total capital of the particular companies investigated. They can tell you. They found the write-ups in the top holding companies $273,000,000.

Senator WHITE. You have spoken of an integrated system. Just what do you mean by that? I think the legislation refers to a geographically integrated system, does it not?

Commissioner SPLAWN. Yes. An integrated system, as I understand it, Senator, is an operating company which owns its generation plant, its transmission lines, and its distribution companies.

Senator WHITE. What would this legislation do to a situation like this? In my community there are a great many cotton mills. I suppose in my home city there may be 15,000 employees in our cotton mills. Those cotton mills are owned by a power company. The power company derives its revenue from the sale of energy for both power and lighting and heating, I suppose. I take it that in the last few years all that it has been getting from the cotton mills has been reports in red ink. Suppose that that power company in turn is associated with or owned by some other organization; would this legislation bring about a breaking down of that structure?

Commissioner SPLAWN. It would depend on how extensive the operation of the subsidiary might be. If it is an independent textile company that generates power for its own industry and furnishes power for accommodation to its employees and the community around its plant

Senator WHITE. It is more than that. It is a power company. It sells power to the mills and it sells power to many others.

Commissioner SPLAWN. To a number of communities?

Senator WHITE. Yes; to communities and to other individual users.

Commissioner Splawn. If they have developed an operating company there it is evidently in a limited area and it would be a very simple matter to take care of a situation of that sort.

Senator WHITE. What has been suggested to me is that this legislation might go so far as to compel that power company to divest itself of its ownership, and then it is asserted that without the support of the power company these mills in my community would be closed.

Commissioner Splawn. If it is an operating company I do not think it would be touched by the bill.

Senator WHITE. It is an operating company, and yet it owns these mills.

Senator Minton. The pyramiding is in the other direction there.

Commissioner SPLAWN. If it is an operating company, one of these regional affairs, I think this bill would not reach it.

Senator WHITE. I wanted to find out, if I could, from some one.

Commissioner SPLAWN. I do not think that it would be reached by the holding company feature of Title 1. I do not believe it will.

Senator WHITE. I was in doubt about it.

Commissioner SPLAWN. If it is an operating company, even if it has these cotton mills there or other unrelated enterprises, it is not within this bill. If it is a holding company, holding operating companies and cotton mills, then the holding companies would have to split off.

Senator WHITE. Let us assume it is a company that both owns and operates cotton mills; it owns and operates electric plants; and let us assume, also, that it is simply a holding company with respect to other operating electrical plants. Let us assume it has that threeheaded form; what would happen to it then?

Commissioner SPLAWN. Insofar as it is a holding company, holding electrical operating companies and cotton mills, it would have to dissociate as a holding company the holdings of the two of them, but the operating company could own the cotton mills. I think that is a very local situation, is it not, Senator?

Senator WHITE. It is a local situation, but it is giving a good deal of concern to people.

Commissioner SPLAWN. I think that there may be several such situations as that. I think you can take care of them without having to leave in existence all these mushroom corporations that have been superimposed on these electrical operations.

Senator WHITE. I did not mean in the questions that I asked to indicate hostility to the ultimate purpose of the legislation, but I wanted to find out if I could, just what the effect of this legislation would be on such a company.

Commissioner SPLAWN. As you have described it, I cannot see why a clarifying amendment could not be put into the bill.

Senator LONERGAN. How many holding companies have we in the country, Doctor?

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