With respect to services of auditors, the examiner stated, on page 371:

The above fees for services of auditors are based in 1927 on direct salaries plus 33% percent of salaries to cover overhead. This percent was the estimated direct overhead, which included idle time, vacations, sick time, and report section accounting department, i. e., supervisor, typists, and reviewers, but included no general overhead. In 1929 this precentage was raised from 331 percent to 50 percent, based on the theory that this class of service should bear a portion of the general overhead. Both of these percentages seem reasonable. That is from the report of the examiner of the Federal Trade Commission.

The CHAIRMAN. What year was that?

Mr. MACLANE. The report was made in 1933, I think, covering the years 1927 and 1931. At the time the report was made a reorganization had been made of its service departments, and that reorganization was made largely because of the decision of the Supreme Court in Smith v. Illinois Bell Telephone Co., which said that these companies, in proving their fees under these service contracts, would have to show the costs of the service; and the lawyers, including myself, told the company that if they expected to get any allowance for their fees in rate cases they would have to revamp their organization so that they could definitely prove the costs of service.

With respect to the reorganization set-up, the Commission's examiner said, on page 373, I think, of Document No. 92, part 62:

The reorganization effective June 1, 1933, was for the purpose of further consolidating departments and to reduce the number of indirect charges distributed to departments on the basis of direct salaries, as compared to the reorganization of March 1, 1933, need not be described because the reorganization of June 1. 1933, in a sense, more closely perfected the purpose of the first.

Prior to the reorganization there were 10 divisions or departments; i. e.. executive, securities, corporations, operating, engineering, comptroller, treasury, office service, lunch room, and undistributed. All these departments, more or less, performed services which applied to all classes of income and, as already stated, the expenses applicable to the various classes of income were never kept separately or distributed. However, the new set-up will enable the company to ascertain the net profit on the various classes or group of classes of income.

It says further, on page 371, with respect to this reorganization. that its purpose was to enable the company, as well as others, to ascertain the cost applicable to the various classes of income:

If this reorganization had been in effect during the years 1927 and 1931 the division of expenses applicable to the various classes of income, as set forth in chapter 1 of this report, would have been readily available, and very few, if any. estimates would have been necessary.

I cite that simply to indicate that this company, which has been much discussed, is endeavoring to conform its policies to the requirements of the present, and to present the facts in available form for consideration of the appropriate authorities. whatever they may be.

The CHAIRMAN. According to exhibit no. 4611, Senate Document 92, parts 23 and 24, which was referred to the other day, volumes 23 and 24, for 1930, the Federal Trade Commission shows the total income of Electric Bond & Share Co. from servicing fees, commissions. from the sale of securities, and so forth, from 1905 to 1929, to be $64.652,376. The total expense for that period was $45,418,587. The net profit was $19.233,789, or 42.5 percent.

Mr. MACLANE. I am unable to verify those figures.

I wish, in closing, to thank you gentlemen for your courtesy. Senator BONE. There is just one question I have in mind. I have followed these hearings of the Federal Trade Commission, and I would like to have you tell me why holding companies were willing to pay the fantastic prices they did for the stock of these operating companies. They ran up to 100 times the book value at times.

Mr. MACLANE. Really, Senator, are not those very exceptional cases that have been used as horrible examples?

Senator BONE. I know a good many of them where they paid several times the book value of the stock. Take Associated Gas as an example. In one exaggerated case they paid over 150 times the book value of the stock acquired.

Mr. MACLANE. I do not know the facts, and I cannot answer for the Associated Gas. All I can say is that I do not know of any reason that would justify a company in paying 150 times what a certain piece of property is worth; whether there was any reason or not I do not pretend to know.

Senator BONE. How can a business in this country that rests on public confidence, that is regulated, and with respect to which all competition against it is destroyed, justify practices of that kind, when the ultimate consumer pays the bill for all that juggling? How can a group come before a body of lawmakers and ask them to just forget all about that kind of business, and not try to stop it? We are met with the argument that we are unfair when we try to correct those abuses. I ask that for this reason. There is a certain type of mind which critics sometimes referred to as the Bourbon type of mind. That type of mind speaks for a group which says, Not an inch will we budge. We will not allow correction of abuses. We will follow the example of one gentleman who says here ' pin the Bolshevik label on anybody who objects.""

That sort of thing begets suggestions for legislation that will be infinitely more drastic than anything suggested by this bill, which I do not look upon as drastic at all. Why, when men have suggested merely the correction of abuses, are they met with the suggestion that they are Bolsheviks? You are the spokesman for power companies, and you can tell us now. Then it will be in the record. We would like to know why. Whenever a legislative body, or I as a private citizen, object to an abuse, I am told by some fellow that his associates must pin the Bolshevik label on me for merely objecting as a lawyer, and as a citizen to an abuse which is grievous and which threatens all good business practice. We know that that is done. Mr. MACLANE. I read some time ago an account of some meeting in some town in Illinois where some phase of the power problem was being discussed, and the protagonists of the power company abused their municipal ownership opponents as Bolsheviks, and the municipal ownership men abused the power company because it was an octopus, and, after all, that was about all that was said at the meeting. They each abused the other. I suppo e, really, it is because epithets of that kind carry with them news values.

Senator BONE. You think that is the reason it was employed?
Mr. MACLANE. I suppose so.

Senator BONE. Instead of argument in the matter?

Mr. MACLANE. I think it is largely a matter of saying something that they think will have some popular appeal.

Let me say, in answer to what you have said, in a broader sense, that while personally I cannot accept the structure of this bill as accomplishing reasonable regulation, or the correction of abuses, but rather see it as contemplating punitive destruction in its effects, yet I would not oppose, and would not advise my clients to oppose, and any expressions of opinion I have had from them indicate that they would not oppose regulatory action which would correct these abuses and would prevent their recurrence. But let me say this to you. Nearly all the cases that have been dwelt on in the public prints, and those you have mentioned yourself, have been drawn from the investigation of a single company. I particularly represented the Electric Bond & Share Co. in that investigation, and its associated companies, and I think I can fairly say that there are two things that the Electric Bond & Share Co. was charged with by the examiners. One was the so-called "write-ups "-and I would be here another day if I started to talk about that. The other was the fact that profit had been realized upon this supervision. Those two things were done. Can you not prevent write-ups, if they are a thing that must be prevented, and can you not prevent extortionate profits for supervision, if such things have occurred?

Senator BONE. I do not know. You have suggested yourself some doubt as to the wisdom of regulation. I saw an instance in my own State of a thing which probably is familiar to the gentlemen about this table. I saw a power plant built at a cost of $1,231,000 on a little stream in which the waters of the stream were utilized without storage. Against the water right which they got by filing on it, and the payment of a small filing fee, that company issued $10,424,000 of common stock, which did not represent a dollar of investment. That stock was the control of that company, and that was accomplished under State regulation, regulation that did not regulate. That is a fact. I have a portion of the hearings here before the publicservice commission, where they finally got around, after several years, to a preliminary consideration of that, and made some changes in that set-up. When I made that statement it was denied. Our companies ought not to have denied it. It was an accomplished fact. It was done.

It is those things that make it difficult to get at the facts in this case. There ought not to have been a denial of that. There should have been a frank and free admission of that monstrosity. There was $600 per horsepower of wind and water against that plant. That company is in your set-up now. That is the White Salmon plant.

Mr. MACLANE. The Northwestern Electric Co. was incorporated by the Fleishackers of San Francisco about 1910 or 1911, and the purpose of its incorporation was to supply some mills with power. I have forgotten now whether they were paper mills or not. That is my recollection, although I am not sure. The purpose of its incorporation was to supply some mills up in that section with power, and also to go into Portland in the competitive field..

It was, I would think. a highly speculative venture, intended to supply an industrial load, in the first place, and to enter a competitive situation against a strongly entrenched company in one of the largest cities of the Pacific Northwest, in the second place. The Fleishackers put up their money and their credit, and spent several

years in the development of their enterprise. They issued, as I recall, something around $10,000,000 of common stock eventually, which they used as a bonus in selling their bonds, turned it back into the treasury of the company and used it to assist in the sale of their bonds, which was in those days a very common method of financing. About 1925 or 1926 they sold that company to the American Power & Light Co., which already, as you know, had the Pacific company out there, and the Portland Gas & Coke, and it fitted into their situation. The American Power & Light Co. paid $5,000,000 for that stock.

You may say, if you wish, that the Fleishackers valued the time and the services and the financing that they did at too high a figure expressed in dollars, but I doubt whether it was too high a figure as expressed in the value of that stock. While I cannot speak with entire accuracy on this subject because I have forgotten the figuresI did know them-my information is that the American Power & Light Co. has realized throughout the years that it has owned that stock, a very modest return on its investment, and in later years none at all.

Senator BONE. How could any business organization justify issuing stock that did not reflect a dollar of investment to an extent of nearly eight times the capital cost of the plant, on top of the capital cost of the plant?

Mr. MACLANE. I think, Senator, with due deference, having investigated that record at different times long subsequent to the event, that you are mistaken in assuming that this was issued against that water power as such.

Senator BONE. It was carried under the euphonious title of "Land." I have examined the record repeatedly.

Mr. MACLANE. My recollection is that it was issued against the total promotional services of the Fleishackers, and that the stock was used, in large measure, as I say, to promote the sale of the bonds. You may deprecate that method of financing if you will, but please remember this, that, after all, the function of security issues is to get money for the enterprise, and the whole question with respect to the sale of securities, as I see it, is whether they are honestly sold, whether the people to whom they are sold know what they are getting, and, if they do know what they are getting and are advised of what they are getting, whether they want to take the speculative risk and put their money into the enterprise. If the security issue has accomplished that result, it has justified itself.

Senator BONE. The company had been paying dividends on that stock right along, up to the time the court struck it out. I have before me some memoranda from the hearings in Oregon. When did the American Power & Light Co. acquire that; do you recall? Mr. MACLANE. I think in 1925.

Senator BONE. In 1933 the Oregon utilities commissioner finally got a break-down of figures in the inquiry into that particular matter, in which he then definitely, in that hearing, charged the Northwestern Electric Co. with having $10,000,000 water in the stock. I was interested in that hearing at that time. This matter came up in 1930 in Oregon, and here is what the Portland Oregonian, a prominent newspaper which was defending private power companies, had to

say about that transaction at that time. As I recall, the American Power & Light Co. owned this Northwestern Electric Co. The stock was paying dividends, although it did not represent any investment of any value.

Mr. MACLANE. They paid $5,000,000 for it.

Senator BONE. I know; but it did not represent any investment in plant. That is the trouble with a holding company's buying something that does not reflect any investment.

Mr. MACLANE. I cannot agree with you about that.

Senator BONE. What do business enterprises gain by paying $5.000,000 for $10,000,000 of wind? There was not a dollar of investment there, and when the people of southern Washington and Oregon were paying 10 percent a year on that 1011⁄2 million of watered stock, they were taking out of that country $1,000,000 a year in interest and dividends on that kind of stock, which was as much as that plant cost.

Mr. MACLANE. I do not believe they ever paid any such dividends. Senator BONE. That is the statement that was adduced in the hearing in Oregon. I made that statement down there at the time and this was the answer of the Portland Oregonian, which was constituting itself the spokesman for the Northwestern Electric Co. [reading:]

The accusation has nothing to do with rates which are not affected by stock watering, but with the sale of shares and bonds.

May I digress for a moment to ask why it was put in there? It is no answer to say that it does not affect rates, when they were paying interest on it. [Continuing reading:]

The company did indeed list (the water rights) at $10,435,453.07. If any shenanigans were done, they were done by the Fleishacker Bros., owners of the Portland Telegram

Which was supporting the candidate, Meier. [Continuing reading:]

We are quite sure that neither Missionary Bone

That was myself

or expert Harlan is charging that stock watering took place that was outside the law. Simply the incident was brought forward to show, we presume, that something ought to be done to make such inflations and their wads of profits impossible. Though it may have been as legal as eating pie, still, we concede, it is all right to denounce stock watering if stock watering occurred in connection with a hydroelectric development and the sale thereof. But what is the denouncer going to do to prevent a recurrence of similar evils.

I think the thing answers itself. The startling thing is that a thing like that could be consummated within the law. If it was infamous, it was infamous in strict accord with the statute. That is why I have asked you about regulation, and why I think, personally, that regulation is a futility.

Mr. MACLANE. There was not any regulation in Oregon, was there, at the time that enterprise started?

Senator BONE. It was in my State. This plant was built in the State of Washington.

Mr. MACLANE. But the lines extended over into Oregon.

Senator BONE. But the plant was in Washington, right in my own State. I have driven by ít many times and looked it over. My files