Quotation no. 7: Hartford, Conn., a city of not half the size, affords what is generally conceded to be the best operating management in the country from the standpoint of the investor and the consumer alike. Quotation no. 8: I have already quoted Mr. Ferguson of Hartford on the danger which the public attitude toward holding companies carries for operating companies. In the case of 7 out of 8 of these quotations, the Senator is highly commendatory as to our results of operation, our policies and my opinions as publicly expressed during the past 10 years; in one case alone is he critical when, after referring to me in the most complimentary terms, he went on to say: 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 regulation except régulation that touches him. But this is what Mr. Ferguson wrote in 1933. I have read this quotation in order to give me an opportunity to deny unequivocally any change whatever in my point of view, nor any change whatever in my condemnation of such abuses as have admittedly been perpetrated in some cases. For 15 years, I actively and successfully opposed every effort of holding companies to acquire control of the Hartford Co., and in public have protested the various acts which are now officially condemned. I am fully conversant both with the abuses themselves and with the requirements necessary to prevent their recoccurence and it is because of my hope that I may be permitted to be of active and constructive assistance to your committee that I appear today. In view of Mr. Corcoran's testimony before this committee to the effect that I was hanging together with my gang in the front room in spite of the fact that I was the author of ideas incorporated into this bill, I should like to state that my recent appearance before the House committee with reference to the corresponding bill was at the request of a committee member and that I received no invitation or request to appear before the committee from the voluntary committee of company officials who have been offering qualified opposition witnesses. My appearance today is, however, at the request of that committee of the industry since my testimony before the House committee proved to them that my past opposition to holding companies had not so prejudiced me as to cause me to refuse to properly evaluate the benefits which have accrued to the consuming public through their existence even though I condemned the methods by which so many of the investing public have been parted from their savings and have been insistent that there be appropriate legislation to prevent any repetition of the losses hitherto suffered by the investing public. Referring to title I, let me record the surprise I felt when I found that under the definition of the bill those companies which I had conducted for years as operating companies are classed as full-fledged holding companies (see chart) and are condemned to dissolution unless by 1940 the bill shall be so amended as to permit the Commission to grant a certificate of continuance under conditions of clear and specific violation of the provisions of this present act. 130254-35-32 (The chart above referred to is here made a part of the record, as follows:) The Commission according to this act has no power to permit our companies to continue as unregistered holding companies under section 4 (c) because of the fact that we deliver current to another company at the State line and thus are not "exclusively intrastate in character"; nor can the Commission grant our continuation as a registered holding company after 1940 under section 11 (b) (4) (A) because we cannot qualify for a certificate from the Federal Power Commission "as necessary for the operation of an economic district. extending into two or more contiguous States where the merger is impossible under the applicable State or foreign law." I do not believe it has been realized how very far-reaching is the definition of holding company nor that it embraces practically every operating company in the country. Referring now to the real, rather than such accidental holding companies as ours, I would first emphasize what other witnesses have told you as to the pending disaster to millions of citizens who have their savings invested in holding company equities, which is sure to follow the liquidation of holding company portfolios in a very limited time as must be done in order to satisfy their creditors before there can be any distribution of operating company stocks. The effect of this on the country's recovery will be disastrous, and yet Mr. Corcoran passed the question over with the casual reference that there are plenty of ways to do it. Remember that it is not a case like that of the Standard Oil Co. where there were no debts. 1 Hartford Electric Light Co. (an operating company) $7,500,000 annual gross revenue from operation, plus $150,000 from subsidiary dividends. 2 East Hartland Improvement Co. (a rural operating company located 20 miles from Hartford) $2,000 annual gross revenue. The stock held by Hartford represents that company's contribution to the cost of lines necessary for rendering service to the 30 farmers located in East Hartland. 3 Connecticut Power Co. (primarily an operating company) $3,500,000 annual gross revenue from gas and electric operations, plus $875,000 annual gross revenue from dividends of subsidiaries. Union Electric Light & Power Co. (a rural operating company) $300,000 annual gross revenue. Bolton Electric Co. (a rural operating company) $7,000 annual gross revenue. The stock owned by Manchester Co. represents the financing of a line extension for which the Bolton Co. could not raise funds. Even then there was a scandal about the harvest which the speculators reaped through the acquisition of the fractional scrip issued to a multitude of small investors who did not realize its value. These utility holding companies and their subsidiary holding companies have debts that run into the billions of dollars if Mr. Corcoran is correct in his estimate that 75 percent of all operating companies are controlled by thirteen holding companies. And, secondly, I would particularly point out that even if the breakup could be accomplished, still the purported objective of this billnamely, to prevent a repetition of abuses-would not have been achieved. This is so obviously fundamental that I fail to see how it has so wholly escaped the observation of the drafters of the bill. The principal sufferers from the admitted abuses of the past have been the investing public. This was testified to by Mr. Healy before the House committee. One absolutely fundamental essential and the one which was the foundation stone of improper financial creations, was the fact that there existed a wide distribution of the stocks of our operating companies in the hands of a multitude of people not fully conversant with their value nor the value of securities offered in exchange. Without this situation, the crazy financing of the speculative era could not have been accomplished. To illustrate by a simile: These operating company stocks were blue chips-the speculative bankers persuaded the holders to take two white chips in exchange and then boomed the market quotation for white chips. The crash of 1929-31 wiped out of the white chips all of their inflated values but there still remains in them, or rather in the corresponding holding company equities, the intrinsic value representing the proportionate equities in subsidiary properties although their market value, due to their prospective abolition under this bill, has fallen far below the intrinsic value; to which intrinsic value if left alone they will eventually return. Looking at the situation relative to the present custody of the operating company stocks, Mr. Corcoran has testified that the control of over 75 percent of these is vested in 13 hands. How much easier to control than when in 5,000,000 hands. The Government has got these men all rounded up and all that remains to do is to determine the necessary further rules and regulations that shall govern their conduct in the future. At the time of the abuses, there were no such rules as now exist under the Securities Act. Now look at the situation to be created by the passage of the bill: The walls of the jail are to be broken down and the operating company stocks scattered again among millions of individuals who do not know their value. Thus the stage will be all set again for the benefit of the clever speculator to repeat in some different form the equivalent of the former speculative abuses. It passes my comprehension when the situation is so nearly in hand as in this case that a bill should be seriously considered which, far from preventing abuses, will create all over again the situation which tempted the clever speculator to create financial enormities by which the investing public were robbed of their savings. The CHAIRMAN. You are assuming in that statement that the securities could not be turned into investment corporations, are you not? Mr. FERGUSON. I am assuming a situation such as would exist if they were spread out into new ownership, I mean these operating company stocks. The CHAIRMAN. But, as I say, one of these holding companies as a matter of fact could keep its stocks and could keep its bonds and become transformed into a purely investment company, but divorce itself of any actual control over operating companies. Mr. FERGUSON. I assume a bill could be drawn for that purpose, but I do not understand that that is the purpose of the title of the bill I have reference to, which is the abolition of holding companies. The CHAIRMAN. Oh, yes. This bill would permit that very thing to be done. I do not think there is any doubt about that. Mr. FERGUSON. You are right, Mr. Chairman, but the thought I had in mind was the resale of these securities to satisfy debts, or in the case of a simple company, like the Standard Oil Co., scattering of its portfolio, that is the portfolio of the holding company, among its stockholders. The CHAIRMAN. Let me say this to you: If the bill does not permit that sort of thing I think it was the intention to permit that sort of thing to be done. Mr. FERGUSON. You are right in saying that my statement referred to the effect of a rediffusion and the opportunities of speculation. I wholly agree with Mr. Corcoran when he testified that "lawmakers should seek to forestall the Insulls of the future." This bill through blind resentment caused by past abuses does not forestall the Insulls of the future but instead makes ready the fields of operation provided only that they give up a single particular one of many possible methods. It has been said by proponent witnesses that the power of these holding companies is too great for the Government to resist. This is absurd and the only ground for the charge is that they are financially strong enough to prevent governmental agencies from treating them without regard to their constitutional rights. I will have to admit that small and scattered companies might not in individual cases be financially strong enough to carry their appeals through to our Supreme Court, but I cannot believe that unconstitutional methods of regulation are in any way essential to proper control. The CHAIRMAN. Do you know of any operating company that is not financially strong enough to carry a case to the Supreme Court of the United States if its constitutional rights were taken away? Mr. FERGUSON. Well, some of our affiliated companies certainly would not be able to do it. The CHAIRMAN. What affiliated companies do you have reference to? Mr. FERGUSON. The Manchester Electric Co., the Union Electric Light & Power Co. of Connecticut, not of St. Louis, and the small operating companies, such as have been gathered together. The CHAIRMAN. Let me ask you this: Why do you have a holding company to have supervision over your operating companies up there in Connecticut? Mr. FERGUSON. I did not get your question? The CHAIRMAN. Why do you have a holding company for your operating companies up there in Connecticut? Mr. FERGUSON. Well, it is only a holding company because the bill defines it as such. It is an operating company pure and simple. The CHAIRMAN. You misunderstood my question. First I will ask, are all your operating companies in the State of Connecticut? Mr. FERGUSON. Yes, sir. But they engage in interstate transactions with companies in adjoining States. The CHAIRMAN. In other words, they sell electricity or power how? Mr. FERGUSON. They sell wholesale. The CHAIRMAN. And your view is that there should be, at least, an exception insofar as those companies are concerned? Mr. FERGUSON. They should not be included in the term "holding company" as defined in this bill. The CHAIRMAN. Because you say it is not a holding company when they sell wholesale? Mr. FERGUSON. My contention was that the bill in its definition goes very much further than such a company is understood to be, and by having the definition so broad it includes practically every operating company in the country. The CHAIRMAN. Instead of having a holding company, why don't you consolidate them and have one operating company? Mr. FERGUSON. Well, one reason is, in the case of a small community about 20 miles from Hartford, the farmers wanted service and they got together and formed a little company of their own; and as a means of helping, by way of a further distribution circuit, our company took part of the stock of their company but not all of it. It was impracticable to be able to serve them at a reasonable price unless they contributed money; and they contributed money, and we made our contribution by taking some of their stock. But the fact that we took some of their stock makes us a holding company, if we were not a holding company by any other method, according to the definition in this bill. The other reason why we are a holding company, according to the definition in the bill, is shown by the chart I gave you of our 9-percent ownership in the stock of the Connecticut Power Co. Senator BROWN. Have you a controlling interest in the stock of the rural line? Mr. FERGUSON. We have. Senator BROWN. Is it over 60 percent? Mr. FERGUSON. The chart will give it to you. It is 62 percent in the East Hartland Improvement Co., and 9 percent ownership in the Connecticut Power Co., and The CHAIRMAN (interposing). Did you say 9 percent? Mr. FERGUSON. Yes, sir. But we have full control of the Connecticut Power Co. through common offices and largely a common board although not entirely a common board. The CHAIRMAN. There would not be any reason why you could not consolidate the Manchester Electric Co. and the Stamford Gas & Electric Co. and the Union Electric Light & Power Co. and the Bolton Electric Co. is there? And, by the way, where is the Bolton Electric Co.? Mr. FERGUSON. They are all in Connecticut. But I am simply citing that in our case, with the definition in the bill, it would make what are really operating companies, holding companies. |