Comparative income statement of Engineers Public Service Co. (parent company only)-Continued

Represented by 158,080 shares, $5 (cumulative) dividend convertible preferred; 196,932 shares, $5.50 cumulative dividend preferred; and 75,000 shares, $6 cumulative dividend preferred, of no par value (entitled in liquidation to $110 per share if voluntary, otherwise $100 per share). Total preferred stock authorized, 431,000 shares.

Represented by 1,909,817 shares (1933, 1,909,800) shares) of no par value. Authorized, 2,349,000 shares. Notes payable to banks secured by pledge of stock of a constituent company.

• Before provision for cumulative dividends not declared, including those normally payable on:

$5 (cumulative) dividend convertible preferred, $7.50 (1933, $2.50) per
share...

$5.50 cumulative dividend preferred, $8.25 (1933, $2.75) per share..
$6 cumulative dividend preferred, $9 (1933, $3) per share..

Total......

Contingent liability: This company has agreed to furnish funds sufficient to meet any deficiency in payments of sinking fund, interest, principal, and/or other mortgage requirements for $2,732,000 principal amount of first-mortgage 6-percent bonds due 1939 of Louisiana Steam Generating Corporation, a constituent company.

NOTE.-There are outstanding common-stock purchase warrants, which were originally issued attached to certificates for the $5.50 cumulative dividend preferred stock, to purchase 196,932 shares of common stock at $68 per share on or before Nov. 1, 1938.

Comparative consolidated income statement of Engineers Public Service Co. and constituent companies

'Income from miscellaneous investments, also $514.37 (1933, $168,221.14) interest on funds for construction purposes.

Equal to 11.1 percent (1933, 11 percent) of gross earnings. These amounts have been appropriated to provide a reserve (see retirement reserve account in balance sheet) against which property retirements will be charged as they occur. The amounts so appropriated are less than the depreciation deductions claimed or to be claimed on Federal income-tax returns which are based on a straight-line method.

Dividends not declared by certain constituent companies of which $1,567,333.91 was not earned by those companies. This amount, which has been deducted in the above statement, however, is not a claim against either Engineers Public Service Co. or its other constituent companies. Eliminating this unearned amount and adjusting for minority interest and intercompany eliminations would increase the balance applicable to Engineers Public Service Co. by $1,556,643.60.

• Deficit.

During a period averaging about 29 years for which records are available, the companies in the Engineers group have expended for maintenance a total of 9.1 percent of their entire gross earnings for the period, and In addition have set aside for reserves or retained as surplus a total of 9.9 percent of such earnings after allowance for cumulative preferred dividends not declared.

Comparative consolidated balance sheet of Engineers Public Service Co. and constituent companies.

Represented by 158,080 shares, $5 (cumulative) dividend convertible preferred; 196,932 shares, $5.50 cumulative dividend preferred; and 75,000 shares, $6 cumulative dividend preferred, of no par value (entitled in liquidation to $110 per share if voluntary, otherwise $100 per share). Total preferred stock authorized 431,000 shares.

Represented by 1,909,817 shares (1933, 1,909,800 shares) of no par value. Authorized 2,349,000 shares. Excludes $9,670,500 (1933, $11,529,000) bonds held in sinking funds, escrow, and treasury, uncanceled, $1,990,000 (1933, $4,527,500) including $1,750,000 bonds pledged as security for a portion of notes payable to banks and $240,000 deposited as security for the performance of certain contractural obligations; $22,190,000 (1933, $4,950,000) pledged as security under indentures securing bonds outstanding in the hands of the public. Excludes $80,500 (1933, $80,500) coupon notes held in treasury, uncanceled.

Includes $1,275,000 (1933, $3,425,000) notes secured by pledge of stock or bonds of constituent companies. Before provision for cumulative dividends on preferred stock of Engineers Public Service Co. not declared, $3,485,289 (1933, $1,161,763.).

Excludes surplus of constituent companies accumulated prior to acquisition in the amount of $8,541,785.21 (1933, $8,541,690.79).

NOTE.-Engineers Public Service Co. has outstanding common-stock purchase warrants, which were originally issued attached to certificates for the $5.50 cumulative dividend preferred stock, to purchase 196,932 shares of common stock at $68 per share on or before Nov. 1, 1938.

There are also contingent liabilities of certain constituent companies for possible claims for additional Federal income taxes for the years 1930 to date in excess of claims for refunds which have been filled and for $7,071.20 resulting from the endorsement of a note by Baton Rouge Electric Co.

MEMORANDUM ON CERTAIN PRACTICAL AND LEGAL ASPECTS OF THE DISSOLUTION PROVISIONS OF THE PUBLIC UTILITY FOLDING CO. BILL OF 1935

I. INTRODUCTION

The proponents of the public-utility bill have prepared and widely disseminated various arguments in support of this bill, the purposes of which arguments are three-fold: First, to charge the utility and banking interests and the press with circulating unfair publicity playing upon the fears and calculating to mislead the public in regard to the effect of this bill on investors; second, to summarize the abuses alleged to have existed in certain situations in various forms (consisting mainly of three types, (a) the issuance of unsound securities by holding companies, (b) burdensome contracts and practices imposed by holding companies upon affiliated interests, and (c) unwarranted concentration of control) and to undertake to lay the foundation for the bill on the proposition that the bill helps and does not hurt the operating companies; and, third, to present legal theories to support the contention that the bill in its present form may be adopted and made effective without injury to investors.

Insofar as the charge of unfair publicity is concerned, we believe that this committee will appreciate the anxiety with which the companies affected and the investing public have viewed this proposed legislation. It is clearly based upon a policy of destruction of utility holding companies and Federal regulation of utility operating companies extending far beyond any measures which have heretofore been adopted in comparable situations, such as railroads, telephones, and other types of public-service regulation. We submit that it is the right and duty of the industry to inform its investors as to the contents of the measure as proposed. We have had no basis on which to inform the public except to take the bill as submitted and point out the meaning of the language used and its probable consequences on the industry.

Insofar as the arguments deal with the substance of the abuses alleged to exist, nothing new is presented by the proponents. These are the same charges, by and large, which have been made during the last several years in connection with the Federal Trade Commission investigation. That there have been abuses in certain situations, there appears to be no doubt. The evidence presented to this committee shows that, in some of the companies, probably none of the alleged abuses has existed to any considerable degree; in most of the companies, only a few of the abuses have existed; and rarely has it been shown that all or the greater part of the alleged abuses have existed in any company. To the extent that any real abuses do still exist, the industry itself desires that they be eliminated. The industry is entirely content to leave to the sound judgment of this committee and of the Congress the adoption of appropriate measures designed to prevent a recurrence of the alleged abuses based upon the evidence submitted rather than upon the theories of the proponents. It is sufficient to say that it has been clearly shown that, with adequate enforcement of the laws now in effect, State and Federal, and with such supplementary legislation as the Congress may deem necessary or desirable and with regulation as the objective rather than destruction, all of these abuses can be prevented in the future.

The declared policy of the bill is to eliminate these alleged abuses, (1) by abolition of the public-utility holding company and (2) by strict Federal regulation of the operating companies. If legislation of a different character can be provided which will fully and effectively regulate the industry and prevent a recurrence of the alleged abuses but with a minimum of loss to consumers and investors, there can be no valid reason for adopting the abolition policy set out in section 11. Moreover, when the proponents of this bill, now for the first time, make the bold assertion, and propound legal theories in support of it, that the abolition provisions of this bill may be adopted and made effective without injury to investors either in operating companies or in the holding companies, then it is time that we stop and consider whether these suggestions are sound and whether they are in fact supported by experience in other fields of regulation.

At the threshold of any consideration of the dissolution provisions of this bill, grave constitutional questions are presented as to whether the Congress has power to require disintegration of holding companies, but for the purpose of this memorandum it is assumed that Congress has such power.

The purpose of this memorandum is to examine the suggestions of the proponents in the light of the provisions of the bill. As a basis for such consideration it may be well to restate in summary terms the dissolution provisions of the bill.

II. THE DISSOLUTION PROVISIONS OF THE BILL

The program for disintegration of holding companies laid down by the bill proceeds in three distinct steps. As the first step, it is made unlawful by section 8 (a) of title I for any holding company to have any interest, on and after January 1, 1937, directly or indirectly, in any business other than the gas and electric business, with certain minor exceptions. By paragraph (b) of the same section it becomes unlawful, on and after January 1, 1937, for any holding company which is interested directly or indirectly in electric-utility companies to have any interest, direct or indirect, in any natural-gas company. Paragraph (c) of the same section makes it unlawful, on and after January 1, 1937, for any holding company interested in properties within the United States to be interested in companies organized or doing business outside of the United States, and certain further restrictions are imposed by paragraph (d) of the same section.

The second step begins on January 1, 1938, at and after which time the Securities and Exchange Commission is directed (by section 11 (b) (2)) to require every holding company to dispose of any securities or capital assets whenever it appears to the Commission that the continued ownership or control thereof by such company is not necessary or appropriate to the operations of a geographically and economically integrated public-utility system. By subparagraph (3) of the same paragraph the Commission is directed, from and after January 1, 1938, to require any holding company or subsidiary thereof to be reorganized or dissolved whenever it appears to the Commission that the corporate structure or continued existence of any such company unduly or unnecessarily complicates the structure of the public-utility system of which it is a part or is detrimental to the subsidiary companies thereof or to investors or consumers, with a proviso that the Com ission may defer such action to a time not later than January 1, 1940, if it considers that earlier action "would cause unnecessary injury to investors or consumers". There is no such proviso applicable after January 1, 1940. It is evident that the framers of the bill expect that there will be injury to investors.

The third and final step in the program laid down by the bill is that, immediately after January 1, 1940, the Commission is directed by section 11 (b) (4) to require every holding company to dispose of its securities or to be reorganized or dissolved insofar as may be necessary to make every such company cease to be a holding company. This mandate is subject to only two exceptions of limited availability and in each case within the discretion of the Commission (a) if a certificate is obtained from the Federal Power Commission that "the continuance of the holding company relation is necessary for the operation of a geographically and economically integrated public-utility system serving an economic district extending into two or more contiguous States or into a contiguous foreign country" and the merger of such holding company with its subsidiaries is impossible under the local law, and (b) if neither such holding company nor any of its sub-. sidiaries is organized or doing business within the United States. One further exception may be available under section 4 (c), which authorizes the Commission in its discretion under certain circumstances to exempt from registration a holding company engaged in exclusively intrastate business in the State where it and all of its subsidiaries are organized.

No clear definition has been offered of what is a geographically and economically integrated public-utility system. No economic justification for such a restriction has been suggested, and it ignores the recognized advantage of investment diversification. Whatever such a system may be, moreover, the exemption will not apply unless for the accidental fact that a merger happens to be prohibited by State law. It seems evident, therefore, that this exemption will be of limited availability, and the proponents of the bill do not present a fair picture when they speak of "a little rearrangement" as being sufficient to satisfy the bill. It is obvious that the other two exceptions have very restricted application. The purpose of the bill is unquestionably to force a general abolition of holding companies under the compulsion of the Commission.

In order to assist it in carrying out this mandate the Commission is authorized by section 11 (c) to apply to a court to enforce compliance with any order made by it. The court is directed, upon any such application, to take possession and exclusive jurisdiction of such assets of the company wherever located as may be held in contravention of such order, or, in the case of any order for reorganization or dissolution, of all assets wherever located, without limitation, and is also directed to appoint the Commission as sole trustee to administer such assets. The Commission is authorized with the approval of the court to dispose of any of such assets and to do so only in accordance with a reorganization plan which shall have been approved by the Commission. Such a plan may be prepared