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(5) Such securities are issued in anticipation of excessive revenues from subsidiaries:

"Such securities are often issued in anticipation of excessive revenues from subsidiaries which if realized would burden consumers, and the reduction of which, in the course of State regulation of subsidiary public-utility companies, would cause loss to investors who have been led to believe that such revenues are a legitimate part of the issuer's income."

Not guilty. The only revenue which U. G. I. receives from subsidiaries, other than dividends and interest on advances, is for professional services actually rendered, such income for 1934 being $375,000, as compared to dividends and interest received from subsidiary companies of $23,725,000.

As the stock of this company accurately reflects the sums invested in underlying public-utility properties, it cannot be said to have been issued in anticipation of excessive revenues from subsidiaries.

(6) Such securities subject subsidiary companies to the burden of supporting an overcapitalized superstructure and prevent voluntary rate reductions:

"Such securities, when improvidently issued, subject subsidiary public-utility companies to the burden of supporting an overcapitalized superstructure to the detriment of investors and consumers and tend to prevent voluntary rate reductions, which over a period of time might promote a greater and more economic use of gas and electric energy and thereby strengthen subsidiary public-utility companies."

Not guilty as outlined above with respect to securities and as shown on page 12 with respect to rate reductions.

(7) Subsidiary companies are subjected to excessive charges for services, construction, and equipment:

"Subsidiary public-utility companies are often subjected to excessive charges for services, construction work, equipment, and materials to the detriment of investors and consumers."

Not guilty. This has been answered as to services, which, when charged for at all, are billed at cost.

While much of the construction work of the larger subsidiaries is done by their own engineering forces, United Engineers & Constructors, Inc., in which U. G. I. has a 50 percent interest, does major construction work for such companies as well as general work for the smaller companies. Such work is done on an agency basis, with competitive bidding for materials, apparatus, and some items of labor. Since its organization, United Engineers & Constructors, Inc., has done twice as much work for outside utilities, railroads, and other industries as it has for the system companies. Not only is this varied experience of great value to U. G. I. companies, but, furthermore, continuity of service, familiarity with U. G. I. system companies, their policies and methods of work, facilitates prompt and intelligent planning and execution with a minimum of effert and expense.

U. G. I. does not sell equipment or materials to its subsidiary companies. (8) Subsidiary companies enter into transactions without the benefit of arm'slength bargaining:

"Subsidiary public-utility companies often enter into transactions with affiliates in which the absence of arin's-length bargaining operates to the detriment of investors and consumers."

Not guilty. There are no transactions entered into with subsidiaries which might operate to the detriment of investors and consumers. Substantially all subsidiary companies have their local boards of directors, representative of the consuming public, U. G. I. representation generally constituting not more than one-third of the total board membership.

(9) Control of subsidiary companies restrains free competition in construction work:

"Control of subsidiary public-utility companies throughout the United States has often been used to secure to holding companies, their affiliates, and subsidiary construction companies a substantial part of all construction work for publicutility companies in restraint of free and independent competition in that field." Not guilty. As already stated, the method of agency agreement on a fee basis allows the purchase of substantially all apparatus and materials on a competitive basis. Some 80 percent of total construction expenditures are obtained under competitive conditions, the other 20 percent consisting of items which cannot advantageously be undertaken except by force account through employees on the operating companies' pay rolls, but under the direction of the supervising agent. Public-utility construction work is inherently different from home,

apartment house, office building, and similar work, where it is quite feasible and desirable to contract for 100 percent of the work under competitive conditions. (10) Management contracts cannot be dealt with effectively by the States: "Service, management, construction, and other contracts involve the allocation of charges among subsidiary public-utility companies in different States and present problems of regulation which cannot be dealt with effectively by the States without the assistance of the Federal Government."

Not guilty. Under the Public Service Commission Act of Pennsylvania every operating company must file with the commission a copy of any service, management, or construction contract which it has with any holding company or other affiliate, and must likewise cause such affiliate to file with the commission a fuil statement of its costs in connection with the performance of services under such contracts. Similar legislation in other States would completely protect the consuming public.

(11) Control of subsidiary companies affects accounting practices, rates, and other policies of such companies and obstructs State regulation:

"Control of subsidiary public-utility companies materially affects the accounting practices and rate, dividend, and other policies of such companies, thereby in many instances complicating and obstructing State regulation of such subsidiary companies."

Not guilty. The accounting practices and rates of subsidiary companies are generally under the complete jurisdiction of the State public-service commissions, and are in no way affected by holding company control.

(12) Growth of holding companies bears no relation to the integration and coordination of related properties:

"The growth and extension of holding companies in many cases bear no relation to the economies of management and operation or to the integration and coordination of related properties but have been influenced by a desire for economic power and security profits and have tended towards the concentration and monopolization in a few holding-company systems of control of gas and electric utility companies to the detriment of investors, consumers, and the general public.”

This does not apply to U. G. I.-Its entire history is one of development of its properties in geographical areas, and the disposal or turning into larger groups of scattered properties in the furtherance of this policy. It is true that there remain in the system a few small scattered properties, mostly gas companies, which U. G. I. has been unable to sell to the groups controlling the electric properties in the same territory. There are no other purchasers.

(13) The above abuses necessitate legislation to control and eliminate the holding company:

"The abuses above enumerated are so commonly associated with the activities of public-utility holding companies and have been so persistent and so widespread that they necessitate legislation to control and eliminate the holding company as an artificial corporate device inherently injurious to investors, consumers, and the general public.

Not as to this company.—If the full story could be written of the pioneer spirit, the risks undertaken, and the constructive policies followed by this company in the 53 years of its life, it would be an epic of our industrial history. U. G. I. service to the public, its constructive influence in the communities in which it operates, and its contributions to the gas and electric industry, have been such that its permanency in industry should be protected, not destroyed. Such a company cannot be labeled "an artificial corporate device inherently injurious to investors, consumers, and the general public.”

REORGANIZATION

Assuming U. G. I. would be authorized to retain its $158,000,000 investments in Philadelphia Electric Co. and other gas and electric companies in Pennsylvania (which is not clear), together with its stock in the integrated Delware companies, representing approxinately 50 percent of its total investments; assuming it was further authorized to retain its $60,000,000 investment in the contiguous Public Service Corporation of New Jersey, there would still remain $121,000,000 of other investments in noncontiguous territory to be disposed of. Of these, the largest interest is represented by $38,000,000 investment in the Connecticut Electric Service Co., New Haven Gas Light Co., and minority interests in other Connecticut operating companies. Disposal of this large investment for cash would be out of the question. Should these companies be merged with other operating companies in Connecticut, U. G. I. would still have its $38,000,000 investment, represented by a minority interest in such new company.

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Operating companies that are owned in scattered localities would presumably be sold the question is to whom? There would be only one possible purchaser in most instances the local utility serving electricity or gas as the case might be. If they could not be sold for cash, U. G. I. would again find itself the owner of stock, to a lesser percentage, in a disassociated gas, electric, or combination company.

A more serious difficulty would be found in the disposal of U. G. I.'s nonsubsidiary investments. Such of these investments as consist of small interests in operating companies might be sold to reorganized local groups at whatever price could be obtained.

For the substantial investments in other holding companies, such as Niagara Hudson, $16,000,000, and Commonwealth & Southern, $10,000,000, there is no group to which these stocks could be sold. These holding companies would themselves be in process of reorganization or dissolution and it is inconceivable that such large blocks of securities could be sold on the market even at present depressed prices. Of still greater difficulty would be the disposal of the company's $60,000,000 investment in the Public Service Corporation of New Jersey, should it not be authorized to retain it.

DISSOLUTION

The difficulties of disposal or distribution of the assets of a company with such wide interests as U. G. I. are very real. The loss to investors lies in the fact that under the bill this action is forced; that the mathematical procedure is too complicated to permit the distribution of U. G. I. holdings pro rata among the stockholders, or that, alternatively, the raising of cash for distribution within a specified time, even if it could be accomplished at all, would entail the loss of much of the value of the company's assets.

There is also the question of prior obligations, such as guarantees that exist in connection with issues of bonds, and preferred stock of subsidiary companies and companies no longer in the system. Moreover, there exists the company's obligation to operate the municipally owned Philadelphia Gas Works and the Northern Liberties Gas Co. There is the further right of the company's preferred stockholders to receive in dissolution $100 per share in cash. It is difficult to consider a method of distributing assets remaining for the common stock, when the principle upon which the prior obligations are to be met is so impossible of determination. However, assuming prior obligations could be taken care of, there are shown in chart form examples of the complications involved in the dissolution or reorganization of this company and the distribution of its assets, particularly those of other holding companies which would themselves be in process of reorganization or dissolution.

DIFFICULTIES OF OPERATION UNDER THE BILL

The enormous practical difficulties in the way of the reorganization or dissolution of a holding company such as U. G. I. are equaled by the obstacles to efficient management imposed by the bill on the conducting of the business of a new "regional" operating company.

The interjection of regulation by Federal agencies would cover four phases of the system's business: Finance, business practices and methods, engineering, and rates and services to customers.

Finance. All of the restrictions put on the corporate management of the existing type of holding company would continue on the new functional holding company organized under the bill.

Broadly, these restrictions apply to the use of corporate funds and the nature of the financial structure. The payment of dividends and fees between companies in the system, intercompany loans, the investment of funds, the purchase and sale of securities, and change in the terms of securities, all would be under Federal regulation, despite the integral character of the new regional utility, which would be one single company in all but name. The effect is to subject to Washington jurisdiction what in many cases amounts, for all practical purposes, to intracompany business.

Business practices and methods.-To secure the economies of unified operation, it would still be necessary for the new company to supply the smaller companies in its group with business services of many kinds. The simplest kind of management service, in the sale, accounting, and engineering fields, might, under Commission rules, have to be withheld until approval was secured as to the usefulness of the service, the price, and the conditions of performance of the contract. Likewise the bill would subject the company to dual regulation, by State and Federal agencies, with regard to all accounting practices.

Engineering. Under the bill, the Federal Power Commission would be given complete jurisiction over the physical property necessary for producing and transmitting electricity. While the Commission is only given jurisdiction over the facilities used in interstate commerce, in an interconnected system such as is here contemplated, virtually all equipment except that used in the local distribution of electricity, would be thus supervised, even though jointly used in inter and intrastate business.

The Commission is authorized to draw up a "superpower" plan and the company can be forced to alter its generating and transmission facilities to conform with such plan. The purchase, sale, or abandonment of property, the extension, repair or change of facilities, could only be undertaken with Commission approval. The intent of these provisions is clearly to establish the utility as a common carrier, virtually under the magement of the Federal agency. The present interchange agreements can be entirely altered, and the generating and transmission facilities used as the Commission, rather than the company, sees

fit.

This is the program recommended in the report of the Mississippi Valley Committee of the Public Works Administration: "There is nothing novel in the conception of a completely unified system for generation and transmission of of electricity. Over wide areas such unification exists. It should not be difficult to reconcile the public and private interests involved in includiug in such a system power from dams which are built primarily for the proper use and control of the nation's water resources. The legal and operating problems appear relatively trivial in contrast to the great social purposes to be accomplished.

"To provide in considerable measure the leadership for the accomplishment of these momentous economic and cultural gains in the years just ahead is a task of Government.

"Government control of transmission is fundamental."

Rates and service to customers.-The bill apparently gives the Federal Power Commission jurisdiction over rates and services of a purely interstate nature. Taken at its face value, this includes only the intersystem sales of electricity, plus the exchange of power with neighboring utility systems. The imposition of Commission supervision over such interchange of electric energy will not tend to the economic use of generating stations. The essence of exchange arrangements is timeliness, and engineers in charge must have full power to authorize the interchange of electricity at proper prices, depending upon operating conditions prevalent at the moment.

Under the bill, the Federal Power Commission could, in effect, fix the gateway cost of electricity, i. e., the cost at the substation. By the determination of gateway cost to different classes of service, the Commission is virtually in a position to dictate the rates charged, not only to wholesale power users such as municipalities and railways, but also to retail customers, depriving the State commission of this local control.

General. The effect of all these provisions is to further complicate the management problems of a large utility system. The jurisdiction proposed for the Federal agencies goes far beyond mere regulation. Över virtually all the phases of the business Federal authorities are given new powers heretofore resting exclusively with the management of utility companies. The placing of final decision on most of the matters of local importance to utility company management, in an agency in Washington, will increase the cost of operation, decrease the initiative of the local management, destroy its inspiration, and prevent improvement in business practices and developments in the engineering field. The tendency will be to crystallize the operations of the utility companies in their present form and thus put an effective end to the very progress which the bill is supposed to promote. The accompanying chart shows graphically the extent and confusion involved in the proposed Federal regulation of a new "regional" operating company, which is not regulation, but inflexible management by Federal authorities.

CONCLUSION

During the 53 years of the life of this company, the gas and electric business in all its successive forms has been a driving force in the elimination of drudgery from the American home and factory, and in the greatest advance in the art of living the world has ever seen. What valid reason can be advanced for believing that a system which has planned, financed, and built an "electrical America' has fulfilled its task and should now be ruthlessly broken up? What reason can be advanced for believing that the benefits to operating companies, and thereby

to their customers, is not a continuing one which the holding company can continue to discharge?

Capable, honestly-managed holding companies should be permitted to carry on the good work which their organizations, by training and experience, are competent to perform without having to face the financial and economic distup-J tion of the industry and the loss of savings to investors which would inevitably follow the passage, in its present form, of the public utility holding and operating! company bill of 1935.

MAP PREPARED

AMERICAN GAS & ELECTRIC CO.

PHYSICAL

BY THE FEDERAL TRADE COMMISSION (BROUGHT UP TO DATE) Properties are integrated and coordinated (although not within the definition: in sec. 10 of the bill).

Every property now owned was owned at organization in 1907 or was acquired to integrate with properties owned in 1907.

The central interconnected system of American Gas & Electric Co. was. spoken of favorably by Commissioner Healy. The complete report of Engineer J. C. Dickerman, praising this system, is in the Federal Trade Commission reports. This central interconnected system has been described by English authorities as of greater magnitude than their "grid"; and it was yielding to our customers the benefits of such interconnection and coordination before development of the English "grid" was begun.

Cooperative operation of the central interconnected system, through American Gas & Electric organization, now secures all beneficial results of a single company. State laws make one company impossible. (Foreign corporation cannot acquire franchise Ohio, Indiana, Virginia; cannot develop water power West Virginia; eminent domain; company books, etc.)

Properties in New Jersey and Pennsylvania each represent integration of dozens of once separate companies.

South Jersey property serves more than 200 communities with 320,000 population and 85,000 annual customers, increasing to 100,000 in summer.

Principal energy requirements come from its ownership in most efficient steamelectric station in world.

Pennsylvania property serves 25 communities with 358,000 population and 80,000 customers.

Principal energy requirements come from ownership in station as low cost as any in the State.

Both these companies obtain all the benefits of integration, through membership in the American Gas & Electric cooperative family and through jointly operated power stations negotiated and built by the American Gas & Electric organization Returning to system map

Represents result of continuous application of American Gas & Electric organization effort over entire period of 28 years. Problems have changed in kind and increased in number, but just as many problems solved in the last 5 years as any preceding 5 years.

Energy sold in 1934 was almost exactly same as 1929.

Notwithstanding increased wage rates under National Industrial Recovery Act, operating expenses of the group (exclusive of taxes and depreciation) in 1934 were $3,000,000 (12 percent) less than in 1929, largely due to engineering and management accomplishments. Comparing the same years (1934 with 1929) taxes were $1,150,000 higher, and amounts collected from customers were $6,400,000 less.

Development has not stopped and there are more problems engaging our attention now than ever before.

Customers served, electric, 654,500; heating, 2,500; total, 657,000. (Customers Scranton and Atlantic City companies, 165,000.)

Communities served, 1,397; population, 2,985,000; average size, 2,136; average number of customers, 470.

Farms served, 18,483.

Generating capacity, hydro, 69,000 kilowatts; steam, 1,109,000 kilowatts; total, 1,178,000 kilowatts.

Transmission lines, 132 kilovolts, 1,305 miles; 66 and 88 kilovolts, 1,223 miles; other, 3,558 miles; total, 6,086 miles.

Distribution, 12,276 miles.

Employees, 8,283.

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