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No. 21 "The Holding Company Bill: An Analysis of a Bill Which if Adopted in Its Present Form Would Compel the Liquidation of Utility Holding Companies, with Serious Loss to Investors, and Would Place Such Restrictions upon Operating Companies as to Cause Probable Eventual Government Ownership and Operation of Utilities," March 18, 1935.
No. 21 "The Holding Company Bill: An Analysis of a Bill Which if Adopted in Its Present Form Would Compel the Liquidation of Utility Holding Companies, with Serious Loss to Investors, and Would Place Such Restrictions upon Operating Companies as to Cause Probable Eventual Government Ownership and Operation of Utilities," March 18, 1935. American Liberty League. 400dpi TIFF G4 page images Digital Library Services, University of Kentucky Libraries Lexington, Kentucky Am_Lib_Leag_21 These pages may freely searched and displayed. Permission must be received for subsequent distribution in print or electronically. No. 21 "The Holding Company Bill: An Analysis of a Bill Which if Adopted in Its Present Form Would Compel the Liquidation of Utility Holding Companies, with Serious Loss to Investors, and Would Place Such Restrictions upon Operating Companies as to Cause Probable Eventual Government Ownership and Operation of Utilities," March 18, 1935. American Liberty League. American Liberty League. Washington, D.C. 1935. This electronic text file was created by Optical Character Recognition (OCR). No corrections have been made to the OCR-ed text and no editing has been done to the content of the original document. Encoding has been done through an automated process using the recommendations for Level 1 of the TEI in Libraries Guidelines. Digital page images are linked to the text file. Pamphlets Available * Copies of the following pamphlets may be obtained upon application to the League's national headquarters: American Liberty League Speech by Jouett Shouse The Tenth Commandment Why, The American Liberty League? Statement of Principles and Purposes Progress vs. Change Speech by Jouett Shouse Recovery, Relief and the Constitution Speech by Jouett Shouse American Liberty League Its Platform An Analysis of the President's Budget Message N. R. A. Its Past, and Recommendations for the Future Analysis of the $4,880,000,000 Emergency Relief Appropriation Act Economic Security A Study of Proposed Legislation Democracy or Bureaucracy? Speech by Jouett Shouse The Bonus An Analysis of Legislative Proposals The Constitution Still Stands Speech by Jouett Shouse Inflation Possibilities Involved in Existing and Proposed Legislation The Thirty Hour Week Dangers Inherent in Proposed Legislation The Pending Banking Bill A Proposal to Subject the Nation's Monetary Structure to the Exigencies of Politics The Legislative Situation Speech by Jouett Shouse * Write to AMERICAN LIBERTY LEAGUE NATIONAL PRESS BUILDING WASHINGTON, D. C. â˜… â˜… THE HOLDING COMPANY BILL â˜… â˜… â˜… An Analysis of a Bill Which if Adopted in Its Present Form Would Compel the Liquidation of Utility Holding Companies, with Serious Loss to Investors, and Would Place Such Restrictions upon Operating Companies as to Cause Probable Eventual Government Ownership and Operation of Utilities AMERICAN LIBERTY LEAGUE Rational Headquarters NATIONAL PRESS BUILDING WASHINGTON, D. C. â˜… â˜… Document No. 21 March} 1935 The Public Utility Holding Company Bill * Outstanding among measures receiving serious consideration in the present Congress, the public utility holding company bill, in the form introduced, embodies the most disturbing threat to recovery. Like the Securities Act of 1933, which was so severe as to hold back the flow of capital necessary to the revival of industry, the pending bill would tend to nullify beneficial effects of activities under other laws. Regardless of how desirable or even necessary some form of regulation of utility holding companies may be, the bill as presently drafted goes far beyond any reasonable requirement and falls definitely within the danger zone. If enacted in its present form, it would impair the savings of a multitude of investors, throttle individual initiative and add to the powers of a Federal bureaucracy. It would threaten losses running into the billions and involving millions of investors. In part, at least, it typifies misguided zeal for reform of practices already outlawed. It would deal a crushing blow to confidence without which the Nation can not hope for restoration of sound economic conditions. It appears to be designed to bring about government ownership and operation of utilities. The probable effects of the bill may be summarized as follows: 1. Investments amounting to $2,000,000,000 in securities of public utility holding companies, already seriously affected, would suffer immediate further depreciation, and, upon the compulsory liquidation of these companies within five years, a shocking loss. 2. A considerable part of investments aggregating $10,000,000,000 in securities of public utility operating companies would be jeopardized by their separation from holding companies and by the new and arbitrary methods of regulation imposed by the bill. 3. Values of many additional billions in securities of holding companies in other and varied industries would be menaced by the possibility of a broadening of the ban on this type of corporate structure. 4. Capital, now available to utility operating companies through holding companies, would be difficult to obtain in the light of such new regulatory proposals as the fixing of rates on a basis of "prudent cost" rather than on the basis fixed by the United States Supreme Court, which is "fair present value." 5. If the bill should pass as drawn, the utilities would be forced to secure governmental aid or else to curtail service to consumers and suspend improvements which create employment. 6. Besides being oppressed by government regulation the utilities would be at the mercy of government competition, Federal, state and municipal agencies engaged in the production and distribution of electricity and gas being exempt from the provisions of the bill. 7. Restrictions upon individual initiative, financial handicaps, a new rate-making theory and government competition would tend inevitably toward nationalization of the utility industries. 8. Encroachment upon the authority of the states over purely intrastate business would appear unavoidable through greatly increased Federal control over companies engaging in both interstate and intrastate commerce. 9. Federal jurisdiction over holding companies is assumed regardless of a lack of court decisions assuring the constitutionality of such a step. 10. Taxpayers would bear the cost of an extensive addition to the Federal bureaucracy necessitated by increased powers vested in three government agencies, the Securities and Exchange Commission, the Federal Power Commission and the Federal Trade Commission. Terms of Bill The bill, designated officially as the Public Utility Act of 1935, is a voluminous document of 178 printed pages. It was introduced by Representative Sam Rayburn of Texas, chairman of the House Committee on Interstate and Foreign Commerce, as H. R. 5423, and by Senator Burton K. Wheeler, chairman of the Senate Committee on Interstate Commerce, as S. 1725. It contains three titles. Title I relates to the control and eventual abolition of public utility holding companies. Title II consists of amendments to the Federal Water Power Act, which extend the authority of the Federal Power Commission to include almost all operating companies, the jurisdiction being based on the transmission and sale of electric energy in interstate commerce. Title III provides for a similar regulation of the dis-4 tribution and sale of natural gas by the Federal Trade Commission. The validity of Title I is based on incidental use of the mails and instrumentalities of interstate commerce. Privately owned electric and gas holding companies are alleged to be affected with a national public interest. The bill defines a "holding company" as " (A) any company which, either alone or in conjunction and pursuant to an arrangement or understanding with one or more other persons, directly or indirectly, controls a public utility company, whether such control is exercised through one or more intermediary persons or by any means or device whatsoever; (B) any intermediary company through which such control is exercised; and (C) any person or persons which the Commission determines, after notice and opportunity for hearing, to exercise such a material influence over the management or policies of any public utility or holding company as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that such person or persons should be deemed a holding company or companies for the purpose of this title." Public utility holding companies are required to register with the Federal Securities and Exchange Commission by October 1, 1935. Their operations and financial affairs come under its control pending the gradual dismemberment which commences under elaborate rules laid down in the bill. Dissolution may be required at any time after January 1, 1938, and is compulsory after January 1, 1940, with the exception that the Securities and Exchange Commission may grant a reprieve from the death sentence upon certification from the Federal Power Commission that continuance is necessary for a geographically and economically integrated system, serving an economic district extending into two or more contiguous states, and that merger or consolidation is impossible under state law. The policy enunciated in the bill declares for simplification of public utility holding company systems, the elimination therefrom of properties not economically and geographically related in operations and abolition of holding companies at the end of five years. Violation of any provision of Title I or of any rule, regulation or order thereunder, imposes a fine of not more than $10,000 or imprisonment of not more than five years, or both, except that 5 in the case of certain violations by a holding company a fine of not exceeding $500,000 may be imposed. Equally severe penalties are embodied in Titles II and III. Title II greatly broadens the powers of the Federal Power Commission over electric utility companies. While the existing Federal Power Act applies chiefly to companies developing power under license along navigable streams, the amendments to that Act comprising Title II of the pending bill make subject to control all electric utility companies which engage in interstate commerce or which are part of a power transmission system crossing state lines. It appears probable that most of the important transmission companies would be brought under a broad regulation applying to rates, issuance of securities and facilities of production and wholesale distribution. Eighty-four per cent of all companies are said to be engaged in interstate commerce. All transmission lines, any part of which cross state boundaries, would be designated as common carriers. Such lines presumably might be required to transmit power for governmental plants as well as for private companies. Rates of companies subject to the Commission may be fixed on a basis of "prudent cost" rather than fair present value or original cost. The Federal Power Commission is given authority to require utility companies to establish interconnections of facilities for the purpose of creating regional districts for the control of production and transmission of electric energy. Title III is similar to many of the provisions of Title II except that it applies to natural gas instead of electricity and its administration is in the hands of the Federal Trade Commission instead of the Federal Power Commission. Provisions apply to the transmission and sale of natural gas in interstate commerce, except that retail sale of natural gas in local distribution is exempt. Destruction of Values Title I is flagrant in its disregard for the fate of individuals, institutions and trust funds that have investments in securities of public utility companies. Titles II and III display the same tendency in a lesser degree. The enactment of Title I could not fail to reduce materially the value of the $2,000,000,000 of securities of public utility holding companies 6 which are outstanding in the hands of very large numbers of investors. In many cases the investments represent the savings of citizens with small means. In the two weeks following the introduction of the bill the market value of stocks of utility holding companies suffered a decline of nearly $100,000,000. The compulsory liquidation of holding companies, even over a period of five years, would mean enormous losses. It would be necessary to convert common stock equities of operating companies, constituting assets of the holding companies, into cash to pay off senior securities of the latter. Such a conversion could not be accomplished without depressing market values of the stocks of the operating companies. The $10,000,000,000 investment by the public in the securities of the operating companies thus would be affected as well as investments in holding companies. The results would be harmful both directly to investors and the companies involved and indirectly to many other segments of the economic structure. One of the effects of the bill which properly is causing serious concern is its application to industrial holding companies which only incidentally are interested in utility properties. These companies are defined as public utility holding companies under the terms of the bill. They would be forced immediately to liquidate their utility holdings in order to escape drastic regulation and eventual extermination. Such liquidations could not take place without heavy losses. During the five years or less while public utility holding companies are being liquidated the restrictions imposed upon them could not fail to affect adversely the market values of their securities. It is made unlawful after January 1, 1937, for registered holding companies to have any interest or own any securities in business other than operating gas or electric companies, business in which under express state approval an operating utility may engage, or business reasonably incidental to the foregoing. It is also made unlawful after that date for a registered holding company or a subsidiary which is operating an electric company to have any interest in a company producing or transporting natural gas in interstate commerce, or to have any interest in an operating company doing business outside the United States except under special conditions. These restrictions for the most part seem un- reasonable and arbitrary. They would necessitate extensive liquidations which would have deflationary effects reaching related industries such as street railways, coal production and water works. Investments Must Suffer It is idle for the proponents of the bill to assert that in the wholesale liquidation attending the dissolution of holding companies all legitimate values would be preserved. Representative Clarence F. Lea of California, a member of the House Committee on Interstate and Foreign Commerce, commented on this phase during hearings on the bill on February 28. He defended investors who have written to members of the Congress in opposition to the bill. "Here is a proposal to terminate the holding company within five years," said Mr. Lea. "Now, would not the fact that we are proposing to end the company largely destroy the market value, even the legitimate market value of that stock? Nobody would be attracted to buy stock in a company that is facing the end of its life. If we force the liquidation of these companies at a time when economic conditions are not favorable, we force liquidation on a vast scale. It is not a case where the company's securities can be readily disposed of, because we would throw so many on the market at the same time that we would over-supply the market and, I fear, to the injury of the holders of the securities. "So I think the stockholders who analyze the situation will have a real apprehension about protecting the real values in their stocks." Titles II and III might lead to a destruction of property values through the new regulatory methods imposed upon electric and gas utilities. The government would be in a position to force down the rate structure to a level comparable with that of such a "yard stick" as the Tennessee Valley Authority, which, because of capital on which no interest need be paid, exemption from taxes and other special favors, is able to charge lower rates than those of private power companies. By using the indefinite "prudent cost" formula, justification might be offered even though it meant a sacrifice of actual investment. Government Ownership The bill raises the issue of nationalization of public utilities. Industry, to survive in private hands, must be free and unhampered as to man- agement, subject, of course, to a reasonable degree of supervision. The bill so restricts the utilities as eventually to create an impossible situation. The security owners would be helpless, and government ownership and operation would be the only outcome. The abolition of holding companies would increase financing difficulties. A small operating company would have much greater trouble in finding a market for securities than under present conditions where the capital is obtained through a holding company with direct access to the financial markets. If the government were to reduce rates and enforce many regulations tending to deprive the management of the right of individual initiative and independence, it is obvious that private capital would not be available. The operating companies would be forced to curtail expenditures for improved facilities. There would be increasing complaints from consumers. Loss of revenue by reason of lower rates would contribute to the financial distress of the companies. The curtailed activities would add to unemployment. All of this would mean a deepening of the depression. In the face of such a situation the government might be forced to take over the utilities to prevent wholesale bankruptcies. Nationalization of industry in such circumstances would mean a widespread destruction of property values. Is the United States ready to embark upon a program of government ownership of utilities? The problem should be faced frankly, with full realization of all the factors involved. Government operation means inefficiency. It means waste. It means political management. It means the socialization of one of our largest industries. The present administration has no authority in its party platform for the attempted abolition of holding companies. That platform declared for their regulation, not their destruction. Functions of Holding Companies It is not here contended that grave abuses have not characterized some public utility holding companies both as to organization and management. On the other hand, they have certain definite and useful functions just as do holding companies in many other lines of industry. The holding companies make available to operating companies technical skill superior to that which they could otherwise command. They are able to purchase equipment at lower cost. They aid in financing, either through loans or the marketing of securities. Investments in holding companies have the advantage of a diversity of risk. Without them and their organized coordination and direction of scattered operating units there could have been no such development in the utility field as has taken place in comparatively recent years. Holding companies of various kinds have been known in the United States for many years. One of the leading railroad holding companies dates back more than a century. Three of the existing gas and electric holding companies were in operation prior to 1900 as were a large number of holding companies in other lines of industry. The chief development of holding companies in the utility field came after 1910. While the agitation responsible for the pending legislation has centered on public utility holding companies, their structure and functions are not essentially different from those in other industries. Hence, if the Congress decrees the abolition of public utility holding companies, the inference is natural that the ban will be extended ultimately to all holding companies. Whether there is such an immediate intention is immaterial. Anticipation of action of this character would affect adversely market values of all holding company securities. With a graphic demonstration before them of the disregard of the Congress for the rights of holders of securities of public utility holding companies, investors would be reluctant to place their money in holding companies of any kind. The deflationary effects might be very great on a vast and varied assortment of industries, involving investments of many billions of dollars. This would seriously retard recovery and have the effect of keeping the country in its present depressed state. Charges Against Holding Companies As part of the attempt to provide a legal basis for control of public utility holding companies the bill reiterates charges made against them. It is declared that investors cannot obtain necessary information as to the financial position and earnings of most holding companies and their subsidiaries. The fact is that the Securities Act of 1933 and the Securities and Exchange Act of 1934 require disclosure of full information. There is no reason to believe that an investor could 10 be any better informed as a result of the enactment of the pending bill. Many of the other charges, even if pertinent a few years ago, cannot be sustained at the present time in the light of the exposure of past practices and the publicity now necessary under the two recent enactments. Among these charges are that securities are often issued upon the basis of fictitious asset values, that such securities are often issued in anticipation of excessive revenues from subsidiaries which if realized would burden consumers, and that such securities when im-providently issued subject subsidiary companies to the burden of supporting an over-capitalized structure. The new Federal laws would appear adequate to protect the public against the improper issuance of securities. A highly significant colloquy took place during hearings before the House Committee on Interstate and Foreign Commerce on February 28. Robert E. Healy, now a member of the Securities and Exchange Commission and formerly in charge of the Federal Trade Commission's public utility investigation while its general counsel, was a witness. Representative Charles A. Wol-verton of New Jersey interrogated him. Former Abuses Cured A transcript of the testimony shows the following exchange between Mr. Wolverton and the witness: Mr. Wolverton: Judge, the thing that is discouraging to me is this: When you appeared before this Committee when we were considering the stock exchange bill of last year, and we were benefited by your presence before us, you related the â– â– â– ..... Company situation to us. Now, in this hearing with reference to this proposed legislation you again refer to the ........ Company situation. When is the .......... Company to cease to be the basis of legislation? Are we never going to get to a point where we can pass legislation based upon our knowledge of evils, that will be effective? I thought we had gone a long way in doing so in the other two bills. Mr. Healy: Well I think they were very helpful; but you have come to a special field now of public utility holding companies in the electric and gas industry. Mr. Wolverton: What I am trying to find out is this: Will the Securities Act and the Stock Exchange Act be effective in stopping these practices in the future? All you say relates to what happened before either of those acts were passed. Mr. Healy: That is true. Mr. Wolverton: Now, can those conditions con-11 tinue under the laws we have passed, and do they continue? Mr. Healy: I believe they can. Mr. Wolverton: Do they? Mr. Healy: I do not know. Mr. Wolverton: Do you know of any single situation similar to what you have related in connection with the .......... Company which has occurred since we have passed the Securities Act or the stock exchange bill? Mr. Healy: Well, offhand, I say I admit I cannot recall one. Mr. Wolverton: If these practices have stopped, without these provisions having been effective, why is it necessary to pass such drastic legislation now to prevent something that does not continue to exist? In view of the safeguards provided by the very far-reaching Securities Act and the Securities and Exchange Act the insistence upon the enactment of the pending legislation leads to the conclusion that its sponsors desire government control and ownership of the utility industry rather than additional protection against alleged abuses. Constitutionality Doubtful Precedents which indicate clearly the right of the Congress to assume jurisdiction over holding companies are lacking. This is admitted by sponsors of the legislation. The validity of Title I hinges in large part upon whether the use of the mails to market securities of holding companies brings them under Federal control. Section 1 of Title I attempts to furnish a legal basis under the commerce clause of the Constitution. It is set forth that public utility holding companies and their subsidiaries are affected with a national public interest by reason of the fact that their securities are widely marketed and distributed by means of the mails and instrumentalities of interstate commerce; that their service, sales, construction and other contracts and arrangements are made and performed similarly; that their subsidiary companies sell and transport gas and electric energy by use of instrumentalities of interstate commerce; that their practices and control over subsidiary companies materially affect the interstate commerce in which those companies engage, and that their activities, extending over many states, are not susceptible to effective control by any state and make difficult, if not impossible, effective state regulation of public utility companies. 12 State Regulation It is not true that public utility holding companies are entirely unregulated at present. Many states have laws dealing with various phases of the relationship between holding companies and operating companies. Many states have laws applying to management or service contracts between operating utilities and holding companies. The New York statute, for example, requires the filing of all management, construction, engineering and similar contracts made with an affiliated interest and provides that no contract shall be effective until so filed. After a hearing the commission may hold the contract not to be in the public interest. Other states with similar laws include Illinois, Indiana, Kansas, Oregon, Virginia, North Carolina, New Jersey, Maine and New Hampshire. Some of the states, like Wisconsin, have even broader provisions. In a number of states there are laws to aid public service commissions in obtaining information from outside corporations. Some of the laws relate to loans between operating utilities and holding companies. Some laws give control to public service commissions over acquisition of public utility stocks by other corporations. The public utility holding companies are coming more and more under definite state regulation. Where state regulation is less extensive in one state than in another, that is a matter of local popular choice. Similarity to Securities Acts The present situation with respect to the pending bill has elements of similarity to conditions surrounding the enactment of the Securities Act of 1933 and the Securities and Exchange Act of 1934 (for the regulation of stock exchanges). It is not without significance that the two technicians who drafted Title I of this bill also were chiefly responsible for the language in the Securities Act and in the original draft of the Securities and Exchange Act. _ The Securities Act was enacted without sufficient consideration. Its harsh terms handicapped the efforts of the administration to revive industry. A year later it was necessary to relax some of its needlessly severe provisions. When the Securities and Exchange Act was first introduced, the President disavowed responsibility for its specific provisions and encouraged 13 a revision by congressional committees. As a result the bill was entirely rewritten. In the form in which it passed the Congress it was a workable statute and contained few of the severe restrictions that attached to its original provisions. Thus its highly deflationary effect was minimized. It became a law to regulate rather than a law to destroy as would have been the case if passed in the form originally presented. In his annual message to the Congress on January 4,1935, the President urged "the restoration of sound conditions in the public utilities field through abolition of evil features of holding companies." He did not then recommend abolition of holding companies. In his special message on March 12 he said that "except where it is absolutely necessary to the continued functioning of a geographically integrated operating utility system, the utility holding company with its present powers must go." Even if certain companies were allowed to continue, the threat of abolition which would be hanging over all under the declared policy of the bill would make for uncertainty and would depress values of securities. The President asserts that the holding company is "a device which does not belong to our American traditions of law and business." Earlier in this summary attention has been called to the fact that some holding companies have been in existence for more than a third of a century. With entire sympathy for the desire of the President to abolish "evil features of holding companies" it is submitted that this bill if passed as presently drawn would constitute unwise and destructive legislation. Also it would result ultimately in government operation of utilities. The congressional committees in charge should modify its provisions so as to protect investors from an unwarranted raid upon the value of their securities and so as not to discourage the country generally in its efforts toward further recovery. Proper regulation within constitutional limits is a theory which will evoke general agreement. Wanton destruction of these instrumentalities of modern business will serve no good purpose and should be militantly opposed. 14