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PUBLIC UTILITY HOLDING COMPANY ACT OF 1935

THURSDAY, APRIL 18, 1935

UNITED STATES SENATE,
COMMITTEE ON INTERSTATE COMMERCE,

Washington, D.C. The committee met, pursuant to adjournment on yesterday, at 10 a. m., in room 412, Senate Office Building, Senator Burton K. Wheeler presiding.

Present: Senators Wheeler (chairman), Donahey, Bone, Minton, Truman, Moore, Hastings, White, and Shipstead.

The CHAIRMAN. The committee will please come to order. You may proceed, Mr. Corcoran.

STATEMENT OF THOMAS G. CORCORAN, COUNSEL, RECONSTRUC

TION FINANCE CORPORATION, WASHINGTON, D. C.

Mr. CORCORAN. Mr. Chairman and gentlemen of the committee, my name is Thomas G. Corcoran. I am counsel of the Reconstruction Finance Corporation.

Mr. Chairman, you have asked me, as I understand it, to describe in general terms the effect of title I of the bill, S. 1725, this morning.

This bill was drawn in two parts. Title I relating to holding companies, was drawn at the instance of the National Power Policy Committee. In testifying before you this morning I understand the request came because I cooperated in the drafting of the bill. Title II of the

bill, relating to the control of wholesale rates and certain other matters in connection with interstate transmission of electricity by operating companies was, I understand, drawn at the Federal Power Commission, and Mr. DeVane, of counsel for that Commission, will testify this afternoon about the general application of that title of the bill.

As I have said, title I of the bill, which relates to holding companies, was drawn by the National Power Policy Committee. Dr. Splawn, at present an Interstate Commerce Commissioner, who testified before you on Tuesday, and who was as you know once a utility commissioner in Texas, spent approximately 3 years for the Interstate and Foreign Commerce Committee of the House of Representatives investigating this holding company situation. Colonel Chantland, who testified before you yesterday, is counsel for the Federal Trade Commission, which spent approximately 7 years investigating the ramifications of the public-utility industry, which really means the holding company situation. The Federal Power Commission has made several studies on its own initiative concerning the relationship of the holding-company problem to the public-utility problem generally.

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Last fall the President appointed a committee, an interdepartmental committee, composed of those persons in each department of the Government concerned with the power problem who knew the most about the problem, to consider what should be done in the way of definite recommendations to Congress on the holding-company problem as a result of all these investigations.

I think there has been laid before each member of the committee a copy of the report of that interdepartmental committee. It is attached to the message of the President of the United States, a message which the President sent to Congress on this bill in the form of a transmittal of the report of that committee.

On page 12, at the end of the report, you will find the names of those who were the members of that interdepartmental committee. There is Mr. Ickes, the Secretary of the Interior; Mr. McNinch, the Chairman of the Federal Power Commission; Mr. Mead of the Reclamation Bureau; Mr. Norcross of the Forest Service; Mr. Morris L. Cooke, who has for many years been a consulting engineer in the electrical field; Mr. Healy, formerly a member of the Federal Trade Commission, who initiated and conducted most of the investigations about which Colonel Chantland testified before you yesterday, and who is now a member of the Securities and Exchange Commission; Mr. Lilienthal, to whom has been peculiarly committed the power problems of the Tennessee Valley Authority; and Mr. Markham, Chief of Army Engineers.

A good many members of that committee, as you will see, are members who have served in more than one administration, and the committee as a whole can in no way be described as a radical or a Bolshevik committee.

The CHAIRMAN. That is supposed to fall to the lot of Senators and not members of the Cabinet or their assistants?

Mr. CORCORAN. My mistake.
The ChairMAN. You may proceed.

Mr. Cohen was chosen as general counsel of that committee. I was asked to cooperate with Mr. Cohen in the drafting of the bill.

This bill was drafted and then submitted to the National Power Policy Committee. It was in process of drafting nearly 5 months. It has been probably prayed over as much as any bill that has been brought up to Congress in a long time.

The CHAIRMAN. Do they pray over them down there?
Mr. CORCORAN. Well, you might say so in this case.

Senator WHITE. They may pray over them down there, but we have to do more than pray over them up here.

Mr. CORCORAN. After the bill had been worked out in a form satisfactory to the National Power Policy Committee, as you may probably know, there were two conferences with members of other organizations in the Government, and with leaders in the Senate and the House; and then after that the bill was sent over to the Attorney General of the United States, or to a committee headed by the Attorney General of the United States, to make sure that there was no question of its unconstitutionality and to make sure that the bill as drafted carried out what was conceived to be the President's policy.

The CHAIRMAX. I take it, Mr. Corcoran, after they get the approval of the Attorney General there could be no question about it.

Jr. CORCORAN. After all that checking and cross-checking, the bill was introduced in both the Senate and the House in substantially identical form.

There has been placed before each member of the committee an analysis, section by section, of this bill, S. 1725. That is, I mean of title I of the bill. As I have said, Mr. DeVane will testify this afternoon and will provide you with an analysis of title II of the bill.

This analysis of title I of the bill was originally prepared for the House Committee on Interstate and Foreign Commerce before their hearings started, and before the hearings started before this committee.

There is a difference between the House and the Senate in the numbering of sections of the bill by reason of the fact that in the House committee the short title was switched to the end of title I instead of at the beginning, so that each section in the Senate bill has a number that is one higher than the corresponding section in the House bill. This analysis has been worked out carefully, section by section, with the policy of each section carefully outlined under the section head.

When the National Power Policy Committee went into this holding-company situation it started with the fundamental underlying operating industry, which as Commissioner Splawn testified before you on Tuesday, is fundamentally a local industry.

It is a legal monopoly, relieved from the check of competition by reason of special grant of the local government. A tremendous amount of the confidence which the public has in public-utility securities is based upon the supposition that local regulation, justified by the fact of that monopoly, protects the industry so that it will be a stable industry, with stable earnings, and stable management.

From the scientific point of view, as Commissioner Splawn pointed out to you on Tuesday, there is no reason why the operating industry should be organized on anything more than a local scale. As he testified, at the present time the feasible limit of transmission of power over a high line is about 300 miles, and there have been, recently, improvements in Diesel generating equipment that make it very doubtful whether it is economical or is going to be economical in the future, to use a high line even for such distances.

The CHAIRMAN. I had understood that there had been recently perfected an invention, or that there were patents for equipment which will make it possible to carry the power farther than that economically. Is there anything to that?

Mr. CORCORAN. Well, I am not an engineer, but-
The CHAIRMAN (interposing). I understand.

Mr. CORCORAN. And I suppose engineers will testify before you; but I understand there are possibilities that through the use of direct current you can transmit for distances possibly longer than that, I mean distances greater than 300 miles. On the other hand, there is cutting in on that the possibilities of a remarkable development of the Diesel engine, which, particularly in rural communities, or in immunities where the load is not too high, may replace the high line altogether.

I know something about that because I have worked on the problem of rural electrification and the problem of supply to isolated areas.

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There is doubt whether it would be wise to consider tapping existing high lines, or whether small Diesel generating units should be used for specific areas.

The CHAIRMAN. In addition to the fact that electricity, or power, is a natural monopoly; and in addition to the fact that they have regulation of them which is supposed to justify them in expecting a fair return on their investment, there was also a thing that attracted investors in the shape of the growing demand for and the use of electricity for various purposes throughout the United States.

Mr. CORCORAN. That is true, Mr. Chairman. I was going to touch upon that in just a minute. The CHAIRMAN. All right.

Mr. CORCORAN. I have just been handed a note in which I have been reminded that Mr. Harriman, president of the United States Chamber of Comemrce, formerly an owner and operator of the New England Power Association, up in the New England States, testified before the House Committee on Interstate and Foreign Commerce that he did not think long-distance transmission was important practically or commercially today beyond a 200-mile limit.

We are going into this situation where the operating power industry is just at the threshold of another great development. I have here a chart, taken from the New York Times, showing what the electric-power output is now, as compared with 1929. Using their own index figure, power output registered 105 for the peak of the output in 1929, and we are back to 103 today. Electric power production is moving up faster than any other evidence of recovery.

And you will remember that in the last few days the Federal Power Commission has put out a survey of what it calls power deficiency in the United States. In view of present actual demand and what can be immediately forecast, the areas in red on this map show an actual deficit in generating capacity.

The National Power Policy Committee started with this essentially local industry. With all the difficulties of the holding company system at the present time, when their stocks are selling at an infinitesimal fraction of what they sold for in 1929 or when floated, and on the eve of a new development in the power industry, statesmanship demands that the Government should think out its policy now, before the situation runs away from us.

The conclusions of that committee-after considering all the testimony that had been presented to it by the investigations of these other Government agencies, and this general situation of the power industry, and the pick-up in electrical production I have been talking about-are embodied in this report attached to the President's message, beginning on page 4.

Let us just see what condition the National Power Policy Committee found in the power industry. In the light of these conditions you may recommend legislation if you think it desirable.

First of all, it found out that although this local monopoly is legalized by the local community and supposedly the most impressed with a public interest of any business we can call private business, concentration of control of the power industry had been effected to the point where, in 1932, when the Insull system was still intact, 13 companies controlled 75 percent of the total privately owned operating utility business in the United States.

That figure is approximately the same today, although, of course, the Insull properties are now in the hands of receivers. Thirteen large companies control 75 percent of the power industry; and o companies, Insull, United Corporation, and Electric Bond & Share, just those 3 alone, control over 40 percent between themselves.

The CHAIRMAN. Insull, United, and what company? Mr. CORCORAN. Insull, United, and Electric Bond & Share. That is brought out on page 3, paragraph 2 of this report. There are also some figures on interstate control. The CHAIRMAN. All right. Mr. CORCORAN. It was further found that that concentration was effected in a very unhealthy manner by pyramiding of control through this device of the holding company. In the utility field there are peculiarly favorable conditions for concentrating control and merging companies through the use of the holding company.

In the first place, with a securities market such as we normally have, if you put two or more companies together you haven't got to worry whether you are going to make money out of the business after it is merged, or are going to make more money than you could have made before. There is a securities market you can use.

You do not have to make your profits out of operations. Demand for holding-company securities, as built up in the securities market over a long period of time, have made it possible for promoters to put companies together to make a killing out of the sale of securities to the public, and then the company itself can go to the devil so far as they are concerned. They have made their profit.

The New York Legislative Investigating Committee, as the chairman pointed out in a speech he made on the floor of the Senate some 2 weeks ago, uncovered a case in 1925 in New York, in connection with the Associated Gas system, where in 1 year by selling 100 million dollars' worth of securities to the public in connection with a series of mergers, the promoters got out with a profit of $34,000,000, leaving the public holding the bag.

It is obvious that when you can make profits like that out of mergers, in the securities market, you do not need to worry very much whether the merger will make money for you, as you have to worry if you are running, say, a shoe business and you want to take over somebody else's shoe business.

There is another reason why if you are a public-utility promoter sou do not have to worry as ordinary industry has to worry at the time of a merger. If I have a shoe business and I want to take over another shoe business I have to remember that if I cannot operate the unified business as well as I operated my first separate business, and if I cannot take care of it, I may lose my business. But when I am dealing with a local monopoly I cannot lose that business until I have goaded the public, whom I am supposed to serve, into a condition where they will demand and vote for a municipal plant, or haul me up before a regulatory commission, or otherwise get me into that we may call political trouble. That is, this utility merger business is not subject to the normal checks of competition; first, beause of the peculiar market built up for its securities; and, second, because the local monopoly nature of the business it is impossible for a competitor to take it away.

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