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From this brief discussion I believe you will see that the holding company is essential to the proper functioning and growth of the utility industry. If the holding companies are destroyed, the weaker operating companies will be driven into bankruptcy and the remaining companies will be seriously crippled and deprived of their only economical means of growth. If the holding companies are permitted to maintain only a nominal existence but with their powers of management and control over their operating subsidiaries impaired or destroyed, the results will be almost equally disastrous. In either event ruinous losses will be inflicted upon millions of innocent investors in the securities of both holding and operating companies, and the process of recovery will suffer an immediate and staggering reverse.
In all the discussions which have taken place before this committee, and in all the reports which have been submitted to it, no proponent of this bill has attempted to say why all holding companies must be destroyed or dismembered, or deprived of their essential powers, in order to remedy the absues which have developed in a few of them. No one has ever pretended to say why proper regulation and control would not cure every evil charged against any of the companies.
To those of us in the utility business, who know what the soundly organized and managed holding companies have accomplished and how necessary they are to the health and growth of the industry, it is inconceivable that this committee, in the face of the evidence which has been presented to it, will recommend for passage those sections of title I which would destroy the holding companies or fatally cripple them.
In the belief that the committee will desire to preserve the holding companies, with the powers essential for their proper service to the industry, but subject to such regulation and control as will prevent abuses, I suggest the following revision of title I in the best interests of both consumer and investor. Since I am not a lawyer, my suggestions will be confined to matters of general substance, without any attempt to indicate the form of the revision.
1. Strike out all provisions which call for the destruction of the holding companies, or for their dismemberment into single "geographically and economically integrated systems”, or for the destruction of their essential powers of control over their operating subsidiaries.
2. Define an operating company as a company whose principal business is the furnishing of gas and/or electricity and whose principal income is derived from its furnishing of gas and/or electricity. Define a holding company as a company which controls an operating company or companies through the ownership of a majority of the voting stock therein, such ownership being either directly in the holding company or in one or more of the holding company's subsidiaries, or agents. Define an intermediate holding company as a company whose principal income is derived from its ownership of the securities of another company or companies, and which is a subsidiary of a holding company or an intermediate holding company, and which in turn has either an operating company or companies or an intermediate holding company or companies, or both, as its subsidiary or subsidiaries. Define a subsidiary as a company the majority of whose voting stock is owned by a holding company either directly or through one or more of such holding company's subsidiaries or agents.
3. Give the Federal Securities and Exchange Commission the power of regulation and control over the organization, corporate structure, security issues and accounting of the holding companies and their subsidiaries substantially as follows:
(a) Give the Commission the power to force the simplification of the existing holding-company systems by requiring, under reasonable regulations and limitations of time, the elimination of such intermediate holding companies as serve no proper purpose, particularly those intermediate holding companes which have no immediate operating subsidiaries and which are designed merely to concentrate control in the hands of the holders of special and limited issues of voting stocks, without substantial investment in the junior capital needed and used in the operating system.
(b) Require all holding companies to register their securities with the Commission, whether they are listed on a recognized stock exchange or not, and require all holding companies to have the word "holding.” in their corporate names.
(c) Provide that no additional securities may be issued by any holding company or intermediate holding company without the approval of the Commission, and that no additional securities may be issued by an operating subsidiary of a holding company without the approval of the Commission, unless such issue has been approved by a State commission having jurisdiction over the operating company In this connection, companies which are primarily operating companies, with their security issues regulated by State commissions, should continue to be treated as operating companies under State commission regulation, and not as holding companies under additional Federal regulation, even though they incidentally hold some stocks of subsidiaries. Give the Commission the specific power to require that all new stocks issued, except true preferred stocks, shall have the same voting rights as all outstanding stocks, in proportion to their par or declared values, and that all now outstanding, stocks, except true preferred stocks, shall have voting rights in proportion to their par or declared values. I do not believe it is wise to lay down an absolute requirement that true preferred stocks, which have real preference and security over common stocks which have provided the capital subject to the greatest risk, shall have equal voting rights with such common stocks. But I do not believe that there would be any vital objection to vesting in the Commission the power to require such voting rights, in its discretion, when approving the issue of new preferred stock.
(d) Provide that no holding company may purchase the stock of another holding company or intermediate holding company except with the approval of the Commission, and that no director or officer of a holding company may be an officer or director of another holding company, or of an intermediate holding company in a different holding-company group. This will prevent the so-called "alliances and interlocking directorates” between holding-company groups which have excited so much popular suspicion.
(e) Provide that no holding company or intermediate holding company may purchase the securities of an operating company unless the operating company is a subsidiary of such holding company or intermediate holding company, without the approval of the Federal Commission, or of the appropriate State commission.
) Provide that holding companies now owning minority voting stock, interests in other holding companies, or in the subsidiaries of other holding companies may be required by the commission to divest themselves of such stock interests, or may be forbidden to vote such stocks, when the commission finds that such stock holding or voting is detrimental to the public interest.
(g) Prohibit the use of operating-company employees in the sale of holdine. company or intermediate-holding-company securities.
(h) Give the Federal Commission the power to set up a uniform system of accounting for holding companies. Provide that holding-company books shall be open to inspection by both State or Federal Commissions and that periodic information along the lines of form 10 under the Securities Exchange Act shall be given out by all companies, whether listed on a recognized exchange or not.
(i) Provide that upon the request of any State commission, the Federal Commission shall have the right to investigate the accounts and records of any holding company or intermediate holding company and report their findings to the State commission making the request.
6) Provide that all management and service contracts shall be subject to the approval of the Federal Power Commission, except where they are approved by a State commission having jurisdiction of the operating company, such contracts to be without profit where the holding company or intermediate holding company rendering the service owns 90 percent or more of the common stock of the operating company, and in cases where less than 90 percent of the common stock of the operating company is so owned, such service shall be performed at no more than a reasonable profit and in no event for any sum in excess of the fair value to the operating company or that for which similar service can be secured elsewhere.
(k) Prohibit the making of upstream loans by any operating company unless specifically approved by the State regulatory commission having jurisdiction of the operating company, or in cases where there is no such State jurisdiction, unless specifically approved by the Securities and Exchange Commission.
(1) Provide that no operating utility which is a subsidiary of a holding company may issue new securities except with the express approval of the commission having jurisdiction in the State in which such utility company operates; if State laws do not provide for such State commission approval, then such securities may not be issued without the express approval of the Securities and Exchange Commission.
(m) In all holding-company systems, require that the majority of the directors of each operating company and the principal officers of such operating company shall be residents of the territory served.
I believe title I of the bill should be confined in substance to the provisions necessary to give effect to the regulations suggested above.
I believe title II of the bill should be confined to such provisions as are necessary to vest in the Federal Power Commission the authority to regulate the rates
charged for electric power transmitted interstate, where the commissions in the States concerned do not have the power to regulate such rates. Where there are authorized commissions in the States concerned, I believe the Federal Power Commission should have authority only to participate in such regulation by designating one of its members to sit on a special commission composed of three members, the other two to be designated by the States concerned.
My reasons for this belief are briefly as follows: The amount of power trangmitted interstate and not already subject to State control is negligible, a very small part of the power consumed in the United States. Electric utilities are essentially local concerns and are not in any important degree agencies of interstate commerce. No Federal agency should be set up and vested with any such broad regulatory powers as are now provided in title II because it would inevitably oust the States from control of matters essentially their own, it would impose a uscless burden of expense upon the taxpayers and upon the power consumers, and it would unnecessarily complicate utility regulation through duplicating, overlapping, and conflicting controls. Finally, the regulatory provisions of title II are 80 extreme and burdensome in character that they would prevent the utilities from exercising the necessary managerial control of their own properties, and would inevitably lead to Government ownership and operation.
The companies in the American Water Works & Electric System are not concerned with title III of the bill and I therefore make no comment on it.
In order to show some of the different types of companies which afford a background for the suggestions I have made, and to illustrate the special problems they present, I am adding to this letter a brief statement and a chart, describing the American Water Works & Electric Co. System. Very respectfully submitted.
H. HOBART PORTER, President. MARCH 30, 1935.
AMERICAN WATER WORKS & ELECTRIC Co., Inc. American Water Works & Electric Co. is a holding company. It controls directly through ownership of approximately 100 percent of their voting stocks over 40 water works companies serving various municipalities in 16 States, including Birmingham, Chattanooga, East St. Louis, South Pittsburgh, Little Rock, St. Joseph, and Clinton, and indirectly three electric light and power companies, the West Penn Power Co., Monongahela West Penn Public Service Co., and
the Potomac Edison Co., through ownership of approximately 95 percent of the voting stock of the West Penn Electric Co.
The American Water Works & Electric Co. was organized in 1914 to acquire the public-utility properties, water-supply and electric, owned by the predecessor company. Most of the waterworks companies had been in the system for more than 25 years, and the electric properties, which were located in the district immediately surrounding Pittsburgh, from the time of their organization.
THE WEST PENN ELECTRIC CO. The Federal requirements during the war for increased power supply to the heavy manufacturing industries surrounding Pittsburgh resulted in a vast exp3sion of the properties of these electric companies and led to the conclusion that the interests of the public would ultimately require the creation of an extended but interconnected system irrespective of State lines. This policy resulted in the acquisition of the electric properties in the portions of western Pennsylvania, western Maryland, northern West Virginia, and to some extent in Ohio and Virginia. The appended map shows the extent of this interconnected electric system.
To accomplish this purpose and secure the cheapest financing and the best operating results, the then-existing intermediate holding company, which had been created prior to 1914, was transformed into the West Penn Electric Co., which today owns or controls substantially all of the common stock of the various electrie properties. It has outstanding in the hands of the public $5,000,000 of debentures and approximately $35,000,000 of preferred stock, the proceeds of the sale of which have been used for the benefit of the subsidiary properties.
The outstanding functions of this utility holding-company system, like those of all properly organized and conducted holding-company systems, are two-fold: The development of economical and efficient group management, and the provision of an instrumentality through which the rapid increases in necessary capital could be provided for the development, extension, and improvement of the service to the public.
The paramount duty of a public-utility company is to furnish the most reliable service to the greatest possible number of consumers at the lowest cost. To accomplish this there must be far-sighted planning as, by the very nature of the business, the facilities for growth must be arranged for long in advance of the demand. There must be a sound corporate structure which will enable those charged with the financial direction of the company to obtain unlimited supplies of money at all times at the lowest interest rates, and the operations of the company must be carried on with the greatest economy. So far as the electric utilities in our system are concerned, all of these necessary and important functions have been applied through the intermediate agency of the West Penn Electric Co. Its only function at the present time is the holding of the stocks of the operating properties. It receives such earnings from them in the form of dividends and interest as they are permitted to earn by the respective public service commissions in the States served, and after paying interest and dividends on the abovementioned debentures and preferred stocks, any balance may be declared as dividends to the American Water Works & Electric Co.
I cannot close this brief description of the American Water Works & Electric Co. System without pointing out the totally destructive character of the liquidation threatened by the pending bill, as respects my company and all similar holding companies, and the resultant utter wiping out of investments in the equity securities of these companies, which have real present value. In this respect, American Water Works & Electric Co. is in no different situation from any other holding company which has bonds, preferred and common stock of its own and intermediate holding companies in the hands of the public. Liquidation will force payment of the bonded debt, and forced liquidation, as is always inevitably the case, will mean enormous losses to investors in junior securities. It is no answer to this to say that the bill provides that under certain circumstances certificates may be issued by some Federal commission permitting the holding company continued temporary existence. No holding company could continue to function under such a threat of dissolution, and the value of the equitv securities in the hands of the investors would enormously shrink and probably entirely disappear.