Mr. MOORE. It is an overlapping of State jurisdiction, and it is going to have the effect, probably, of ousting it. That is particularly true in connection with depreciation. If you will look on page 124, you will find, in section 302, a requirement as to depreciation that is absolutely going to conflict with State jurisdiction, and necessarily, in large measure, oust it, because there is provided authority for governing depreciation, and setting up, as an arbitrary method, the sinking-fund method, which the States have not usually recognized. That is going to mean that before any of that depreciation fund can be used at all, the companies have to come and get permission to use it.

Senator BÓNE. How does the average operating company employ its depreciation fund that is collected in its operating overhead?

Mr. MOORE. It puts it right back into the property.
Senator Bone. In other words, it plows it back into the system?
Mr. MOORE. That is the best place to put it.

Senator Bone. In what form-replacement of rotted poles and worn-out equipment?

Mr. Moore. It is used partly for the retirement of property. The money itself is used for general capital purposes also.

Senator Bone. Have you ever known an instance where it was employed to pay dividends?

Mr. Moore. We do not have that sort of companies in our section, Senator.

Senator Minton. I will answer that for you. I know where they do it.

Mr. MOORE. I have heard of it.

Senator BONE. I have known where there was a vast amount so paid out.

Mr. MOORE. Just one more point and I am through here. It is in connection with this valuation business. I am not going to argue the prudent cost

Senator BONE (interposing). I wanted to ask you about this prudent-cost proposition. It will take just a second. This bill, by its specific terms, provides that rates shall be established on the "actual legitimate prudent cost” of the property used and useful for the service in question. That is by statute a definite abandonment of the theory of cost of reproduction new less depreciation, which has been invoked in so many of these cases.

Mr. MOORE. Yes.

Senator BONE. What is the position of the utilities on this particular matter?

Mr. MOORE. Senator, I do not know that I could speak for the companies in an authorized way on a question of that sort. I am glad to answer your question personally, though, as best I can. I think Judge MacLane fully covered the point as to the real meat of the question, that any effort, irrespective of the pure legal objection to the words used, to try to fix an absolute standard of valuation is bound to fail, depending upon great changes in price conditions and economic conditions. You remember he pointed that out quite at length, and I agree with what he said.

Senator BONE. There has been a determined effort made, particularly in the courts, where appeals were taken from decisions by commissions in rate cases, to establish the doctrine of cost of reproduction as the basis for rates.

Mr. Moore. Yes.

Senator Bons. The companies have very ardently presented that theory to the courts, and the courts have yielded to a degree which is rather startling at times. I think in this Southwestern Bell Telephone case that theory was advanced, and it found lodgement in the books. I have seen editorials in newspapers that were friendly to utilities, pointing out that if price levels fell to a point where that doctrine would threaten the stability and the market value, and the marketability of outstanding securities of these companies, which you say have no relation whatever to rates, then the companies would fall back on the doctrine of prudent investment and would be justified in doing it, and that it was the proper thing to try to execute that flip-flop which many of them are now doing because of lower commodity price levels.

Mr. MOORE. We never have gotten away from the principles of Smyth v. Ames, that there are a number of factors that are considered. Depending upon conditions at different times, greater emphasis is placed upon some of those elements than others. Right now I do not think there is any question that there is a tendency to give greater emphasis to original cost rather than reproduction. Some time back there was greater emphasis on reproduction.

Senator Bons. Is not that due to fluctuating prices and practically nothing else?

Mr. MOORE. That is one of the elements.

Senator Bons. The company has to hang its hat on either horn of the dilemma, and, of course, it hangs its hat on that horn which best serves its economic purposes. We had an example of it, and I will ask my colleague, Senator Minton,

if I am correct in this. It is rather dim in my memory now, but, as I recall this water case in Indianapolis, McArdle v. Indianapolis Water Co.--I have forgotten the exact title.

Mr. MOORE. Yes.

Senator BONE. That case is one of the cases I can recall. I am sorry I do not have it before me so that I could cite the exact holding. In that case this doctrine of cost of reproduction played an important part.

Mr. MOORE. Yes.
Senator BONE. Also going concern value.
Mr. MOORE. Yes.

Senator BONE. That water company now has reflected in its rate base this intangible value which is part and parcel of reproduction cost, on which the people of that city must pay rates forever, unless that rate base is broken up in subsequent hearings and unless they can show fraud, or something, they may never be able to break it up.

Mr. MOORE. We know, as lawyers, that that rate base fixed at that time does not necessarily continue as the rate base.

Senator Bone. Unless they can show palpable error or fraud in it, it will probably continue to remain the rate base of the company, with additions that are made.

Mr. MOORE. In the time I have here, of course, I cannot discuss the merits of this standard that is set up here, but I do want particularly to invite your attention to section B on page 117 in this connection. It has a very practical bearing on it. After providing, in subsection (a), that the Commission has power to ascertain, for the purposes of this title and title III, the actua), legitimate, prudent cost of the property and every fact which in its judgment may or does have any bearing on the determination of such cost, section B follows that up and says this. (Reading:)

(b) The Commission may require any public utility to file with it an inventory of all or any part of the property of the utility and of the original cost thereof, including, only those elements of cost that may be considered for purposes of determining just and reasonable rates under the provisions of this title and title III and the rules and regulations of the Commission.

Notice title III in that connection, because title III is not restricted as title II is. That means actually the filing of an inventory and original cost figures for practically all these operating companies.

Senator BONE. The reason I raised this point about these two theories of value is because your cost of reproduction involves a shifting rate base and has been severely condemned by State regulatory bodies at times, but there remains this fact in this picture, which is a very significant fact as I view it. I do not know whether you will agree with the statement, but the studies of the Federal Power Commission indicate that the ers of electric energy in this country have actually invested more in facilities for the use of electric energy than the utilities themselves have invested in the machinery of production and distribution of electric energy. If that is true, or even approximately true, then the question of whether or not we should adopt one or the other theories of value for rate-inaking purposes becomes a very important one, because if I have $100 invested in the thing you sell me and you have $100 invested in the thing you are producing to sell me, I have just as great a stake in the game as you have. I do not think anyone would deny that. It certainly would not be consonant with decent ideals of business to deny that statement, and that is why I asked you about this. I want to know what the theory of the companies is with respect to this, whether this suits them, or whether they want not to anchor to historic cost and prudent investment, or whether they want to go back later in court and raise this question.

Mr. Moore. While I have no authority to speak in a real way about it, I am sure the position of the companies is that they feel that fair value is the proper basis.

Senator MINTON. You are going to stick to Smyth v. Ames.
Senator Bone. Fair value is the worst glittering generality on earth.
Were you through?

Mr. MOCRE. I have this comment. This reminds me of the fact that the Interstate Commerce Commission and the railroads have spent approximately $200,000,000 since 1913 trying to get this sort of information, and it is not worth very much.

I want to thank you gentlemen for your patience. I am sorry to have taken so much time.

(Whereupon, at 1 p. m., a recess was taken until 2:30 p. m.)


The committee reconvened at 2:30 p. m. in its hearing room in the Capitol, at the expiration of the recess.

The CHAIRMAN. The committee will resume. Gentlemen, who is your first witness this afternoon?

Mr. GADSDEN. Mr. Ferguson.

The CHAIRMAN. All right. Mr. Ferguson may come to the committee table.



Mr. FERGUSON. Mr. Chairman and gentlemen of the committee

The CHAIRMAN (interposing). Please state your name for the record.

Mr. FERGUSON. My name is Samuel Ferguson; residence Hartford, Conn. I am chairman of the board of the Hartford Electric Light Co. and the Connecticut Power Co.

My qualification intelligently to discuss this bill without prejudice in favor of holding companies is evidenced by the testimony of Dr. Splawn when he said:

That company (the Hartford Electric Light Co.) has done so well that I mention it as an example of what can be accomplished in this. It gives you no trouble. It gives nobody any trouble. If all of them were managed on that principle, you would not be here, you never would have had any occasion for this inquiry; you would not have this bill before you at all.

And by the speech delivered to the Senate on March 28 by your chairman, Senator Wheeler.

I will not take the time of the committee to read all of the following extracts from that speech but I file same with the clerk of the committee in order that the record may be complete. They follow in the order as given:

Quotation no. 1:

The difference between the holding company and the operating company from the point of view of the investor has been stated bluntly and clearly by Samuel Ferguson, president of the Hartford Electric Light Co. of Hartford, Conn., in an article in the Electric World for January 21, 1933, entitled “Public Putting Blame Where It Belongs. Mr. Ferguson, reputedly among the very best operating utility managers, has made Hartford's system a model unsupported by any of that super-holding company assistance without which, the House committee was told the other day by holding company managers, operating utilities cannot function.

Quotation no. 2:

I understand that Mr. Ferguson, too, has recently come out with the rest of his utility brethren against the bill. He has found that some of the regulatory provisions affect him, and it has been my experience that every utility man favors regulationexcept regulation that touches him. But this is what Mr. Ferguson wrote in 1933:

Quotation no. 3:

The most striking feature pertaining to the public-utility industry during the past year has been the terribly expensive lesson which has taught the public to understand that a holding company is something very different from a publicutility company.

Heretofore in the public minds the two have been practically synonymous, and, as a consequence, the sins of speculation, wild finance, and get-rich-quick schemes, to which abuses the holding company set-up has lent itself all too readily, has been attributed to the operating utility which renders the daily service. Today criticism is to a large extent being directed more nearly toward the perpetrators of abuses, and the operating utility is being judged as it should be-upon its specific local performance.

It was obvious even in boom times that those speculators who bought operating utilities at prices far above any figure on which a legitimate, reasonable return could be earned were interested more in the sale of the resultant holding-company securities than they were in the real, though often exaggerated, economies that

could be effected, and that thus the promotion was designed to unload inflated holding-company securities upon unwary investors who in their innocence thought that they were purchasing securities of public-utility companies.

The results of such abuses as have been perpetrated by certain speculative holding companies have been and will continue to be far worse for the investing public than for the consuming public, since the latter is protected from abuses by the regulatory control of the States over the operating companies, which control is exercised by public-utility commissions.

For years, I have anticipated the results of the past few years, namely, that the public would visit the sins of the speculative holding company upon the head of the operating utility. But it is very heartening to see clear evidence on all sides that the public is now beginning to differentiate intelligently, and to lay blame where it properly belongs, instead of indiscriminately, though it is very sad that the knowledge has to be acquired at so great expense and sorrow to a great multitude of investors.

Quotation no. 4:

The report by the Federal Power Commission on its electric rate survey shows that the price paid by a residential customer in Miami, Fla., is $4.18 for 40 kilowatt-hours per month, while the price paid by a consumer of Mr. Ferguson's Hartford, Connecticut Electric Light Co. for the same quantity of electric energy is $2.20.

Quotation no. 5:

Let me quote again from Mr. Ferguson of the Hartford Electric Light Co., writing in 1926, to confirm this point:

In defense of the practice of purchasing operating companies at several times the face value of their existing capitalization, and consolidating them into a new company on the basis of the purchase price, it has been urged that the customer cannot be affected by the number of pieces of paper issued by the new company, since he is protected by the limitation of earnings to a fair return on the value of the property. Theoretically this is so, but practically he does not have a full protection from injury unless injury is defined as limited to the rates charged. The injury from inadequate service and the inability of a company to care for the growth of a community is quite as real, and often much more serious, and yet this must be the result in the case of an overcapitalized company, which, through its limitations to a reasonable return on the property value, has earnings insufficient to maintain its credit.

The public has an interest in the extent of the capitalization of our companies, and if our liberty of action in this respect is abused, as it is today being abused in some cases, there will be an eventual day of reckoning, and when that day comes it may not be possible to separate the sheep from the goats.

When a company is sold for many millions of dollars more than has apparently been paid into the treasury for the purpose of providing facilities for service we must realize that the public is bound to sit up and take notice. What the public sees is that only a comparatively small fraction of the purchase price is represented by what the company received for the stock at the time of issue and that the new owners must of necessity earn a return on the whole of the price paid, therefore, regardless of the soundness of the reasons which may justify the transaction, it is only natural to expect that the public will insist on being convinced that its interests are fully safeguarded, and apparently it does not today feel at all sure that such is the case. It is, indeed, a very curious situation which exists at the present time in that the stocks of our operating companies are of so great real value to the holders, due to the future equities contained in the same, that they should not be parted with except for a price so high as to make the recapitalization of that price a potential cause for future antagonism.

Quotation no. 6:

It may be as Mr. Ferguson pointed out in the quotation I read from him earlier in this speech, that the public is beginning to understand that the wrath they justifiably visit upon the holding company may not be deserved by the con servatively managed independent operating company.

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