Liberty Park, USA Foundation

Till now the realm of private monopoly has been one of mystery. We have been told that it is a sort of enchanted land, shut away from the common public by barriers of necessary trade secrets, jealously guarded, and by complexities and problems beyond the ken of the ordinary citizen. But now this realm has been invaded, explored, and chartered. It stands revealed.

The Federal Trade Commission, acting under authority of a resolution of the United States Senate approved February 15, 1928, has been at work now for four years in the investigation of this subject. So far—up to August, 1932—44 volumes of this report have been published, containing over 20,000 pages and 4,972 exhibits. And more are coming, for the hearings are still going on.

The revelations brought out regarding the utility corporations in these hearings constitute, we believe, one of the most important public documents ever published by a commission of the American Government. They deal with one of the most vital and fundamental problems of our modern life. The testimony reveals facts and information, tendencies and trends regarding the most basic industries of the country little known or understood by the public, and so amazing to the ordinary citizen as to be almost unbelievable.

We have been told by the utility interests that there is no such thing as a power trust; that utility rates are reasonable and fair"a fair return upon a fair valuation"; that there is no such thing as "watered stock," "write ups," or inflation of capital stock; that earnings are moderate and modest. And in support of these contentions the courts, the press, university professors, economists, and publicists have all joined in a chorus of approval and substantiation. Only the most daring would have the temerity to question or challenge such a generally accepted view of the matter.

But the Federal Trade Commission has penetrated this jungle of mystery, this labyrinth of darkness and secrecy. Armed with the authority of the Federal Government to compel the attendance and testimony of witnesses and to subpoena important and telltale documents and records, the Commission has hewn its way through the maze and intricacies of designed confusion and the bewildering mass of material to the very heart of our modern monopoly system and laid it bare. Step by step, and piece by piece, through four years of patient, persistent, and painstaking investigation, the Commission has ferreted out the facts and made them public; so that we now have the most complete, the most illuminating, and the most authoritative picture of the whole monopoly system, its innermost methods, and its modus operandi that has ever been published. Now we know, or may know if we will but read the record, just what is going on in the utility field; just how the system works; and just what it is doing. The mystery is solved. The trade secrets of extortion are revealed. The seals of the book are broken, and the whole subject lies open before us.

However, the material in this voluminous report is a bewildering mass. It is wholly unorganized, wholly unclassified and without an index; so that in its present form it is so formidable and involved as to be quite beyond the reach of the ordinary individual and its essential facts almost inaccessible. The reading, analyzing, classifying, and indexing of this great mass of vitally important material has been a tremendous task. In this work the author has had the assistance of a number of associates who have helped in various ways, especially in reading, marking, and indexing the various volumes, so that attention could be drawn directly to the more essential facts and evidence. Among those who have assisted in this matter especial mention should be made of the following: Charles Edward Russell, noted publicist and author, has read the manuscript and has given many helpful suggestions in the preparation of the material. Rev. Dr. John A. Ryan, Director of the Department of Social Action of the National Catholic Welfare Conference; Donald Richberg, attorney, of Chicago; William H. Holly, attorney, of Chicago; Honorable S. A. Stockwell of Minneapolis, Minnesota, and Miss Grace Peter, attorney, of Chicago, have all assisted in reading and marking the various volumes. R. E. McDonnell and C. F. Lambert of the engineering firm of Burns and McDonnell of Kansas City, Missouri, have been especially helpful in reviewing the technical and engineering phases dealt with in the report, and Mr. Lambert has assisted in checking up on the various financial features, accounting, etc. Lloyd Bemis, certified public accountant of Chicago, has also checked over important financial features of the report. Many others have assisted in the detail work of indexing and otherwise preparing the material for publication.

William H. Holly, attorney, of Chicago, Chairman of the Executive Committee of The Public Ownership League of America, has read the entire manuscript and offered many helpful suggestions and criticisms which have been incorporated in the text.

But most important of all has been the help and co-operation of W. T. Rawleigh of The Rawleigh Foundation of Freeport, Illinois. The work of the preparation of the manuscript of this volume would not have been possible except for his generous contribution and public-spirited co-operation. Mr. Rawleigh has financed the many months of work required in making the careful and exhaustive study of these findings and the preparation of the manuscript. It is fitting, we believe, that we should dedicate this volume to Mr. Rawleigh in appreciation, not only of this particular contribution to the public service in America, but also in appreciation of his many other similar contributions in the field of economic research and of progressive civic action.

It is understood, of course, that although the many associates above mentioned have assisted in the preparation of this volume, the author assumes all responsibility for the work of final reading of the volumes and the selection of the material that has gone into the summary; also for the form in which the material is presented , and the comments and explanations that appear.

Other pamphlets and books have been written and published on the findings of the Federal Trade Commission. But we have felt that the facts here presented and the revelations here made are of such vital importance to the American people that a more or less complete review should be made of these proceedings than has heretofore appeared. It is important, we feel, that the publication should present as complete a picture of the methods, operations, and activities of the utility companies as possible. Moreover, the most important and significant revelations in the whole proceedings have to do with the financial methods, structure, and operations of these companies. This particular phase of the subject is at the very heart of the whole problem. It is in the financial methods and structure of the utility corporations that the interests and the destinies of our people are more vitally and powerfully affected than in any other. And, strangely enough, upon this particular phase of the subject neither the press nor the volumes so far published have given any adequate presentation or review. And so for these various reasons we have felt impelled to go forward with the publication of this volume.

We have tried to review the hearings o£ the Federal Trade Commission in an impartial manner and without bias. So far as practical we have reviewed the testimony in the very words of the witnesses themselves, using our' own words and statements only so far as seemed necessary to make the connections clear and the testimony understandable. Every important fact presented in this summary and every statement made, if not directly quoted, is based upon statements of the witnesses or records presented and, so far as practical or where deemed important, reference is made to the volume and page of the hearings where the original testimony may be found.

Thus with this great mass of bewildering testimony sifted until the essential matter stands out; with the material organized and classified under chapter heads; with every important statement based upon actual testimony given, and references to all important statements made; and, finally, with a carefully prepared index covering the entire subject matter, we have endeavored to make this volume an essentially complete and an especially usable summary and review of these amazing revelations.

The hearings are still going on. Other volumes and possibly other investigations will appear. It is the intention of those of us who have worked in the preparation of this volume to follow up these further reports as they appear, and should additional facts and information of an essential nature be developed by these later and further hearings, we shall undertake to publish a supplemental volume to cover these reports. Whether this is done or not will depend upon what the later investigations develop.

All italics used in quoting from the text of the hearings are our own, and are used freely in order to bring out more clearly the important points presented.

Introduction—Is There a Power Trust?

Senator George W. Norris of Nebraska, Senator Thomas J. Walsh of Montana, Governor Gifford Pinchot of Pennsylvania, and others say there is. The representatives of the utility corporations say that there is not and that the power trust is a myth.

In an address to the United States Senate on January 2, 1925, Senator Norris had this to say:

“I have been dumbfounded and amazed, and the country will be dumbfounded and amazed when it learns that practically. everything in the electrical world is controlled either directly or indirectly by some part of this gigantic trust. It controls from one end of the country to the other the generation and distribution of electricity by water power and by other means, and the manufacture and sale of electrical appliances, running all the way from a little electric bulb in the house lamp to the gigantic generator that will handle without trembling from 30,000 to 60,000 horse power. A gigantic trust that has fastened its fangs upon the people of the United States from the Atlantic to the Pacific and from the Great Lakes to the Gulf.” [Congressional Record, January 2, 1925, 68^th Congress, 2^nd Session, pp. 1101-1107. See also same record for February 9, 1925, p. 3382.]

About the same time Governor Gifford Pinchot submitted his report to the State Legislature of Pennsylvania on "Giant Power," in which he said:

“Nothing like this gigantic monopoly has ever appeared in the history of the world. Nothing has ever been imagined before that even remotely approaches it in the thorough-going, intimate, unceasing control it may exercise over the daily life of every human being within the web if its wires. It is immeasurably the greatest industrial fact of our time. If uncontrolled, it will be a plague without previous example. If effectively controlled in the public interest, it can be made incomparably the greatest material blessing in human history?” [“Giant Power Survey” report to State Legislature of Pennsylvania, February, 1925, pp. X-XII, Harrisburg, Pa.]

On the other hand, representatives of the utility corporations insist that there is no power trust and that the investigations that have been made prove their contentions. According to the witnesses, speakers, and writers of the utility corporations, there is no such thing as a power trust. The power trust is a myth. [Exh. Pt. 3, p. 290.] A typical example of the position taken by the utilities on this point is an address delivered by Martin J. Insull, President of the Middle West Utilities Company. [An address delivered as guest speaker of Halsey, Stuart and Company over the coast-to-coast network of the National Broadcasting Company and associated stations February 11, 1931, and printed and widely distributed by Halsey, Stuart and Company and others.] Mr. Insull says:

“Our government spent several years and much of our money in arriving at the same conclusion”—

namely, that there is no trust.”

“The power trust must, therefore, remain a myth until the politicians, professors, and editors who talk about it so glibly condescend to give us more definite information about it.”

This controversy went on in Congress and out until finally a joint resolution was passed and approved on February 9, 1925, providing for an investigation of the utility corporations by the Federal Trade Commission. [Joint Resolution No. 329, of the 68^th Congress, 2^nd Session, 1925.] The Commission submitted its report on February 21, 1927, as Senate Document No. 213. This report preceded the publication of the present investigation, with which we are chiefly concerned in this book, by over a year and we refer to it frequently as "the earlier report of the Federal Trade Commission."

Senator Walsh’s Resolution

Senator Thomas J. Walsh of Montana, Senator George W. Norris of Nebraska, and other senators were not altogether satisfied with the findings of this earlier report of the Federal Trade Commission and pressed for an independent investigation by a committee of the United States Senate.

In an address in the Senate in 1927, 69th Session, on the "Capitalization of Public Utilities," Senator Walsh discussed the growth of the numerous utility companies, and the development of the holding companies, together with the issuing of various kinds of securities "offered to the investing public in sums staggering in amount." The experience of the long-suffering public, he said, had led the people to surmise that these securities were often "acquired at inflated values, affording an unsafe basis for the securities issued against them, or that the rates exacted of consumers from which interest and dividends must be met are unwarrantedly high." [Quoted from The public Pays, by Ernest Gruening, pp. 3-4, Vanguard Press, New York, 1931.]

Pursuant to this line of thought, Senator Walsh introduced a resolution providing for an investigation to be made by a committee of five senators. The resolution was not acted upon at that session and he introduced a similar resolution in the first session of the following Congress.

Stubborn Resistance

When this resolution by Senator Walsh was introduced providing for an independent investigation by a Senate committee, a very determined opposition up at once. Open opposition to defeat it entirely was obviously impolitic, so efforts were made to sidetrack it. Senator George H. Moses of New Hampshire moved to refer the matter to the Senate Committee on Interstate Commerce and the motion carried by a narrow margin. Friend and foe alike assumed that there the matter would be buried. But very much to the surprise of both, the committee reported on the resolution recommending unanimously that it pass.

Failing in the effort to bury the resolution in committee, the next move of the opposition was to try to amend it so that the investigation should not be made by a Senate committee but by the Federal Trade Commission, which it was believed would be more friendly. An amendment to this effect was introduced by Senator Walter F. George of Georgia who later admitted that he believed that no investigation whatever was needed. [The Public Pays, By Gruening, p. 7.]

And then the battle began. There was a hurried call to the utility forces in every direction and a hurrying and scurrying of their representatives to Washington to appear in opposition to the Walsh resolution and in favor of the George amendment to have the investigation shifted to the Federal Trade Commission. What Senator Walsh described as "the most formidable lobby ever brought together, in my time at least, for fifteen years, representing capital to the amount of nearly $10,000,000,000, and representing what? The general public, the consumers of electric energy, and the purchasers of securities that are put out by these companies? Not at all; but representing the companies to be investigated." [The Public Pays, Gruening, p. 7.]

And the utilities won. At least, they got what they were contending for. The investigation went to the Federal Trade Commission.

It is the findings of this Commission and a summary of the evidence there presented that we review in the subsequent chapters of this volume.

Confessions of the Power Trust

Part 1—The Hearings

Chapter 1—The Investigations

What the Senate and the Country Wanted to Know

For ten years or more the thoughtful people in this country have been watching with growing concern developments in the utility field-especially in the electric power part of the field. For most of that time such men in the United States Congress as Senators George W. Norris, Thomas J. Walsh, Clarence C. Dill, R. B. Howell, Robert M. LaFollette, Burton K. Wheeler, have been demanding and insisting on finding out the facts in regard to this matter. And what they wanted to know and what they insisted that the country wanted to know was the basic, essential facts and especially the facts regarding the economic and financial operations of the utility companies.

Financial Structure and Methods Fundamental

Senator Walsh opened the long fight for the investigation with a discussion of "The Capitalization of Public Utilities." To him this was the heart of the whole question. Later, he said:

“The purpose of the proposed investigation is to protect two classes of our citizens: First, the 17,000,000 of householders who pay for electric lighting; and, second, the great body of our people who are now putting their savings into the securities of these corporations.” [The Public Pays, p. 5, Gruening.]

And Senator David I. Walsh of Massachusetts, emphasizing the same thought, declared:

“The underlying question here is the financial structure of these utility corporations,

and that he considered it

“A public and political question of the highest, if not of supreme, importance in America today.” [The Public Pays, Gruening, p. 8.]

They wanted to know, of course, to what extent the control of electric power utilities had been concentrated or was being concentrated into the hands of a few-but they knew that the question of the financial structure and methods of the utility corporations would reveal that. They wanted to know, of course, the extent to which these utilities had exercised their force and influence in molding public opinion in the press and in the schools, universities, and otherwise; and to what extent they had used their influence and power in affecting the political affairs of the country. But, above all, they wanted to know the financial structure, methods, and operations of these companies. And these facts, as we shall see, have been the most obscured, the most closely guarded, and the most difficult to obtain.

What the Earlier Investigation Revealed

As stated above, the utilities contend that the earlier investigation made by the Federal Trade Commission showed that there was no power trust and they felt that this report gave them, more or less, a clean bill of health. On the other side those who were pressing for an independent investigation also felt that the report was not entirely satisfactory. But let us see what this earlier report reveals.

This first report of the Federal Trade Commission was submitted to the president of the Senate under date of February 21, 1927, and covered the situation as it existed prior to December 30, 1924. The present investigation of the Federal Trade Commission, which is our chief concern in this volume, is quite a different matter. It takes up the subject much more exhaustively, and while it covers to some extent the earlier period, it deals more particularly with the situation following the year 1924 and follows the development during five or six years following the period covered by the previous report. Even so, it may be well to recall the exact words of the earlier report of the Federal Trade Commission.

In the conclusion of the earlier report covering the period previous to 1924 the Commission says: [Electric Power Industry, Control of Power Companies, Document No. 213, 69^th Congress, 2^nd Session, p. 50.]

“From the facts presented above regarding the electric power industry, it is obvious that in 1924, neither the General Electric Company nor any other single power interest, or group of clearly allied power interests, substantially monopolized or controlled the generation, transmission, and sale of electricity in the United States. In 1924, about one-eighth of the country's total generating capacity and about one-ninth of the electric energy generated was within the sphere of influence of the General Electric Company and its subsidiary, the Electric Bond and Share Company.”

Especial attention is called to the fact that in this earlier investigation the Federal Trade Commission was instructed by the resolution passed by Congress in that connection to inquire particularly into the extent of the control of the industry by the General Electric Company. For at the time this resolution was approved, it was charged in the Senate that the General Electric Company had acquired and was exercising a very extensive control over the entire power industry, either directly or indirectly through stockholders or interlocking directorates, or otherwise. And while it was true that the investigation was made somewhat more general, the main point at that time was to determine. whether this particular company or some other single power interest or group had secured or was securing a substantial monopoly in the electric industry. This, as stated above, the Federal Trade Commission found to be not the case at that time. Furthermore, the Commission went on to say that "no other single interest in 1924 dominated or controlled as large a portion of the total as the General Electric interests."

Moreover, this earlier report goes on to say that "since 1924 the General Electric Company has disposed of its direct control of the Electric Bond and Share Company and their present managements have no obvious or necessary community of interest nor the support of any known dominant group of stockholders." [Electric Power Industry, Control of Power Companies, Document No. 213, 69^th Congress, 2^nd Session, p. 51.]'

It is upon the above statements of the earlier report of the Federal Trade Commission, no doubt, that the representatives of the utility corporations base their claim that the Commission has found that there is no trust.

Even so, in this earlier report of the Commission a statement is made regarding the tendency that was already under way and which has moved very swiftly during the year's following 1924. In this same report, and immediately following the quotation made above, the Commission said:

“On the other hand, both the Insull and North American companies have increased their control in a marked degree over operating properties, and this is also true of several other groups. As a result of these developments. the proportion of the industry controlled by independent operating units appears to be declining in spite of the rapid growth of the industry.

“Although no substantial monopolization exists of the entire electric power industry of the country by any single interest, such monopolization within certain states and lesser territorial areas is already a fact, growing out of the increase in size of the groups of operating units, and modern operating systems now tend to transcend state boundaries, thereby creating larger and larger areas in which there is a substantial monopoly in the furnishing of the service.” [Electric Power Industry, Control of Power Companies, Document No. 213, 69^th Congress, 2^nd Session, p. 51.]

Moreover, this earlier report, as we shall see in subsequent chapters, develops some very interesting and significant information regarding the financial structure and methods of these utility corporations which, as all agree, constitutes the very heart of the whole subject. We shall not attempt to review this phase of the findings of this earlier report, as it will be dealt with in subsequent chapters.

From the above it will appear that even this earlier report of the Federal Trade Commission brought out many vital and important matters regarding this utility question. We shall now turn to the volumes of the present report of the Federal Trade Commission which covers the period subsequent to 1924 and in the following chapters will present the findings of this more recent investigation.

Chapter 2—Confessions

The System Reveals Itself

The evidence submitted in this volume regarding the private utility companies is made up almost exclusively from the testimony of the representatives, officials, and employees of the utility companies themselves. In this sense the whole volume constitutes in a very real sense the confessions of the utility companies. But of all of the confessions made by these various representatives throughout the hearings, there is probably none more sweeping, more significant, or more astonishing than that of J. B. Sheridan, who was for many years the director of the Missouri Committee on Public Utility Information. [Exh. Pts. 5 and 6 pp. 99-634.]

Mr. Sheridan, according to the evidence submitted, was one of the most aggressive, one of the most effective, and altogether faithful of the men in the active work of the utility companies. It would seem from the evidence that at times he was over-zealous in his work and his devotion to the tasks that he had undertaken in behalf of the companies. He was evidently thoroughly informed upon every phase of the subject and familiar with the inside workings of the whole organization. A more competent witness, therefore, could hardly have been called to the stand. We shall have occasion to refer to his work incidentally in other chapters, but here we shall present some of his intimate personal and confidential communications that will bare not only the innermost soul of the man, but the innermost workings of the private utility companies.

J. B. Sheridan, the Star Confessor

In Exhibit 2968 of the Commission's reports [Exh. Pts. 5 & 6, pp. 306-7.] will be found a letter of this Mr. J. B. Sheridan which was taken from the files of the Missouri Committee on Public Utility Information. It was marked "Personal and Confidential," dated August 12, 1927, and addressed to Mr. Thorne Browne of the Middle West Division of the National Electric Light Association at Lincoln, Nebraska. This astonishing letter reads as follows:

“What can we do when the financiers will inflate, overcapitalize, sell securities based on blue sky or hot air, and rates must be kept up to pay returns on said blue sky and hot air?

“The best public-relations stuff in the world is a nice little reduction of rates. Do we get it? We do not. I know places where I believe a 13-cent top rate should be 8 cents.

Municipal Plant Does Better

“A municipally owned plant, city of 8,000, pays all indebtedness on plant without recourse to tax fund, lights white way, streets. etc., without getting money therefor, but it is charged on the books, and has a top rate of 8 cents per kilowatt hour, 4 cents power; B, 50 miles away from A, 8,000 population, better industrial town than A, better power load, exacts a top rate of 15 cents per kilowatt hour, 8 cents for power.

“Reconcile these, if you can. I can't. I don't pretend to. There are no holes to be found in the municipal plant at A. As I see it there is nothing inherently sacred in private or public ownership. It all depends on which works out the best for the public. We talk a lot about what private ownership has done. Yet many municipal plants were built because no private parties would build them.

“If cities and states own and operate highways, schools, streets, sewers, water supply, why not electric and gas plants?

“To be logical, private ownership should at least have designed means to supply water.

“I know places where public schools are anathema to the people, holding with private schools.

“I believe in private initiative, but I don't believe in subsidizing it 3 to 6 cents per kilowatt hour. The privately owned industry should be ashamed of itself to permit a municipally owned plant, operated on the square, to undersell it 4 to 6 to 7 cents per kilowatt hour. Don't say taxes? Taxes are less than $0.0023 per kilowatt hour in this state.”

Huge Profits for Bankers—Increased Rates for Customers

“Mr. Browne, the bankers in the electrical industry, do not appreciate what a fat thing they have had in the past seven years. They do not appreciate the enormous value of the monopoly feature. They do not appreciate that electric light and power properties are not loaded dice to be employed in a craps game in which investors and the public are injured. Until they appreciate and practice these things, I greatly fear that neither you nor I nor anyone else can help them very much.

“Things were lively in this state until February, 1927. Then an unpopular railway company demands a huge valuation and increase of rates. Another company gets $13,000,000 added to its value and publicly promises not to ask for increase of rates. Three months later this company petitions for a "readjustment of rates" which in effect increases slightly the rates of 155,000 of 200,000 customers, then the controlling group sells out with a profit of from $12,000,000 to $14,000,000 on 60 per cent of the small issue of common stock.

“Huge profits for the bankers, increase in rates for customers.

“This was an ideal state for public utilities. What it will be in the future, I do not assume to forecast. No doubt 90-per cent of the business in the state is honest and rates correct. But the 10 per cent smears the 90 per cent.

“Two years ago in Chicago, Davis and I asked that the industry declare itself on speculation. The hired publicity men had a fit. They'd lose their precious jobs. A year later Jim Davidson did say something against speculation before the electrical board of trade, St. Louis, but when I asked him to repeat for publication he declined. Aylesworth said something. Sam Insull said something about it. But no one drove it home.

“Unless the industry is honest and on the level, it will kill itself. . Ninety per cent of it is honest enough. It must be 100 per cent honest. And it must come to recognize that public utilities are not private dice, or playing cards, or chips in a poker game, but public trusts to be administered carefully, cautiously, economically, with the interests of investors in fixed securities and public, which are identical, coming before profits on common stock or upon inflation of securities.

“What's the remedy? Why, hang the offenders high as Haman upon the gibbet of publicity. Tell the world what they are doing. Admit your own sins and repent.

“Most people will say that I am a damn fool for this, but I don't believe that you will.”

Sheridan’s Change of Heart

The letter quoted above is not the only indication of a realization of the nature of the work that the private utility companies were doing, nor the only confession that Mr. Sheridan is found to have made in his personal and confidential correspondence. Exhibit No. 2721 of the Commission's hearings [Exh. Pts. 5 & 6, p. 156.] is a letter by Mr. Sheridan to John W. Colton, Editor Aera, American Electric Railway Association, New York City, under date of June 14, 1927, which reads as follows

“As far west as St. Louis the fame of a protest made by a certain remote employee of large corporations against a certain proposed plan to offset certain political movements affecting private ownership of public utilities has penetrated. May I modestly claim blood brothership with a little hammered-down Yankee who has the intestines, the intelligence, and the native honesty to make the protest as related to me?

“You are a man, John Colton, and I am glad that there is one like you left _____ _____ _____ feller; “What profiteth it for a man to gain the whole world if he loses his own soul?” “From your action, as reported to me, I take renewed courage and renewed faith that the ‘Government of the people, by the people, and for the people shall not perish from the earth:' Gratefully yours,

John Colton’s Confession

In reply to this letter Mr. Colton wrote to Mr. Sheridan under date of June 16, 1927, a reply that was a very interesting sidelight on what was going on in the hearts of these men relative to the nature of the work they were doing. Mr. Colton's letter reads as follows:

“It may be needless for me to say that I deeply appreciate your letter of June 14, but I want to say it just the same.

“They say that fools rush in where angels fear to tread. If that is true, I am probably one of the biggest fools on earth. But I can not help being what I am. If people ask me for my opinion, and I believe that it is worth while to give an opinion, I mean to give my honest one. A hypocrite is one of the poorest works of the Almighty; it isn't fair to the Almighty to ascribe to Him the creation of a hypocrite. Perhaps fear makes more hypocrites than any other cause. If that is so, pray God there will be an improvement in the process of evolution.

“Just at present I feel very much disillusioned. I am one of those simple-minded creatures who believe all men to be honest and sincere until I find them otherwise, and even then I doubt the justice of my own conclusions. When I am forced to acknowledge that men whom I believed were earnest and sincere are only cheap, lying politicians, I have a feeling of sadness that is depressing to me. I do not resent this condition so much as I deplore it.

“You are absolutely right when you ask the-question, as it was asked 2,000 years ago, "What profiteth it for a man to gain the whole world if he loses his own soul?" The man who can not look himself in the eye when he shaves himself in the morning, or who hangs his head in the solitude of his bedroom when attempting to address himself to God, is one of the poorest and most miserable creatures, though he have wealth incalculable.

“I know that all things work for good, and that seeming defeats may be merely heralds of victory—and I do not mean this in any materialistic sense.

“Here's wishing you the best of all good things and assuring you of my sincere friendship, Sincerely, [Exh. Pts. 5 & 6, p. 156.]

Free Speech the Greatest of Human Rights

Another and still deeper look into the nature of the utility situation is presented by Mr. Sheridan in his letter to Mr. Colton under date of June 24, 1927. [Idem.] He says:

“A brave man is never foolish. If a man has not courage, what has he?

“Yea-up men are a little breed. Possession of property breeds liars and cowards. The man who invented private ownership was a mortal enemy of the human race.

“Hot dog! Boy, I am strong for you. For 30 years I spoke as I felt. For 5 years I held my tongue. Now I mean to resume the greatest of human rights—that of free speech.

“Damn it all, John, they never can make hypocrites and cowards of all the people. T’ell mit 'em.

“Sincerely your friend,

“Lying, Trimming, Faking, Flag-Waving”

Corroborating Mr. Sheridan's confidential testimony, Mr. John Colton of the American Electric Railway Association writes to Mr. Sheridan under date of October 17 as follows:

“The thing about the utility industry that disgusts me is the lying, trimming, faking, and downright evasion of trust, or violation of trust that marks the progress toward enormous wealth of some of the so-called big men in the industry. When I see some of these fellows waving the flag, I am filled with not only disgust but rage, for they are anything but patriots.

“I do not know whether I am going to stay in the utility industry or not. I would thoroughly enjoy fighting some of these faking patriots through the editorial page of an influential newspaper, and I do not believe I would have much difficulty in landing such a position. On the other hand, there are utility companies that try to play the game honestly and with whom I would be glad to be associated. I do not believe that this type of utility company is representative of go per cent of the industry by any means; I think it is about 10 per cent. I would enjoy being linked up with even so small a minority if it might impress upon the go per cent a realization of its responsibilities to the public, and inculcate in it a few germs of ordinary, garden variety of honesty. [Exh. Pts. 5 & 6, p. 157.]

“All Slaves of Money Are Timid”

Replying to the above letter of Mr. Colton, Mr. Sheridan wrote on October 22 a letter which appears as Exhibit No. 2725, as follows:

“I agree with everything you say, but I have found more honest people in the industry than you have. The trouble with them seems to be that they are so timid and fearsome. Of course, the biggest of them are merely messenger boys of money, and all slaves of money are timid.

“The first thing with the boys is to hold their jobs. I suppose that is natural. They all have around them a dozen fellows crazy to get their jobs, so they must be careful of what they say and do.

“We are raising a lot of thoroughly drilled ‘yes, ma'ms’ in the big corporations, who have no minds of their own; no opinions. As soon as the old individualists die, and there are not so many of them left, I think the corporations will have a lot of trouble in getting good executives. After a man has served 20 to 30 years in one of these monstrous corporations he is not liable to have much mind of his own.

“Then, too, they do the very thing they rail at-socialize' their employees and the people. The best of these big corporations, the ones which treat their employees best, merely socialize them. Unless the corporation is there to look after them they are helpless.” [Exh. Pts. 5 & 6, pp. 157-58.]

Grasping for Profit

Another confession of Mr. Sheridan goes deep into the nature of men in matters of this kind. He says in his letter to L. E. Gettle of the Railroad Commission of Wisconsin:

“Grasping for profit is an underlying human quality common to the world, accentuated in the United States. Men are fair, just, honest, generous, until it comes to splitting up the money. Then—beware." [Exh. Pts. 5 & 6, p. 456.]

And again Mr. Sheridan makes this observation in the same letter:

“The farmer is quite as avaricious for land value profits, the unearned increment, as the Wall Street gambler. Des Moines and Cedar Rapids are the Wall Streets of the land speculators, in my mind, the most evil of all speculators.

“Bearing these things in mind, the only thing that will save the public utility industry from the speculators is a firm hand upon securities, valuations, rates, etc.”

Regulation Breaking Down

And then, as though to substantiate another well-known contention of many who have criticized the present situation, Mr. Sheridan discusses the part that the courts have taken in breaking down State regulation. "The courts," he says, "have, legally and logically, weakened the power of the State Commissions which, the utility people admit, are the best friends of the industry."

Here is another confession to the effect that the utility commissions are regarded by the utility corporations as the best friends they have. But Mr. Sheridan goes on:

“It appears to be logically and legally right that a public utility should gain from increased value—prices—of property, but I doubt the wisdom of demanding valuation on "reproduction new." In some instances rates could not be collected upon "reproduction new." There is a danger that prices will recede to 1913 standards.. . . The great danger to the utilities seems to be the man who wants to "cash in" now, not to operate for the future.

“By insisting upon "reproduction new," issuing securities, cashing in, this man, aided legally and logically by the courts, is breaking down state regulation. (Our italics.)

“What a lovely business it could be if men were not so greedy. I have great confidence in Aesop. We are all killers of the goose that laid the golden egg. All of us.” [Exh. Pts. 5 & 6, pp. 456-57.]

Ambitious to Get Rid of Every Municipal Plant

To all of the above we may add yet another confession which is significant of the purpose of the public utilities and their representatives. Mr. Sheridan in a letter to Mr. A. J. Luick of the Illinois Power and Light Company under. date of February 4, 1926, makes the frank confession: "My great ambition is to get rid of all municipal plants in Missouri.” [Idem., p. 409]

This letter of Mr. Sheridan's was a reply to an appeal from Mr. Luick for material that would help him (Luick) to counteract the influence of the success of the municipally owned plant in Hannibal, Missouri. Mr. Sheridan in this case, as in others, was honest enough to confess that the Hannibal Municipal Plant was absolutely on the square and a successful project, and that it sells electricity at a very low rate. And then he says: "It is extremely desirable that the Hannibal plant should be removed from the field of comparison in Missouri." (Italics ours.) And later on he expresses the more general ambition to get rid of all of the municipal plants in Missouri.

How They Blocked Enabling Legislation

Another very interesting and significant confession of Mr. Sheridan comes out with reference to certain legislation in Missouri.

It seems that the farmers and rural residents in the vicinity of Hannibal, Missouri, were very anxious to get electric service from the municipal plant at that place. To do this the farmers wished to build their own distribution line and purchase energy from the Hannibal municipal plant. However, as the laws of the state did not provide for this particular form of co-operation or public ownership, the farmers appealed to Representative Nelson of Marion County, who introduced a bill in the session of the Missouri Legislature to enable the farmers to form co-operative electric service districts to generate, purchase, and distribute electric energy.

The bill did not pass. And Mr. Sheridan in a letter to Mr. J. E. Hillemeyer of the Union Electric Light and Power Company of St. Louis cites the fact that this bill failed to pass as an evidence of "the general favorable results which may be reasonably anticipated from the organization of the Missouri Committee on the Relation of Electricity to Agriculture." [Exh. Pts. 5 & 6, p. 410.]

Not only does Mr. Sheridan in this case confess to the activity of the utility organizations in the defeat of needed enabling legislation, but in the same letter he goes on to explain just why it was advantageous for this legislation to be defeated. He says:

“One of the best arguments of the privately owned electric industry with farmers is that the farmer can look only to the privately owned plants for electric service, that the municipally owned plant simply can not give him service.”

He then cites the Hannibal situation, saying:

“In this particular instance at Hannibal, the farmers can not even purchase current from the municipal plant.”

In other words, by preventing the passage of this enabling legislation, the utility interests were by that very means enabled to have a very substantial argument against municipal ownership. Their efforts crippled the municipal plant and prevented its service reaching the farmers, who were thereby supposed to be driven to support private ownership.

Above we have quoted the testimony of Mr. Sheridan with regard to the success of municipal light and power plants, which is so generally denied by the utility companies in their publicity material. He has testified to the success of the municipal plants in Seattle and Pasadena; to the lower rates charged by municipal plants as compared to private, and that the low rates so puzzle him that he is unable to figure it out; that "when a little municipal plant can equal a big system in rates and service, we have no excuse for being in the business," [Exh. Pts. 5 & 6, p. 434.] and how the municipal plant at Hannibal, Missouri, and Chillicothe have undersold the private plants. [Idem, pp. 400-408.]

Here in these confidential letters of these men we catch a glimpse of the innermost workings of these great utility organizations. After all allowances and deductions are made for possible personal grievances and bias, it would seem that practically every contention which the critics of the utility companies of this country have been making regarding their methods and the effects of their operations have here been admitted and confessed by those who are in the best position to know the truth. In these letters the following confessions are made:

What the Confessions Show

(1) That the utility companies do inflate their capital accounts, a matter which they have strenuously denied until the facts were established in the hearings of the Commission.

(2) That the inflation of capital accounts forces up rates, a matter which they have always denied and apparently seem still to persist in denying.

(3) That utility rates are too high.

(4) That municipal plants have lower rates than private plants under similar and comparable conditions.

(5) That municipal plant accounts are properly kept, at least in many cases.

(6) That it is just as logical for a community to own and operate light and gas plants as it is for them to operate highways, schools, streets, sewers, and water plants.

(7) That the taxes paid by private plants do not account for the difference in the rates charged as compared with municipal plants and have little effect upon rates.

(8) That the bankers are involved in the electrical industry.

(9) That the investment bankers are making enormous profits playing with the utility interests as with loaded dice at the expense of investors and the public.

(10) That utility companies do not keep their promises that they will not increase rates.

(11) That corporations make huge profits in the purchase and resale of their properties which results in further increases in rates to the public.

(12) That efforts on the part of men in the industry who have declared themselves against extortion and exploitation in the hope of reducing it were silenced and repudiated by hired publicity men.

(13) That the utility industry is killing itself by treating public utilities as dice, cards, or chips in a poker game instead of a public trust to be carefully, cautiously and economically administered in the interests of the public.

(14) That there is much in the service of the utility corporations that breeds hypocrisy, dishonesty, and insincerity.

(15) That the greatest of human rights, free speech, is largely surrendered by those in the service of the utility corporations.

(16) That the great boast of patriotism on the part of the utility companies is often a mere hypocritical pretense, a fake and delusion.

(17) That in the service of the industry is much "lying, faking, and downright evasion."

(18) That it is the greed for profit that works havoc in the utility as in other fields.

(19) That regulation is breaking down.

(20) That the utilities are determined to destroy municipal ownership and acquire every municipal plant.

(21) That the utilities block and prevent the passage of legislation helpful to municipal plants.

It would be hard to find encompassed within so small a space such a complete and sweeping indictment of the methods of the utility companies as is here confessed by some of their own most trusted and effective representatives.

The Price He Paid

Thus the amazing story of John B. Sheridan. There was something pathetic-something tragic about it. Even in the testimony of these innermost thoughts of his is the evidence of the price that he was paying for the service he rendered. And there may have been a still deeper tragedy in it all than appears in these records. For we are told that in April, 1936, John B. Sheridan committed suicide. [The Public Pays, Gruening, p. 247.]

Other Confessions

Startling and sweeping as are the above confessions, there are yet others of importance that may be noted here, reserving to later chapters a more detailed and extended presentation. Among these the following may be just briefly noted:

(1) That Utility Corporations Do Not Amortize or Pay Off Their Capital Accounts. Another confession that is found in the literature of the utilities, and one that is quite important, is to the effect that the private utilities never amortize their capital accounts. It is stated in the pamphlet gotten out by the utilities in California, entitled Shall California Be Sovietized? and the statement reads:

“Privately owned public service corporations never attempt to repay the capital investment out of rates. The investment is permanent. The rates merely provide interest on the value of operative properties.” [Exh. Pts. 10-16, p. 613.]

(2) That Utility Rates Are High and High Rates Restrict the Service. Another important confession that comes out of the testimony of the utility corporations is that high rates restrict the use of electricity and especially so in the case of domestic service. It is pointed out by one of the representatives of the companies that due to the extremely low rates for domestic service in Ottawa, Canada, the average use is 1,440 kilowatts per year, whereas in the United States the average domestic use is only 362 kilowatt hours per year. [Exh. Pt. 3, p. 604.] And this same author goes on to explain that the lowest rates on the continent are in Canada under public ownership, whereas the highest rates are in New Mexico, where they reach 18 cents per kilowatt hour. There is quite a large group of companies, according to this same authority, where the rates are 14 and 15 cents per kilowatt hour, and a fairly representative number where the rates are 12 and 13 cents per kilowatt hour. The average domestic revenue was around 10 cents per kilowatt hour. [Pt. 22, p. 25.] And the companies having the best average use, namely, 424 kilowatt hours per year, are the companies where the domestic rates are about 5 and 6 cents per kilowatt hour.

Here then is another admission of the contention that the proponents of public ownership have been making, that rates are lower under public ownership, and that the lower rates greatly stimulate the use of the service.

(3) That the Publicity Material Published and Distributed by the Utilities in the Schools and Universities, Press, etc., IS Propaganda. The utility companies throughout their literature, and especially that which is used in the public schools and universities, have insisted that the material they are publishing is strictly educational and in no sense of the word propaganda. And yet the Director of the Public Utility Information Bureau of Michigan seems to be a little more frank in the matter. Discussing the advertising policy of the committee, the material that appears in their news bureau, etc., he asks: "Is this propaganda?" And answers immediately: "Of course." And later he adds: "Our news matter is propaganda just like the public information about insulin, safe driving, peace, pure foods," etc. [Exh. Pts. 5 & 6, pp. 819-20.]

(4) That Utility Contracts Are Not Binding. Another confession that appears in the records is one that will doubtless come with a good deal of surprise to many people. It is to the effect that contracts made by municipalities with utilities are not binding. This fact is familiar to those who have been in close contact with these matters during recent years, but is generally unknown to the public. The matter is made very clear and very emphatic in a report by the board of directors of the Western Society of Engineers at its meeting in Chicago August 25, 1920. The report says:

“In our opinion the only thing which has saved any semblance of adequate utility service in Chicago under present cost conditions was the fact that the "contract ordinances," established by the city council under the old system and still fought for by the city administration, could legally be broken and overruled by action of the State Commission under the working of the new system. (Our italics.) The fallacy of "contract rates" for public service has at length been fully demonstrated.” [Exh. Pt. 2, p. 763.]

Samuel Insull Speaks

Samuel Insull is even more emphatic and decided upon this point. In an address before the Peoria Association of Commerce in March, 1921, Mr. Insull had this to say:

“We are also told that in advancing their rates when forced to by war consequences utility companies have broken solemn contracts with municipalities, because the former rates had been specified in so-called contract-franchise ordinances. I am advised by competent lawyers (1) that this contention is utterly false; (2) that no city in Illinois ever has had authority from the State legislature to make rate contracts; (3) that the law of Illinois in this respect is so well settled and was settled so long ago that even political lawyers ought to know it.”

And then he makes this astonishing statement:

“The first contract breakers in respect to utility-service rates in Illinois were cities, not utility companies; and it was settled then—about 20 years ago-long before a public—utilities commission for Illinois was ever thought of, that municipalities could not fix rates by contract or otherwise for a period of years (our italics), because changing conditions might convert a fair rate of this year into an unfair rate, too high or too low, next year. The duly constituted authorities have the power to fix rates, but not the power to fix them unchangeably for 5, 10, 20, or any other period of years; rates must be at all times subject to change as conditions change. This has been decided by the Illinois Supreme Court and affirmed by the United States Supreme Court again and again. So-called rate-contract provisions in franchise ordinances always have been void, even when originally enacted?” [Exh. Pt. 2, p. 153.]

(5) That the Cost of Producing Electricity by Steam Is Now Less Than by Water Power. Here is another very significant and important confession or admission that comes out in the hearings, viz., the fact that, according to the utility companies themselves, they are able to produce electric current by steam under present conditions more cheaply than it can be produced by water power. They now estimate that on the average it costs 1.92 cents per kilowatt hour to produce electricity by water power, whereas it can be produced by steam on the average at 1.79 cents per kilowatt hour. The importance of this point lies in the fact that if, as they claim, electricity can be produced as cheaply by steam as by water power, then the argument which they have so frequently used to the effect that it is unfair to compare the cost of electric service under private ownership in New York State, for example, with the cost of electric service in Ontario, because the production in Ontario is wholly by water power, whereas in New York and elsewhere the private companies produce largely by steam power—this argument falls to the ground by their own admission. [Exh. Pts. 5 & 6, p. 1059, in article on “State Ownership and Operation of Water Powers,” by Halford Erickson, Vice President, Byllesby Engineering and Management Co., Chicago.

(6) That the Utilities Think the American People Have Low, Mercenary Ideals. Dr. Theodore J. Grayson of the University of Pennsylvania, speaking at an annual convention of the New Jersey Utilities Association, spoke of the mercenary motives that have captured the American people. "They like to make money," he said, "we all like to make money; but there is something additional that the American people like to do. They like to succeed in the business world; they like to gain power and the mental attitude that comes with business success." And then, as though realizing the lowering of ideals he was suggesting, he went on to remark

“I deplore as an individual that this attitude of mind has more or less swept into the background for years the development of art and literature and music. They have been secondary in modern America.... The thing that appeals to us is conquest in business.” (Our italics.) [Exh. Pts. 7, 8, 9, p. 37.]

(7) That the Utility Men Often Have a Wolfish Cupidity. J. B. Sheridan of the Missouri Committee confesses to some dislike of the cupidity of the power companies. He says:

“The thinking of many utility men is the inconsiderate cogitation of a famished wolf when confronted with a defenseless baby, "It is meat. Bolt it as quickly as possible." . The fact that the baby's family may not be appreciative of the complete satisfaction of the wolf never occurs to him and he is probably surprised when they do not participate in it.” [Exh. Pts. 5 & 6, p. 457.]

(8) That the Press and Utilities Work Together. We learn from Ole Buck of the Nebraska Press Association, in a letter written to J. B. Sheridan, that the Nebraska Press Association worked together with the utilities right along.

(9) That the Consciences of the Utility Men Sometimes Trouble Them. Horace Davis of the Nebraska Committee of Public Utility Information admits that he had been "so anxious to get figures that read the way they did," that he grasped them, even though had he taken pause, he should have known that they were not correct. "It was a case," he writes, "of 'do a great right, a little wrong, and curb this cruel devil of his will.’” But in the same letter he confesses:

“Been to bed and can't sleep-some of these times I'm going to get a piece of soft pine and a sharp knife and whittle out a conscience that will let me sleep when other people do.” [Exh. Pts. 5 & 6, p. 1101.]

(10) That the Public Can Borrow Money More Cheaply than Private Companies. [Exh. Pt. 3, p. 667.]

(11) That a Return to the Utilities on Their Investments is Practically Guaranteed. [Exh. Pt. 3, p. 668.] The statement in this connection is made by Ernest Greenwood to the effect that "the trend of rates has been steadily downward, while the stability of the industry and its security issues has been steadily upward," and that "this is due to the fact that while state regulation limits the profits to a reasonable return on the value of the property, this return is virtually assured because the service enjoys a monopoly under Government regulation."

(12) That the Utilities Have no Competition. In this connection, the statement is made that under existing regulatory laws in 30 different states the utilities have no competition and are guaranteed a virtual monopoly? [Pt. 3, p. 131.]

Here we have in this brief chapter a pretty fair outline of the confessions of the utility corporations. In the chapters that follow we shall present further testimony upon these matters, as well as others, to complete the picture supplied by these remarkable hearings.

Chapter 3—The Ultimate Purpose

One Vast Monopoly

"Eventually all power plants will be joined together in one vast system or series of systems and every new completed project will be added to them, forming a tremendous power reservoir, from which current will flow into every darkened locality in the nation. Each water power, power house, or substation will be a unit in the complete whole."

So speaks the Utilities Information Committee of Georgia in one of its textbooks. [Exh. Pt. 3, p. 1232; see also p. 1236.]

Similarly the New England Power Conference proposes the "creation of a completely integrated system for the transmission of power in New England." [Exh. Pt. 3, p. 418.]

Mr. M. H. Aylesworth, Managing Director of the National Electric Light Association, and later President of the National Broadcasting Company, speaking at a convention of the Pennsylvania Electric Association in 1924, pointed out that at that time

“Three great so-called superpower systems or pools already exist. One, with the exception of a very short gap, which, however, is bridged by low-tension transmission, constitutes an interconnection of high-tension lines reaching from Montana westward into Washington, through Oregon and California into Mexico, a distance of 1,800 miles. In the Middle West a number of states already have been tied together and shortly additional tie-ins will be completed, forming a system reaching from Wisconsin and Michigan, through Illinois, Indiana, Kentucky, West Virginia, Ohio, and part of Missouri. The third is known as the great southeastern tie-in reaching from Alabama, through Georgia, Tennessee, South Carolina, and North Carolina, with the prospect of ultimately reaching westward into Mississippi, Louisiana, Arkansas, and Texas.” [Pt. 3, p. 405.]

And, of course, these three pools, as the evidence shows, are increasingly interrelated and interconnected.

Samuel Insull’s View

In 1921 Mr. Insull delivered a speech before the Peoria Association of Commerce. In that speech Mr. Insull said in erect that utility companies always would have to cross state lines more and more, and that the interstate feature of the development was sure to grow. [Pt. 2, p. 94.]

Judge Healy asked if this was' not consistent with the idea expressed by General Tripp that they are building up one vast power system for the whole country. . . . "It means, doesn't it, that Mr. Insull then thought that the movement toward one vast power system for the whole country was growing?"

[The article by Mr. Tripp here referred to was published in a little volume entitled Super Power As An Aid to Progress, by Guy E. Tripp, published by the Knickerbocker Press (G. P. Putnam’s Sons) in 1924. The idea of “one vast system,” to use the expression referred to above, or one “single super power system,” to use the expression of Mr. Tripp, occurs constantly in this volume. In fact, the frontis-piece is a relief map of the Untied States, with main transmission lines crossing East and West, North and South, of what is designated as “The Proposed Future Super Power Systems of the Untied States.” The map shows “the main transmission lines of a single super power system for the entire United States as proposed by Frank G. Baum, hydroelectric engineer.

[The discussion opens on the very first page of the first chapter with the statement: “Some day if the people of the United States and Canada desire it, a single ‘super power’ system will furnish electric current to the greater part of the North American continent. . . . The question—‘Shall we or shall we not have a single super power system?’—is sooner or later bound to become an important national issue.”

[Again in this volume Mr. Tripp says: “By means of a single super power system, extending from ocean to ocean and receiving power from every waterfall, from the waste products of industry, and from all other economical sources including huge steam plants of the most efficient type placed in the coal regions and other favorable locations, we shall be able to distribute the maximum amount of power obtainable from our resources to the largest number of people at the lowest possible cost.” (Pp. 5 and 6.)

Reference to this “single super power system” occurs again and again throughout the book. (See pages 7, 8, 9, 10, 58, 60.) And the author goes on to state that “the system is being developed more rapidly than most people are aware. Because of the economic and technical advantages of large systems, the present tendency in the electric light and power industry is to consolidate or interconnect adjacent systems; and as a result, super power systems of considerable size have already been formed along the Pacific Coast, in the Southeastern states, New England, and the Northwest. Others are in the process of formation in western Pennsylvania, the Middle West, and elsewhere. Continued development along these same lines, including high-tension interconnections between adjacent super power systems, will bring into being two large super power systems, one covering the country east of the Mississippi and the other west of the Great Plains. Then, if some time in the future, transcontinental lines join these two systems together, the single system will be consummated.” (Pp. 9 and 10.). . .

“Even complete and detailed plans for the final system have been prepared. These plans are the work of Mr. Frank G. Baum, a hydroelectric engineer of long experience, and have been made available to the industry with the assistance of the Westinghouse Electric and Manufacturing Company. Guided by these plans, or by some standardized modification of them, electric light and power companies in the remotest parts of the country can carry on new construction and extensions with assurance that, when the time comes, their systems will be able to take their proper places in the single system.” (Pp. 10 and 11.)

“Now, of course, Mr. Tripp is at great pains to point out that this great “‘single super power system’ must be under private control.” (p. 11.) At another place Mr. Tripp says: “By its very nature, a composite system can produce power at a lower cost, and therefore can sell it at lower rates than an isolated local company. Hence, when its lines reach the territory of a local company, the latter will be unable to compete and must eventually become a part of the larger system. The growth of these composite systems will, therefore, be irresistible, until in time a few ‘super power’ systems, drawing upon all economical sources of power within the areas they cover, will supply electric energy to the greater part of the North American continent.” (p. 14)]

Mr. Mullaney: "Yes." [Idem.]

Mr. A. Flor of the Electric Bond and Share Company writes to the utilities calling attention to an article by this same Gen. Tripp entitled "One Vast Power System for Whole Country Is Projected," and speaks approvingly of it. He urged that it would be of assistance to them "in educating the people in your territory as to the futility of municipal ownership and operation," etc. [Exh. Pt. 2, p. 150.]

Out to Get Them All

Another example of the way in which the leaders of the electrical industry look forward to the integration of the whole electrical industry into one combined organization is shown in the testimony of Mr. Frank Comerford, President of the New England Power Association, and also of the International Paper Company. Judge Healy asked of Mr. Comerford, "Is it correct to say that you are out to get all of the utility companies, all of the electric companies, in Massachusetts that you can?"

Answer: "This is true, Judge: That we believe that the industries of Massachusetts will be bettered, their condition will be bettered, by an integration of the electric companies in that territory. (Italics ours.) We believe that economically such an integration is sound, that it is going on throughout the world, and that we will do our best to integrate in Massachusetts."

Question: "Well, that integration I presume is to occur with your company at the head of it?"

Answer: "We hope so."

Question: "You hope to be the integrating force, in other words?"

Answer: "We do.... We do hope to bring together under one ownership and one operation all of the electric companies in the area touched by our lines, so far as it is sound to do it. I mean that there are exceptional cases where it would not be sound. But so far as it is sound we hope to bring together the electric distribution under one ownership and that one management."

Question: "And that one ownership and management to be yourself, may I ask?"

Answer: "We hope so, judge."

Further in the discussion of this matter Mr. Comerford said that should there come about a conflict between the State and Federal Government, so that this proposed integration would be prevented or retarded, then he felt so strongly the necessity of this integration that he would rather see the States or the Federal Government take over the industry than to see the integration prevented. Judge Healy then asked:

“But tell me why the thing that you are talking about if it happens, will not give your company a monopoly of the electricity in the territory described?"

“Answer: "Judge, it would." [Pt. 15, pp. 92-93.

President Arkwright Admits It

Mr. Preston S. Arkwright, President of the Georgia Power Company, and one-time President of the National Electric Light Association, while reluctant to admit such a general purpose on the part of the power companies, when pressed by judge Healy, could not deny "the intention of the leaders of the electrical industry to eventually erect in the power field a company which will occupy the same position in that field that is now occupied by the American Telephone and Telegraph Company in the telephone field." Judge Healy then asked:

“Well, it would not be surprising, in view of what has been transpiring for the last seven or eight years, if the larger mergers we have now are succeeded by still larger ones, until the entire control of the electrical industry comes into the hands of a comparatively few corporations, would it?”

Mr. Arkwright replied that he had no opinion on that matter. He did not know-thus evading the question. [Pts. 18 and 19, p. 135.]

This same purpose of the leaders of the industry to bring about one vast system controlled by a central organization of individuals or companies is brought out again and again in the hearings of the Commission and in the literature of the leaders of the industry.

But it remains for an enthusiastic professor of a southern university to complete the picture with the familiar and quite astonishing illustration of the spider and the fly. According to the record, this professor, Dr. H. A. Morgan, President of the University of Tennessee, in an address to the southeastern division of the National Electric Light Association, says:

“With infinite cunning, a spider spins his gossamer web to ensnare the unwary fly. With a higher motive, but with more infinite cunning, your electrical engineers are spinning the web of transmission lines; and God speed the day when into every village and hamlet this broad Southland over, your lines and your service shall penetrate.” [Exh. Pts. 7, 8, 9, p. 197.]

So there can be little question that the leaders of the industry are looking forward definitely to the complete concentration and organization of the electric light and power industry of the country under one centralized control. Whether it be a single individual, a single company, or a single group of interests is not essential.

Part 2—The Organization

Chapter 4—The Parent Structure

Titanic Power of the United Utilities

The first and most striking feature that stands out in the hearings of the Federal Trade Commission is the fact that the utility corporations have developed a nation-wide and even an international, compact, thoroughgoing, and powerful organization such as has never before existed in the history of the country.

The first volume and the exhibits that accompany it open with a description and the details of this prodigious organization. And as the hearings proceed in volume after volume and in exhibit after exhibit, the evidence and substantiation of this statement appear.

1. The Joint Committee of the National Utilities Associations

There is, first of all, in this organization of the utility companies of the country what is known as the joint Committee of the National Utilities Associations. This committee is made up, or at least seems to be closely co-operating with, three other committees, also of nation-wide scope, namely, (a) The National Electric Light Association; (b) The American Gas Association; and (c) The American Electric Railway Association. Looking at the matter from a little different angle, it would seem that the National Electric Light Association stands out more prominently as the dominant organization. At any rate, the first one of these

various organizations to be examined by the Federal Trade Com mission, and the one that seems to have been given the most complete and thorough examination is the National Electric Light Association. Whichever may be the dominant, or parent, or "holding" group, the whole investigation makes it clear enough that these four organizations are closely co-ordinated, have constantly and in all matters, covered in the report, a common purpose and a unity of action.

Thus we are confronted with a new phase of the utility question and a new method of control. It may be true, as the earlier investigation of the Commission disclosed, that "no single power interest or group" completely dominates or controls the electric industry, but we have now to consider whether in this combination or coordination of these four great utility interests, acting essentially as a unit, we do not have what amounts to a complete control of the electrical field by the combined power of these coordinated groups.

The Joint Committee of National Utilities Associations seems to have been a more recent organization than the others above referred to. In response to a question by Judge Healy of the Commission Mr. Paul S. Clapp testified that "the Joint Committee of National Utilities Association is made up of the three associations, The National Electric Light Association, The American Gas Association, and The American Electric Railway Association."' On this joint committee are found representatives of all of these three different associations? [Exh. Pt. 1, pp. 9-77.]

2. The National Electric Light Association

This organization of the electrical companies of the country seems to be in many ways the most important, powerful, and influential of all. It was the first organized. Paul S. Clapp, Managing Director of the National Electric Light Association; and the first witness to be called in the hearing, testified that the Association was organized in 1885 and had been at that time in existence 43 years. [No. 1 of the Reports on Utility Corporations, 70^th Congress, Doc. No. 92, p. 2.]

This organization has 12 geographical divisions covering the entire United States, and a 13th division covering Canada.

The headquarters of the organization are in New York City and in the departments there, there was a personnel of 98 as of February 29, 1929. The general management was under Paul S. Clapp, Managing Director, with a personnel of 3. Then there was a Secretary, A. Jackson Marshall, with a personnel of 46, including an Assistant, a General Secretary, Office Management, Finance and Accounting, Purchasing, Membership, and several others.

There was a Public Information Department under the direction of George F. Oxley, with a personnel of 14; an Engineering Director, H. S. Bennion, with a personnel of 28; a Statistical Bureau, a Commercial Director, with 2 assistants,.and a Service Department, with a personnel of 5—all of this in the national headquarters alone.

There was a National Executive Committee of 20; 4 National Sectional Chairmen, and then geographic division presidents covering the 13 geographic divisions.

The list of officers alone of the 13 geographic divisions covers nearly three pages of the Commission's report. [Exh. Pt. 1, pp. 9-14.]

3. Geographic Divisions

In order to facilitate the work of the above organizations of the utility companies and make it still more efficient, the National Electric Light Association has divided the country into 12 sections, with a geographic division in each of these sections and one in Canada, making 13 in all. [Pt. 1, p. 3.]

These geographic divisions are as follows:

(1) The, Canadian, covering the entire Dominion of Canada.

(2) Eastern—New Jersey, New York, Pennsylvania.

(3) East Central—Kentucky, Ohio, West Virginia.

(4) Great Lakes—Illinois, Indiana, Michigan, Wisconsin.

(5) Middle Atlantic—Delaware, District of Columbia, Maryland, Virginia.

(6) Middle West—Iowa, Kansas, Missouri, Nebraska.

(7) New England—Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont.

(8) North Central—Minnesota, North Dakota, South Dakota.

(9) Northwest—Alaska, Idaho, Montana, Oregon, Utah, Washington.

(10) Pacific Coast-Arizona, California, Hawaii, Nevada, Philippine Islands.

(11) Rocky Mountain-Colorado, New Mexico, Wyoming.

(12) Southeastern; Alabama, Cuba, Florida, Georgia, North Carolina, South Carolina, Tennessee, Porto Rico.

(13) Southwestern -Arkansas, Louisiana, Mississippi, Oklahoma, Texas.” [Exh. Pt. 1, p. 11.]

Under and within these geographic divisions, and yet apparently more or less independent, there have been set. up state organizations. Of these there are 28, covering 38 of the states in the Union. [Pt. 1, p. 20.]

And in addition to these geographic and state organizations there have been created also company organizations which seem to be more or less independent, although cooperating with the state and national organizations. Finally, there exist in many cases also local clubs or local organizations.

4. General National Committees

Next in this hierarchy of super organization come the General National Committees. There are nearly 30 of these, among them the following: (1) Civic Development Committee; (2) Educational; (3) Insurance; (4) Membership; (5) Rural Electric Service; (6) Accounting; (7) Commercial; (8) Customer Relations; (9) Domestic Electric Range; (10) Electrical Advertising; (11) Merchandising; (12) Home Lighting; (13) Industrial Heating; (14) Promotional Rates; (15) Refrigeration; (16) Street and Highway Lighting; (17) Transportation; (18) Water Heating; (19) Wiring; (20) Engineering; (21) Accident Prevention; (22) Electrical Apparatus; (23) Hydraulic Power; (24) Overhead Systems; (25) Prime Movers; (26) Underground Systems.

5. Special National Committees

Besides the regular subsidiary organizations mentioned above, the all-inclusive nature and the equipment for perfectly organized work of the utility organizations is indicated in the fact that there are more than a dozen Special National Committees. Among these may be mentioned the following: (1) Advertising Committee; (2) Prize Committee; (3) Codes and Standards; (4) Constitution and By-Laws; (5) Electrification of Steam Railroads; (6) Exhibition Committee; (7) Finance Committee; (8) Lamp Committee; (9) Membership; (10) Prize Awards; (11) Public Policy; (12) Public Relations; (13) Rate Research; (14) Water Power Development, etc.

And many of these committees have sub-committees. There are also general national committees on civic development, education, insurance, rural electrification, accounting, fixed capital, statistics, commercial cooking, customer ownership, merchandising, home lighting, industrial heating, refrigeration, promotional rates, street and highway lighting, transportation, water heating, accident prevention, electrical apparatus, inductive co-ordination meters, prime movers, underground systems, cooperation with educational institutions, public relations, industrial relations, relations with financial institutions, public speaking, women's committees, Chamber of Commerce of the United States, International Chamber of Commerce, state public utility information bureaus, electrification of steam railroads committee, related organizations committee, and many others.

6. Specialized and Technical Sub-Committees

These numerous committees are much more than mere shells of organization. For many, if not most of these committees are again subdivided and have geographic divisions covering the various sections of the country; or in the technical field the committees have sub-committees dealing with the most intricate and specialized phases of the subject. And the listing of the committee memberships of the above committees, their geographic and sub-committees often cover page after page of the hearings of the Commission.

As an example of the subdivisions of some of these committees and their special provision for highly specialized and technical work may be mentioned the sub-committees of the General Committee on Prime Movers mentioned above. Among these are subcommittees dealing with such highly technical subjects as "Distillation Products of Coal Sub-Committee"; "Higher Steam Pressures and Temperatures Sub-Committee"; "Oil and Gas Engines Sub-Committee"; "Power Station Betterment Sub-Committee"; "Pulverized Fuel Sub-Committee"; "Station Piping Sub-Committee"; "Stoker Equipment and Furnaces Sub-Committee"; "Turbine Sub-Committee," etc. [Exh. Pt. 1, pp. 14-56.]

7. Public Relations National Section

One of the most important and aggressive of the subsidiary organizations of the utility companies is the so-called "Public Relations National Section."

This committee has its own independent executive committee, officers, members-at-large, etc., and geographic division representatives from each of the 13 geographic divisions mentioned above into which the country is divided.

And then under this Public Relations Section are a number of subsidiary committees as-follows:

(1) Co-operation with Educational Institutions.

(2) Customer Ownership Committee.

(3) Information Bureau Organizations Committee-and this again has its geographic division representatives.

(4) Industrial Relations Committee.

(5) Manufacturers Advertising Committee.

(6) Public Speaking Committee—and geographic division representatives in each of the 13 districts.

(7) Relations with Financial Institutions Committee—with geographic division representatives.

(8) Woman's Committee-with separate officers, members-at-large, and geographic division representatives in each of the 13 districts; also sub-committees on home service and manufacturers? [Exh. Pt. 1, pp. 14-56.]

8. Related Organizations

Besides the above thoroughgoing and all-inclusive organization of the forces of the utility interests, and supplementing them, additional organizations have been set up for the purpose of bringing into co-operation and coordination the forces of various non-utility organizations throughout the country. Among these "related organizations" may be mentioned the following:

(1) The American Engineering Standards Committee. This committee is headed by an "allied power group," [Exh. Pt. 1, p. 62.] of which the Chairman is Mr. S. G. Rhodes of the New York Edison Company. Other members are selected from various electric light and power concerns. The committee is then subdivided into "sectional committees," the list of which covers nearly a page and a half of the report. [Exh. Pt. 1, pp. 62-63.]

Then follow three pages of the subdivisions noted as "additional technical advisers"; then there are special committees, etc.

(2) The next committee representing the "related organizations" is the "American Society of Mechanical Engineers."

(3) The American Uniform Boiler Law Society is next.

(4) Then comes The American Water Works Association.

(5) Chamber of Commerce of the United States.

(6) Committee on the Relation of Electricity to Agriculture.

(7) Electrical Manufacturers' Council.

(8) International Chamber of Commerce.

(9) Joint Committee of Bell Telephone System and National Electric Light Association on Physical Relations Between Electric Light and Signal Circuits. On this committee representatives of both American Telephone and Telegraph Committee (Bell Telephone System) and the National Electric Light Association are shown. There are a number of sub-committees of this particular joint committee.

(10) Joint Committee of Western Union Telegraph and National Electric Light Association. Here again the representatives of the Western Union Company and the National Electric Light Association are shown.

(11) National Electrical Manufacturers Association. Under this Association there are two joint committees of manufacturers and representatives of the National Electric Light Association, and sub-committees on various technical matters.

9. State Public Utility Information Bureaus

These bureaus, while operating under the direction of the National Electric Light Association, and in more or less close cooperation with the geographic divisions mentioned above, seem each to have its own particular field and function. There are 28 of these state bureaus covering in their operations 38 different states. [Pt. 1, p. 20.]

10. International Organizations

Besides the above complete and all-inclusive organization of the utility forces of the country, covering the United States and Canada, there are two international organizations as follows:

(1) Union Internationale des Producteurs et Distributeurs D'Energie Electrique.

(2) United States National Committee of the International Electrotechnical Commission.

11. National Conventions

Among other things, the National Electric Light Association holds a national convention each year. These conventions are very large. According to the reports, attendance frequently reaches 10,000. [Exh. Pts. 10-16, p. 912.] Speakers are brought to these conventions from many different groups and from nearly every part of the country. Thousands of dollars are paid to university and college men to attend and address these conventions. The cost for speakers at these conventions between I92o and 1928 is given as $12,332.

A. Thorough, All-Inclusive Organization

Considering the thoroughness of the organization of this National Electric Light Association, not only geographical, but also in the innumerable subjects that are covered by the committees and sub-committees, it would seem that almost nothing, either 'of a popular or of a technical nature is unprovided for.

It will thus be seen that there is a very high degree of interconnection and coordination between all of the various committees representing, not only the electric light and power companies of the country, but in addition the gas companies, electric street railway companies, the telephone and telegraph companies, electrical manufacturers' associations, national and international, Chambers of Commerce, and the American Water Works Association. In addition to this, through the various committees which these organizations have set up, there is, to an almost astonishing degree, cooperation and coordination of efforts between these groups and the educational institutions of the country, farm organizations, such as the American Farm Bureau Federation, the American Society of Agricultural Engineers, various civic organizations such as Rotary Clubs, Kiwanis Clubs, etc., women's groups and clubs, etc.

Chapter 5—Non-Utility Organizations

Big Business Answers the Utilities’ Roll Call

The utility interests thoroughly united and organized constitute in themselves one of the most powerful forces that has ever arisen in the economic life of the nation. We have seen in the previous chapter how thoroughly and well they have united and organized their own forces.

But they have not been content to organize and unite their own forces. As we have pointed out, they have set up special committees for the purpose of interesting and securing the support and co-operation of other forces and influences outside of the utility field.

“Public Relations” a Far-Reaching Function

Especial attention is called to the Public Relations Section of the National Electric Light Association. This special committee is one of the most powerful of the numerous committees which the utilities maintain. It has an independent executive committee of its own, with offices, members, etc., and representatives in all sections of the country. But especially significant is the fact that this committee has certain sub-committees whose particular function it is to secure and maintain friendly relations and cooperative support in various ways with groups of people, organizations, and institutions outside the utility field.

For example, we have a sub-committee of this Public Relations Section on "Cooperation With Educational Institutions." The records have much to say about the activities of this particular committee in enlisting the support and co-operation of schools, colleges, universities, and especially the teaching forces of the country. Then we have a sub-committee on "Industrial Relations," another on "Customer Ownership," etc. But the task of reaching, influencing, and bringing the big financial interests of the country into co-operation with and support of the utilities was assigned to the sub-committee known as "The Committee on Relations With Financial Institutions."

Lining Up the Banks and Insurance Companies

That this sub-committee and other forces of the utility organization were very successful in lining up the great financial interests of the country in support of their program is shown by the record.

A very large proportion of the funds of the insurance companies of the country is invested in the securities of the utilities. Thus they are bound by the compulsion of economic and financial necessity to support the utilities. The banks and investment companies are similarly interlocked and dependent upon the utilities. And the record shows how active their support became.

With these two great financial institutions of the country so closely related by the ties of common financial interest and necessity, the utilities are given very powerful allies. But the work of enlisting the support and co-operation of big business interests does not stop here, as we shall see. It reaches out in many different directions and into innumerable financial, industrial, and commercial organizations.

Big Business Stands By

We have seen how the electrical utilities or power companies have very naturally enlisted the co-operation and support of the other utilities, such as railroads, telegraph and telephone companies, street car lines, gas companies, water works, etc. These were natural allies because they operated in the utility field. We have also seen, or shall see as we study the records, how the great financial interests, such as the banks and insurance companies, financial interests, such as the banks and insurance companies, which are not in the utility field, have been enlisted. But the record goes farther than this. It shows that this alliance and alignment of forces has reached into almost every imaginable line of big business.

A Partial List of Big Business Interests

As illustrating this far-reaching influence we may mention from the record the following, which are only a few of the innumerable and better known commercial and business organizations of the country which are given in the records as having interlocking directorates in or otherwise co-operating with the utility organizations.

Adams Express Co.

Alberene Stove Co.

Alliance Coal Mining Co.

Allis-Chalmers Mfg. Co.

American Brass Co.

American Exchange National Bank.

American Express Co.

American Locomotive Co.

American Ship & Commerce Core.

Anaconda Copper Mining Co.

Andes Copper Mining Co.

Art Metal Construction Co.

Associated Laundries of America (Inc.).

Atchison, Topeka & Santa Fe Railway Co.

Bankers Trust Co.

Bethlehem Steel Corp.

Braden Copper Co.

Bradstreet Realty Co.

Bristol Paper Co.

Brooklyn Warehouse & Storage Co.

Canal Bank & Trust Co.

Central Union Trust Co. of N. Y.

Chamber of Commerce of the United States.

Chase National Bank.

Chicago, Rock Island & Pacific Railroad Co.

Chicago & Eastern Illinois Railway Co.

Children's Aid Society, New York.

Chili Copper Co.

Cocoa Cola Co.

Colon Oil Corp.

Continental Mexican Rubber Co.

Continental Oil Co.

Cramp Ship & Engine Building Co.

Cuba Cane Sugar Corp.

Cuban Portland Cement Corp.

Curtis Wright Corp.

Diamond Match Co.

Federal Insurance Co.

Gallup American Coal Co.

Gasoline Products Co.

Greenwich Savings Bank

Independence Indemnity Co.

Intercontinental Rubber Co.

International Cement Corp.

International Nickel Co.

Irving Trust Co.

Island Run Coal Co.

Lehigh Coal & Navigation Co.

London Guarantee & Accident Co. (Ltd.).

Manhattan Railway Co. .

Matangas Sugar Corp.

Mathieson Alkali Works.

Mavis Bottling Co. of America.

Merchants Refrigerating Co.

Mesabi Iron Co.

Missouri State Life Insurance Co.

Monroe Water Supply Co.

National City Bank.

National City Safe Deposit Co.

National Fire Insurance Co.

National Surety Co.

New York Rapid Transit Co.

N. O. Branch Federal Reserve Board of Atlanta.

North American Cement Corp.

Penn Mutual Life Insurance Co.

Pennsylvania Fire Insurance Co.

Philadelphia National Bank.

Postal Telegraph & Cable Co.

Provident Mutual Life Insurance Co.

Rockefeller Foundation.

Santa Fe Pacific Railway Co.

Securities Corp.

Shell Union Oil Co.

Simons National Bank.

Skandia Insurance Co.

South Porto Rico Sugar Co.

The Valley Realty Co.

Trexler Lumber Co.

Tulane University.

Twin Branch Railroad Co.

United States Cast Iron Pipe & Foundry Co.

Western Union Telegraph Co.

Wilkes-Barre & Scranton Railway Co. [Pts. 23 & 24, pp. 735-749.]

And so on through page after page of the record, 15 pages in all. The above is, therefore, only a very partial list.

Investments of Utilities in Non-Utility Enterprises

The interrelation between the utilities and other lines of business outside of the utility field is indicated at many points in the hearings in connection with the investments which the utility companies carry in these outside enterprises. Investments of this nature are mentioned in paper mills, spinning mills, fertilizer companies, chemical products, manganese [Pt. 27, pp. 274-75.]; also in bus lines, ice plants, water works, land and coal. [Idem, p. 281.]

Similarly, the Electric Bond and Share Company is interested in a wide range of business outside of the utility field, including banks, insurance, and industrial concerns of various kinds. [Pts. 23 & 24, p. 2 ff.]

Thus the picture—a figure of speech used not only by Governor Pinchot but by speakers of the utilities as well-a huge web of titanic power covering the whole country—concentric circles of power with the utilities at the center; their various committees reaching out over their radii to every circle in the mighty network of financial, industrial, economic, and cultural organizations of the country and tieing them into the web of their system by incorrigible bonds of economic, financial, and industrial necessity.

Chapter 6—Membership and Financial Support

The Bone and Sinews of War

The power and influence of these highly developed organizations may best be judged by the membership and financial resources at their command. The membership, as the records show, includes the individuals and organizations representing approximately 90 per cent of the electrical industry of the country, to say nothing of the allied and cooperating groups outside the utility field. As to finances the records show that the National Electric Light Association alone had at its disposal well over a million dollars per year besides special funds for special purposes said to amount in some cases to from $25,000,000 to $30,000,000 a year additional.

A Huge Membership

Back of the above organization, and supporting it financially and otherwise, are, of course, the various utility and non-utility companies, national and international, with their membership and financial contributions.

Exhibit No. 4 [Exh. Pt. 1, pp. 78-96.] gives the list of the member companies of the National Electric Light Association as of January 1, 1928, classified as follows:

Class A (light and power companies) 790

Class D (manufacturers) 375

Class F (associate companies) 327

Class H (foreign) 101

Total 1,593

INDIVIDUAL MEMBERS. "In addition" to the company members mentioned above "the National Electric Light Association has 17,331 individual members comprising 13,83o employees of light and power companies, 118 invited members, 2,682 employees of manufacturer companies, 657 employees of associate companies, and 44 foreign individual members. The complete membership, both companies and individuals, totals 18,924:"

The mere listing of the Class A, Class D, and F companies occupies 26 pages in the Commission's report. And it is interesting to note that among the foreign members there is a long list in Asia, covering China, Japan, the Malay States, Java and Siam; quite a list in Australia, New Zealand, one each in Tasmania and Bermuda; a long list in Europe, of course, especially in England, several in South America, and two in the West Indies.

HOLDING COMPANIES. In the membership of the National Electric Light Association are a number of holding companies. In 1928 there were listed 48. Of these holding companies, Exhibit No. 5. [Exh. Pt. 1, pap. 96-97.]

Abundantly Financed

The financial support of this great organization is derived from annual dues collected from the various company and individual members of the Association on a percentage basis. Class A, made up of companies having a gross revenue amounting to, but not in excess of, $50,000, pays at the rate of 50 cents per thousand dollars of its gross revenue. The minimum dues for this class are $10 per year. The annual dues of central station individual members, Class B, are $3.00 a year; invited members, Class C, pay not to exceed $5.00 per year; annual dues-of manufacturer company members, Class D, are fixed by the executive committee, and so on, various members paying generally on the basis of volume of business handled, [Exh. Pt. 1, pp. 2-3, Article IV of the Constitution of the N. E. L. A.

The magnitude and volume of the work done by this National Electric Light Association may be judged by the fact that the receipts grew from approximately $549,705.31 in 1923 to $1,079,190.33 in 1928, as follows:

July 1, 1922, to June 30, 1923 $ 549,705.31

July 1, 1923, to June 30, 1924 $ 626,917.23

July 1, 1924, to June 30, 1925 $ 680,057.25

July 1, 1925, to June 30, 1926 $ 1,056,673.84

July 1, 1926, to June 30, 1927 $ 1,075,905.42

July 1, 1927, to June 30, 1928 $ 1,079,190.33 [Exh. Pt. 1, p. 98.]

These funds of the National Electric Light Association alone do not, of course, represent all of the financial resources that are available for the work of these organizations. It is stated by a number of the witnesses at different times that for advertising purposes alone the combined organizations of these various committees have had available between $25,000,000 and $30,000,000 a year.

Chapter 7—The Concentration of Control

Many and Devious Methods

The earlier report of the Federal Trade Commission-Senate Document No. 213, submitted in February, 1927-found that there was no single company nor single group of interests that exercised a dominant control over the electric industry in the country. "Nothing approaching control has been acquired by a single interest over the electric power industry." [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, p. XXII. See also pp. XII to XXXVIII covering summary; also p. 49.] The representatives of the power companies have seized upon this particular feature of the summary of the earlier findings of the Federal Trade Commission as final and conclusive evidence that there is no power trust in the United States; that there really is no concentration of control, and that the concern of those who regard the present tendencies in the electric light and power field towards complete monopolization are entirely without foundation.

"The power trust is a myth," according to these representatives of the utility interests. No such thing exists. And, what is more, they claim, under existing laws and conditions, no such concentrated control or trust is possible.

What Is the Trend?

But the important consideration in this matter is not only whether there is one single company that has secured complete control or domination in the electric power industry of the country, but whether there is a group of interests representing a considerable number of companies that dominate the situation, and

whether this group is steadily and rapidly narrowing into fewer and fewer companies or organizations. In other words, the essential question is whether or not the trend in the electric industry is towards concentration of control. And again, the essential question is not whether the tendency to concentration in ownership and control in the industry has already reached a point where that control has actually been secured by some one single company or concern, but whether or not the tendency in that direction is moving with such rapidity and certainty that the ultimate control of the whole industry by a very small group of interests or individuals is assured. That such is the case is clearly indicated even in the earlier reports of the Federal Trade Commission, and still more so by the more recent findings, as we shall find.

Different Methods of Control.

Moreover, both the earlier and the more recent reports of the Federal Trade Commission bring out in sharp relief the fact that the concentration of control in the electrical industry is being accomplished, not by one but by a great many different and devious methods and devices.

Among these may be mentioned the following:

(1) Direct ownership of the voting stock in sufficient proportions to secure control.

(2) Through mergers, reorganizations, and combinations, by means of which the owners of the dominating organizations secure control of subsidiary groups.

(3) The holding company, the most powerful and effective of all of the devices for concentrating control.

(4) By interlocking directorates, by means of which the directors of one company secure control of other companies through a majority or controlling influence on the directorates of other companies.

(5) Through the voting trust, by means of which the holders of voting stock surrender their voting power to a voting trust that thereafter exercises control.

(6) Through control of proxies.

(7) By stock trading, by means of which the officers seeking control acquire common or voting stock, for which they exchange preferred or non-voting stock, thus increasing their control.

(8) Through supervision of subsidiary operating companies by holding companies, by means of which under contract the holding companies determine substantially the methods of "operation, development, construction, financing, rates, and general management of the supervised operating public utility companies." [Pts. 23 & 24, p. 123.]

(9) By control of the issuance of stock by boards of directors so that they may perpetuate their control. [Pts. 23 & 24, p. 333.]

(10) Control through the issuance of option warrants. [Idem, p. 341.]

It will thus be seen that the concentration of control of utility corporations does not depend upon any one particular method but that such control is brought about in a great many different ways. And the operation of these various methods and means throughout the utility field multiplies the force of the tendencies working towards concentrated control. In subsequent chapters we shall examine briefly the evidence presented in the hearings of the Commission with reference to these various forces at work in the field of the utility corporations.

Part 3—Financial Structure and Methods

Chapter 8—The Fight to Get the Facts

How the Utilities Resisted and Blocked the Investigation

The most vital, interesting, and challenging revelations of all in the findings of the Federal Trade Commission have to do with the financial structure, methods, and operations of the utility corporations. The facts in this field were the most difficult of all to secure. They constituted the "trade secrets" of the greatest organization in the utility field that has ever existed, and these secrets were concealed and guarded by the companies with the utmost care and determination.

In spite of the fact that when the proposal was first made for an official investigation of the utility corporations and their methods, the leaders of the industry loudly professed that they had no objection whatever to a legitimate investigation, that they had nothing whatever to hide, and that they would gladly welcome such an investigation and would co-operate in carrying it on, the evidence before the Commission reveals the fact that again and again the only way by which the Commission could get the facts was by actually forcing out the truth.

The Inquiry Blocked

When the investigation by the Commission reached the point where these matters of financial methods were being inquired into the witnesses became suddenly reticent and evasive and finally positively and persistently refused to answer the questions put to them. And when the matters were pressed it was found that the witnesses were being coached and that expert and clever attorneys were at their elbows warning them and the Commission that they would not permit the questions to be answered. In spite of the fact that the Commission represented a duly authorized body of the Federal Government with power to subpoena witnesses, documents, and evidence, the utility corporations and their attorneys defiantly, definitely, and persistently blocked the investigation at this point.

So persistent were these objections that the Commission was finally compelled to take the matter into court before it could force the facts from the reluctant witnesses of the utility corporations. It was months before the decision of the court in this case was reached which compelled the companies to give up their evidence, which enabled the Commission to proceed with the investigation of these matters.

“We Object, Your Honor!”

When the Commission met on October 17, 1928, there appeared before it Mr. J. F. MacLane on behalf of the Electric Bond and Share Company, requesting the privilege of making a formal statement regarding the position to be taken by the witnesses which the Commission had summoned and was about to examine. [Pt. 8, p. 1.] Mr. MacLane in his formal statement referred to the fact that the Commission had asked the Electric Bond and Share Company to cooperate with the Commission in securing certain evidence based upon the records, books, accounts, etc., of the company, and objected in behalf of the company to a "disclosure in detail of its private business and professional undertakings for its clients which are competitive in their nature and would involve the disclosure of costs, employments, and transactions wholly private and confidential and not relevant to the subject of the inquiry." [Pt. 8, p. 2.] Later he objected to the administration of the oath or to the interrogation of the witness, setting forth at length the basis of this objection.

From that time on, as the examination proceeded, whenever the questions asked of the witness referred to any vital or important matter, Mr. MacLane, the attorney, would interpose an objection and prevent the witness from answering.

For example, judge Healy was trying to get at some of the records and was asking the witness, Mr. A. E. Smith, about certain accounts on the books. At that point Mr. MacLane, the attorney for the Electric Bond and Share Company interposed as follows:

“Mr. MacLane: Just a moment, please. I think, Judge Healy, that I am obliged, in order to protect the record, to advise the witness that he is not required to answer with respect to the contents of the books.” [Idem, p. 12.]

The objection was overruled. Then Mr. MacLane again interposed, saying: "I have given the witness certain advice which he may follow or not." The witness declined to answer.

“On Advice of Counsel I Decline to Answer”

And then followed a long session in which over and over again the witness answered: "I must decline to answer." When asked on what ground, he invariably replied: "On advice of counsel." And, of course, the counsel sat right at his elbow, persistently and repeatedly warning him that he should not and was not required to answer.

Judge Healy asked the witness if he could in a general way give the things that are recorded in the ledgers of the company. Mr. MacLane interposed, saying: "I shall advise the witness that he is not required to answer the question." Thereupon the witness replied: "I decline to answer, on the advice of counsel."

Records Also Refused

Later the witness was asked if he would produce certain books of the company so that "this Commission may see whether there has been any payment to influence public opinion or the avenues of publicity, or to control the avenues of publicity in the matter of public or municipal ownership of utilities."

To this Mr. MacLane, the attorney for the Electric Bond and Share Company, interposed, saying: "I feel that in fairness to the company I should state an objection to the question in the form in which it is asked, because the witness has not been asked to produce these particular payments, if any, but has been asked to produce the entire book. I shall advise the witness under the form of subpoena, directed to him, that he is not required to answer the question." [Pt. 8, p. 14.]

Again the objection was overruled and again the witness refused to produce the books.

Finally Judge Healy asked the witness if he would permit the Commission to look at the books for the purpose of discovering whether certain payments were made. And to this the witness replied: "I must refuse to answer on the advice of counsel." [Idem, pp. 17-18.]

Later Mr. Ralph B. Feagin was called to testify. Again Mr. MacLane, attorney for the Electric Bond and Share Company, interposed, saying: "Your honor, before Mr. Feagin is sworn, I desire that the record show that we renew at this time the objections made to the swearing of the witness Smith—we renew them as to the witness Feagin, and that the company makes the same objections to the swearing and interrogation of this witness that it made to the swearing and interrogation of the witness Mr. Smith." [Pt. 8, p. 20.]

Again the objection was overruled, but again the witness refused to answer.

Again Judge Healy asked of this witness to produce in the hearing room vouchers showing the disbursement of money expended to influence or control public opinion on account of municipal or public ownership of means by which power is developed, etc.

And here again Mr. MacLane interposed with the same objection and advised the witness that he was not required to answer. And so the evidence goes on, page after page, the witness declining and refusing to answer the questions propounded to him and refusing to do so on advice of counsel.

Defying the Jurisdiction of the Commission

Finally Commissioner McCulloch entered a protest, saying:

“Now, it seems to be very clear to my mind that the information sought today comes squarely not only within the Senate Resolution but also within the power expressly conferred by Congress upon this Commission.... I think that if we have not the power and jurisdiction to inquire into these matters, this statute to which I have referred and the Senate resolution are just pieces of waste paper and nothing more. We want it understood that this requirement for the production of information and documents is made not only pursuant to the Senate resolution, but pursuant to the powers of the Commission as conferred not alone by resolution but by statute. . . .

“It is very clear to my mind, and I can draw only the one assumption that the Electric Bond and Share Company has only been willing to share in this investigation or cooperate in this investigation to the extent that it suits its own officers and that it is unwilling to submit itself to the jurisdiction of the commission. [In this as in all cases throughout the present volume where italics are used in quoting from the text of the Commission’s hearings the italics are ours.] In other words, I can only indulge in the presumption that they are defying the jurisdiction of the Commission or that they have something that they are unwilling to let the United States Senate know about and to let the people of the country know about....

Witnesses have refused to comply with the demands of the Commission and if there is any way under the law to compel the Electric Bond and Share Company and its associated and affiliated companies to comply with those demands and permit this investigation to be made, the Commission will make use of whatever methods the law affords to compel them to do so.” [Pt. 8, pp. 34-35.]

Forced by Court Procedure to Give Up the Facts

As a result of this refusal on the part of the witnesses and representatives of the Electric Bond and Share Company to testify, as stated, the Federal Trade Commission was compelled to take the matter into the United States District Court. The courts held for the Commission and thus compelled the Electric Bond and Share Company and its witnesses to testify. And thus only by court procedure was the Commission finally able to force out the truth from these unwilling witnesses.

Other Difficulties of the Investigation

In the investigations of the utility companies the Commission has encountered other difficulties and obstacles. We have referred above to the absolute and persistent refusal of the representatives of the utility companies to testify or to submit the records of their companies. Numerous other instances of refusal of witnesses to testify are found in the hearings.

Another difficulty that the Commission encountered frequently was the fact that, for one reason or another, important records were "lost, strayed, or stolen." In one case, for example, that of the Oklahoma Gas and Electric Company, which was reorganized in 1902, the capital stock was increased from $300,000 to $1,000,000, but the accountants of the Commission could not tell definitely whether this was a “write up” or not because, as they testified, the “records had been lost.” [Pt. 3, p. 543.]

In the investigation of the affairs of the Electric Bond and Share Company, according to the investigators of the Commission, important records were withheld or refused.

Many other similar instances are reported.

What the Investigation Revealed

In view of what the investigation has finally revealed it is not surprising that the companies have so carefully guarded these matters and resisted with such determination and persistence having them made public.

The difficulties encountered by the Commission in getting at the real facts regarding these financial matters of the utility corporations will explain why no private research or investigation, however disinterested or thoroughgoing, could have discovered and disclosed these important matters. Nothing but an arm of the Federal Government, backed by its full authority and power, was sufficient to accomplish this work.

Strangely enough, these disclosures with reference to the financial methods of the utilities, constituting as they do by far the most essential of all of the revelations, have been given little or no publicity in the press. Nor, so far as we know, have any of the , articles, pamphlets, or books that have so far been published upon the hearings of the Commission given this particular phase of the subject any adequate discussion or presentation.

Out of an interminable mass of evidence covering hundreds of pages of testimony and many volumes of the published hearings, the following essential facts have been revealed and established:

I. A tremendous inflation of the capital accounts practically universal. These inflations, as we shall show from the evidence submitted in the hearings, range from a few millions of dollars in the smaller companies to many hundreds of millions of dollars in some of the larger ones. And, as the evidence to be presented will further show, this practice of inflation is practically universal throughout the entire field of utility corporations.

II. Enormous earnings on actual capital invested, these excessive earnings being very cleverly concealed from the public, the Commissions and the courts by means of the inflations above referred to. These earnings which, upon the inflated values showed at from 5 to 6 and 8 per cent, were, when reckoned upon actual investment, as high as 40 per cent, 6o per cent, 6oo per cent, and even higher in extreme cases, as we shall show by quotations and references from the hearings later on.

III. The involving of most of the big financial interests of the country, including banks, insurance companies, railroads, etc., and a considerable proportion of the general public (in customer ownership schemes) through the lure of excessive earnings based on the above mentioned methods.

IV. A swiftly accelerating concentration, both of the earnings and the ownership and control of the utility corporations through a wide application and use of the device of the modern holding company. The methods of operation of this device constitutes one of the most clever and effective of those in use in the modern field of finance.

V. The acceleration of the general concentration of wealth and power in the hands of the few through and by means of a combination of the above methods of financial structure, operation and control.

We shall endeavor in the following chapters to present a summary of the revelations of the Federal Trade Commission with reference to each of these above mentioned matters.

Chapter 9—Corporation Finance

The Concealed Weapons of Corporate Power

The financial structure of the utility corporation is considerably complicated. And the complications tend to facilitate the concentration of control and of earnings as well.

Control by Direct Ownership

The first thing to be noted and emphasized in regard to the control of utility corporations is the fact that control of the companies lies in the voting stock and that those who buy preferred stock, bonds, and other types of securities do not, except in rare instances and under unusual conditions, have any voting power at all and, therefore, no voice or control in the management. Thus at the very outset and by the very nature of the financial structure of the utility corporation, control is concentrated in the hands of those who own the common or the voting stock.

As stated above, the investigations of the Federal Trade Commission have not disclosed the concentration of direct ownership in the utility field to such an extent as to give any single company or group a dominating control by this particular means. And yet the investigation has shown that some of the utility companies have concentrated their direct ownership of voting stock in many of these companies to such an extent that they hold a very considerable proportion of control.

A Minority Ownership Often Controls

And it is important to note that the evidence presented brings out the fact that it is by no means always necessary that there should be an ownership of the majority of voting stock in order to control an organization. For example, the Electric Bond and Share Company owned only 16.70 per cent of the total shares of the Electric Power and Light Corporation and yet very effectively controlled the latter company. [Pts. 23 & 24, pp. 334-36.]

Thus by direct ownership of the voting stock in the various utility corporations, the more powerful and dominating influences already exercise a very extensive and concentrated control. But, as indicated above, the control by this method is not as yet sufficiently complete or extensive to make any one group completely dominant or to bring about a completely centralized control. Other forces are operating in that direction.

The Operating Company

The financial structure of the underlying operating company is comparatively simple. It consists of the usual different types of securities, viz., common stock, preferred stock, and bonds. Of course, there are numerous varieties of these three different types of securities. There are "Class A Common" stock and "Class B Common"; then there are "prior preferred" and "second preferred," "participating preferred," and other classes of various designations and denominations. Then there are "option warrants" which may need a special word of explanation; and, of course, various types of bonds-just ordinary bonds; then "collateral trust bonds" and others. Occasionally we find use of "scrip," [Pt. 27, p. 387.] "gold coupon notes," [Idem, p. 415.] and other variations. [Sen. Doc. No. 213, pp. 192, 257.] However, roughly speaking, the securities may be said to consist of the three classes mentioned above, viz., (1) common stock, (2) preferred stock, and (3) bonds.

As explained above, the important matter to emphasize in connection with the financial structure of the operating companies and, for that matter, of all the various forms of financial structures of the utilities is that only one form or class of securities, with but few exceptions, have voting rights. This is generally the common stock. The other securities—the preferred and the bonds of whatever kinds—have no voting rights, as a rule, and, therefore, have no part in the management or control of the organization.

Where Concentration Begins

Now, as explained in the earlier report of the Federal Trade Commission,' the return on preferred stock is usually limited to 6 or at most 7 per cent, while bonds draw only a specified rate, usually not more than 6 per cent. Meanwhile, courts and commissions allow the operating companies to earn 8 per cent on their total investment. This leaves a margin of excess earning above that required to pay the interest and dividends to the preferred stock and bond holders, and this goes to the holders of the common stock, which increases their rate of return above the usual 6 per cent and often above the 8 per cent allowed by the courts and commissions. It may go up to 15 per cent, according to the illustration used in the Federal Trade Commission report.

Thus at the very foundation of the financial structure of the utilities companies we have in the usual form of corporate organization in the underlying operating companies the basis upon which the concentration of ownership and control rests. Upon this basis and growing out of it rises the financial superstructure which at each step accelerates the processes of concentration.

Intercompany Relations

Next to the usual financial methods of the underlying operating company in its concentrating force and influence are the intercompany relationships. These phases of the process are explained at great length and extended detail in the evidence. They are developed in connection with practically every company examined.

Chief among these intercompany relations is the well known practice of interlocking directorates. By this means the directors. of one company may be at the same time directors in several other companies and thus, although the companies may be ostensibly independent, they are practically under the same control, or largely so. Intercompany relationship is also made effective through the ownership of the voting stock in one company by the officers and stockholders of another. And this feature of the financial methods of the companies is very extensively developed throughout the evidence. [See section on “Intercorporate Relations” in each important company.] Our next chapter will deal further with this feature of the financial structure of the utility companies.

Besides the various methods and processes of interrelation and integration mentioned above, we find disclosed in the evidence other devices and practices that tend to concentrate the financial control and advantages, such as the voting trust, the purchase and resale of securities of one company in another, loans of one company to another, service contracts of various kinds, reorganizations, mergers, and consolidations-all of which affect the financial structure of the companies in one way or another.

Mergers and Consolidations

Another very important feature in the financial set up, methods, and operations of the utility companies is the merger or consolidation movement. Individual operating companies find it to their advantage to combine or merge their interests. Larger and more powerful companies seek to and do absorb lesser companies, thus increasing their control and influence. And, finally, even the holding companies merge and combine. This process, according to the evidence, has been going on with such rapidity that during the five years from 1925 to 1929 inclusive there was a total of 3,895 combinations, including the absorption of municipal plants, the merging of operating companies and of holding companies, extending even into the international field. This matter of the merger and combination in the utility field is of such significance and importance that we shall devote an entire chapter to the subject. [pp. 80 ff.]

The Holding Company

But by far the most powerful and far-reaching force in the financial structure of the modern utility organization is the holding company. As an agency for increased economy and efficiency, but more especially as the most powerful force for the integration of organization and the concentration of control and of earnings, the holding company is the keystone and culmination of the financial structure of the utilities organization. It is of such vital importance and significance that we shall devote an entire chapter to the subject. [pp. 84 ff.]

Chapter 10—Intercorporate Relations

How the Companies Are Inter-tied

The concentration of control in the utility field, as previously pointed out, is brought about in a number of different ways. There is a certain degree of concentration of control in the very financial structure of the utility companies themselves, by which the control for the most part is vested in the owners of the common stock. Other and more effective means of concentrating control, such as the merger, the holding company, etc., will be discussed later. In the present chapter we consider the intercompany or intercorporate relationship in the utility organizations. Here is another very effective means by which the concentration of control is effected.

This intercompany or intercorporate relation takes on various forms. One of the economists of the Commission, Mr. William B. Horne, was asked:

“How many methods of control does a holding company have over its subsidiaries?”

In reply, he said:

“Four, as follows: (1) Through stock ownership; (2) through control of directors; (3) through control of officers; (4) through management and supervision service.” [Pt. 22, p. 56.]

There are more, as we shall see.

Interlocking Directorates

As we have noted in the preceding chapter, one of the very common practices in the utility field by which the control of various companies is concentrated into the hands of a few is by means of interlocking directorates-that is by managing to have some or all of the directors of one company at the same time directors of a number of other companies. In the examination of this phase of the subject the present or later work of the Federal Trade Commission has been quite diligent in studying out and publishing in chart form and otherwise the facts as to the interlocking directorates of these various companies.

For example, a very striking instance of the way the Electric Bond and Share Company worked its directors into control of the Electric Power and Light Corporation is set forth in Parts 23 and 24, pages 323 to 325. The first board of this company held office for only one day. A new board was then elected, consisting of five men, of which the Secretary and Treasurer resigned, and the Secretary and Treasurer of the Electric Bond and Share Company were elected in their places. By this election the Electric Bond and Share Company secured control of the Board of Directors. Then on June 29, 1925, the number of the board was increased from five to fifteen, and of the ten new members added, eight were Electric Bond and Share men. Then on September 8, 1925, three of the old directors resigned and Electric Bond and Share men took their places. So that finally the Electric Bond and Share Company had all of the members of the Board of Directors of the Electric Power and Light Corporation.

A characteristic example of the way these directorates are interlocked is shown in the case of Sidney Z. Mitchell of the Board of Directors of the Electric Bond and Share Company. Mr. Mitchell was also chairman of the Board of Directors of the American Power and Light Company, the Electric Power and Light Corporation, and the National Power and Light Company. He was also director of seven subsidiaries of the American Power and Light Company; also a director of two subsidiaries of the Electric Power and Light Corporation, and two of the National Power and Light Company; a director of the Montana Power Company and one of its subsidiaries, of the American Gas and Electric Company, of the Southeastern Power and Light Company and two of its subsidiaries, and of one company in the miscellaneous group. A total of twenty-two companies, seven of these being outside of the Electric Bond and Share group. [Pts. 23 & 24, p. 436.]

Similarly, C. E. Groesbeck, Vice-President of the Electric Bond and Share Company, was a director in 31 companies, which was the largest number of directorships held by any director of the Electric Bond and Share Company. He was a director of the three principal holding companies in the Electric Bond and Share group, of six subsidiaries of the American Power and Light Company, five of the Electric Power and Light Corporation, thirteen of the National Power and Light Company, of the American Gas and Electric Company, and of the Southeastern Power and Light Company and one of its subsidiaries. [Pts. 23 & 24, p. 436.] These are but typical instances of the interlocking of directorates which are set forth in great detail with reference to many of the larger and more important corporations throughout the reports of the Commission.

Of more than 300 persons who held directorships in one or more companies in the Electric Bond and Share Company, 33 held directorships in other companies. [Idem..] The officers and directors of the Electric Bond and Share Company held exactly one-third of the directorships and all offices in the American Power and Light Company. They held the same proportion of directorships in the Electric Power and Light Corporation and all the offices except one vice-presidency. They also held two-fifths of the directorships and all of the offices, except one, in. the National Power and Light Company. [Idem, p. 440.] The officers of the Electric Bond and Share Company held 50 cent or more of the offices in 20 subsidiary companies, and in five others have lacked only one of holding this proportion. In addition to the foregoing, one of the officers, P. B. Sawyer, held at one time an office in 26 other companies in this group. [Pts. 23 & 24, p. 441.]

A striking example of the control by a holding company of its subsidiaries is shown in the case of the American Gas and Electric Company, which exercised absolute control of almost every one of its subsidiaries through their directors and officers, who are also officers of the American Gas and Electric Company. With four exceptions, a majority of the directors of each of these companies, on March 1, 1928, were officers of the American Gas and Electric Company, all of whom, ten in number, resided in the environs of New York City and were employed in the New York office of the American Gas and Electric Company. [Pt. 23, p. 724.] George N. Tidd, for example, director in the American Gas and Electric Company, was a director also in 14, president of 13, and vice-president of other companies.

In this connection it is interesting to note that this same principle of control through interlocking directorates which applies so effectively in the utility field is extended so that these men who were directors in so many different utility companies were also directors in a great many non-utility companies. Thus the control of the utility companies extends beyond the field of utilities into various other fields. Sidney Z. Mitchell, for example, according to the testimony, was a director in the Irving Trust Company, the Postal Telegraph and Cable Company, and the Securities Corporation General. [Pts. 23 & 24, p. 735.]

Lewis E. Pierson, Director of the Electric Bond and Share Company, was also director in the Chamber of Commerce of the United States, of the Merchants Refrigerating Company, of the Merchants Association of New York, and of the National Foreign Trade Council.

Mr. William C. Potter was a director in the American Rubber Producers, Inc., the Atchison, Topeka & Santa Fe Railway Company, the Bethlehem Steel Corporation, the Chicago & Eastern Illinois Railway Company, the Continental Gin Company, the Continental Rubber Company, the Gasoline Products Company, and many others.

Frederick Strauss was a director in the Central Union Trust Company of New York, the Cuba Cane Sugar Corporation, trustee of the Rockefeller Foundation, and many others.

Edward Kimball Hall, Director of the Electric Bond and Share Company, was Vice-President of the American Telegraph and Telephone Company, a director in the Bell Telephone Securities Company, and others.

And so on page after page in the records of the Commission proceedings. [Pts. 23 & 24, pp. 735-742.]

Directors and officers of the various utility corporations were directors and officers in such various non-utility corporations as Bradstreet Realty Company, Diamond Watch Company, Adams Express Company, Allis-Chalmers Manufacturing Company, Chicago, Rock Island & Pacific Railroad, Cuba Cane Sugar Corporation, Mesabai Iron Company, New York Rapid Transit Company, Bristol Paper Company, National City Bank, North American Cement Corporation, Piggly Wiggly Corporation, Tulane University, Monroe Water Supply Company, Wilkes-Barre and Scranton Railway Company, Penn Mutual Life Insurance Company, etc., etc. [Idem, pp. 743-749.]

Control by Common Ownership of Stock

Another form of intercorporate relationship through which control is concentrated is by means of the common ownership of stock. The stockholders of one company,. which may exercise control over many subsidiaries, may at the same time hold a sufficient number of stocks in still other subsidiaries or companies so that they may exercise control over both.

For example, 27 per cent of the voting stock of the American Gas and Electric Company was held by the ten largest stockholders. Included in this list of the ten largest stockholders were stockholders of the Electric Bond and Share Company, holding between 14 and 16 per cent of the stock in that company.

Another instance of the common ownership of stock is that of the Electric Bond and Share Company, which in 1928 held almost 14 per cent of the stock of the American Power and Light Company, 13 per cent of the Electric Power and Light Corporation, almost 30 per cent of the National Power and Light Company, 9 per cent of the Southeastern Power and Light Company, and 8 per cent of the American Gas and Electric Company. At the same time S. Z. Mitchell, a director of the Electric Bond and Share Company, held about 6 per cent of the stock in the American Power and Light Company and the American Gas and Electric Company each, while the combined holdings of this group for the American Power and Light Company was 23 per cent; for the Electric Power and Light Corporation, i9 per cent; for the National Power and Light Company, 40 per cent; and for the American Gas and Electric Company 25 per cent. [Pts. 23 & 24, p. 33.]

Similar intercorporate relationship and control existed quite generally between the various holding companies and their subsidiaries and often between holding companies and operating companies that were outside of the group.

In 1928 the American Gas and Electric Company held $48,000,000 of common stock in the Electric Bond and Share Company. [Pt. 22, p. 490.] At the same time the American Gas and Electric Company owned $50,000,000 of common stock in the Appalachian Electric Power Company.

The Voting Trust

Another very clever method by which a few are able to exercise control over a corporation, or by which a holding company may exercise control over a subsidiary without owning or controlling a majority of the stock is by means of the so-called voting trust. The way this operates is illustrated by the testimony in the hearing before the Commission regarding the Utah Securities Corporation controlled by the Electric Bond and Share Company. It was shown that the Electric Bond and Share Company did not retain a majority of the capital shares of the Utah Securities Corporation and still it controlled that corporation. The testimony reads as follows:

“It was not necessary for Electric Bond and Share Company to retain a majority of the stock to keep control of the company, as the plan of organization of the Utah Securities Corporation provided, among other things, that-the stock of the Utah Securities Corporation may be deposited under a voting trust agreement (the duration of which voting trust and the provisions of such agreement to be determined by Electric Bond and Share Company), and in such event voting trust certificates will be issued in lieu of stock of Utah Securities Corporation to which subscribers are entitled.” [Pts. 23 & 24, p. 327. See also pp. 1192-93.]

By this device of the voting trust those individuals and corporations that hold their voting stock often place them in the hands of the voting trust, thus resigning to them whatever element of control they had in the stocks which they owned. And, according to the evidence, this device of the voting trust was used very commonly in the utility field as a means by which holding companies kept control of subsidiary and other organizations. Details may be found in Exhibit No. r within the Commission's Exhibit No. 3995, where the text of the voting trust agreement of the Southeastern Power and Light Company is given in full.

In the case of the Insull interests, the voting trust of at least one of the top companies is in the hands of three men. By this device, which is frequently used, the control of the companies is still further concentrated. [Pt. 22, p. 54; see also Pt. 27, pp. 164-68.]

Proxy Voting

Another means by which the control of the utility corporations is exercised by a few, as is well known, is by the use of proxy voting. The records show that in some cases, notably in that of the Utah Power and Light Company, all of the shares of stock, including both preferred and second preferred, that held any voting power, were held and voted by one man who held the proxies of all the other voting shares. The records show that the members of one firm voted all the proxies at every meeting of the Electric Power and Light Company and of the Utah Power and Light Company except one or two.

Thus it often happened that very few stockholders, and sometimes none, attended the meetings, and the votes were cast by those who held proxies. [Pts. 23 & 24, p. 1159.]

When the Electric Bond and Share Company was organized, the General Electric Company took the entire issue of stock, both common and preferred, and voted by proxy at each of the first four meetings. With two exceptions they voted more than 65 per cent of the total stock voted at these meetings. In some cases they voted more than 99 per cent. [Idem, p. 35.]

The Electric Bond and Share Company exercised this control over the American Power and Light Company and the Pacific Power and Light Company from the time of their organization down to May, 1928. One firm of lawyers, located in Augusta, Maine, voted as proxy holders all the stock present at every meeting held by the stockholders of these two companies during that period. [Pts. 23 & 24, p. 812.] In some cases control was exercised by a holding company through this device of interlocking directorates over companies that were entirely outside of their group. Nine companies were in this way controlled by the Electric Bond and Share groups. [Idem, p. 187.]

Controlling Issue of Stock

Another method by which the companies keep control in their own hands is by a very clever provision in the charters and by-laws of the company "whereby the directors may retire such of the preferred shares as they may select and whereby the directors may decide what of the authorized stock shall be issued, and at what price, and to whom." (Italics ours.) [Pts. 23 & 24, p. 333.]

The purpose of this provision is clear, for, as judge Healy queried in the hearing, "If an effort were made by some outside interests to acquire control of the corporation, it might be possible for the Electric Bond and Share Company to get the board of the Electric Power and Light Corporation to issue more stock and give it the right to buy it." [Idem.]

These provisions of the by-laws of this company are described in the record as follows:

“Due to the provisions of the by-laws, the board of directors of the Electric Power and Light Corporation, for example, is actually in control of the corporation. The Electric Bond and Share Company has continually controlled the board of directors since organization. Should there be an effort made by some outside interest to acquire control of the corporation, the board of directors could issue all the remaining authorized common stock to the Electric Bond and Share Company. The quantity authorized but not issued would be sufficient, taken with the present holdings of the Electric Bond and Share Company, including its option warrants, to give that company over 30 per cent of the total. (Our italics.) Furthermore, persons directly associated with the company as officers, directors, and employees, would raise this proportion to over 45 per cent. There can be no reasonable doubt, therefore, in view of the wide distribution of the stock and the absence of any other large holders that it would be practically impossible to wrest the control of the Electric Power and Light Corporation from the Electric Bond and Share Company. (Our italics.) [Pts. 23 & 24, p. 1192.]

Stock Trading

Another rather subtle but very effective means of concentrating control is through the conversion of voting stock that may be in the hands of outsiders into non-voting stock. By this means outsiders or those who may be unfriendly to the controlling group may be persuaded to trade their voting stock for non-voting stock. In order to make such a trade seem attractive, two or more shares of preferred or non-voting stock may be offered to the holders of the common or voting stock in return for one of their shares. In this way the control of the affairs of a company may be kept in the hands of an inside group and thus the control concentrated.

In the case of the Foshay Company, with headquarters in Minneapolis, for example, two shares of preferred stock were traded for one share of common stock. This was done to retire as much as possible of the common stock not held by the officers, so that the officers would have control of the voting stock of the company. Through this method about $100,000 in common stock was retired in 1926. And the purpose of this action was clearly .and definitely avowed in the annual meeting of the stockholders of the company held in March, 1926. At that meeting a resolution was adopted stating "that it is for the best interests of the company that as early as possible 100 per cent of the common stock of the company be owned by the officers of the company in order to insure their control and management of the affairs of the company.” [Pt. 25, pp. 46-47.]

Again in the case of the Washington Water Power Company the preferred share holders were persuaded to surrender their voting rights by this same method of trading their voting shares for preferred non-voting shares. This concentration of control was obtained by amending the articles of incorporation whereby certain of the common stock was converted into non-voting stock. As a result all but 40 shareholders had surrendered their voting rights by accepting in return for their voting stock non-voting preferred stock. In this way the American Power and Light Company acquired over 99 per cent control of the voting stock [Pt. 29, p. 96.]

Control Through the Issuance of “Option Warrants”

Another subtlety by which the companies may concentrate control in their own hands is the manipulation of "option warrants." For example, the Electric Bond and Share Company at one time issued 800,000 "option warrants," giving the holder of each warrant the right to purchase one share of common stock for $25. The company distributed a portion of these warrants among their employees and other friendly interests and retained approximately 47 per cent for itself. By this arrangement it became possible, if at any time there should be any danger of the Electric Bond and Share Company losing its control, for the company to arrange with these holders of "option warrants" to exchange them, as they were permitted to do, for shares of common or voting stock. In other words, by this device an arrangement was made by which, if necessary, the company could at -any time insure its complete control by the shift of "option warrants" to common or voting stock.

Furthermore, persons holding these warrants, instead of paying cash for the stock that they had the right to buy under the warrants, were allowed to turn in second preferred stock at $100 per share in payment for the common stock [Pts. 23 & 24, p. 341.]

Thus by one or the other of these various means and methods, or by a combination of a number of them, the utility corporations and the inside controlling officers and interests are able to concentrate and hold within their own hands the control of the organizations. By these means, as well as by others mentioned in other chapters, the concentration of the control of the utility corporations goes on.

Thus it will be seen that through various forms of intercorporate relation the control exercised over the utility companies is very complicated, but that each complication indicates a trend and tendency towards the concentration of control in an ever-diminishing number of holding companies, and of directorates within the holding companies, and in the hands of individuals within the directorates of the holding companies.

Chapter 11—Mergers

“A Record Trend in Centralized Management”

Perhaps the most definite and potent influence in the concentration of control in the utility field in recent years is the merger. With amazing rapidity and operating in every section of the country and in every part of the field, mergers, combinations, and consolidations have gone forward with terrific speed. And this is particularly true of the period covered by the records of the Federal Trade Commission for the years 1925 to 1929.

Four Years of Rapid Concentration

The records of the Federal Trade Commission with reference to mergers are very complete covering the five years from 1925 to 1929, inclusive. During that period there are recorded a total of 3,895 mergers. Of these, 2,851 were in the general field, 698 represented the acquisition by the private companies of municipally owned utilities, 228 were mergers of holding companies, and 118 were mergers of foreign companies.

We present below a table which has been compiled from various volumes of the hearings, as indicated in the foot notes. This table shows at a glance this process of merger consolidation and combination that went on during the period covered.

Mergers—1925-1929, Inclusive.

Holding Cos. Muni. Gen. Foreign. Total.

1925 407 407 (1) [Exh. Pt. 3, p. 25.]

1926 201 821 1,022 (2) [Idem, p. 38.]

1927 52 181 564 31 828 (3) [Exh. Pt. 3, p. 64.]

1928 87 162 464 17 730 (4) [Exh. Pts. 10-16, p. 346.]

1929 89 154 595 70 908 (5) [Exh. Pt. 3, p. 25.]

___ ___ _____ ____ _____

228 698 2,851 118 3,895

Breaking the Record

In Exhibit No. 744 [Exh. Pt. 3, p. 25.] of the Commission's records is quoted an article on power and utility company mergers for 1925 from the Electrical World of January 2, 1926. According to this article, some 560 companies were involved in merger movements for that year. The capitalization of the 407 acquired companies, according to the Electrical World article, totaled approximately $1,957,263,000, or about one-quarter of the aggregate capitalization of the electric light and power industry.

And yet this movement which was presented as a "record trend to centralized management," the list of companies covering nearly ten pages of the Commission's records, was far exceeded by the mergers in the year following, 1926. In 1926 the number of mergers, according to the record, was more than twice as many as in 1925. The Electrical World in its article of January 1, 1927, quoted in full, as Exhibit No. 745 [Exh. Pt. 3, p. 38.] in the Commission's report, gives a long and extended list with many details covering this year's mergers and consolidations. Many small private and municipal properties were purchased and merged into a co-ordinated system. It was a very active period of consolidation in ownership and a simplification of organization and administration. [Exh. Pt. 3, pp. 38 ff.] During this year of 1926 there were over Zoo municipally owned light plants absorbed by the private corporations, according to these records. The list is given in full by state. [Exh. Pt. 3, p. 40.] There is also included in the record 21 ½ pages listing these various mergers. [Idem, pp. 42-63.]

In 1927 there were almost as many mergers as in 1926, although the number declined somewhat. The total was 828. [Idem, pp. 63-85.]

In 1928 there were recorded 730 mergers in all. However, the Electrical World for the first time in its review of the mergers during the year pointed out that the number was beginning to decrease. Nevertheless, there were 162 municipal plants that were absorbed during that year, according to the Electrical World, 464 general, 17 foreign, and 87 holding company mergers. Full details and a complete list, as in previous years, will be found in Exhibit 4168. [Exh. Pts. 10-16, pp. 335-361.]

In 1929 the number of mergers increased again, the total number being 908. The Commission's record shows that "consolidations continued" but again suggests that "purchases and mergers have passed the peak." Then follow 17 pages listing the mergers effected during that year and two pages of "municipal systems absorbed by private corporations in 1929.” [Pt. 2, pp. 973-996.]

Still Going On

Thus it will appear that during the whole period covered by the records of the Commission this process of combination and consolidation, which is concentrating the ownership and control in the utility field, has been going on rapidly throughout the entire country and indeed in some foreign countries.

Speaking of the situation in 1928 the Electrical World remarks that there has been "a let-up in the purchase of properties," but significantly adds that this is "in order to consolidate those already purchased:” [Exh. Pts. 10-16, p. 335.] The statement is also made that at the end of 1928 there is "in no part of the country any large number of properties that may be consolidated into one of the large holding companies." In other words, the consolidations had in this view of the matter been practically completed. However, by the end of 1929 we find that the consolidations were still continuing and that there were even more in that year than in 1928.

Two major developments have been going on during recent years, according to the Electrical World, quoted by the Commission. One was the formation of the holding companies; the other was the development of comparatively large properties in each area to take full advantage of the economic possibilities of large scale production and unified operation. During 1929 these two trends continued.

"During the past few years," this 1929 report goes on to say, "each local property has enlarged its scope of service by buying adjacent small properties or by extending its transmission system to outlying towns. This trend continued in 1929 and notably in the West and South. But the peak of this movement has passed and possibilities for local expansion are rather limited." [Pt. 25, p. 973.]

It is interesting to note that one of the features of the movement in 1929 was the development of foreign control in the utility field. "Prospects are bright," says the report, "for a big overseas utility growth backed by American capital and with American principles of construction and operation." [Idem, p. 974.] Thus the merger movement has moved and, so far as the record shows, is still moving with remarkable swiftness in the direction of consolidation and unification in the utility field, and has even reached into foreign countries.

Chapter 12—The Holding Company

Its Function, Advantages and Dangers

The holding company is the most distinctive and characteristic feature in the recent development of financial methods of utility corporations. It is undoubtedly the most effective device yet developed in corporate finance for the achievement of their purposes, and plays a most important and significant role in all of the recent operations in the utility field.

There are two views of the purpose and function of the holding company brought out in the findings of the Federal Trade Commission. The first of these views is that presented by the witnesses for the utility companies. The second view is one that emerges from a careful study of the facts revealed piece by piece in the testimony of the accountants of the Commission and in the cross-examination of the witnesses. These two views are not necessarily antagonistic but rather complemental. Certainly no one would get a complete or adequate conception of the purpose and function of the holding company if he had before him only the views of the matter presented by the representatives of the utility corporations. And the final significance of the holding company can be seen and appreciated only after a careful review of the whole testimony of the Commission's accountants and the cross-examination of the witnesses and a study of the confidential literature, correspondence and material which have been presented in the evidence.

The Holding Company as the Utilities View It

In their testimony before the Federal Trade Commission and in the literature which the utility companies have published, which appears in the exhibits of the Commission, the utility corporations' view of the purpose and function of the holding company is set forth with clearness and emphasis. Looking at the matter from the standpoint of the utility corporations, the functions of the holding company are something as follows:

(1) General supervision, advice, and assistance to the subsidiary or serviced companies. For this service there is a fee charged based upon the percentage of the gross earnings or revenues of the supervised company. [Pts. 23 & 234, p. 117.]

(2) The second class of service rendered by the holding companies is that of construction work and supervision of construction, for which a fee is charged on the basis of a percentage of the cost of the construction.

(3) A third type of service is in the nature of special engineering investigations, accounting and other special services, for which a direct charge is made, sometimes with an added percentage for overhead.

(4) A fourth type of service is in the sale and marketing of securities. Certain fees are charged for this service?

Advantages of the Holding Company

Out of a great number of excellent statements by representatives of the utilities that appear in various volumes of the hearings, we select the following as one of the most succinct in setting forth the advantages of the holding companies as viewed by the companies:

The benefits justifying the existence of the holding company are:

1. Financing on better terms than the local operating companies could command.

2. Rendering expert engineering and construction services at minimum cost.

3. Massing purchasing requirements of many subsidiaries, thus saving money for all of them and tending to reduce cost.

4. Giving small local companies the managerial ability and experience available to the largest companies.

5. Helping to make weak companies self-supporting by assisting them financially and making improvements and extensions necessary to make them self-supporting.

6. Improving the quality and reliability of service in small communities.

7. Displacing small inefficient plants by large generating stations.

8. Giving service from high tension interconnections to farms and small communities that could not themselves support individual plants. [Exh. Pts. 10-16, p. 749p see also Pt. 28, p. 221 ff. and for a still more extended statement Pts. 10-16, p. 164 ff.]

One of the best of the longer statements of the advantages of the holding company as viewed by the utility corporations themselves is one prepared by the American Gas and Electric Company at the request of the Federal Trade Commission, and appears as Exhibit No. 4525 in the records. [Pt. 22, pp. 682-721.]

The statement is too long and in some respects too technical for reproduction here, comprising nearly forty pages of fine print in the hearings. However, it is such a comprehensive statement of the matter from the standpoint of the companies that we shall undertake to review it, setting forth the more important considerations.

The Holding Company Generally

The statement opens with a brief foreword in which appears the following:

“Who is capable of condensing into the necessarily brief pages of a memorandum, intended to serve as but one item in an exhaustive investigation, the economics, the romance, and the drama of the electric industry's growth under holding company leadership in the United States in the last quarter century? The "dismal science" of economics has just as surely been the sound guiding principle of this growth as the romance of its accomplishments and effects has captured the popular imagination of our own and foreign peoples. The residents of literally countless towns, villages, hamlets, rural sections, and of many cities enjoy the advantages and witness the effect of the accomplishments without having any interest in the economic machinery which serves as the instrument....

“The holding company form of organization, of course, is not peculiar to the electric industry. Industry generally has availed itself widely of this economic instrument. The United States Steel Corporation was one of the early holding companies and today continues among the largest; the American Telephone and Telegraph Company exemplifies practically perfectly the striking advantages of this form of organization.”

The Union Carbide Corporation and the General Motors Corporation are other outstanding examples of holding companies in the industrial field. [Pt. 22, pp. 682-83.]

Functions of the Holding Company

The function of the holding company is described at length in this statement of the American Gas and Electric Company. In this connection it is said that "by association in the American Gas and Electric Company holding company group, the credit of each of the subsidiaries is appreciably enhanced; the parent company advances funds to the subsidiaries as needed, being reimbursed when the time is propitious for the subsidiary to finance permanently; it serves as the agency through which the permanent financing of the subsidiaries is done; and it provides the means by which all the subsidiary companies cooperate for their mutual advantage."

The statement then presents a resume of "a large number of the services essential to the proper functioning of the subsidiaries." Among these the following are mentioned:

(a) The services of a complete staff of 14 corporate officers who are also officers of the operating companies and as such supervise the functioning of every department of .the operating companies. (Our italics.)

(b) The services of a trained staff for the performance of many offices in connection with the drawing and recording of mortgages, work in respect to financing, compliance with requirements of "blue sky" laws, preparation and assistance in negotiation of contracts, examination of deeds, preparation of applications, protests, etc., to regulatory and tax commissions.

(d) The services of an auditing department consisting of a general auditor and two assistants, and a staff of 33 assistants. Of this force there are constantly in the field 20 auditors traveling from company to company checking and auditing general accounts, consumers' accounts receivable, and storerooms.

(e) Services of an insurance department which inspects physical property and examines construction valuation records, etc.

(f) Services of a valuation department which, at the request of operating companies, makes appraisals in rate eases, financing, insurance, etc.

(g) A statistical and commercial department.

(h) An engineering department consisting of a chief engineer and 81 other engineers and draftsmen. "This department is in constant intimate touch with the operation of the subsidiaries, making surveys and studying conditions so that future needs may be anticipated, etc. [Pt. 22, pp. 687-88-89.]

Advantages of the Holding Company

The statement goes on at great length and in detail, setting forth the advantages of the holding company. Among these may be mentioned briefly the following.

(a) FINANCING.. The necessity of an organization like the holding company is emphasized in the statement that the rapid development of the electric light and power industry requires an enormous amount of new capital. "The industry has been increasing its energy output," the statement reads, "at a rate which has doubled the output every 5 to 5 ½ years." (Our italics.) "It will be readily seen that this means an ever-increasing investment of new capital.... This money could not possibly have been provided from the earnings of the industry and had to be raised by financing; that is to say, by the sale of stock or bonds." Permanent financing for the subsidiary companies has been accomplished by the holding companies in the following ways: (I) "Raising funds to retire bonds issued by subsidiary companies in former years under closed mortgages." (2) "Raising of funds by the sale of bonds under existing open mortgages and under new mortgages and by the sale of preferred stock." (3) "Raising funds by the sale of securities to permit the subsidiary companies to extend their operations by purchasing smaller companies operating in contiguous territory." (Our italics.)

In connection with this matter of financing, the statement points out that during the five-year period ending December 31, 1928, the American Gas and Electric Company sold on behalf of its subsidiaries $59,192,000 worth of bonds and held in its treasury at that time $34,150,600 worth of subsidiary companys' stock. And the claim is made that when securities of subsidiary companies were sold at a loss, the holding company bore the losses itself, whereas if the securities were sold at a profit, the "practice has been to pass on to the subsidiaries all the excess so received." [Pt. 22, p. 691.]

"The holding company stands ready at all times to advance substantial amounts over long periods of time without collateral to its subsidiaries when they are unable to finance at favorable rates.... There has been as much as $35,000,000 at a given time so owing to the parent company by the subsidiaries." [Pt. 22, p. 691.]

(b) INTERCONNECTION. The statement has a long and rather technical section dealing with the great advantages through the holding company by interconnection. The protection of the service, release of transmission lines for repairs, maximum utilization of water power, economy of operation, staggering installation of generating capacity, diversity of load, transfer of energy, interchange of spare parts, and other technical advantages are emphasized. [Pt. 22, pp. 692-95.]

(c) RATE REDUCTIONS. Great stress is laid upon the advantages to the public through reduction of rates in the statement. Comparative figures are presented to show that the savings to the customers by reason of the reduction of rates have amounted to $46,747,975 in the five-year period ending 1928, and in the fourteen-year period, $252,978,157. [Idem, pp. 710-11.]

(d) CENTRALIZED PURCHASING. On the matter of centralized purchasing as an advantage of the holding company some very interesting matter appears in the statement. "It is axiomatic," it says, "that the purchase of material in large quantities enjoys lower prices, better services, closer contacts with market changes, quicker delivery, more prompt and equitable adjustment of differences than the small buyer located at points remote from commercial centers. There is one very great advantage inherent to the regular purchaser of material in quantity. His business is constantly sought by sellers of goods in the lines bought by him." (Our italics.)

"Take, for instance, the matter of transformers and meters, the manufacturers of these devices have a regular scale of discounts which increases as the number of devices purchased from them increases. (Our italics.) Through these aggregate purchases the American Gas and Electric Company falls into the class receiving the greatest discount:'

The statement then quotes from several of the manufacturers and dealers that have given the American Gas and Electric Company better prices than could be given to separately operated properties. One of the statements reads: "The prices during 1928 average 10 per cent below what would have been our standard selling price. This lower selling price to you (the American Gas and Electric Company) is a concession due to the lower selling expense when such an amount of business is placed at a central point." The quotation from another company reads: "The situation as far as your automobile buying is concerned is that probably at least So per cent of your subsidiaries buying independently could not obtain the national user's agreement which calls for the initial 10 per cent discount and, in addition to this, by combining your purchases, you will earn an additional volume discount between 2 and 5 per cent, depending upon number of cars purchased." From another company: "We do many things for the American Gas and Electric Company that we do not consider for one moment doing for any other small local property." From another company: "There would be a saving of approximately 50 per cent of our sales burden of 11.2 per cent due to a volume of sales to the one company. This saving is largely accomplished by reason of a reduced sale figure, reduction in advertising and duplication of effort in general." [Pt. 22, pp. 696-7.]

The statement estimates that a saving of $1,982,148.48 was effected through this centralized purchasing during 1928 alone. This amounted to an average of 8.29 per cent of the cost, according to the estimate. [Idem.]

(e) IMPROVEMENT IN THE SERVICE. Many pages in the statement of the American Gas and Electric Company are devoted to the various improvements in service that have been effected due to the service of the holding company.

(f) OTHER ADVANTAGES. Other advantages to the public that are stressed in the report are the conservation of coal due to new developments and improvements in the art brought about by the service of the holding companies; stability of mining and transportation and the decentralization of industry and population. [Pt. 22, pp. 718-19.]

Summary and Conclusion

Summarizing the advantages of the holding company, the statement in a final section emphasizes the point that the "holding company form of organization is founded on sound economics and its merits have been demonstrated in many fields of endeavor, industrial, as well as public service companies." Many of these. advantages, the statement urges, are secured through this form of organization which could not have been secured in any other way.

"The management of the American Gas and Electric Company are themselves so thoroughly convinced of the `advantages of the holding company form of organization, with particular reference to the American Gas and Electric Company group,' and they are so confident of agreement in this by the more than 600,000 customers being served by the operating companies of the group, that this brief statement of merits and accomplishments is submitted with considerable pride. We are willing to have the theories ignored and be judged by results." [Pt. 22, pp. 720-21.]

"We are confident," the statement says, "that the examiners and engineers of the Federal Trade Commission who in the course of the present investigation have spent weeks and months in contact with our organization, with our physical properties, and with our customers, have fully realized these advantages and accomplishments and will cheerfully bear witness to them." [Idem.]

We shall see as we proceed with a review of the subject what these "examiners and engineers" of the Commission, the other witnesses and evidence show with regard to these matters.

The Holding Company as Revealed by the Commission’s Examination

The value and effectiveness of the holding company in the financial set up and successful operations of the utility corporations, as set forth by the representatives of the companies, may be frankly conceded. That there are certain phases and elements in the situation which they have not mentioned is to be expected. For 'a more complete view and a better understanding of the significance of the function and purpose of the holding company we must turn to the records of the Commission and piece together the facts which their long, patient, and persistent investigation has revealed.

Studying the matter from this point of view and bringing together the evidence brought out in the examination and scattered throughout the volumes of the report, we may present the following as some of the more essential facts regarding the purpose, function and significance of the holding companies. And these are the matters which are of a special interest and importance to the general public and which, for obvious reasons, the public statements, literature, and testimony of the representatives of the companies are not likely to reveal.

We shall state but briefly in this chapter these latter functions of the holding companies, leaving for subsequent chapters the development of the details. The following then are some of the more concealed and yet most significant features regarding the holding companies which the findings of the Commission reveal:

(1) The Concentration of Earnings. The first outstanding fact that emerges from a study of the methods of the holding companies, as revealed in the cross-examination and especially in the testimony of the accountants of the Commission, is the concentration of earnings. As we explain elsewhere, [pp. 180 to 184.] the earlier report of the Federal Trade Commission, namely, Senate Document No. 213, makes very clear the manner in which the holding companies concentrate earnings. As this has been fully presented elsewhere, we need not review it here other than to point out briefly that by concentrating the earnings of the preferred and other non-voting securities of a company upon the common stock, the earnings are thereby often raised from 6 per cent to 10 per cent, and 15 per cent. And then by superimposing above the operating company a holding company, and again concentrating the earnings of the preferred and non-voting securities upon the common stock, the earnings on the latter in the first superimposed holding company may be raised to 40 or 50 per cent. And if above this holding company there is superimposed still another holding company with the same methods followed, the earnings are still further concentrated. And so on until the earnings on the common stock of a fourth or fifth superimposed holding company may and actually do in some cases reach the almost unbelievable rate of 100 per cent, or even 138 per cent. [Sen. Doc. 213, pp. 173-174.]

(2) Excessive Profits Earned. While the service of the holding company to the subsidiary serviced companies is undoubtedly a perfectly legitimate and certainly a very advantageous service to the underlying company; and while the charges for these services are perfectly legitimate and natural, the evidence nevertheless reveals the fact that these charges are often excessive. Moreover, in innumerable cases, as we shall show further on, the evidence shows that the charges for these services rendered to the subsidiary companies are seldom on the basis of cost but, on the contrary, are usually on the basis of excessive and sometimes extortionate rates. The profits on services rendered by the holding companies are shown to be 20, 89, and even 179 per cent."' These excessive profits still further tend to concentrate earnings in the hands of those who control the holding companies.

(3) Profits Through Reorganization and Mergers. Again, while the service of the holding companies in the matter of assisting in the reorganization and merging of operating companies, and especially in assisting them to secure adequate financial management and financial resources, is a perfectly legitimate and very advantageous service, the findings show that the commissions charged for these services constitute another drain upon the industry which still further concentrates earnings in the hands of the holding companies. The findings show that the fees charged by some of these holding companies in bringing about reorganizations, mergers, and combinations are so great as to appear extortionate, and in the handling of stock-selling campaigns and particularly in the promotion of the so-called customer ownership campaigns for the sale of stock, which are frequently managed by the holding companies, the commissions are also a very considerable charge upon the industry. [pp. 141, 191 ff.]

(4) Concentration of Control. But perhaps the most important and significant of all of these less obvious, but nevertheless powerful functions of the holding company lies in the fact that it operates to concentrate control. Starting with the underlying operating companies, the control is concentrated, as is well known, in the hands of those who own the common or voting stock. If now there is superimposed over an underlying operating company a holding company, the control of which is also concentrated in the hands of those who own the voting stock; and if, in addition, this holding company controls not one but many underlying operating companies, it can be seen at once how rapidly, by this process, the concentration of control is brought into the hands of the few. And if, as the evidence shows, these holding companies are pyramided, one upon the other, until they stand 5 deep, it will be seen how powerful this device operates to concentrate the control of the whole structure. And then, as the holding companies themselves begin to merge—and the records show that in the three years from 1927 to 1929, inclusive, there were 228 mergers of holding companies—the process of concentration must be proceeding at a terrific rate.

We shall not attempt at this point to develop the evidence on these matters which will appear later. It may be sufficient just to mention the fact that in one instance it is revealed by the findings that an original investment of $1,000,000 has grown through these processes in the course of 24 years to $45,000,000, involving the control of properties valued at $375,000,000. Similar instances, which are typical of what is going on in this field, will be referred to in later chapters.

Dangers of the Holding Company

That the utilities recognize the dangers inherent in this holding company device is indicated by the fact that frequently there appears in the evidence a word of warning. One of the typical instances is found in a statement by Samuel S. Wyer in which he quotes Samuel Ferguson, President of the Hartford Electric Light Company, as follows:

“The outstanding dangers of the holding company situation center around the investor rather than the consumer.

“The purchase of common stock control of operating companies at prices that may be in excess of value and the sale to the public of holding company securities based on such inflated value is creating a financial hazard that may result in grief to the investing public. Repeated warnings on this point have been issued by the Investment Bankers Association of America.

“In purchasing the securities of a holding company the investing public is in the same situation that it is in purchasing the securities of any other private corporation where there is no state or federal regulatory body with jurisdiction over the issue of securities.

“The mere bringing together of a number of independent units for the creation of one large unit does not necessarily make for economy in the integrated or "brought together" plant. Oui recent experience in well-known industrial combines has demonstrated that there is a limit to size, as far as increasing economy is concerned, and that mere bigness does not necessarily make for reduced costs. If the public is to receive no benefit from the economies effected by the holding companies, the service is of no value and public sentiment will demand the discontinuance of the holding company method of control.

“I know of no more reprehensible abuse than for speculators to buy up companies for high prices, put them into a holding company, and then, by trading upon the credulity of the investing public relative to claimed increases in economy to unload the holding company's securities at advanced prices and thus get completely out from under before the bubble is punctured leaving the unfortunate final investor to face an angry consumer (Samuel Ferguson, President Hartford Electric Company—Electrical World, Mar. 20, 1926). [Exh. Pts. 10-16, pp. 749-50.]

Here then is the picture in outline of the modern holding company. Its avowed purpose and function may be legitimate and worthy enough. But when the picture of the whole procedure is completed, drawn laboriously out of the thousands of pages of the hearings of the report,'it is quite a different picture from the one that is presented to the public view by the proponents of the utility corporations.

Chapter 13—The Holding Company

Pyramids of Power

In the preceding chapter we have spoken of the holding company as a method by which the concentration in control of the electrical industry is being brought about. The way this device operates to concentrate control is described quite clearly and definitely in the earlier report of the Federal Trade Commission, and still more so in the present findings of the Commission.

On this point the earlier report has this to say: "During the last ten years electric power operating companies have been acquired by holding companies at an accelerating rate, until, at the end of 1924, 20 large holding company interests controlled 61 per cent of the total generating capacity of commercial electric power plants." [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, p. 168.]

Avowed and Real Object of the Holding Company

Speaking of the purpose, avowed and real, of this modern device of the holding company, the earlier report of the Commission has this to say:

“One of the principal features in most of the electric power groups is the holding company. 'This is usually justified as necessary in order to maintain control, to diversify investment and reduce risk, and to develop technical efficiency. Neither safety of investment through diversity nor security of professional service business through control of the clients has been regarded, however, as the sole motive actuating those who have obtained control of electric power companies and secured the control in an electric holding or investment company. It has been claimed that the activity in the formation of holding companies or in the acquisitions of additional subsidiaries by them and in the issuance of securities by these organizations during 1924, 1925, and 1926 largely represented the endeavors of promoters and speculators to take advantage of the so-called "superpower" idea by manufacturing securities with which to exploit the investing public.[Sen. Doc. No. 213, 68^th Congress, 2^nd Session, pp. 172-73.]

Thus both the avowed and the real purpose and function of the holding companies is clearly indicated. Later we shall take up the means by which this concentration of control through the holding company is used to "exploit the investing public." For the present we shall deal with the matter of the way this holding company is utilized to concentrate control in the hands of an ever-diminishing number of organizations and individuals.

Examples of Concentration of Control

The earlier report of the Commission gives a number of very striking examples of the concentration of control in the electrical industry by means of these holding company arrangements. For example, the Middle West Utilities Company has 9 subsidiary holding companies, as well as a number of direct subsidiaries that are operating companies. The American Water Works and Electric Company had at one time 3 sub-holding companies. [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, p. 175.]

Says this report:

“The foregoing illustrates a method by which, with a careful selection of a large number of operating companies so chosen as to afford the maximum diversity of risks, a relatively small investment in the common stock of a super-holding company can control a very large capital invested in the operating utilities and net a very large rate of return for the organizers even though public authorities restrict the return on the total investment to a moderate rate of return.” [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, p. 174.

As a further illustration of the mechanism by which control is concentrated, the report goes on to say: "The Standard Gas and Electric Company had 16 direct subsidiaries.... Thus ownership by the parent company of $1,830,800 of voting stock effected control of a total investment represented by capital securities of $7,622,000.” [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, pp. 192-193.] Other securities of other subsidiaries brings the total controlled capital in this company up to $95,345800, so that "$1 invested by the chief holding company controlled over $6.40 of capital invested in the operating companies." [Sen. Doc. No. 213, 68gh Congress, 2^nd Session, pp. 193.]

The most spectacular case of pyramiding control of companies controlled by the Standard Gas and Electric System, according to the earlier report of the Commission, is that of the Northern States Power Company. In this case there were three layers of holding companies between the Standard Gas and Electric Company and the Northern States Power Company of Wisconsin and the other direct subsidiaries of the Northern States Securities Corporation. And by this method of pyramiding the Standard Gas and Electric Company, with an investment of less than $5,000,000 in the Class B Stock of the Northern States Power Company of Delaware, and $2,000,000 of Preferred Stock in the Northern States Power Company of Wisconsin, controls an investment of approximately $200,000,000. [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, pp. 194-195.] In one case this pyramiding of holding companies in the Pittsburgh region is reported to have developed 4 and 5 holding companies pyramided by the most direct line, and 6 and 7 by the most indirect line and 5 holding companies were pyramided upon the San Francisco operating company. [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, p. 196.] The H. M. Byllesby & Company, by this process of pyramiding of holding companies, “with an investment of less than $1,000,000 is able to exercise the voting control over more than $370,000,000 of operating capital.” [Sen. Doc. No. 213, 68^th Congress, 2^nd session, p. 197.] In the Hodenpyl-Hardy group an actual investment of $9,500,000 exercised control over a total capital investment of $239,000,000. [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, p. 203.]

In the Associated Gas and Electric Company an investment of $5,250,000 controls an investment of nearly $171,000,000. [Sen. Doc. No. 213, 68^th Congress, 2^nd session, p. 222.] In the Fitkin group an investment of $2,102,000 controls nearly $113,500,000. [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, p. 231.]

In the Middle West Utilities Company, an Insull organization, there are 5 direct subsidiaries, (1) The American Public Utilities Company; (2) The North West Utilities Company; (3) The Central and Southwestern Utilities Company; (4) The New England Public Service Company, and (5) The Southwestern Securities Company, according to the earlier report of the Commission. This group is so organized as to its control that "the owners of about one-third of the stock, representing a book value of a little more than $28,000,000, not only control an investment of $353,000,000 in the businesses of operating power companies but are practically the beneficiaries of any increase in the earning power of that vast capital after paying 6 or 7 per cent on the bonds and preferred stocks of the operating companies and dividends on the sub-holding companies' preferred stock." [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, p. 258.]

Testimony submitted in the hearings of the Commission on March 16, 1932, showed the connection of the New England Public Service Company and the National Electric Power Company, a subsidiary of the Middle West Utilities Company, an Insull holding company. According to this testimony "the National Electric Power Company held 91.5 per cent of the voting stock of the New England Company."

Holding Companies Five Layers Deep

In the case of the Penn-Ohio or Republic Railway and Light Company, the earlier report of the Commission finds a striking example of the pyramiding of holding company upon holding company until they are five layers deep. "Starting with a comparatively simple corporate structure in 1919," the report says, "holding company after holding company has been interposed or superimposed until by the middle of 1926 the column supported by the original operating companies was five layers high, the line of descent being the Penn-Ohio Securities Corporation, the Republic Railway and Light Company, the Penn-Ohio Edison Company, the Pennsylvania-Ohio Electric Company and, finally, the Pennsylvania-Ohio Power and Light Company: [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, p. 265.] In this instance the device known as the voting trust, which we shall discuss later, was used in bringing about the concentration of control.

It will thus be seen that while the. primary and more openly avowed purpose of the holding company device is to increase the facility with which the financing of operating companies may be secured, also an improvement in the engineering and management of these companies, the far more important purpose, or at least the final result, is to enormously concentrate the control of the industry and also to enormously increase the earnings of the few who exercise that control.

Chapter 14—Subsidiaries of the Holding Companies

The Hierarchy of Power

The movement of concentration, combination and merger goes on with such rapidity in the electric light and power field that it is almost impossible to keep track of the various companies involved. Any attempt to list the holding companies and their subsidiaries, or the operating companies and their relationships, is certain to be out of date in a very few months at most, due to the rapid changes that are going on. The earlier report of the Federal Trade Commission, known as Senate Document No. 213 on "Control of Power Companies" gives the most complete list of the larger service groups, holding companies, combinations and underlying operating companies that is available. But that list, published under date of February, 1927, has already been superseded by changes that have occurred since then and, of course, more changes are occurring every year.

Quoting from the above last-mentioned report, we find that

“During the last ten years electric power operating companies have been acquired by holding companies at an accelerating rate, until, at the end of 1924, 20 large holding company interests controlled 61 per cent of the total generating capacity of commercial electric power plants. [Sen. Doc. No. 2313, 68^th Congress, 2^nd Session, p. 168.]

This rapid movement of concentration which during the ten years referred to had been going on with a constantly increasing rate, has since then continued and undoubtedly will still continue. Under these conditions it is obviously almost impossible to present an adequate or true picture of the existing organization of the electric light and power companies of the country which will not in a few months be considerably out of date. Nevertheless, it is interesting to present the picture as the Federal Trade Commission has found it, always bearing in mind the rapid change that is very likely to make it necessary to revise the list repeatedly as time goes on, in order to keep it up to date.

Classification of the Companies

The electric light and power companies, according to the findings of the Commission, seem to fall under four main classes as follows

I. The so-called Service Groups-made up of holding companies which, either through direct or indirect ownership, or otherwise, and through engineering, financing, and other services exercise control over a large number of subsidiary companies.

II. Large Combinations, more or less independent of the so-called service groups, which nevertheless exercise a considerable degree of control over a great many subsidiary companies throughout the country.

III. Extensive Unit Developments, which are more or less independent but nevertheless have extensive ownership and service.

IV. Large Local Companies, such as the New York Edison, Detroit Edison, Southern California Edison, Philadelphia Electric, Brooklyn Edison, etc., serving certain local communities but of such magnitude as to constitute a considerable element in the situation?

Taking up the above groups of the various power utility organizations, the following table presents the more important of these groups, arranged as nearly as possible in' the order of their size and importance.

Listing of Holding Companies, Large Combinations,

and Extensive Unit Developments in the Order of Their Electric Output in

Kilowatt Hours for 1924.

[Sen. Doc. No. 213, 68^th Congress, 2^nd Session, pp. 168-169. (See also pages 36 to 38.)]

Company Electricity Generated Kilowatt Hours

I. Service Groups:

Electric Bond & Share Co. 7,167,713,000

Byllesby 2,640,000,000

Hodenpyl-Hardy 1,441,000,000

Stone & Webster 1,188,000,000

Doherty 1,158,000,000

Barstow 569,000,000

White 388,000,000

Others (6) 2,819,000,000

Total (13 service groups) 17,370,713,000

II. Large Combinations:

Insull 4,562,000,000

North American 3,800,000,000

Public Service Co. of New Jersey 1,128,000,000

Others (4) 2,045,000,000

Total (7 large combinations) 11,535,000,000

III. Extensive Unit Developments:

Pacific Gas & Electric Co. 1,710,000,000

Duke Power Co. 1,338,000,000

Montana Power Co. 1,117,000,000

Other (2) 883,000,000

Total (5 extensive unit developments) 5,048,000,000

IV. Large Local Companies:

New York Edison 2,051,000,000

Southern California Edison 1,466,000,000

Detroit Edison 1,460,000,000

Philadelphia Electric 1,313,000,000

Brooklyn Edison 635,000,000

Others (3) 990,000,000

Total (8 large local companies) 7,915,000,000

Grant total 41,868,713,000

Total commercial output for the

United States 54,413,000,000

===========

The above table will give a general view of the existing power utility corporations of the country in the order of their importance, as they appeared at the end of 1924. The later investigations of the Federal Trade Commission appear, of course, in the volumes which constitute Senate Document No. 92, of which some 44 volumes and exhibits have been printed up to the present date (August, 1932), and constitute the report with which we are particularly concerned in this volume.

Holding Companies

The present report of the Federal Trade Commission, in Exhibit 5, [Exh. Pt. 1, p. 96.] gives a list of 48 holding companies, as of January 1, 1928, which are members of the National Electric Light Association, and in Exhibit 6, [Idem, p. 97.] an additional list of 69 holding companies is given as of 1926, including those that are not members of the National Electric Light Association. The first list, however-those that are members of the National Electric Light Association, constitute the larger and more important holding companies.

The following are the holding companies constituting the membership of the National Electric Light Association, as mentioned above: [Exh. Pt. 1, pp. 96-97.]

American Electric Power Co., Room 2626, 120 Broadway,

New York, N. Y.

American Gas & Electric Co., 30 Church Street,

New York, N. Y.

American Utilities Co.,

Harrisburg, Pa.

American Water Works & Electric Co. (Inc.),

50 Broad Street, New York, N. Y.

Associated Gas & Electric Co., 33 Liberty Street,

New York, N. Y.

Atlantic Public Utilities (Inc.), 70 State Street,

Boston, Mass.

W. S. Barstow & Co. (Inc.), 50 Pine Street,

New York, N. Y.

Buffalo, Niagara & Eastern Power Corp., Electric Bldg.,

Buffalo, N. Y.

Byllesby Engineering & Management Corp., 231 S. La Salle Street,

Chicago, Ill.

Central Indiana Power Co., 606 Guaranty Bldg.,

Indianapolis, Ind.

Central Public Service Corp., 209S. La Salle Street,

Chicago, Ill.

Central & South West Utilities Co., 1100 Allen Bldg.,

Dallas, Tex.

Cities Service Co., 60 Wall Street,

New York, N. Y.

Cities Service Power & Light Co., 60 Wall Street,

New York, N. Y.

E. W. Clark Engineering Corp., 321 Chestnut St.,

Philadelphia, Pa.

Columbia & Electric Corp., 61 Broadway,

New York, N. Y.

Commonwealth Power Corp.,

Jackson, Mich.

Community Power & Light Co., 205 Planters Bldg., 4th and Pine Streets,

St. Louis, Mo.

Continental Heat & Light Co., 611 Power Bldg.,

Montreal, Quebec, Can.

Day & Zimmermann (Inc.), 1600 Walnut Street,

Philadelphia, Pa.

Henry L. Doherty & Co., 60 Wall Street,

New York, N. Y.

Electric Bond & Share Co., 2 Rector Street,

New York, N. Y.

Electric Management & Engineering Corp., 57 William Street, 14th Floor,

New York, N. Y.

Electric Public Utilities Co., 29 S. La Salle Street,

Chicago, Ill.

Electrical Securities Corp., 31 Nassau Street,

New York, N. Y.

Engineers Public Service Co., 120 Broadway,

New York, N. Y.

Federal Light & Traction Co., 52 William Street, 21st Floor,

New York, N. Y.

General Engineering & Management Corp., 165 Broadway,

New York, N. Y.

General Public Utilities Co., i6oo Walnut Street,

Philadelphia, Pa.

General Utilities & Operating Co., 1310 Standard Oil Bldg.,

Baltimore, Md.

Hodenpyl-Hardy & Co., 14 Wall Street,

New York, N. Y.

Inland Power & Light Corp., 72 W. Adams Street,

Chicago, Ill.

Laurentide Power Co., Grand' Mere,

Quebec, Can.

Middle West Utilities Co., 72 West Adams Street,

Chicago, Ill.

Midland Utilities Co., 2025 -122 S. Michigan Ave.,

Chicago, Ill.

Mohawk-Hudson Power Corp., 126 State Street,

Albany, N. Y.

National Electric Power Co., 57 William Street,

New York, N. Y.

National Public Service Co., 165 Broadway,

New York, N. Y.

New England Public Service Co.,

Augusta, Me.

North American Light & Power Co., 231 South La Salle Street,

Chicago, Ill.

Peoples Light & Power Corp., 27 William Street, Suite 914-922,

New York, N. Y.

Stone & Webster (Inc.), 49 Federal Street,

Boston, Mass.

Charles H. Tenney & Co., 200 Devonshire Street,

Boston, Mass.

United Gas Improvement Co., Broad and Arch Streets,

Philadelphia, Pa.

The United Light & Power CO., 733 Illinois Merchants Bank Building,

Chicago, Ill.

United Public Service Co, 100 West Monroe Street,

Chicago, Ill.

Utilities Power & Light Corp., 327 S. La Salle Street,

Chicago, Ill.

The J. G. White Management Corp., 33 Liberty Street,

New York, N. Y.

The Holding Companies and Subsidiaries in Order of Their Importance

Combining the findings of the Federal Trade Commission with reference to the holding companies, as presented in their present report [Sen. Doc. No. 92, 70^th Congress, 1^st Session.] with information supplied from the earlier report of the Commission, [Sen. Doc. No. 213, 68^th Congress, 2^nd Session.] the holding companies with their respective subsidiaries may be presented as follows:

I. Service Groups. The main holding companies in the order of their importance are the Electric Bond and Share Company, with its numerous subsidiaries; the Byllesby Company; Stone and Webster; the Doherty, Barstow and the White groups. There are several other smaller ones.

Taking up first the largest and most important of these service groups, and the one upon which the Federal Trade Commission has made its present report, we have the Electric Bond and Share Company. This company and its subsidiaries may be listed as follows:

(I) The Electric Bond and Share Company

I. American Power & Light Co.

Citizens Power & Light Co.,

Council Bluffs, Iowa.

Central Arizona Light & Power Co.,

Phoenix, Ariz.

Consumers Water Co.,

Miami, Fla.

Crystal Ice & Cold Storage Co.,

Dallas, Texas.

Eagle Pass Water Co.,

Eagle Pass, Texas.

Florida Power & Light Co., general office,

Miami, Fla.

Fort Worth Power & Light Co.,

Fort Worth, Texas.

Helena Gas & Electric Co.,

Helena, Mont.

Kansas Gas & Electric Co., general office,

Wichita, Kans.

Miami Beach Railway Co.,

Miami, Fla.

Miami Water Co.,

Miami, Fla.

Minnesota Power&Light Co., general office,

Duluth, Minn.

Missoula Public Service Co.,

Missoula, Mont.

Montana Power Co. (The), group,

Butte, Mont.

Nebraska Power Co.,

Omaha, Neb.

Northern Power Co.,

Superior, Wis.

Northwestern Electric Co., general office,

Portland, Ore.

Pacific Power & Light Co., general office,

Portland, Ore.

Portland Gas & Coke Co.,

Portland, Ore.

St. Augustine Co.,

St. Augustine, Fla.

Superior Water, Light & Power Co.,

Superior, Wis.

Texas Electric Service Co., general office,

Dallas, Texas.

Texas Power & Light Co., general office,

Dallas, Texas.

Texas Public Utilities Corp., general office,

Dallas, Texas.

Washington Water Power Co. (The), group,

Spokane, Wash.

II. Electric Power & Light Corporation.

Arkansas Power & Light Co. (general office, Pine Bluff, Ark.),

Little Rock, Ark.

Dallas Power & Light Cd.,

Dallas, Texas.

Dallas Railway & Terminal Co.,

Dallas, Texas.

Dallas-Terrell Interurban Ry.,

Dallas, Texas.

Idaho Power Co., general office,

Boise, Idaho.

Inter-City Terminal Ry. Co.,

Little Rock, Ark.

Louisiana Gas & Fuel Co.,

Shreveport, La.

Louisiana Power & Light Co.,

New Orleans,

La. Mississippi Central Power Co.,

Jackson, Miss.

Mississippi Power & Light Co.,

Jackson, Miss.

Nevada Power Co.,

Boise, Idaho.

New Orleans Public Service (Inc.),

New Orleans, La.

Salmon River Power & Light Co. (general office, Boise, Idaho),

Salmon, Idaho.

Texas Interurban Ry.,

Dallas, Texas.

Utah Light & Traction Co.,

Salt Lake City, Utah.

Utah Power & Light Co., general office,

Salt Lake City, Utah.

Western Colorado Power Co.,

Durango, Colo.

III. National Power & Light Co.

Birmingham Electric Co.,

Birmingham, Ala.

Birmingham & Edgewood Electric Ry. Co.,

Birmingham, Ala.

Carolina Power & Light Co. (general office, Raleigh, N. C.),

Asheville, N. C.

Holston River Electric Corporation,

Rogersville, Tenn.

Houston Lighting & Power Co.,

Houston, Texas.

Knoxville Power & Light Co.,

Knoxville, Tenn.

Memphis Power & Light Co.,

Memphis, Tenn.

Memphis Street Ry. Co., The,

Memphis, Tenn.

South Texas Utilities Co.,

Houston, Tex.

Tennessee Public Service Co.,

Newport, Tenn.

West Tennessee Power & Light Co.,

Jackson, Tenn.

IV. Lehigh Power Securities Corporation.

Pennsylvania Power & Light Co., general office,

Allentown, Pa.

Lancaster Group, Edison Electric Co., general office,

Lancaster, Pa.

Transit Group, Lehigh Valley Transit Co., general office,

Allentown, Pa.

V. American & Foreign Power Co.

Nations in which operating plants are located.

Argentina

Brazil

Chile

Colombia

Costa Rica

Cuba

Ecuador

Guatemala

Mexico

Panama

Venezuela

China

India

VI. American Gas and Electric Co.

Appalachian Electric Power Co.

Ohio Power Co.

Indiana & Michigan Elec. Co.

The Scranton Electric Co.

Atlantic City Elec. Co.

Ky. & W. Va. Power Co.

Wheeling Elec. Co.

Ind. General Service Co.

Kingsport Utilities, Inc.

VII. Commonwealth & Southern Corporation.

VIII. Electric Investors, Inc.

Investment in various banks, insurance, industrial,

public utility, non-utility service and other operations

both at home and abroad. [Pts. 23 & 24, pp. 420-423.]

As indicating the rapidity with which the process of combination and concentration is going on, it is interesting to note that one of the quite important groups of the subsidiaries of the Electric Bond and Share Company, namely, the Hodenpyl-Hardy properties, has already been absorbed by a merger under date of January 7, i93o, involving the Southeastern Power and Light Company, Allied Power and Light Corporation, Commonwealth Power Corporation, Penn-Ohio Edison Company, and the Commonwealth and Southern Corporation, in the formation of a merged company now known as the Commonwealth and Southern Corporation. [Pt. 27, p. 5.] Thus these particular properties which appeared in the earlier reports of the Commission have now entirely disappeared from the picture. They are not listed at all in the 1930 or 1931 Moody Analysis of Public Utilities.

The present report of the Federal Trade Commission has not up to date (August, 1932) reported upon the other holding companies and their subsidiaries and sub-subsidiaries other than those of the Electric Bond and Share Company, as presented in the above table. In order, therefore, to complete the presentation of the list of the other holding companies and their subsidiaries, we will have to refer to the earlier report of the Commission until such time as the present hearings are completed. And while this earlier report is, of course, already somewhat out of date by reason of subsequent mergers, consolidations, and absorptions, it will serve at least to give in a general way a picture of the situation as it stood at that time (1924)

(2) The Byllesby Group

The Byllesby group constitutes another one of the large combinations which controls subsidiaries and sub-subsidiaries too numerous to mention and covering more than two pages of the record merely to list the companies in the earlier report of the Commission. [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, pp. 188-190. (See Moody’s Manual for more recent data.)]

(3) Stone & Webster Group

This organization differs somewhat from the Electric Bond and Share Company and yet exercises a considerable control over a very large number of underlying operating and subsidiary companies. The list will be found on pages 177 to 179 of the earlier report of the Commission. [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, pp. 177-179.]

In Moody's for 1930 (page 576) it is stated that "the properties under supervision of the Stone & Webster Service Corporation are located in 23 states of the United States, in Canada and in the West Indies." They serve a population of over 6,000,000 and have annual gross earnings of over $80,000,000.

(4) The Cities Service or Doherty Group

The Cities Service is also known as the Doherty Group of Utilities. This group includes more gas, oil refining, and oil transportation companies than it does electric power companies. The list of companies controlled by this group, together with the subsidiaries and sub-subsidiaries covers nearly two pages of the earlier report of the Commission. [Sen. Doc. 213. See page 204-206.]

Moody's Manual for 1930 states that this company controls "more than 65 public utility companies rendering electric light, power, gas, or transportation service in 20 states and the Dominion of Canada." It serves territories having a population of about 4,000,000 in 1,000 communities. The list of subsidiaries and communities served by this company occupies nearly three full columns in Moody's Manual for 1930, [Moody’s See page 1991.]

(5) Other Companies in the Group of Service Companies

Besides the companies above mentioned there are several other groups in this section, among them the Barstow group; [Sen. Doc. 213, 68^th Congress, 2^nd Session, pp. 210 ff.] the White group; [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, pp. 217 ff.] the Fitkin group; [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, pp. 223 ff.] the Public Service Corporation of New Jersey;[Sen. Doc. No. 213, 68^th Congress, 2^nd Session, pp. 260 ff.] the Columbia Gas and Electric Company. [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, pp. 262 ff.]

II. Large Combinations. In view of the fact that so many changes have been made since this earlier report of the Federal Trade Commission, it may not be wise to undertake to give more than a brief outline or skeleton of these larger combinations in the power field, referring the reader who desires more detailed and recent information to the various analyses of public utilities, either by Moody or Poor. Among these large combinations and their subsidiaries may be mentioned the following:

(I) The Insull Group

This group comprises the Commonwealth Edison Company, the Public Service Company of Northern Illinois, the Middle West Utilities Company and its subsidiaries. The list of these various companies of the Instill Group and their subsidiaries covers two and a half pages of the earlier report of the Federal Trade Commission in merely listing the companies.

By the end of 1925, according to the earlier report of the Commission, the Insull companies served 1,836 communities in 16 states. The report states that recent additions have been made to this group so that the list would be considerably extended even at that date. Moody's Manual for 1931 gives a list of 4,741 communities served by this group in 30 different states, showing the rapid growth of this organization during the last few years? [See Chapter XXIX for more recent, fuller details regarding Insull companies.]

(2) The North American Company

The North American Company includes such important organizations as City Utilities Company, Mississippi River Power Company-in all 13 subsidiaries, a score or more of sub-subsidiaries, and other underlying companies. [Sen. Doc. No. 213, 68th Congress, 2^nd Session, pp. 240-241. (See Moody’s for more recent data.)]

Part 4—Financial Methods

Chapter 15—Overcapitalization

Making Many Shares of Stock Grow Where Only One Grew Before

The tendency of utility corporations to inflate their capital accounts, water their stocks, and otherwise add fictitious values to their investments has long been known and understood. However, during recent years it has been claimed that all of this has been done away with due to the strict requirements of the laws, regulatory commissions, and other restrictions.

No Water Now, They Say

The spokesmen of the utility interests have been very insistent in recent years in their claims that watered stock and inflated values are no longer to be found. The literature of the utility interests, and particularly the pamphlets and textbooks prepared for use in the schools and colleges insists that there is now no such thing as watered stock in the capital structure of the companies. One of the prominent spokesmen and representatives of the companies went so far as to exclaim in one of his statements on this matter:

“There is not enough water in the stock of all of the power companies of the State of Missouri to wash a baby's face.” [Exh. Pts. 5 & 6, p. 277.]

Dean Ralph M. Heilman of the Northwestern University, quoted in a bulletin of the Oklahoma Speakers' Bureau, says that "the man on the street who has given no careful thought nor study to this subject may say of some utility company, ‘It is being compelled to charge an excessive price because it finds it necessary to do so in order to maintain the dividends upon the large volume of watered stock which it has outstanding.' . . . As a matter of fact there is no justification whatever for any such statement. For under the present method of regulating public utilities the rate which any company is permitted to charge the consumer, whether it is a gas company, a telephone company, a street railroad company, or what not, rests upon the present value of the property and not on its capitalization." (Our italics.) [Exh. Pts. 5 & 6, pp. 16-17.]

What the Record Shows

These were the claims, and this was the attitude of the utility companies on this matter until the hearings of the Federal Trade Commission got well under way. Then their attitude changed. And now that the accountants in the employ of the Federal Trade Commission have made a thorough and exhaustive analysis of the capital structure and the financing methods of the various utility corporations, one after another, and their findings have become a matter of public record, the leaders of the utility interests have shifted their position. Faced with the indisputable facts and the unquestionable evidence of their own records, they now admit that there are inflations, appreciations, and "write ups"—which are the recent words for watered stock—in their capital accounts. So that after the facts have been forced into the open, the representatives of the utility corporations have shifted their position from a flat denial that such inflations existed to a frank admission that they do exist and that they are very considerable, if not universal in extent.

The significance of these inflations, appreciations or "write ups," as they are now called, is obvious. Whatever their purpose may be, they very effectively conceal excessive earnings. If, for example, an investment of $100 is earning 16 per cent and the investment is written up so that it is $200, then the rate of earning is only 8 per cent. Perhaps the property represented by the investment is earning enough so that it can pay 8 per cent on the $200. But whether that is so or not, it is necessary under existing laws, court decisions, and the influence of public opinion to keep the earnings in public utilities down to something like 8 per cent or less. Should the earnings exceed that amount there would naturally be public complaint and probably efforts before the commissions and courts to reduce the rates so as to reduce the earnings. But by the very simple device of inflation, appreciation, "write up," or watered stock, the apparent investment is increased and the rate of earning kept down to the desired and approved level.

With these matters clearly in mind, let us turn now to the records of the Federal Trade Commission and see to what extent these inflations, appreciations, and "write ups" have occurred. Obviously, it will be impossible in a single volume to review the entire field. It may be sufficient if we give a summary of what has happened in these respects in two or three of the most outstanding and most typical instances as revealed by the testimony.

We have selected for our first study in this connection, and as typical of what is going on throughout the entire utility field, the Electric Bond and Share Company with headquarters in New York City.

Different Methods of Watering Stock

It is important to note at the outset that the methods of watering stock in the utility corporation of today are more refined and devious than those of the corporations of a generation ago. The modern utility corporation may inflate or appreciate its capital account by any one of a number of different methods, according to the evidence. For example, to quote from the record, [Pts. 23 & 24, p. 63.] the Electric Bond and Share Company owned on December 31, 1927, investments in common stocks of certain companies doing business within the United States, which investments it carried in its accounts, at $20,310,516.48. Of this amount $9,161,109.94 represents the cost, and the balance, $11,149,406.54, represents "write ups" through reappraisals, values placed on stock dividends, and values placed on bonus stocks acquired. Thus it appears that the inflation of capital accounts has been brought about in several different ways: (1) Through re-appraisals; (2) through values placed on stock dividends; (3) and on values placed on bonus stocks acquired.

But these are not the only methods by which the capital accounts are increased without any added investment. Another method is what is known as "splitting the stock," that is, by issuing 2 or 3 or more shares of stock to take the place of 1. In some cases this has been carried to such a point that 1o and even 15 shares have been issued in the place of 1. In this way the capital stock, where this method is applied, may be increased two, five, ten, or even fifteen times the actual original investment.

Then too there is the method of increasing the capital stock by "capitalizing the earnings" of various kinds.

Thus we have at least five different methods by which the capital investment or capital account of the utility companies is increased—appreciated, inflated, watered, or "written up" without actually investing any new capital, as follows:

(1) By re-appraisals.

(2) By values placed on stock dividends.

(3) By values placed on bonus stocks acquired.

(4) By splitting the stock, and

(5) By capitalizing earnings.

Now let us turn to the evidence to see how these methods are employed and how they work out.

Chapter 16—Watered Stock

Trade Secrets of Extortion

Back in 1927, according to the evidence, the Electric Bond and Share Company, which has to be designated as the "old" Electric Bond and Share Company, because there was presently formed a "new" Electric Bond and Share Company, entered into an agreement for a consolidation. In this consolidation "there were issued 9,615,306 shares of no par value of Common Stock of the ‘new' Electric Bond and Share Company in place of the 3,205,102 shares of no par value Common Stock of the Electric Bond and Share Securities Corporation." That is, for each share of the Common Stock of the Electric. Bond and Share Securities Corporation 3 shares of the "new" Electric Bond and Share Company's Common Stock were issued.

A "Write Up" of $399,201,827

As a result of this re-organization, to quote from the record, "the investments which were formerly carried by the ‘old' Electric Bond and Share Company at $148,501,290.79 were ‘written up’ to $547,703,118.18, the increase representing a ‘write up' of $399,201,827.39.” (Our italics.) [Pts. 23 & 24, p. 49. See also p. 4786 for comparative balance sheet of old Electric Bond and Share Co. and new Electric bond and Share Co. as at March 13, 1929.]

Other Inflations or “Write Ups”

During the course of the examination of the financial operations of the Electric Bond and Share Company many instances of inflations or "write ups" were brought out.

A $4,353,000 "write up." It is stated in the evidence that the ledger value of the investment by the Electric Bond and Share Company in the Common Stock of the American Power and Light Company was $5,976,790.91. The cost of this stock was $1,623,253.76. "The balance of the ledger value," the evidence reads, "amounting to $4,353,537.15, is composed of a value placed on stock dividends received of $796,736.40; value placed on bonus stock acquired in the organization of the company of $241,240; and a net write up through re-appraisals of $3,315,560.75—making a total of $4,353,537.15." [Pts. 23 & 24, p. 65.]

A $1,256,615.59 "write up." The Electric Bond and Share Company held Common Stock in the National Power and Light Company on December 31, 1927, amounting to $1,926,619.05. The cost of this stock was only $670,003.46. In this case, to quote the evidence, the "balance of the ledger value, amounting to $1,256,615.59 was composed of—value placed on bonus stocks acquired at organizations of the National Company, $260,000; net "write up" through re-appraisals, $996,615.59—making the amount of $1,256,615.59.” [Idem, p. 66.]

A $4,412,460.24 "write up." On December 31, 1927, the Electric Bond and Share Company held Common Stock in a number of utility companies in the United States, the ledger value of which amounted to $6,453,576.88. The cost of this group of investments, according to the evidence, was only $2,041,116.64. "The balance of the ledger value," to quote the record, "amounting to $4,412,460.24, is composed of values placed on stock dividends received of $1,481,682.20; net "write up" through re-appraisals, $2,881,157.04; values placed on bonus stocks acquired, $49,621—making a total of $4,412,460.24.” [Pts. 23 & 24, p. 66.]

A $3,349,980,76 “write up.” In the group of investments just above mentioned was included the American Gas and Electric Company. On December 31, 1927, the Electric Bond and Share Company held Common Stock in this American Gas and Electric Company, the ledger value of which amounted to $3,625,882.79. This stock, according to the record, cost only $275,902.03. "The balance of the ledger value," to quote the record, "amounting to $3,349,980.76, was composed of value placed on stock dividends of $1,442,571.20; value placed on bonus stock acquired at organization of the American Gas and Electric Company, $49,620; net "write up" through re-appraisals, $1,857,789.56—making a total of $3,349,980.76." [Pts. 23 & 243, p. 66.]

A $974,201.98 "Write up." On December 31, 1927, the Electric Bond and Share Company held shares of Common Stock of the Montana Power Company with a ledger value Of $1,573,200. Of this amount, the record states, "there had been $1,024,236.48 Of "write up" recorded through appraisals, of which $I50,034.5o had become realized profit through sales of the stock, making a net deduction from the ledger value on account of "write up" of $974,201.98."

A $337,864.56 stock dividend. The evidence shows that the Electric Bond and Share Company acquired 111,123 shares of Common Stock of the Electric Investors (Inc.) carried at a ledger value of $2,266,668.21. The cost of this stock was $1,928,803.65. "The difference between the cost and the ledger value," the record states, "amounting to $337,864.56, represents values placed on stock dividends received." [Pts. 23 & 24, p. 69.]

Something for Nothing—Stocks Acquired at No Cost

One of the interesting features of the methods of financing of the utility corporations has to do with the methods by which very considerable amounts of their holdings are acquired "at no cost, either for servicesrendered or as stock profits arising out of the organization." (Our italics.)

Judge Healy drew the attention of one of the witnesses to the fact that the Electric Bond and Share Company had acquired a considerable number of shares of Common Stock in four holding companies at a cost ranging from as little as 5 cents per share to about $3.54 per share, and asked, "Will you explain why this cost per share is so little?"

In reply Mr. Dickerman, the Commission's accountant, explained that this was due to the fact that a very large percentage of the total shares that were acquired at the organizations of the companies mentioned were acquired "at no cost." (Our italics.) For example, he stated that 55.6 per cent of the holdings of the American Power and Light Company were acquired as a bonus; 17.9 per cent of the holdings of the Electric Power and Light Company were acquired as a bonus; 98.7 per cent of the holdings of the Lehigh Power Securities Corporation were acquired as a bonus; and 36.8 per cent of the holdings of the National Power and Light Company were acquired as a bonus.

Split Stock-one Share for 5, 10, 15

And in this connection we come upon another interesting phase of the methods of financing by the utility corporations, to which we have referred above-a method whereby 5 shares of stock are made to appear where only one appeared before; and in some instances 1o and even 15 shares. For, in reply to Judge Healy's question as to why the cost per share of certain stocks acquired by the Electric Bond and Share Company were so low, Mr. Dickerman, the accountant, testified: "Another factor that has had its effect on the cost per share of the Common Stocks of these companies is that the Common Stocks of the American Power and Light Company, Lehigh Power Securities Corporation, and National Power and Light Company have been split 10, 10, and 15 shares respectively for each share of old stock; and this has resulted in a lower average cost per share of the present common stock." (Our italics.) And speaking of the American Gas and Electric Company, the record shows that of the total shares of Common Stock held in this company on December 31, 1927, "exclusive Of stock dividends received, 71.2 per cent were acquired at no cost as a stock profit growing out of the organization of the company. (Our italics.) The stock has also been split 5 for 1, this too having its effect on the average cost per share." [Pts. 23 & 24, pp. 71-72.]

Built up Largely out of Earnings

With the above facts, regarding the methods by which the Electric Bond and Share Company was building up its capital account, before him, Judge Healy asked this question: "Then the Electric Bond and Share Company has purchased comparatively few shares for a cash consideration. Is that it?"

Answer: "Yes, Sir."

Question: "Then the investment of the Electric Bond and Share Company in Common Stock of American Gas and Electric Company, amounting to 169,982 shares, with a ledger value of $3,625,822.79, and a cost of $275,902.03, has been built up largely around the shares received as a bonus of stock profits from the organization of the American Gas and Electric Company and the stock dividends received from time to time on this stock?" (Italics ours.)

Answer: "It has." [Idem, p. 73.]

Another $42,341,947 "Write Up"

In the hearings on the capital account of the Electric Power and Light Corporation, Mr. Kenneth A. Miller, accountant for the Commission, summarized the "write ups" involved in that company. Resulting from the organization of the Electric Power and Light Corporation, Mr. Miller testified, the valuation of securities received from the Utah Securities Corporation was $33,373,343, whereas the ledger value was only $3,854,264. So the "write up" on these securities was $29,519,080.

Similarly, the valuation of the securities received by the Electric Power and Light Corporation from the Electric Bond and Share Company was $33,126,656, whereas the ledger value of these securities was only $21,023,789. So that the "write up" of securities in this case was $12,102,867.

Then, in addition to this there were charges to investment account of initial financing and organization Of $3,400,000, of which $2,680,000 were cash expenditures, which left a "write up" in financing expense of $720,000.

The above "write ups" summarized show a total "write up" of $42,341,947, which, by the way, is about 173 per cent over the ledger values of the same securities on the books of the predecessor companies. [Pts. 23 & 24, pp. 319-320, 322.]

Another typical instance of the inflation of capital account is that of the American Power and Light Company in connection with mergers effected with certain public utility subsidiaries. The facts in this case may be found in summary form in Exhibit No. 4634 on page 1096 of Parts 23 and 24. The exhibit is as follows:

Book Value of Plant and Property Accounts

Time of After Before Amount of Per

Merger Merger Merger Write Up Cent

Kansas Gas &

Elec. Co. Jan., 1910 $ 5,519,462.32 $ 2,971,920.08 $ 2,547,542.24 86

Texas Power &

Light Co. June, 1912 $ 10,550,000.00 $ 2,390,000.00 $ 8,160,000.00 341

Nebraska Power

Co. June, 1917 $ 10,499,500.00 $ 4,633,047.42 $ 5,866,452.58 127

Minnesota Pr. & Nov. 1920 $ 33,578,006.27 $13,326,323.80 $20,251,682.47 152

Lt. Co. Do May, 1920 $ 5,133,172.71 $ 3,749,926.00 $ 1,383,246.62 37

Florida Pr. &

Lt. Co. Dec. 1925 $ 58,445,216.86 $28,213,209.01 $30,232,007.85 103

Total $123,725,358.16 $55,284,426.40 $68,440,931.76 124

============ =========== =========== ===

Washington Water Power Company "Write Ups"

In the case of the Washington Water Power Company, a subsidiary of the American Power and Light Company, one of the principal holding companies of the Electric Bond and Share Company and serving a territory covering the eastern portion of the State of Washington and parts of Idaho and Montana, the records do not seem to be quite so clear and definite, but the accountant, Mr. Edwin T. Harris, testified that he knew definitely of $74,811.64 "arising from engineers' appraisals" and an estimated value of a street railway franchise acquired without known cost. [Pt. 29, p. 26.] In addition to this relatively small amount of inflation the evidence shows that there were a number of additions to fixed capital from sources other than actual investment. For example, the company authorized a $500,000 mortgage bond issue in 1889 at a discount of $50,000.00. This $50,000 discount was charged to fixed capital and was not amortized. [Idem, p. 28.] Later $43,228.07 discounts and expenses on certain bond issues were charged to fixed capital account. So that up to 1889, $93,228 had been charged to fixed capital account. [Idem, p. 28.]

Again in 1890 the Washington Water Power Company acquired the Edison Electric Illuminating Company and paid $121,271.74 in excess of the amount shown on the books of the Edison Company. (Italics ours.) [Idem, p. 30.] The records also show that in the purchase of the Okanogan Valley Power Company the Washington Water Power Company paid $110,561 more than the book values, and for the Nine Mile plant $513,161 more than the book value. In this case also, there were commissions amounting to $269,117.52 charged to fixed capital. [Idem. p. 30.]

Under date of February 11, 1930, the American Power and Light Company acquired a number of Washington companies, including the Washington Water Power Company, in which there were "write ups". amounting to $2,516,614. [Pt. 29, p. 34.] About this time the Washington Water Power Company paid in legal expenses, engineering services, stock selling expenses, and commissions on stocks to the Electric Bond and Share Company a total Of $45,925.90 which was also charged to the fixed capital account. (Italics ours.) [Idem, p. 35.]

Washington Water Power Company Acquires the Chelan

Electric Company

Another instance of the "write up" of capital account in the case of the Washington Water Power Company was in connection with its acquisition of the Chelan Electric Company. This company, according to the records, was organized in October, 1906, with a capital stock of $500,000. It was formed primarily for the purpose of acquiring and developing a water power site and generating plant to supply the Great Northern Railroad with electric service.

The first interesting incident that comes out in the hearing was that the actual cost of the property acquired was not $500,000, but only $262,197.97. [Pt. 29, p. 41.] Nevertheless the whole $500,000 was, of course, charged to fixed capital which would indicate that there was at the outset a "write up" of something like $237,800.

Now, the Washington Water Power Company acquired this Chelan Electric Company in 1925. And the inflation, of course, was carried over into the capital account of the Washington Water Power Company.

How $50,000 Grew to $500,000

A very interesting example of the way the capital account of a utility company grows of and within itself without additional investments on the part of its stockholders comes out in connection with the testimony regarding the Kootenai Power Company, one of the properties acquired by the Washington Water Power Company, along with several others. This Kootenai Power Company was organized April 24, igo8, for the purpose of furnishing electric service to the City of Coeur d'Alene, Idaho. The capital stock at the time of organization was $50,000. The stockholders made no further investments in the company, according to the record, "except in so far as additions to fixed capital were made from earnings and contributions received from customers." [Pt. 29, p. 44.] And yet, in the 1g years from 1909 to 1928 the capital account of this company grew from $50,000 to $532,974.02.

The story of this growth running through the record is something as follows: The additions to fixed capital made from earnings and contributions received from customers amounted to $176,098.67. [Idem, p. 44.] That was the first element of appreciation. Next we find that in 1921 the engineers of the Public Service Commission of the State of Idaho made an appraisal of the property based on the so-called reproduction costs and added to its value another $22,811.05. [Idem, p. 45.] That is appreciation No. 2.

Next, in 1929, the American Power and Light Company acquired the capital stock of this Kootenai Company and paid a lump sum of $6,000,000 for the stock of the four companies that were acquired. Just how much was allocated to the stock of the Kootenai Company could not be determined. But the record shows that of the $6,304,702.59 which the American Power and Light Company paid for the several companies acquired, including the Kootenai Company, $2,516,614.66 constitutes "for the greater part a `write up' of book values.”’ [Pt. 29, p. 48.] With reference to the growth of the capital account of the Kootenai Company itself specifically, the record seems relatively clear and reads as follows:

Question: "The original investment by stockholders in this company was $50,000?"

Answer: "Yes, sir."

Question: "There was a subsequent investment, so-called, derived from income of the company, except a small amount contributed, of $176,098.67?"

Answer: "Yes, sir."

Question: "There was an increase of $11,873.55, arising from revaluation on physical assets?"

Answer: "Yes, sir."

Question: "Which made the total investment $237,972.22?"

Answer: "Yes, sir."

Question: "Made up as you just detailed for us?"

Answer: "Yes, sir."

Question: "Now, in addition to that growth, which finally brought the total investment to $237,000 plus, the original owners were paid in dividends a total of $295,001.80?"

Answer: "Yes, sir."

Question: "From 1909 to 1928?"

Answer: "Yes, sir." [Pt. 29, p. 49.]

Thus, with the original investment by the stockholders in this company, of $50,000, the capital account has grown without further investment on their part, to $532,974.02 in the 19 years from 1909 to 1928.

Chapter 17—Other Instances of Watered Stock

More Inflations, Appreciations, “Write Ups”

In addition to the instances of appreciations, inflations, or "write ups" which have been mentioned in the previous chapter, and in some cases as instances of specific companies which have been included in "write ups" previously cited, mention may be made of a number of other cases in order to show how universal this practice is.

Georgia Power Company "Write Ups"

The records of the Georgia Power Company reveal an interesting phase in the inflation of capital accounts. Under an agreement dated October 21, 1926, the stock of the Georgia Railway and Power Company, together with other securities and properties of several Georgia companies, were transferred by the South eastern Securities Company to the Georgia Power Company. [Pt. 28, p. 4.] The Common Stock of the Georgia Railway and Power Company had a value on its books of $115 a share, approximately, whereas the same stock was valued by the Southeastern Power and Light Company on its books at $230 a share. Thus the valuation which the Southeastern Power and Light Company placed upon its stocks, which were issued in exchange for Common Stock of the Georgia Railway and Power Company, was $28,713,660 more than the valuation of that stock on the books of the Georgia Railway and Power Company. (Italics ours.) [Idem, p. 5.]

But that is not all. A little farther in the record we find that this same stock, after the Georgia Railway and Power Company and other subsidiaries were merged into the new Georgia Power Company, was given a further "write up" in February, 1927. At that time the surplus of the Georgia Railway and Power Company was retained as a part of the surplus shown by the books of the new Georgia Power Company, thereby adding at that time $15 more per share, or $3,745,260 to the previously mentioned increase of $28,713,660, and making the total "write up" $32,458,920. (Italics ours.) [Pt. 28, p. 6.] And this "write up" in the values of the stock of the predecessor companies was carried into the accounts of the new Georgia Power Company—and still remains there. [Idem, p. 7.]

But even that is not all of the inflation or "write up" in the Georgia Power Company's accounts. The testimony further shows that there was another item Of $994,580 which represented the difference between the par value of stocks of subsidiaries of the Georgia Power Company and the stated value of certain no par preferred stock of the Georgia Power Company, which was issued therefor under a merger agreement in September, 1928. This adds almost another million to the "write up." And, finally, another item consisting of "an unamortized debt discount and expense" adds another $7,083,459.80. There was also included interest and expenses amounting to approximately $1,628,000. These several items bring the total "write up" or appreciation in this case up to $42,164,959.80. [Pt. 28, pp. 9-10.]

Capitalizing Fees, Earnings, and Commissions

Another method by which the capital accounts of the utility companies are inflated, appreciated, or "written up" is by the capitalization of the fees and commissions paid to holding companies and of earnings. In the case of the Georgia Power Company, according to the records, there was paid to the Southeastern Engineering Company for certain engineering fees, $83,156.37 in 1928 and $270,949.74 in 1929. There was also paid to the Empire Construction Company by the Georgia Power Company certain construction fees amounting to $101,806.76 in 1928 and $178,392.84 in 1929. And those charges were capitalized by the Georgia Power Company on its books. (Our italics.) [Pt. 28, pp. 10-11.]

The records are a little indefinite as to the total amount of inflation in this particular case but, as stated above, there was a total of at least $42,164,959.80 [Besides above references, see also p. 161, Pt. 28.]

Still Other Inflations

Electric Power and Light Corporation. This company recorded certain securities acquired from the Electric Bond and Share Company at a ledger value of $33,126,656.02. These securities were carried by Bond and Share at a total cost of $21,023,789. The "write up" of these securities amounted to $12,102,,967.02. [Pts. 23 & 24, p. 313.]

Utah Securities Corporation. The securities and properties which cost the Electric Bond and Share Company $6,433,118 were capitalized by the Utah Power and Light Company at approximately $23,000,000 more than such cost to the Bond and Share Company. [Idem, p. 348.]

Arkansas, Louisiana and Mississippi Power and Light Companies. The fixed capital on the books of these companies, when they were reorganized in 1926 and 1927, were written up approximately $27,761,740, or 56.4 per cent in the aggregate."'

Southeastern Power and Light Company. As of December 31, 1929, there are known appreciations of security values on the Southeastern Power and Light Company records aggregating $42,597,229.19. [Pt. 27, p. 215.]

Carolina Power and Light Company. The Electric Bond and Share Company held securities in this company which were annually reappraised through a period of years, so that the net result was that the ledger value of the common stock of this company had been "written up" or appreciated to the extent of $748,000. [Pts. 23 & 24, p. 93.]

Kansas Gas and Electric Company. The book value of the securities of this company exceeds the actual investment by $2,547,542.24. [Idem, p. 207.]

Montana Power Company. The Electric Bond and Share Company held securities in the Montana Power Company on December 31, 1927, which had been "written up" to the extent of $1,024,236.48 . [Idem, p. 101.]

Scranton Electric Company. This company, which was taken over by the American Gas and Electric Company, transferred its assets to the new company, at which time the assets were "written up" to the extent of $4,426,000. [Pt. 22, p. 522.]

Atlantic City Electric Company. The fixed capital of two companies, acquired by this company, was $2,212,774.86 greater than the combined fixed capital accounts on the books of the Electric Company of New Jersey and the Atlantic County Electric Company. [Pt. 26, p. 43.]

Appalachian Electric Power Company. This company, which absorbed several other companies by merger, had in its capital account an appreciation or "write up” of $66,418,000. [Idem, p. 539.]

Typical "Write Ups"

In the Carolina Power and Light Company there is recorded a "write up" of $19,100,000 which the witness declared to be "indefensible." [Pt. 26, p. 43.]

In the Arkansas Power and Light Company a "write up" is recorded of $6,970,000, or 23 per cent. [Pts. 23 & 24, p. 377.]

In the Louisiana Power and Light Company a "write up" is recorded of $10,070,000, or 109.64 per cent. [Idem.]

In the Mississippi Power and Light Company a "write up" is recorded of $10,714,544, or 110.15 per cent . [Idem, p. 1228.]

In the Oklahoma Gas and Electric Company (Byllesby group) a "write up" of $2,407,735 is recorded in 1928. [Pt. 36, p. 785.]

In the Ohio Power Company a "write up" of $2,775,000 is recorded. [Pt. 22, p. 238.]

In the Indiana and Michigan Electric Company a "write up" of $5,958,475. [Idem, p. 265.]

In the Kentucky and West Virginia Power Company there was recorded a "write up" of 135 per cent. [Idem, p. 190.]

The total amount of "write up" or appreciation in the capital account of the American Gas and Electric Company, according to Mr. Harold D. Anderson, assistant secretary of this company, who reported upon the subject, was $85,992,660.30. [Pt. 22, p. 629.]

The Insull Companies

In the Middle West Utilities, which is the leading subsidiary of the Insull interests, we find an instance of a "write up" of $4,836,746-36 in the assets acquired from the Central Illinois Public Service Company. [The statements here made are based on verbatim press reports of the hearings of the Commission, the printed volumes on the Insull Companies not being available at the time this section was written.]

Another "write up" of $431,500 is noted in the case of the Nebraska City Utilities Company.

In acquiring certain properties of the Public Service Company of Oklahoma there is recorded a "write up" of $2,754,260.76.

In the North American Light and Power Company of Maine there were "write ups" of various kinds, amounting to $24,000,000. Of this amount, according to the record, $16,000,000 represented "appreciation of investments on the basis of engineering appraisals." And $8,000,000 of appreciation was the result of a "resolution of the board of directors."

The records show a total of $30,816,770 "write up" in the Insull properties.

And these are but typical of what is going on throughout the industry.

Grand Total $925,985,795.26

In a speech in the Senate of the United States, on Wednesday, July 13, United States Senator George W. Norris of Nebraska, gave a summary of the total write-ups, or inflations, which have so far been disclosed by the findings of the Federal Trade Commission. With the investigations still going on and perhaps not much more than half finished, Senator Norris gave the following writeups of the different companies so far reported:

Electric Bond and Share Company, $399,201,827.39. [Pts. 23 & 24, p. 49.]

The American Gas and Electric group, $85,992,660.30 [Pt. 22, p. 1199.]

American Power and Light Company group, $68,448,931.76.

Middle West Utilities (report not yet printed), $30,816,770.00.

New England Power Association, $41,575,771.00.

North American Light and Power Company (report not yet printed), $21,180,934.36.

W. B. Foshay Company and subsidiaries, $4,018,953.93.

The Alabama Power Company, $6,392,241.73.

Georgia Power Company, $33,453,500.00.

Southern Power Securities Corporation, $26,898,275.47.

Louisiana Gas and Electric Company of the Byllesby group

(report not yet printed), $2,013,500.00.

Louisiana Power and Light Company, $10,076,594.16.

Mississippi Power and Light Company, $10,714,544.37.

Nebraska Power Company, $2,521,063.35.

Carolina Power and Light Company, $22,414,833.79.

And many other similar instances in varied amounts. And then the Senator sums up as follows:

"Mr. President, what do you imagine is the total of the writeups? How much water, how much air, have these financial jugglers changed into gold upon which they are taxing the American consumers of electricity? How much do you think, sir, it amounts to up to date, with the investigation probably not much more than half finished? Here is the grand total of the sums I have just read: $925,985,795.26."

"Just try to comprehend what that means. With the investigations only partially finished, the Federal Trade Commission have disclosed write-ups in round numbers to the amount of $926,000,000.00, upon which the poor people, the common people, must pay a profit for all time-not only for a day, not for a year, but, unless some change is made by the proper authorities, it must be paid forever." ["The Holding Companies," address by Senator George W. Norris, in the United States Senate, Wednesday, July 13, 1932, 76th Congress, 1st Session.]

Chapter 18—The Defense of Inflations

Inflations Justified by Earnings; Earnings Based on Valuations;

Valuations on Inflations

Mr. George N. Tidd, President of the American Gas and Electric Company, testified at length before the Commission on March 12, 1930. He had heard the testimony of the accountants of the Commission as to the inflations of capital accounts and the evidence of excessive earnings and other financial manipulations, and finally insisted upon making a long drawn out statement covering many pages, explaining and defending the methods of the corporations in these respects. His statements constitute not only a frank admission of the existence of these amazing inflations or "write ups" of capital accounts, but a labored defense of the practice.

"I have heard a lot of testimony here about `write ups,"' said Mr. Tidd. "This without explanation has a vicious sound. Perhaps I can make my view of it clear by a homely comparison."

The Utilities’ Justification of “Write Ups”

“Your Honor, if you purchased a dwelling in 2920 for $10,000 and had properly maintained it until the present date and then found that you desired to borrow money on it from your bank, and the hank said to you, ‘Why, this dwelling is worth today about $20,000, so we are willing to loan you 70 per cent of its value, or $14,000,’ do you think in such a case that you would say to the bank, ‘Oh, no, I only paid $10,000 for this dwelling and you must not loan me more than 70 per cent of that amount?’ Do you think you should say to a prospective tenant of this dwelling of yours that his rental should be only 7 ½ or 8 per cent on $10,000, notwithstanding the fact that to reproduce the dwelling today would cost you $20,000? To both of these questions I think your answer should be no. I know my answer would be no.

“To my mind—not trained, I will admit, in the instructions of expert accounting—this seems to be the sum and substance of write-ups referred to at this hearing and I think it is the view that would be taken by any business mind. I am reminded that I have heard my legal department state that the supreme court takes this view of it.

“It is rare, indeed, that property increases violently in value overnight, an expression I have heard used here. It is apparent that in the absence of the discovery of gold or oil on the property such an overnight appreciation is extremely unlikely. Its appreciation has occurred over a long period of years. It may well be stated that an accountant has made an entry in a book that recognizes overnight this appreciation built up over a long period of time. This matter of appreciation in values has certainly, to the knowledge of most of us, been acknowledged by the tax authorities. Do they tax us on what we paid for our property, or are their assessments influenced by the present-day value—the reproduction cost less depreciation, if you please—of that property?

“I know that in the New York City tax appraisal property was given at $1,000,000,000, of which $500,000,000 was appreciated.” [Pt.22, pp. 613-14.]

In further explanation of the financing methods of the utilities Mr. Tidd took up the question of earnings. He does not deny "such things as 66 per cent return on equities," but insists that the property values back of them justify such returns. He says:

“Now as to the earnings on these properties that we own, I must admit if I had no evidence before me other than that which I have heard in this room, I would imagine myself and the stockholders of the companies I represent staggering under a load of wealth that would break the back of Atlas. I do not, however, propose to let myself be dazzled by reference to such things as 66 per cent return on equities, which represent only a small part of the total money invested, and other references belonging particularly to the sphere of the accountant. I propose, however, to look at the facts with common horse sense and consider the amount my companies are earning on the value of the property used in their business. [Pt. 22, p. 614.]

Admitting the facts brought out by the preceding evidence regarding the "write ups," Mr. Tidd insists: "I definitely now state that the property account on the books of these companies is not unfair and never has been." (Italics ours.) "A fair appraisal of these properties will show, I am satisfied, millions of dollars in excess of the values shown on the books and likewise in excess of all the securities issued against them. The book values of our property accounts as presently stated and including every dollar of the so-called ‘write ups' referred to by witnesses here, represents a total fixed capital per unit of capacity installed which is nearly 9 per cent, less than the average of the entire United States." [Idem, p. 615.]

Speaking of the capital account and earnings as brought out by the evidence, Mr. Tidd argues: "To me this reflects a healthy financial condition, it reflects a fair rate of return on the property, with a fair capitalization conservatively divided between bonds and stocks. It also reflects the fact testified to by your utility expert that 70 per cent of our earnings have been plowed back in the business." (Italics ours.) [Idem, p. 615.]

In the last above statement Mr. Tidd acknowledges another phase of the financing methods of the utility companies which has been brought out by the evidence and which constitutes in one sense at least an inflation of capital accounts. We refer to the fact that the earnings of the companies are capitalized; that is, they are re-invested in the business or, as Mr. Tidd says, "plowed back in the business."

Profits on Services Admitted

Coming to the question of the services rendered by the holding companies to their subsidiary operating companies, Mr. Tidd again admits the findings of the Commission.

"It has been stated," said Judge Healy in cross-examining Mr. Tidd, "that the total engineering and supervising fees collected up to the end of 1928 were $2,228,000, and that the cost of that engineering work and supervision work was $586,ooo, or a charge over the cost of $1,641,000, or 279 per cent:" (Italics ours.) "Is that about right?"

Answer: "I do not think there is any dispute as to that.” [Pt. 22, p. 623.]

Pursuing this matter further, Judge Healy asked:

“Question: It is further stated that these engineering and supervision fees—in Mr. Bickley's report it is stated that the engineering and supervision fees up to the year 1928 amounted to $2,228,018, or $1,195,470 more than the total expense of the American Gas and Electric Company, except interest and discount and taxes and commissions on securities sold. There has been no dispute about that, I believe.

“Answer: There is no dispute on that; no.

“Question: And that that represented a percentage, the engineering and supervision fees, to the total expense of the corporation of 215 per cent.

“Answer: Well, that department; yes.

“Question: Now I wonder if you can explain to me why it is that these companies could not have furnished their own service for the same price that you paid for it and saved 115 per cent the 179 per cent?

“Answer: It is our opinion that it would cost them a very great amount to do the work themselves.” [Pt. 22, p. 623.]

Here then is a frank admission of the fact, as brought out by the evidence, of a profit of 279 per cent on the engineering and supervising fees collected by this company over and above the actual cost of the service.

And Millions More

In his long statement of explanation regarding these matters, and speaking of the profits earned, Mr. Tidd said: "A profit most certainly was made." But he goes on to argue that the services rendered were worth all that was charged for them and millions more. [Pt. 22, pp. 615-16.]

“Of course, we in this business have made money. We have been successful, we are guilty of that, but also we are giving service that is as near perfection as present-day knowledge and skill can produce. We are giving this service at a fair rate, a rate even less than 8 per cent return on the value of the property. Our security issues are approximately $100,000,000 less than the value of our assets and we are going forward, and in my opinion the growth that I have just pictured from the formation of our company down to date is going to continue. The country is going to need our industry more and more each year and 1 believe that we in this industry will be able to meet these demands, unless we are stopped by some unwarranted interference of a nature beyond our control .” [Idem, p. 616.]

In other words, admitting the findings as to the "write ups" in the capital accounts, Mr. Tidd insists that the securities issued are capable of sustaining still further "write ups." They are "approximately $100,000,000 less than the value of their assets." It would also appear from the testimony that it is the settled purpose of the companies, according to Mr. Tidd, to go forward with the same practices that have here been revealed and that the companies believe that the industry and the country will support these practices.

Chapter 19—Inflations Challenged

Appropriating Community Values

In the preceding chapter we have quoted the statement of George N. Tidd, President of the American Gas and Electric Company, in defense of the practice of inflating capital accounts, citing the instance of the increase in value of a dwelling house.

Seeking to bring out the fallacy in this line of argument, judge Healy questioned Mr. Tidd:

“I wonder if you would talk with me about this illustration of the dwelling house just a minute.”

And then Judge Healy continued:

“You say you have a dwelling house you bought in 1910 at $10,000 and that because of appreciation it became worth $20,000. Now you were loaned at the bank $14,000 in that illustration. And since you did that you have received back, of course, your original $10,000, and $4,000 more; is that right?

“Answer: Yes.

“Question: Now, assume you form a corporation and transfer the equity of that property, or to that property, and issue the remainder of $6,000 in stock; that is, assuming that you issue $6,000 in stock, $3,000 of which is preferred, and you get back the preferred stock of $3,000, don't you?

“Answer: Yes.

“Question: And the preferred stock, or the man holding the preferred stock, has no vote in the corporation; is that right? Answer: Assuming the preferred stock is non-voting; yes. Question: And then you have the $3,000 of common shares which is controlling the property; isn't that true?

“Answer: That is true.

“Question: And you have received back on what you got for . $10,000, put $14,000 in the form of a loan, and $3,000 in the form of preferred stock. Now you raise your rent so that you get a fair rental on $20,000.

“Now, isn't that somewhat akin to what has happened in this Appalachian Power Company situation? You have the Appalachian Electric Power Company properties considered at something around $62,000,000, don't you?

“Answer: So it seems.

“Question: And when you put them all together, conveyed them to this new corporation, the bonds and the underlying issues on the outstanding property was approximately $60,000,000. So it was mortgaged for a great deal more than it cost. (Italics ours.) Now then there was over, in addition to the loan you speak of, the preferred stock, first and second. And then it finally came down to the common stock.

“Answer: Yes.

“Question: Now, isn't that a parallel case to the illustration that you have given, the one that you made in connection with the house

“Answer: It is a parallel case, that is true, from the financial side, but not to the extent of raising the rate. The Appalachian Electric Power Company, on the contrary, have reduced the rates. Question: Yes.

“Answer: About a million dollars a year.

“Question: But your net return from the rate has increased far faster than your gross return, than the gross return has? (Italics ours.)

“Answer: That is true by reason of the efficiency of the organization—they have operated a great deal more efficiently.” [Pt. 22, pp. 624-25.]

Community Growth Increases Utility Values

Not satisfied with the argument in support of inflations of capital account presented by Mr. Tidd, and evidently not satisfied entirely with his own analysis of the argument, judge Healy undertook to bring out the fact that whereas the utility companies contribute to the growth and, therefore, the increasing values in a community, on the other hand, the growth and increasing value of the community and of industry and society at large also contribute to the growth and increasing value of the utilities. At this point the evidence becomes significant and searching and very interesting.

Judge Healy queries:

“Now, during these 23 years that have intervened since this company took over the Electric Company of America, I think you will agree that there has been a great growth in this country?

“Answer: Unquestionably, yes.

“Question: And that is true in the electrical industry which has profited by the growth.... And some of your own appreciation in the values of your property is to some extent due to the fact that the prices have increased during that period (italics ours); is that not true?

“Answer: I think, especially, since the war.

Judge Healy then traced step by step, by the question and answer method, Mr. Tidd agreeing at each point, the development of the electrical industry with its interlocking systems, growth, and expansion, and the way it "has brought about various problems, both to the communities and to the various governments." [Pt. 22, pp. 618-19.] A little later Judge Healy asks:

“Question: O f course, when you build up a community that uses a large amount of power, you get the use or benefit of that? (Italics ours.)

“Answer: Yes; the community gets it and we do.

“Question: And the benefit goes back to the company, does it not? Answer: Yes. (Italics ours.)

“Question: Your industrial load used in the factory increases the domestic users?

“Answer: Yes, indeed.

“Question: It is something that works both ways?” [Pt. 22, p. 622.]

Here then, both Judge Healy of the Commission and President Tidd of the utility company seemed to have come to agreement and to at least a partial realization of the tremendous significance of the growth of community value and development and its effect upon the increase in the value of the companies serving within the community. It is the first recognition that we have noticed in any official documents or admitted by any utility corporations of the existence and the effect and significance of community values. And these community values by means of inflations and appreciations are appropriated by the utility companies as brought out by the evidence here presented.

At another point but still in this particular part of the testimony, referring to the fact brought out earlier in the testimony, to the effect that an original investment of $1,000,000 of paid in capital had grown to $45,500,000 by the end of 1928, thus increasing 45 times in 22 years, [Pt. 22, pp. 124-25.] and to the further fact that beginning with this nucleus of $1,000,000 of actual paid in common capital, the company had thereby come into control of properties amounting to $375,000,000, [Idem, p. 128.] Judge Healy asked:

“Well, don't you think that it is worthy of note that as a matter of economic interest from the viewpoint of some that the common stock, as this value that is written on the books today shows, is worth only in an investment of cash $1,000,000 at that time (1922)? (Italics ours.)

“Answer: Oh, I am not criticizing the point of view at all. I have no idea of criticizing any one in this report. That wasn't the thought of it at all. I was merely trying to present another view of the picture, as I see it .” [Pt. 22, p. 620.]

Warnings on Overcapitalization

It is interesting to note that the utilities have been warned of the dangers of overcapitalization, not only by disinterested students of the subject but often by their own men. We have quoted in a previous chapter the words of J. B. Sheridan, Director of the Missouri Committee on Public Utility Information and one of the most keen and active of the utilities managers on this particular point. [Exh. Pts. 5 & 6, p. 306.]

Mr. Sheridan was writing about the competition of municipal plants which private plants could not meet either in the matter of rates or service, or other things, and the trouble, he thought, was just here in this matter of over-capitalization. [We have quoted the full letter on pp. 9-11.]

Others saw the dangers of overcapitalization and issued their words of warning. There are numerous instances in the course of the investigations showing that some at least of the leaders of the industry realized the dangers of this inflation of capital accounts, and warned their colleagues about it. For example, in an address by Mr. Chester Corey, Vice-President of the Harris Trust and Savings Bank of Chicago, at one of the conventions of the Great Lakes Division of the National Electric Light Association, the statement is made:

“It is treading on dangerous ground to assume that rates will be permitted which will yield more than a fair return upon the value of the property used and useful in the conduct of the business, and make possible the raising of new capital for the development of the business. We have before us the regulation of the railroads and the limitations placed upon their earnings. History repeats itself, and we can all remember when a large percentage of the railroad mileage of the country was in receivers' hands, a condition caused by the over-bonding of properties with an unsafe proportion of earnings, even in good years, required for the payment of fixed charges.... I am not an alarmist, but I do want to utter a word of warning against the tendency, especially through the holding company, toward overcapitalization and an undue increase in fixed charges. [Exh. Pt. 3, pp. 827-28.]

At the same convention, in an address by A. C. Marshall, President of the Great Lakes Association, this statement is made:

“Another danger of easy money is that it makes possible the putting over of mergers, combinations or reorganizations on a basis not justified by either earnings or valuation.” [Idem, p. 815.]

At another time one of the speakers at a utility convention drew attention to statements by Dr. Thomas N. Carver of. Harvard University, pointing out the dangers of "insecurity and economic instability" due to overcapitalization. [Exh. Pt. 4, p. 455.]

Chapter 20—Do Inflations Affect Rates?

Conflicting Answers—The Obvious Becomes Obscure

To the ordinary human being not versed in the intricacies of utility accounting it would seem perfectly obvious that if a company increases its capital account by issuing additional securities without additional investment the rate of return will be reduced and rates will have to be increased to keep them up, or at least rates can not be reduced. In other words, it seems obvious that inflations do and must affect rates.

And that is precisely what the representatives of the utilities say when they are talking among themselves. Thus, as we have related in a previous chapter, J. B. Sheridan, Director of the power companies' Committee on Public Utility Information for Missouri, writing to Thorne Browne of a similar committee in Nebraska, says:

“What can we do when the financiers will inflate, overcapitalize, sell securities based on blue sky or hot air, and rates must be kept up to pay returns on said blue sky and hot air?” [Exh. Pts. 5 & 6, p. 306.]

That is quite competent testimony and it seems clear and obvious and in accord with popular thought and experience. But here we are confronted with another line of testimony quite the contrary. When the utility representatives are talking or writing or testifying for the public, they tell quite a different story. They never tire of insisting that the inflations, appreciations, or "write ups" of capital accounts do not have any effect in increasing rates. Over and over again throughout the hearings, representatives of the utility companies emphasize and reiterate this claim.

Companies Insist Inflations Do Not Affect Rates

They argue very plausibly that rates are determined and fixed, not upon the capital account or inflated values, but only and wholly upon the basis of actual value or at least upon the basis of "reproduction new less depreciation"; and that, therefore, inflations or "write ups" have nothing to do with rates.

So certain and positive are the utilities upon this question that they published in one of the bulletins issued as instructions to their speakers the following statement:

“The heavy capitalization required in the utility business excites suspicion of water and of rates to produce dividends on watered stock. On this subject the demagogue rises to a fine frenzy. As a matter of fact, all the water of the Atlantic would not affect rates under modern utility regulation. Capitalization is utterly ignored in rate making. The rates and the return to the investor yielded by the rates are based on the value of the property regardless of the capitalization, on that and nothing else?” [Exh. Pt. 2, p. 37.]

In discussing this question Mr. Preston S. Arkwright, President of the Georgia Power Company, and a past president of the National Electric Light Association and chairman of their Public Policy Committee, in a long statement insisted that watered stock or the inflation of capital would have no effect upon rates. "Rates are not based on what people pay for properties," he said, "as I understand it. As I understand the theory of rate making, they are based upon the value of the property." [Pts. 18 & 19, pp. 140-41.] Later on Mr. Arkwright was asked if it were not true that under existing conditions "the industry in all of its elements presents' the opportunity for those who are so minded to make unconscionable profits from it."

“Unconscionable Profits”—Perish the Thought!

"To make unconscionable profits," he exclaimed, and queried. And when Judge Healy said "Yes," Mr. Arkwright went on to say:

“I do not see how, so far as the making of those profits, if made, would adversely affect public interest in it.... When it comes down to the public utility business under regulation, our operating costs are subjected to investigation, criticism and ... review by the regulatory commission, and if unreasonable or unjust or exorbitant, may be disallowed by them in arriving at the operating costs that are to be charged against earnings in determining rates. Then, in addition to actual costs, you disregard the securities issued, discounts, the commissions, the under-writings, the profits, or anything else in connection with them, or whether the securities are paid 100 cents on the dollar of their face value, or whether they are all water (our italics), and you get the value of the property and allow only a reasonable rate of return on the fair value of the property. And I do not see how under the machinery now set up, if intelligently and properly exercised, there could be any injury to the public in the operation of these utilities, even if somebody did make an unconscionable profit out of the trading end of it, or trading in those securities.” [Pts. 18 & 19, pp. 142-43.]

In the survey made by the utilities of the textbooks used in educational institutions, this subject of overcapitalization and watered stock is dealt with. The report says:

“Some of the textbooks state that public utilities are or were overcapitalized, have "watered their stock," and impose excessive rates upon their customers to enable them to make financial returns upon alleged capital investment which does not exist in fact.

“Under state regulation the utilities are permitted to charge rates based only upon the actual value of the property used and useful in giving public service.

“Public service commissions ignore capitalization when investigating and prescribing rates.

“Under state regulation there can not be basis in fact for the charge that public utilities are permitted to charge rates which will pay dividends upon ‘watered stock.’” [Exh. Pt. 2, p. 455.]

Similarly, one of the committees reported that "to offset the statement of Governor Pinchot to the 48 governors that there has been tremendous inflation in the common stocks of certain holding companies, it is suggested: That the committee prepare a statement showing that the financial structure of holding companies have no effect upon rates charged for electric service, and that state regulatory commissions were instituted to assure that rates paid by the people would be based upon cost of giving service, and that capitalization can not have any effect upon rates charged for service. (Italics ours.)

Even the university professors who were making special studies and publishing books dealing with this subject seem to have joined in the chorus in this respect. We have previously referred to Dean Ralph M. Heilman of the Northwestern University of Chicago. He is mentioned by the utilities as "one of the best informed living authorities on public utilities and who has absolutely no connection with any utility." On the subject of watered stocks, he is quoted as saying: "The man on the street who has given no careful thought nor study to this subject, may say of some utility company, `It is being compelled to charge an excessive price because it finds it necessary to do so in order to maintain the dividends upon the large volume of watered stock which it has outstanding. As a matter of fact,. there is no justification whatever for any such statement. For under the present method of regulating public utilities the. rate which any company is permitted to charge the consumer, whether it is a gas company, a telephone company, a street railroad company or what-not, rests upon the present value of the property and not on its capitalization." (Our italics.) [Exh. Pts. 5 & 6, pp. 16-17.]

How are we to reconcile these two conflicting statements-one frankly admitting that inflations do and must affect rates, the other definitely denying it and presenting lengthy and labored arguments to prove their contention?

What the Commission Finds

The findings of the Federal Trade Commission do not seem to substantiate this contention of the utility representatives that inflations do not affect rates. On the contrary, with increasing clearness and emphasis, as the studies of the accountants come out, the evidence shows that the increase of capital account by whatever method it is accomplished tends ultimately, in one way or another, to get into the rate base and thus affects rates. In other words, the more carefully these matters are analyzed and the sources of income traced, the more clear it becomes that these inflations, appreciations, or "write ups" do affect rates.

A very conservative statement of the situation is made by Mr. Judson C. Dickerman, accountant for the Federal Trade Commission, in his report upon the American Gas and Electric Company.

Having made a concession as to the skill and efficiency and reasonable rates of the company he goes on to make the following conservative and yet significant statement with regard to the effect of inflations upon earnings and rates:

“Through the device of writing up the book-fixed property accounts in accordance with company appraisals stated to be based on present reproduction cost inclusive of estimated construction and going-value overheads assumed to be the value of the property, a prima facie situation is presented that the rate of earnings on the apparent book capital is reduced and rates producing those earnings appear reasonable. The same upward adjustment of property accounts permits of an expansion of securities and increases the base upon which bonds and preferred stocks may be issued. Nominal fair rates of return on these appreciated values represent. large rates of return on the original investment and redound to the profits of the common stock held by the holding company, in addition to the profits which would normally accrue to the holders of the equity in the actual investment as skill in management and growth of the business would attract investment money for bonds and preferred stock at lower and lower costs.” [Pt. 22, p. 28.]

This then is how these inflations work: First of all, by making the capital account larger, they make the earnings appear reasonable. Secondly, they permit the issue of additional securities which may be sold to the public and, finally, large rates of return which increase the profits to the holders of common stock held by the holding companies. Even so, the testimony does not at this point seem to indicate the connection between the inflated values and the resulting rates. However, it is perfectly obvious that these increased returns on additional securities can finally be maintained only by the rates charged by the underlying operating companies. It is admitted, of course, that economies of large scale production, the increased efficiencies claimed for the holding companies through their engineering and supervising services, etc., and improvements in the industry itself might make it possible to maintain these increased returns on increased capital values without increasing rates. But when it is shown, as it is abundantly in the evidence submitted, that the services of the holding companies have been rendered at enormous profit to the companies rendering them, and when due allowance is made for the improvements and reduction in cost of production in the industry, there can be no doubt that these appreciations of capital do and must affect the rates. To the lay mind, such an effect upon the rates seems inevitable. And the evidence submitted here and there through the hearings seems to substantiate that view.

Accountants See the Relation

Later on, in discussing the make-up of operating expenses and capital charges of the American Gas and Electric Company, this question of the effect that such charges have upon rates comes up. In this connection, Judge Healy asks:

“Whichever way they (servicing and capital charges) are handled, they have an effect on the rates charged to the customers of the operating companies?

“Answer: In this way, that anything that is charged to fixed capital is in the plant, and anything that is charged by the operating company as operating expense is deducted from the gross revenues from utility service before arriving at the net operating revenue, which is one of the principal steps in arriving at the return on property." [Pt. 22, pp. 161-62.]

So then the inflation of the capital account, by whatever method it is accomplished, does have an effect upon the rates charged to. the customers.

Speaking of the servicing fee charged by holding companies to their subsidiaries, Judge Healy asked how this would affect rates. In reply, John H. Bickley, testifying in behalf of the Commission, stated:

“It affects rates in that the rate schedules under which a utility operates must yield sufficient revenue to pay, first, the operating expenses, so that anything that goes into operating expenses has a direct bearing upon rates.

“Question: How may rates be affected if the servicing charges are made against fixed capital?

“Answer: When the servicing charges are carried to the fixed capital accounts, they become a part of the original cost, or the book cost of the property, and in so far as book cost is a factor in the valuation of property, these servicing fees, as a part of book cost, enter the picture.” [Pts. 23 & 24, p. 147.]

Carl H. Depue, one of the Commission's accountants, in reporting upon the Carolina Power and Light Company, and referring especially to an inflation of $19,100,000 in the fixed capital accounts of the company, referred to certain methods which he stated were indefensible, mentioning, among others, the "failure to segregate such inflation and intangibles from those items of fixed capital which properly constitute the company's rate base, and by such failure handicap if not prevent the state commission from intelligently determining whether or not the prevailing rates are proper." [Pt. 26, p. 43.]

Here at least is a recognition of the fact that these inflations do manage to get into the rate base and thus affect rates.

Admitted—"What Harm Is Done?"

Again when President Arkwright of the Georgia Power Company, and former president of the National Electric Light Association, was on the stand discussing these matters, judge Healy pressed him with some rather searching questions upon this subject. In this cross-examination Mr. Arkwright admitted that inflations were made the basis for the issuance of new stock and asked: "Yes; but what harm is done?"

To this Judge Healy replied: "What harm is done? The harm that is done is this: In rate cases the valuation, of course, at which that property is sold, whether it is the reproduction value or not, has its influence in the making of rates. (Our italics.) It has this further difficulty, that that stock that is issued in payment for the property is sold to the public, and then at the same time your people put into pamphlets that go into schools and public libraries and other places that this business is not conducted for a profit as other businesses are, whereas you make a profit in that change and in that increase in value, which gets capitalized now and again by some such means as I have pointed out." [Pts. 18 & 19, p. 175.]

Mr. Arkwright tried to dismiss this contention of Judge Healy by saying that "the rise in value of property merely represents in this day and time the shrinkage in the value of the dollar-like you applying German marks to it, or anything else." To which Commissioner McCulloch replied: "That is like saying there is no such thing as darkness; it is only the absence of light." [Pts. 18 & 19, p. 175.]

Attitude of Regulatory Commissions

Some light is thrown upon this subject of the relation of inflations to rates in the recent actions and orders of some of the state utility commissions. For example, the Commerce Commission of Minnesota, in refusing to allow The Foshay Company to sell certain stocks which were based upon inflated values, gave as one of the reasons for the denial that the values of the property and stock were "not sufficient to support the proposed capitalization," and further "that the earnings of the respective operating companies are not such as to justify the proposed capitalization." [Pts. 18 & 19, p. 175.]

In other words, the Minnesota Commerce Commission recognized the fact that the returns on an inflated capital account depend upon the earnings of the subsidiary operating companies; and further that if the inflation is too great, the earnings of the subsidiary companies will not support it. On that ground the Commission denied the company the authority to issue the stock which was only one of the usual practices of this company, as of all the rest, in inflating their capital account. Now, if the inflation depends upon the earnings of the subsidiaries, then, of course, the earnings of the subsidiaries are affected in that manner by the inflations. Thus to this extent at least the Minnesota Commission seemed to appreciate the fact that inflations do affect rates because the earnings of the subsidiaries come from the rates charged for the services.

The Commission denied the application on the ground that the sale of the proposed securities "would be likely to work a fraud upon the purchasers thereof." [ See text of Commission’s order in Pt. 25, pp. 359-60 of Federal Trade commission’s hearings.] Obviously, the inflation would . work a fraud upon the purchasers because they would not get the expected and promised returns upon their investments. And they would not get these returns because the earnings of the subsidiaries would not be sufficient to pay them. And the earnings of the subsidiaries can come only from the rates charged for the services rendered. So then the whole thing comes back to the rates. And in this way inflations do affect rates.

Similar actions have been taken by other state commissions in matters of this kind, notably by the Massachusetts Commission, in their denial of the petition of the Boston Edison Company for permission to "split their stocks," which is only another form of inflation.

Thus it would seem that there is a growing realization of the fact, vaguely perceived at first, but being more clearly defined and recognized, that the inflations of capital accounts do and must result in increased rates.

Chapter 21—Rates

Are They Lower Under Private Than Under Public Ownership?

The hearings of the Federal Trade Commission shed new light on the question of comparative rates.

The utility companies claim that electric light and power rates are lower on the average under private ownership and operation than they are under municipal. And they prove their claim and base their proof upon the United States Census reports.

But the new light on the subject that the evidence of the Federal Trade Commission brings out is the fact that while the average rates are lower under private than under municipal ownership, each type of service costs more. Or, to put it in another way, the great bulk of the current sold by the utility companies is at wholesale rates with a comparatively small portion of retail or domestic service, whereas with the municipal plants the situation is exactly reversed, the bulk of the service being retail or domestic and a relatively small proportion being wholesale or industrial. With these facts in mind the whole question of comparative rates appears in an entirely different light. Let us examine the evidence on these matters.

Cost of Service the Test

The final test of the economy and efficiency of utility service, it is claimed, is in the rates charged or the cost of the service to the public. On this ground the utilities claim they have demonstrated finally and conclusively the superiority of private ownership and operation over municipal or public. And they have filled the records of the hearings of the Federal Trade Commission with their literature and other evidence in support of this contention.

Private Rates Lower on the Average

The argument runs as follows:

“A comprehensive study of electric rates in the United States, as disclosed by census figures, are presented in the 1928 annual report of the rate research committee of the National Electric Light Association.

“In the 20-year period from 1902 to 1922 the average unit revenue on electric energy generated by all plants in the United States excluding taxes, decreased from 3.25 cents per kilowatt hour to 2.35 cents, or 28 per cent. Average unit revenue of private plants declined from 3.23 cents per kilowatt hour in 1902 to 2.25 cents in 1922, a decrease of 30 per cent. Average unit revenue of municipal plants increased from 3.49 cents per kilowatt hour in 1902 to 4.42 cents in 1922, or 26 per cent. The report sets forth the complete data from. the census reports on which all data therein are based. The electrical industry census for 1922 is the latest issued; that for 1927 may not be expected until 1930.” [Exh. Pts. 10-16, p. 837. For complete text of report see Exh. Pt. 1, pp. 148-91.]

The argument further reads:

“An exhaustive bibliography on electric rate making, with special reference to the analysis of costs and the classification of customers is included in the report.

“The following items of interest have been digested from the committee's report, with corresponding page references:

“In 1922, according to the census of that year, private electric plants collected from light and power customers an average of 2.8434 cents per kilowatt hour, excluding taxes, and the municipal plants collected 4.1137 cents per kilowatt hour, or 44 per cent more per unit.”

“Average revenue per kilowatt hour collected by municipal plants for light, excluding taxes, was 2 per cent less in 1922 than that of private plants and for power purposes was 20 per cent more. Municipal average unit revenue on all sales was 87 per cent higher than that of private plants.” (Exh. Pts. 10-16, p. 837; see also Exh. Pt. 1, p. 153.]

It is true that in this report o£ the Rate Research Committee a study is made of the "average revenues of different classes of service" and in this there is at least some recognition of the different types of service. [Exh. Pt. 1, p. 153.] In this connection, however, it appears that even on the basis of "the average unit revenue of the municipal plants from energy sold for light," the municipal rates were 2 per cent less than that of the private plants. On the other hand, the report states that "from energy sold for power purposes the municipal charges were 20 per cent more." This would be precisely what would be expected in view of the fact that, as stated above, the greater proportion of the current sold by the private companies is for power purposes, and the further fact, as shown by the evidence, that of the current sold for power purposes the larger proportion in that class is in the larger quantities sold in the larger cities to the larger industries and power users and is, therefore, on the lower rate schedule. This again would tend to bring down the average charge even for power purposes by the private companies as compared to the municipal.

The report gives many details of comparison between municipal and private plants in a number of different states, and also comparisons between different kinds of service rendered. A special comparison is made of rates charged domestic consumers by 24 of the largest municipal plants in the United States with those charged by private companies in 24 large cities on the basis of net monthly .bills, excluding taxes. According to this report on this basis, the comparisons are given as follows:

Private Plants Municipal Plants

30 Kilowatt hours $1.75 $1.79

40 Kilowatt hours $2.14 $2.30

60 Kilowatt hours $2.84 $3.26

90 Kilowatt hours $3.75 $4.58

[Exh. Pts. 10-16,

P. 838.]

The report also makes a special study and comparison of rates in Ontario as compared to private plants in Quebec, and shows that “the Ontario publicly owned system produced 23 per cent less energy, collected from customers 24 per cent more revenue, collected at the rate of 61 per cent more per kilowatt hour, and, excluding taxes, collected at the rate of 75 per cent more per kilowatt hour.” [Idem, p. 838.]

The above quotations from a report made a part of the records of the findings of the Federal Trade Commission are typical of rate comparisons and claims made by the utility corporations which appear constantly throughout their literature and throughout the hearings of the Commission. The contention in substance is that on the basis of the findings of the Untied Sates census, electric light and power rates or the cost of service is less under private ownership and operation than it is under public. In one instance the claim is made that

“The average rate of all municipal plants is more than twice as high as the average rate of all companies reported by the census.” (Italics ours.) [Exh. Pt. 1, p. 359.]

At another place the claim is made that electric rates are always lower under private than under municipal ownership. [Exh. Pt. 1, pp. 364-65. See also Pt. 4, p. 65.]

A study of comparative rates in Massachusetts made by Dr. E. E. Lincoln of Harvard University shows that "the average rate per kilowatt hour was 5.786 cents for the municipal and 5.461 cents for the private plants." [Exh. Pts. 5 & 6, p. 1064.] But here again the comparison is made on the basis of the average cost or rate for all classes of service.

In their Handbook for Speakers, the companies set up a table in which they show that the average revenue per kilowatt hour received by the municipal plants in 1922 for light was 5.3 cents, whereas the revenues received by the private companies were 5.8 cents, which is a little more for the latter, showing that for domestic service, as we have pointed out, the municipal plants have the lower domestic rates. On the other hand, the handbook shows that for power the average revenue received by the municipal plants is 2 cents per kilowatt hour as against 1.8 cents on the part of the companies, which is to be expected?

Georgia Power Company Claims Lowest Rates

Out of innumerable other rate comparisons submitted in the course of the hearings in the literature of the utility companies we may select the case of the Georgia Power Company. This company, in its reports and literature on file with the Federal Trade Commission in Volume 28 of the Commission's reports, claims the lowest electric light and power rates in the country. After setting up a table and various data to show that from 1926 to 1930 there had been rate reductions on the part of the Georgia Power Company that had resulted in a saving of more than $3,500,000, [Pt. 28, pp. 157, 158, 283.] they then set up a table showing the average rate charged by the Georgia Power Company in 1930 as compared with the average rate for the entire country, as follows:

National Average

Georgia Power Co. Year Ended

Jan.-June, 1930 May 31, 1930

Cents Cents

Residential Service 5.77 6.07

Industrial Power 1.173 1.544

Average rates for all classes of service. 1.97 2.59

[Pt. 28,

P. 158.]

Similar Claims of Low Rates by Other Companies

In the report of the accountants of the Alabama Power Company it is stated that residential rates have been reduced by that company from 7.75 cents per kilowatt hour in 1926 to 5.56 cents per kilowatt hour in 1929. On the other hand average revenues from industrial and other electric companies increased nearly one mill and the average revenue from all sales went up from 1.03 cents per kilowatt hour in 1926 to 1.22 cents in 1929. [Pt. 30, pp. 16-17.] Thus it appears that with considerable reduction in rates on one type of service and a slight increase in another, the average revenues were very low, namely, 1.22 cents per kilowatt hour.

The accountant further testified that the changes in rates on the part of the Alabama Power Company in 1928 to 1930 "brought about reduction estimated to reduce the revenues of the company almost $1,000,000." [Pt. 30, p. 17.]

Similar testimony intended to show lower rates under private than under municipal plants were submitted in various states and, of course, is one of the constant claims of the utility companies.

Where and Why Municipal Rates Are Lower

As a matter of fact, it is true, as has been amply proved by the utility corporations in the evidence which they have submitted from time to time, that average rates or revenues for service are lower under private ownership than under municipal. Nevertheless, as the evidence in the hearings of the Commission show, when comparisons are made of each particular kind or class of service under municipal ownership with a similar class or kind of service under private ownership, the rates are lower under municipal than under private. This at first would seem impossible but it is this fact that is almost universally overlooked by those who are studying comparative rates, and is studiously concealed in all of the studies of comparative rates made by the representatives of the private power companies.

Let us cite a few examples:

In the case of the Georgia Power Company, above referred to as having the lowest average rates in the United States, the evidence shows that only 6 per cent of the electric current sold by the company is sold to domestic consumers. Ninety-four (94) per cent of the service goes to industrial concerns and other companies for resale. In other words, the great bulk-more than 90 per cent of the service of this particular company is in the field of low rates and only 6 per cent in the domestic field where rates of necessity are high. And it is important to note that whereas the average rates of this company are very low, as stated above, being on the average for all classes of service 1.97 cents, the domestic rates are high, the average domestic rate being 5.77 cents. And, what is more, when the maximum rate or cost of service for residence purposes is considered, the disparity is still greater. For example, the cost of 15 kilowatt hours of service per month is shown to be 16.67 cents per kilowatt hour. And, according to the records, there are a great many domestic customers who use no more than that amount of current per month, which makes the rates for domestic service very high indeed. Even the domestic customers who use 30 kilowatt hours per month must pay a rate of 8.33 cents per kilowatt hour." [Idem, p. 30.]

The Reason Why

In other words, the reason for the extremely low rates on the average is due to the fact that the company is essentially in the wholesale business, for when it comes to the ultimate consumer, the domestic user, the rates are high on the average and extremely high for those who use only the smaller amounts of service per month.

Similarly with the Alabama Power Company. We are told that "approximately go per cent by volume of its entire sales of energy are to industrial consumers and to other electrical utility corporations," and only 2.37 per cent to domestic service. [Pt. 30, p. 322.] "It is the principal source of power for affiliated electric utilities in the States of Mississippi and Florida and is an important contributor to the supply of affiliated electric utilities in Georgia and Tennessee. It is a subsidiary of Commonwealth and Southern Corporation, a holding company controlling, among others, large electric utilities operating in the six Southern States of Mississippi, Alabama, Florida, Georgia, South Carolina, and Tennessee." [Pt. 30, p. 217.]

In other words, the great bulk of the service of this company, as in the case of the Georgia Company and others to be mentioned, is essentially wholesale. Naturally, therefore, the average rates are very low while the domestic rates are high. The fact that a very high percentage of the sales are at average rates of between 6 and 7 mills "to other utilities" and about one cent to industrial power, with relatively small domestic and commercial sales still further emphasizes this point. Furthermore, the largest city in the State, Birmingham, which is in the great industrial center of the state, is served by another utility corporation, "which, however, purchases its supply of energy at wholesale from the Alabama Power Company. A number of municipal plants do likewise." [Idem, p. 218.] Similarly, the American Gas and Electric Company reports that only 10 per cent of its total sales are to domestic consumers; go per cent are to industrial and power consumers and other utilities." Similarly, the domestic service of the Oklahoma Gas and Electric Company, which is a subsidiary of the Standard Gas and Electric, is only 6.78 per cent of the total service; and in 1929 the domestic service of the Carolina Power and Light Company was only 7 per cent of the total service. [Pt. 26, p. 54.] In contrast to all this, and showing how the situation is exactly reversed under public ownership, the domestic service in the Ontario Hydro Electric Power System constitutes 83.7 per cent of the whole. [Exh. Pt. 1, p. 168.]

Current Sold below Cost Reduces Average

A very interesting and important disclosure comes out of the records at this point. It is the fact that in many cases considerable portions of the power sold by private power companies is sold below cost. In studying the cost of producing, transmitting, and delivering current by the Alabama Power Company the Commission's Engineer Examiner, Judson C. Dickerman, finds that "if 6 per cent were allowed for return, more nearly the actual return earned by the company in 1929, the corresponding kilowatt hour costs (including 6 per cent return on the investment) would be 0.746 cent (supplied to the system) or 0.891 cents (sold) which are more than the revenue received from the sale of nearly go per cent of total kilowatt hours sold." [Pt. 30, pp. 215, 217, 218.] In other words, a very large proportion of the current is sold below cost. About 40 per cent of it is sold to industrial users, and another 37 per cent "to other utilities." And these portions, together with certain other smaller amounts, are sold at rates so low that they are below cost. The loss on these sales is made up, of course, by the much higher rates on the other classes of service which constitute relatively small proportions of the total sales.

The point here is that by reason of these very low rates to go per cent of the service, the average rate will be low even if rates on the remaining10per cent are very high. Thus by selling go per cent of its current at or even below cost to industrial users and "other utilities," including their own subsidiaries, this company shows a very low average rate, while its charges to the ultimate consumer are still very high.

A similar study of the cost of production and revenues for current sold by the Georgia Power Company reveals much the same situation. Over 72 per cent of the total current sold is sold below the average cost of production. Naturally, these low rates with which industrial users and other utility companies are favored bring down the average rate to a very low point while the rates to the other and ultimate consumer are still high.

By leaving these facts out of the calculation and basing their comparisons on "averages" the utilities have made it appear that rates are higher under municipal than under private ownership.

Municipal Plants in Smaller Places with Smaller Volume

In considering the matter of comparative rates, it is also important to bear in mind that the municipal plants in the great majority of cases are in the smaller places and, therefore, are producing in smaller volume. The utility companies never tire of pointing out the fact that the municipal plants produce only 5 per cent or less of the total amount of current in the country. [Exh. Pts. 5 & 6, p. 1066, and frequently throughout the hearings.] It is a well-known fact that the cost of producing electric current goes down very rapidly as the volume increases. And this is one of the great advantages which is claimed by the large utility companies and especially their great super-power organizations. On this ground alone the private companies have a great advantage over the municipal, which should be considered in studying comparative rates. But further than that, since the municipal plants are in the great majority of cases in the smaller places, they have comparatively little of the industrial or power loads in which the cost of production is still further reduced and in which, therefore, the rates should be still lower. Even where the municipal plants may have some industrial load, they are still in the comparatively lower volumes and, therefore, could not be expected to have as low rates. Moreover, the private power companies, as the evidence shows, sell a considerable proportion of their current to "other companies," in some cases subsidiaries of their own companies. And yet these sales, at extremely low rates, are included in making up the average rates charged by the companies, and thus enable them to make a still further lower average rate showing. All of these facts are brought out in the evidence presented in the hearings of the Commission but they are not considered in the studies of comparisons made.

As shown previously in this chapter we see that in the case of the Alabama Power Company, as in that of the Georgia Power Company, while the average for all classes of service is very low, the rate for residence service is high, and especially for the smallest consumers very high. This again emphasizes the point made above that comparisons of rates on the basis of the average for all classes of service is very misleading and does not fairly represent the situation.

Legitimate Comparisons Cited

This is further emphasized by the fact that wherever in the hearings comparisons of rates of the various classes of service of the municipal plants are made, with rates charged for the same class of service by private plants, the results give quite a different picture.

Springfield, Illinois, Rates. Mr. MacGregor of the Illinois Committee on Public Utility Information made a study of the report of the Springfield, Illinois, City Water, Light and Power Department for the year ended February 28, 1927. In that report comparisons are made between the rates charged by the Springfield municipal plant on the basis of the various classes of service rendered, ranging from 3o kilowatt hours up to a heavy power load. On this basis the municipal rates were lower in every case under municipal ownership than under private—and in most cases considerably lower. Mr. MacGregor undertook to check up on this report and to make it appear that there were discrepancies in the comparisons and thus explain away the results. Mr. MacGregor's check-up came to the attention of Mr. C. A. Wait, Assistant to the President of the Illinois Power and Light Corporation at Decatur, Illinois, one of the cities where the rates were considerably higher than the Springfield rate, and Mr. Wait wrote Mr. MacGregor indicating that his analysis would not stand up. He said: "We must confess the cold fact in central Illinois that the most energetically operated and most energetically ‘publicity-cated' municipal plant gives rates which are far below standard basis of operation." And then he adds: "The less said on the high rates of municipal plants, within the territory conversant with the Springfield situation, at least, the better." [Exh. Pt. 2, pp. 483-84.]

Ponca City, Oklahoma, Rates. A report to the effect that "with the citizens paying no larger rates than are paid elsewhere in the . state, and in some instances less rates," the Ponca City, Oklahoma municipal plant was making profits of over $100,000 a year and practically tax free, appeared in the Christian Science Monitor in Boston January 19, 1927, and attracted the attention of S. T. MacQuarrie, Director of the New England Bureau of Public Service Information, who wrote to Mr. E. F. McKay, Manager of the Oklahoma Utilities Association at Oklahoma City, wanting to know "why you permit a municipal light plant to make so much money." In reply, Mr. McKay wrote back: "The sad part of this story is that it is true." (Italics ours.) [Exh. Pts. 5 & 6, pp. 92-93.]

Rates in Hannibal and Chillicothe, Missouri. The low rates of the municipally owned plants in Missouri seem to have baffled the power company men in that state. Speaking of the municipally owned plants at Hannibal and Chillicothe, Missouri, Mr. J. B. Sheridan, Manager of the Missouri Committee on Public Utility Information, writing to Percy Markham of the Consumers Public Service Company at Brookfield, Missouri, said: "Such municipal plants make rates which are so low that they puzzle men in that industry. If any person desired to embarrass the privately owned industry in Missouri, he would need but to ask when the cities of Hannibal and Chillicothe can sell energy for domestic purposes at 7 ½ cents top, why is it that the privately owned plants at Brookfield must charge 15 cents, and the privately owned plants at Moberly, Kirksville, Mexico, from 12 ½ to 13 ½ cents?" [Exh. Pts. 5 & 6, p. 400.] Here again on the testimony of the utility men themselves the domestic rates, when compared as between municipal and private plants, are very much lower with the municipal than the private. Writing to another utility man, Mr. Sheridan a little later urged that the electric industry in Missouri should have some special studies made of this matter, because, as he said, "the Chillicothe, Hannibal, Marshall, and maybe some other municipal plants appear to sell energy at rates which appear to us to be so low as to be inexplicable on the basis of the customer paying all costs of service." [Exh. Pts. 5 & 6, p. 437.]

Again replying to Mr. C. E. Brenton, General Manager Southeast Missouri Division, who was inquiring for some information that would show that the Seattle and Pasadena municipal plants had been unsuccessful, Mr. Sheridan replied: "I regret to inform you that to date the Seattle and Pasadena and other municipal plants report nothing but progress and profit.” [Idem, p. 402.] In the same letter he goes on to say: "I have some of our best district managers investigating some of these municipal plants for us, and I can not get much out of their reports. In places where privately owned electric companies are charging 13 and 14 cents per kilowatt hour, first step,, the neighboring municipal plants are selling at 7 ½ cents, first step."

In this connection, it is interesting to note that since the above testimony was taken the municipal plants in Missouri, such as Hannibal, Fulton, Columbia, etc., have still further reduced their rates. Fulton has very recently reduced its rates to the level of the Columbia rates, which are nearly the same as those in Hannibal, which are so low as to seem "inexplicable" to the power company witnesses.

Marshall, Missouri, Rates. But perhaps the most extensive and conclusive comparison of rates on the basis of the various types of service from 10 kilowatt hours per month up to 1,000 per month appears in connection with the reports on Marshall, Missouri. An extended table of comparison appears on this basis on page 414 and 415, Exh. Pts. 5 and 6 of the Commission's reports, the substance of which is as follows:

“The average net cost of 10 kilowatt hours in the 34 cities served by corporations is $1.25 and in the 16 cities served by municipal plants is 96 cents, or a difference of 29 cents in favor of the municipal plants.

“The average net cost of 20 kilowatt hours furnished by corporation plants is $2.48 and by city plants, is $1.82, a difference of 66 cents in favor of the city owned plants.

“The average net cost of 30 kilowatt hours furnished by companies is $3.69 and the same amount of service furnished by cities is $2.66, a difference in favor of the cities of $1.03.

“The average net cost of 50 kilowatt hours furnished by corporately owned plants is $5.95 and municipally owned plants is $4.23, a difference of $1.72 in favor of the municipal plants.

“The average net cost of 100 kilowatt hours furnished by corporations is $11.03 and by city-owned plants is $7.72, a difference of $3.31 in favor of the city plants.

“The average net cost of 1,000 kilowatt hours furnished by corporation plants is $84.64, the average for this amount of service furnished by the 16 municipal plants is $59.74. The difference in favor of the municipal plants is $24.90.

Marshall is below the general average for all 50 cities, as follows: On 1o kilowatt hours, 116 cents; 20 kilowatt hours, 37 cents; 30 kilowatt hours, 56 cents; 50 kilowatt hours, 80 cents; 100 kilowatt hours, 87 cents; and 1,000 kilowatt hours, $6.58. Marshall is below the average cost of service in the 34 cities having corporation plants, as follows: On 10 kilowatt hours, 25 cents; 20 kilowatt hours, 58 cents; 3o kilowatt hours, 89 cents; 50 kilowatt hours, $1.35; 100 kilowatt hours, $1.93; and 1,000 kilowatt hours, $14.54.

Several of the cities listed have both a residence and a business lighting rate. The cost of all service is figured herein by the residence rate, except for 1,000 kilowatt hours which is figured on the business rate.

The current, in a number of the cities listed, is generated by water power. These cities should have a cheaper rate than the cities obtaining current generated by steam.

The Kansas City Power and Light Company furnishes service in Blackburn, Malta Bend, Miami, Carrollton, Sweet Springs, Glasgow, and Brunswick. This company also furnishes current to the local distributing companies in Lexington, Liberty, Norborne, Richmond, and Excelsior Springs. The cost of service in all of these cities is high.

We invite comparison, especially with corporately owned plants, and trust that this showing will be of interest to all.

James A. Walker,

Paul Groeschel,

William F. Fisher,

Fred Fair,

Board of Public Works.

Pts. 5 & 6, pp. 415-16.

This comparison on the basis of the different classes of service rendered shows as in other cases that for each particular kind of service-rather than the average of all classes of service-the rates are lower under municipal than under private ownership.

Holland, Michigan, Rates. Another municipal plant whose low rates when compared on the basis of the types of service rendered seems to have baffled the utility men was that of Holland, Michigan. Mr. F. A. Newton of Hodenpyl, Hardy & Company of Jackson, Michigan, writing to Mr. Al Fischer of the Public Utilities Information Bureau at Ann Arbor, Michigan, says: "The less said about Holland, the better. I have looked into that thing time and time again, and so have others. There are no `bugs' in it. It is a successful municipally owned plant and there is no use of denying the fact:' In the same letter he speaks of the Lansing municipal plant and says that he thinks "they are `due for a blowup over there' before many years go by, but at present anything anybody gets will be denied immediately and you can not prove a thing. I know because we have tried time and time again. There have been audits and audits, and examination after examination by different people but no one gets any place." (Italics ours.) [Exh. Pts. 5 & 6, p. 834.]

Ontario Rates. Of course, the question of comparative rates under municipal and private ownership comes up in connection with the Ontario rates more frequently and more vitally than in any other instance and here the utility companies have made their most extensive and persistent efforts to show that rates under private ownership are lower than under public. Innumerable comparisons, studies, and reports have been made by the companies in their efforts to establish this point. But here as in other cases the comparisons are made on the basis of the average rates and not on the basis of a comparison of the rates for the various classes of service rendered. In other words, in the case of Ontario, as in the case of other municipal or publicly owned projects, the comparisons that show lower rates under private than public ownership are in instances where the bulk of the service is wholesale compared with instances where the bulk of the service, or at least a very much larger proportion is retail.

In this connection the record shows that certain statements were made by George L. Record, President of the Anti-Monopoly League, to the effect that "in 1925 the average rate charged domestic consumers of electricity in the United States on 25,000,000,000 kilowatt-hours they consumed was 7.9 cents per kilowatt hour as compared with 2 cents in Ontario under the publicly owned plant." Mr. W. M. Carpenter, Research Statistician of the National Electric Light Association, replying to Mr. J. B. Sheridan on this matter, claimed that Mr. Record's figures were wild. However, according to Mr. Carpenter, the average domestic rate charged in the United States in 1926 was a shade under 7 cents per kilowatt hour, whereas "during the same year the average revenue received by the Hydro Electric Power Commission of Ontario for domestic service was 1.82 cents. Insofar, therefore, as his statement concerns Ontario, it is true. It is also trite, however, that the greater part of the energy sold to the Canadian residents is sold at a loss, the difference being made up from the commercial and power consumers." (Italics ours.) [This claim, which is persistently set forth by the utility companies, is denied and disproved by Professor Mosher and his Associates of the Syracuse University, who made an exhaustive study of this subject and published their findings in a book entitled Electrical Utilities—The Crisis in Public Control, published by Harper and Brothers. See especially pages 232-67.] "In Toronto there is a service charge of 3 cents for every 100 square feet of premises per month, with a minimum bill of 75 cents net. We can not dispute the Ontario rate except to point out the above." [Exh. Pts. 5 & 6, p. 448.]

A little later, Mr. Sheridan, writing to Mr. Carpenter on this point, says: "I apprehend that when Senator Norris, Mr. Record, and others speak of electricity being sold in Ontario at an average cost of 1.82 cents to the domestic consumer, they do not include service charges. Please tell me if I am right in such assumption." se To which Mr. Carpenter must have replied to the effect that the 1.82 cent rate in Ontario includes the service and other charges, as well as the energy charged. At any rate, under date of March 13, Mr. Sheridan writes to Mr. Carpenter, thanking him for "exact information on the cost of energy supplied to domestic consumers by the Hydro Electric Power Commission of Ontario," and adds "As I get it, the average cost of 1.82 cents per kilowatt hour covers everything, service, demand customers, and all other charges as well as the energy charge?" (Italics ours.) "If I am in error in this assumption, may I request that you set me right." [Exh. Pts. 5 & 6, p. 453.]

In this connection, it is interesting to note that when Mr. Sheridan and the utility companies in the middle west generally were so much disturbed over the rate comparisons between the Ontario system and the private utility systems in the United States, made by Carl D. Thompson in his Chautauqua lectures in 1924, Mr. Sheridan wrote to Alfred Fischer, Director of the Michigan Committee on Public Utility Information, in an effort to disprove the comparisons, particularly with reference to the rates in Detroit and nearby Ontario towns. In reply to Mr. Sheridan's inquiries, Mr. Fischer wrote:

“Previous attempts have been made to set up a comparison between electric rates in Detroit and Ontario towns. In all instances the results have been unfortunate. (Italics ours.) I referred your request to Detroit and am quoting herewith the reply which I received. I can assure you that if any constructive objective was to be obtained by a comparative study, the Detroit Edison people would have been only too glad to prepare this for us. Permit me to suggest that you follow the recommendation submitted from Detroit. [Idem, p. 133.]

The recommendation from Detroit was from Harry A. Snow, Assistant Controller of the Detroit Edison Company. He wrote under date of July 15, 1924, saying:

“With reference to the comparative rates for electric service in Detroit and Windsor. Superficial comparisons of rates are dangerous things and even an exhaustive study can not but be open to pointed criticism such as was leveled at the Murray and Flood report on the. rates charged by the Hydro Commission of Canada. This Murray and Flood report has been published in several places and was sponsored by the National Electric Light Association. I suggest that you obtain and consult this report.

“I am also endeavoring to obtain the latest information on rates charged for electric service in Windsor and I will forward this to you without comment in a day or two together with our schedule of rates. Please let me warn you again that rate comparisons are dangerous.” (Our italics.) [Exh. Pts. 5 & 6, p. 133.]

In other words, in the efforts to disprove the comparison of rates charged under municipal and private ownership in Ontario and the United States, respectively, on the basis of the various classes of service, the representatives of the private companies were unsuccessful and were warned that such comparisons were dangerous and better not be undertaken.

Perhaps the most complete and conclusive study of this subject of comparative rates, based on the different classes of service rather than on the average of all kinds of service compared, and at the same time the clearest explanation of the fallacy of basing comparisons on the average charged for all classes of service, is that made by Professor Mosher and his Associates of the Syracuse University, which may be found in his book on Electrical Utilities—The Crisis in Public Control, published by Harper and Brothers. [See especially pp. 232-67.]

Chapter 22—Prodigious Earnings

“Never in the history of the human race has the progress of mankind paid such returns."

So reads the enthusiastic report of the Customer Ownership Committee of the National Electric Light Association for 1924 and 1925. [Exh. Pt. 1, p. 208.]

Significant words. Earnings are prodigious. And they come out of "the progress of humanity." And this according to the testimony of the official representatives of the utilities.

Here we are at the very heart of the whole question. For in the final analysis it comes down to this- Are the charges of the utility companies such as to give a fair and reasonable return to the capital invested in the service rendered? And this in turn can be determined only by an analysis of the actual earnings upon the actual capital invested and the service rendered. Upon these points the examinations of the Federal Trade Commission have been painstaking, searching, and exhaustive.

Many Kinds of Income

In studying the earnings of these utility corporations it is important to bear in mind that there. are many and varied sources of income. There is, first of all, of course, the returns from the rates charged for the services rendered to the public. This is the foundation upon which the whole financial structure of the system rests. But besides the returns from rates the utilities have an even greater source of income in the sale of securities to the public. This is supposed to be merely a source of supply for capital investment, but we shall see presently how, in the development of elaborate and far flung systems for the sale of "customer ownership" securities and campaigns for the sale of securities through holding companies, this has become a very important source of profit and, therefore, of earnings and income.

Then there are earnings and profits on engineering and supervising fees by the holding companies; profits on reorganizations, on construction, accounting, on bank deposits, interests on call loans—earnings and profits too numerous to mention and sometimes too involved to follow.

Earnings on Actual Investment

The Commission was concerned, first of all, throughout the hearings in getting at the earnings or returns on actual investment. There are a number of different sources of earnings and profits which we shall discuss later, but the ultimate source of all earnings, of course, is the rates charged for services rendered. And whether these rates are reasonable can best be judged by determining as nearly as may be what are the returns upon the actual investments made.

We have seen elsewhere how the inflation of capital accounts has been used to cover up and conceal the actual earnings on actual investments, and how they have been deliberately and persistently used to make excessive earnings appear "reasonable." The investigations of the economists and accountants of the Commission have dug down under these inflations in company after company, and endeavored to get at the actual investment, so as to determine this very vital and fundamental question of earnings. Their findings are extremely interesting and important, and in many cases almost amazing.

Of course, the companies always try to show, as they present the matter to the public and for rate-making purposes to commission, courts, and public bodies, that they are earning a very normal and reasonable return, frequently considerably below the . standard rate of 7 or 8 per cent. But what the public wants to know, and what the United States Senate wants to know, and what the investigations of the Commission were undertaken to find out was whether these apparently "fair and reasonable" returns were returns on actual or on fictitious and inflated values. We shall see what the evidence reveals.

Findings of the Earlier Investigation

In the earlier report of the Federal Trade Commission [Sen. Doc. No. 213, 68^th Congress, 2^nd Session.] we are told how, by concentrating the earnings of a company upon the common stock, and then by the device of pyramiding holding companies upon the operating companies, sometimes 2, 3, and even 5 deep, the earnings upon the actual original investment have become 18 per cent, 43 per cent, and even as much as 183 per cent.

The report goes on at some length to explain just how this is worked out. Indeed the purpose in forming the holding company is to accomplish this very result. To quote the exact words of the Commission:

“Another and an evident motive for the formation of holding companies, particularly successive layers of holding companies, is the desire of the promoters to obtain out of the 7 or 8 per cent that public authorities generally permit the local operating companies to make on the total investment in those utilities as large a rate of return as possible on the funds personally contributed by the promoters. It is reckoned that if $1 of common stock money can be obtained, another dollar can be obtained by the sale of preferred stock and that, having accomplished this, two or three additional dollars can be obtained by the sale of mortgage bonds or of debentures.” [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, p. 173.]

How it Works

And then the report goes on to explain in detail just how the scheme is worked. It says:

“The preferred stock's participation in profits is limited, usually to 6 or 7 per cent cumulative dividends, and it does not always participate in the management. The bonds or debentures, of course, participate in profits only to the extent of interest at the special rate. Suppose then there are 100 local power companies. the aggregate total investment in which is $1,000,000,000, each owned and operated by a separate corporation. The total investment might have been raised by the sale in the aggregate of $200,000,000 of common stock, $200,000,000 of 7 per cent cumulative preferred stock, and $600,000,000 of 6 per cent bonds. If these companies are permitted by public authorities to earn 8 per cent on the total investment, or $80,000,000, of this, $36,000,000 would be required to pay the bond interest and $14,000,000 as dividends on the preferred stock. This leaves $30,000,000 for the common stockholders, either to draw as dividends or to use in further expansion of the business. This amounts to 15 per cent on the common stock investment and has been made possible out of the 8 per cent earned on the total investment only because the major portion of the total invested funds was furnished by two classes of investors whose per cent of return is limited. [Sen. Doc. No. 231, 68^th Congress, 2^nd Session, p. 173.]

How 40 to 100 per Cent Is Earned

Suppose, however, the particular group of promoters would like to make more than 15 per cent from these power company investments, and for this purpose forms a holding company with a total capital of $200,000,000 consisting of $100,000,000 of 6 per cent collateral trust bonds or 6 per cent debentures and $50,000,000 of 7 per cent cumulative preferred stock and $50,000,000 of common stock. This group may be able to furnish the common stock money and persuade others to furnish the bond and preferred stock money, or, furnishing the common stock money, they may persuade the holders of the common stock of the local operating companies to exchange those stocks for this cash, together with the collateral trust bonds and preferred stocks. [The following footnote appears at the bottom of page 173, Sen. Doc. No. 213: “The promoting group might also borrow from the banks, purchase the desired common stocks, sell them to the holding company at a considerable profit, receiving payment in its securities, retain the common stocks, and sell the bonds and preferred stocks for enough cash to pay off the bank loans and realize a cash profit.”] Now the $30,000,000 earned by the local operating companies on their common stock equities would accrue to the holding company. Out of it $6,000,000 would go as interest on its collateral trust bonds and $3,500,000 would go as preferred dividends. This would leave $20,500,000 for the group of promoters who hold the common stock of the holding company, which amounts to 41 per cent on its investment of $50,000,000.

In both cases the per cent of profit on the common stock investment includes only that received from the profits of the operating companies. Some profits are also obtained by holding groups from fees charged for different kinds of services. [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, pp. 173-174.]

How 138 per Cent May Be Earned

Thus the mystery of the means by which the power companies, through concentrating control by way of the holding companies, enable certain of their stockholders to draw not 6 but 15, and even as high as 41 per cent, is made clear. But the earnings of these companies by this device are even greater than 41 per cent. They may reach 50 per cent, 60 per cent, 100 per cent, and even more, as we shall show by references to the hearings of the present Commission. The earlier report, in explaining how these higher rates of interest may be earned, goes on to say:

“This group, however, might not be satisfied with this arrangement, or it might not have as much as $50,000,000 to invest. Suppose, therefore, that instead of providing 1 holding company it provides Io, dividing the local operating companies among them, the aggregate capital of the10companies being the same as in the preceding case and of the same proportional structure in common and preferred stocks and in bonds. Now suppose that the promoters organize a super-holding company with a total capital of $50,000,000, consisting of $25,000,000 of 6 per cent bonds, $12,500,000 of 7 per cent cumulative preferred stock, and $12,500,000 of common stock. The promoters furnish the common stock money, thereby retaining for themselves the entire voting power in the whole pyramid of companies and constituting themselves the ultimate beneficiaries of the group's earning power, and sell the other securities to the investing public. The $20,500,000 of income left after paying interest on the bonds and dividends on the preferred stocks of the operating companies and of the sublayer of holding companies accrues to this super-holding company. Out of it $1,500,000 is required for interest on the super-holding company's bonds and $1,750,000 for dividends on its preferred stock. This leaves $17,250,000 for the common stockholders whose investment was only $12,500,000, or 138 per cent per year.” [Sen. Doc. No. 213, 68^th Congress, 2^nd Session, p. 174.]

Here then is the way it works. This reveals the trade secret of extortionate rates. And it explains the mystery of how, while earning only "a fair return" Of 7 or 8 per cent, or even less, "upon a fair valuation," these corporations in some cases pile up prodigious profits of 15, 50, 100 per cent, and in some instances even more.

Instances of Enormous Earnings

Having explained the modus operandi by which the companies are able to build up their earnings in some instances to enormous proportions, the earlier report of the Commission cites numerous instances. Thus the Cities Service Company of the Doherty group derived an income on common stock of 15.24 per cent on the average amount of common stock outstanding in 1925. Like rates on the common stock in 1924 were 21.14 per cent; in 1923, 18.28; in 1922, 14.88; In 1921, 13.04, and in 1920, 43.09 per cent. [Sen. Doc. No. 213, p. 208.]

Similarly, the Electric Bond and Share Company, during the 19 years that it was under the control of the General Electric, earned the following rates of return, according to the records: 11.8 per cent in 1922; 17.3 in 1923; 15.1 in 1924; and nearly 19.4 per cent in 1925. "After deducting $1,500,000 for preferred dividends, the remaining earnings in 1925 were sufficient to have paid 43 per cent dividend to the common stockholder." (Our italics.) [Sen. Doc. No. 213, p 76.]

On page 45 of this earlier document of the Federal Trade Commission, No. 213, appears a table giving "rates of earnings of specified holding company groups on total investment and on common stock equity of the holding company, as shown in published consolidated balance sheets and income statements, 1924 and 1925." Taking the latter figures we find that the Electric Bond and Share Company earned 15.8 per cent on total investment in 1925 and 40.5 per cent on common stock equity in that year. The Middle West Utilities Company earned 12.37 per cent on total investment in 1925 and 21.46 per cent on common stock equity that year; the Standard Gas and Electric Company earned 14.96 per cent on total investment, and 37.58 per cent on common stock equity.

Electric Bond and Share Earnings

We come now to the report of the present hearings of the Commission and find instances of enormous earnings, taking first the Electric Bond and Share Company.

A Return of 27.42 Per Cent. During 1927 the cash dividends earned by the Electric Bond and Share Company on certain securities of the American Power and Light Company were $445,067.25, which gave a return of 27.42 per cent on the original cost. [Pts. 23 & 24, p. 142.] These earnings are on stock investments, of course, and not upon any physical properties.

A 56.24 Per Cent Return. The Electric Bond and Share Company received in cash dividends on securities of the American Gas and Electric Company in 1927, $155,15975 on shares of the American Gas and Electric Company which had cost $275,902.03, which gave a return of 56.24 per cent to the Electric Bond and Share Company on the cost of the stocks. [Pts. 23 & 24, p. 143.]

A Return of 200 Per Cent. In 1928 the Electric Bond and Share Company received a return of $1.00 a share, which was approximately 200 per cent on the original cost. This company paid no dividends on its common stock until that year. [Idem, p. 143.]

Dividends of 63.14 Per Cent. The Electric Bond and Share Company held certain shares of common stock of the National Power and Light Company acquired at a cost of $670,003.49. Dividends were received during 1927 on this stock in the amount of $423,020.20. This was a return of 63.14 per cent on the original cost. [Pts. 23 & 24, p. 143.]

A Return of 2,191 Per Cent. In 1928 the Electric Bond and Share Company held 428,710 shares. of Lehigh Power Securities Corporation. These cost the Electric Bond and Share Company $19,562.50. Now, if the same number of shares were turned over in exchange for National Power and Light Corporation, then there would have been received 428,710 shares of National Power and Light, which in 1928 paid a dividend of $1.00 a share. So that dividends on the equivalent of the old Lehigh Power Securities Corporation stock would have amounted to 428,710 shares on a cost of $19,562.50. That would have yielded a return of around 2,191 per cent. [Stated first on pages 143 and 144 and corrected by the witness on page 146.]

A Return of 3,102.62 Per Cent. The most extreme case that we have found in the matter of earnings on the original cost was that of the holdings of the Electric Bond and Share Company in the Southeastern Power and Light Company. There were 198,400 of these shares which were acquired by the Electric Bond and Share Company between 1924 and 1927 at a cost of $4,795.95. Dividends received on this stock during 1927 amounted to $148,800, and gave a return to the Electric Bond and Share Company of 3,102.62 per cent. [Pts. 23 & 24, p. 143.]

Fortunately, in cases just above cited the records give the total cost of all the stocks mentioned in this group and the total cash dividends, so that the total rate of return on the original cost for these companies, mentioned in the six paragraphs just preceding, amounts to an average rate of return on the original cost of 42.95 per cent. [Pts. 23 & 24, p. 143.]

Earnings on Basis of "Capital Employed"

The returns given in the paragraphs just preceding are, as stated, on the basis of "the original cost" in each case. The records show that the return on investments has been figured also on the basis of "capital employed in the business," to use the exact words of the record-"that is, on the investment in Electric Bond and Share Company." [Idem, p. 145.] On this basis, that is, of "return on capital employed," as computed by the Commission's accountants in Exhibit 59 within the Commission's Exhibit No. 4613, [Idem, p. 712.] has ranged from a minimum of 5.23 per cent in 1906 to a maximum of 19.31 per cent in 1926. The average for the 24 years was 12.69 per cent. The return on the common stock equity after deducting federal taxes from income but before determining the earnings available for common stock averaged 14.80 per cent for the 24 years.

American Power and Light Earnings

Accountants of the Federal Trade Commission have estimated the rate of return to the American Power and Light Company on numerous subsidiaries on the basis of dividends received to the book cost of their securities. [Pts. 23 & 24, pp. 280 ff.; See also Table Exhibit 4627, p. 140-A, being p. 905 of Pts. 23 & 24.] Some of these earnings are, as follows:

On the Kansas Gas and Electric Company, common stock, 3.76 per cent.

Portland Gas and Coke Company, common, 43.3 per cent. Southwestern Power and Light Company, Inc., New York, 51.86 per cent. .

Florida Power and Light Company, 54 per cent.

Minnesota Power and Light Company, 10.6 per cent.

Nebraska Power Company, 96.8 per cent.

Average, 26 per cent.

In 1928 the rates of return on these companies, with the exception of one or two, dropped very heavily. In one or two cases, however, the rate of return in 1928 was higher than in 1927. For example, the Southwestern Power and Light Company earned on this basis in 1928, 113 per cent as against 51.86 per cent in 1927.

The Nebraska Power and Light Company earned practically the same in 1928 as in 1927, namely, 96.45 per cent.

The Minnesota Power and Light Company increased its earnings on this basis in 1928 to 17.71 per cent. Some of the other companies were reduced in their returns slightly, while others were reduced very considerably. The average for 1928 is given as 5.42 per cent for these companies as against an average of 26.4 per cent for 1927. [Pts. 23 & 24, p. 905-7.]

On its actual investments in the common stock of the Southwestern Power and Light Company the American Power and Light Company earned 41.5 per cent in 1924 and 1925, and 51.9 per cent in 1926 and 1927. [Pts. 23 & 24, p. 226.]

On five of its subsidiaries, viz., the Atlantic City Electric Company, Indiana General Service Company, the Ohio Power Company, the Scranton Electric Company, the Wheeling Electric Company, the American Gas and Electric Company earned dividends of from 46 to 65 per cent, depending upon the method of computing the cost of the stock. [Pt. 22, pp. 138, 141, 900-901.]

On its entire capital for the whole period covered by the investigations of the Commission the rate of earnings of the American Gas and Electric Company, the average given is 9.99 per cent or almost 1o per cent. [Idem, p. 630.]

From these typical cases and others reported in the hearings of the Commission it appears that an earning of from 15 to 50 per cent on the actual investment in the utility corporations is quite common and that earnings on that basis frequently reach 60,100, and even higher percentages. Thus it would seem the boast of the companies that never has the progress of mankind paid such returns is not without foundation.

Capitalizing Earnings

It is interesting to note that it was quite a common practice of the utility companies to capitalize their surplus earnings. The statement is made that 76 per cent of the earnings of the American Gas and Electric Company were "plowed in" to the system, that is, were re-invested in the enterprise. [Pt. 22, p. 126.]

Excessive Salaries

Another form of excessive earnings in the utility field is the excessive salaries paid to officials and friends of the companies. Officials of the Marshall, Missouri, Municipal Plant complained of this excessive burden, as we have shown in another chapter. [Exh. Pts. 5 & 6, p. 420. See p. 496.] In the case of the Foshay Company the records show that the officers of the company by control of the board of directors and otherwise were able to pay themselves enormous salaries. W. B. Foshay's average salary for the 13 years of the company's operation was $53,000 a year, and R. J. Rosenfeldt's, $17,100 per year. [Pt. 25, p. 89.] In one year Mr. Foshay received in salary and bonuses $306,000. [Idem.]

Chapter 23—Holding Company Earnings

Services That Pay Big Profits

A very considerable portion of the income to the holding companies comes from various fees and charges made to the subsidiary companies which they control or serve in one way or another. Indeed in some cases the largest source of income is from these various services rendered. [Pts. 23 & 24, p. 654.] And these earnings, of course, are separate from and in addition to the returns which they have from investments in the securities of these subsidiary companies. In other words, these charges are an added burden which the industry has to carry, although, of course, the representatives of the companies claim that these services are a great advantage to the subsidiary companies, and that these subsidiary companies secured these services at a much lower total cost than they would otherwise have to pay. Be that as it may, the profits earned by the holding companies on these various services constitute another and a very heavy additional charge against the industry.

In some cases the evidence shows, or at least the claim is made, that these charges are based strictly on what the service costs the holding company. In other cases, however, it is admitted that the holding companies have charged for these services a very heavy profit in excess of what it cost the holding company to render, the service.

The Various Kinds of Holding Company Service

There are a number of different kinds of services which the holding companies render to their subsidiary companies. Among them may be mentioned the following: (1) Engineering service; (2) Supervising service; (3) Financing service; (4) Reorganizations and mergers; (5) Stock-selling campaigns.

Holding Company Profits on Services

Engineering. One of the main services of the holding company to the subsidiaries is that of engineering advice and service. And the important thing to note here, in connection with all of these different kinds of services rendered, is that in almost all cases the holding companies charged the subsidiary companies sufficient fees so that the holding companies made a very substantial profit. For example, the American Gas and Electric Company made a profit on the engineering and supervision services rendered to their subsidiaries in 1927 of 71.6 per cent, "which means that of every dollar received from engineering and supervision fees there was about 71 cents profit." In 1928 the profit was still larger, being about "two and eight-tenths times the cost of rendering the service.” [Pt. 22, p. 155.] The profit from these fees amounted in some cases to $1,641,260 per year. [Idem, p. 145.]

During 1927 the largest fee of this kind was paid by the Appalachian Electric Power Company and amounted to $971,060. In that case "this one company paid over $262,000 more than the direct cost of rendering the service to all subsidiaries." (Our italics.) [Idem, p. 146.]

In 1928 the Ohio Power Company paid for these services $903,151, which was $316,392 in excess of the cost of providing the engineering and supervision service for all of the subsidiaries. [Idem, p. 259.]

The engineering and supervision fees for all of the companies in this group from 1917 to 1929 aggregated $16,624,562. The expenses were $4,360,957, leaving a gross profit of $12,263,605, and that profit was about 73.7 per cent. [Pt. 22, p. 147.]

Supervision Fees. Another source of profitable income to the holding companies was from fees charged for supervision work. For example, the total fees paid to the Electric Bond and Share Company by the Electric Light and Power Corporation and its subsidiaries amounted to $1,633,202.30 in 1927. [Pts. 23 & 24, p. 397.] And, besides, the various subsidiaries paid direct to the Electric Bond and Share Company during that year $975,145.85 additional. [Idem, p. 399.]

Profits and Commissions on Sales of Securities

The holding companies frequently conducted selling campaigns for the subsidiaries in handling the sale of their securities. And on these sales very considerable profits and commissions were made.

For example, the total commissions paid by the American Gas and Electric Company to the Bond and Share Company on all the various classes of securities which they handled for their subsidiaries from the organization of the company to December 3,1, 1928, amounted to $658,574. [Pt. 22, pp. 924-25.]

During the years 1924 to 1927, inclusive, the American Gas and Electric Company earned $12,299,904.13 "from the sales of securities," and for the entire period from March 11, 1905, to March 13, 1929, the earnings amounted to $16,401,772.86. [Pts. 23 & 24, p. ,655.]

Coming to the matter of net proceeds from the sale of stocks and bonds, mention may be made of the fact that the Kansas Gas and Electric Company earned net proceeds of $2,418,491.63 in 1910. [Idem, p. 926.] The American Gas and Electric Company made a total profit of approximately $8,000,000 on the sale of common stock which it owned in the American Electric Power Corporation. [Pt. 22, p. 214.] Again, this same company derived a profit of $50,000,000 on the certain securities turned over to the Appalachian Electric Power Company. [Idem, p. 217.] Servicing fees and commissions in some cases amounted to as much as 241 per cent. [Pts. 23 & 24, pp. 124-126.]

The Electric Bond and Share Company acquired certain securities of the Electric Power and Light Corporation in 1927 on which the net profit amounted to $4,703,735-.43. [Pts. 23 & 24, p. 89.]

In the purchase of 76,652 shares of common stock of the United Gas and Electric Corporation, the Electric Bond and Share Company made a net profit of $2,932,238.06. [Pts. 23 & 24, p. 100.]

Profits on Reorganizations

Another service which the holding companies rendered to their subsidiaries was in connection with "reorganizations" of various kinds. On these services also they derived very considerable profits. For example, the Electric Bond and Share Company, in carrying out the reorganization of the Electric Power and Light Corporation, made a profit of $10,835,963.67. The percentage of this profit to the cost of the securities to the Electric Bond and Share Company was 53.2 per cent. [Idem, p. 396.]

The American Electric Power Company made profits amounting in all to about $11,000,000 in handling the sale of a number of subsidiaries. [Pt. 22, p. 214.]

The Electric Bond and Share Company in 1909 entered into an agreement with a certain syndicate for the purpose of raising $2,500,000 to be used for financing the purchase of certain utility properties in Astoria, Oregon, Wichita and Pittsburg, Kansas. The Electric Bond and Share Company as a 6o per cent participant in this syndicate received 60 per cent of the stock profit resulting from this transaction, or $1,621,100 par value of the stock of the American Power and Light Company. [Pts. 23 & 24, p. 78.]

In December, 1925, the National Power and Light Company was reorganized and a new National Power and Light Company formed. The new National Power and Light Company issued its common stock for common stock of the old National Power and Light Company on the basis of 15 shares of the new common stock for each of the old shares. This increased the Electric Bond and Share Company's holdings from 19,408 shares of the old company to 291,120 shares of the new company. In addition to this, the new National Power and Light Company acquired the common stock of the Carolina Power and Light Company by issuing, in effect, 15 shares of its common stock for each share of the Carolina Common stock. Now, the Electric Bond and Share Company owned 15,608 shares of the Carolina Power and Light Company and received therefor 234,120 shares of the common stock of the new National Power and Light Company.

Thus through the conversion of stocks of the old National Power and Light Company and of the Carolina Power and Light Company into common stock of the new National Power and Light Company, the Electric Bond and Share Company acquired 525,240 shares of the common stock of the present National Power and Light Company. Of these shares 13,000 of the old stock, which is equivalent to 195,000 shares of the common stock of the present National Power and Light Company, were acquired as a bonus for services. The value placed on the bonus stock acquired was $260,000. [Pts. 23 & 24, pp. 92-93.]

Promotion Profits

Frequently the holding companies take an active part in promoting the organization of subsidiary companies and receive a handsome compensation for their efforts. For example, the Electric Bond and Share Company participated in the organization of the American Gas and Electric Company, we are told. For this service the Electric Bond and Share Company received 4,700 shares, or $235,000 par value, of the stock as its portion of the promotion profits? [Pts. 23 & 24, p. 72.]

Later, in 1909, the Electric Bond and Share Company received an additional 130 shares as additional stock profits arising from the organization of the American Gas and Electric Company. And, finally, this stock, acquired as "a bonus on stock profits," was "split five shares for one" in 1923. Thus, the 4,831 shares acquired through the participation of the Electric Bond and Share Company in the organization of the American Gas and Electric Company represented 24,155 shares of no par stock in December, 1927, at $50 per share. Thus the promotion profits earned by the Electric Bond and Share Company on this one deal amounted finally to $1,207,750. [Idem, p. 72.]

Other Service Charges

Accounting, Purchasing, Etc. Besides the various kinds of service charges mentioned above, there were still others rendered by the holding companies, among which may be mentioned construction, accounting, bill checking, purchasing, legal, and appraisals. The total of these expenses for the American Gas and Electric Company in 1928 amounted to $1,135,847, "or 61 per cent more than the total corporate expenses, including taxes and discount, commission and expense on securities sold." [Pt. 22, p. 156.]

Profits on Officers' Salaries. Then there was one rather peculiar kind of profit derived by the holding companies on the salaries of their officers. According to the records, there were five officers of the American Gas and Electric Company who were also officers of various subsidiary companies. These officers are paid by each subsidiary, "but each one indorses his check or his salary, whatever the method is of paying it, over to the holding company and then receives his salary from the holding company." [Pt. 22, p. 152.] The total salaries paid these five officers by the subsidiary companies was $131,473 or about $26,294 per year each. These five officers receive salaries of only $123,750. In other words, the American Gas and Electric Company by this peculiar arrangement made something like $8,000 a year on the salaries of their officers. [Idem, pp. 152-3.]

Earnings On Bank Deposits, Call Loans, Etc. Another source of earnings to the utilities was from interest on call loans, bank deposits, etc. In the case of the American Gas and Electric Company this source of income amounted to $2,500,000, [Idem, p. 121.] and covered the 22 years from 1907 to 1928. In 1926 and 1927 the Electric Bond and Share Company loaned to various companies amounts ranging from $100,000 to as high as $22,325,000. These loans were demand loans and the rate of interest. charged was 5 per cent. [Pts. 23 & 24 p. 104.]

In some cases the holding companies were able to borrow money at 5 per cent and loan to their subsidiaries at 6 per cent, thus making a one per cent profit on the deal.

Merchandising. There seems to have been only one kind of service rendered by these various holding companies that did not make a profit and that is merchandising. As a general rule, or at least frequently, the companies report a loss on their merchandising enterprises. For example, the American Gas and Electric Company showed a loss of about $35,000 in 1928 from merchandising and jobbing by the Ohio Power Company. [Pt. 22, pp. 260-61.] And it is interesting to note that this merchandising loss was charged to operating expenses and thus reduced the amount of the earnings available for interest and dividends. [Idem, p. 261.]

In General

In commenting upon the earnings of the Electric Bond and Share Company on these various kinds of service charges, fees, commissions, etc., Mr. Dickerman, accountant of the Commission, says:

"The construction fees and construction supervision fees are very largely clear profits."

The total receipts of fees and other income received for the year 1927 is given as $18,513,300.85. [Pts. 23 & 24, p. 408.]

And summing up the total earnings of the Electric Bond and Share Company covering service fees, dividends, interest, etc., the total for the 24 years of records covered by the Commission up to March 13, 1929, is given as $138,680,325, of which the net earnings were $93,261,738. [Pts. 23 & 24, p. 113.]

These are the earnings in only a few typical instances of some of the larger holding companies and their subsidiaries. What the total or average rate of income and earnings of all of the utility corporations may be can not, of course, be determined until the investigations which are still under way have been completed and a final summary made. The above, however, will give something of an idea of the earnings of these corporations in these particular respects.

Chapter 24—Utilities and the Banks

“A Sort of Invisible Partnership”

The importance of maintaining close relations and co-operation with the financial institutions of the country is keenly realized by the utilities, as the records show. The organization provides for a committee on relations with financial institutions, the purpose of which is stated to be "to encourage understanding and establish cordial relations between the public utility industry and financial institutions, with special emphasis being laid on the value of close working relations between the utility and the local banker." [Exh. Pt. 1, p. 61.]

In the memorandum on this subject it is stated further that the committee "will labor to create an understanding between the public utility companies and the banker.... It is realized that the local banker plays a most important part in the life of a community, his judgments and opinions are respected, his counsel is followed, and his friendship can bring to the local utility a support and co-operation which will be very helpful.... Consequently there exists a sort of invisible partnership between the utility and the banker which should work, to the advantage of both parties.” [Exh. Pt. 2, p. 329.]

The chairmen of geographic divisions are urged to organize their respective committees and get them to functioning without delay. Each committee should be composed of not less than ten able men representing the various sections of the geographic division. "Too much emphasis," it is said, "can not be laid on the desirability of having local public utility officers keep in personal contact with local bankers. This is a vital factor in this partnership arrangement between the banker and the Utility.” [Exh. Pt. 2, p. 330.]

How the Utilities Use the Bankers

How this partnership between the bankers and the utilities operates is illustrated in a most striking manner in a letter written by A. F. Hockenbeamer, President of the Pacific Gras and Electric Company, to Mr. A. W. Robertson, President of The Philadelphia Company in Pittsburgh, Pennsylvania. Mr. Hockenbeamer had been very successful, it seems, in working out to perfection this "invisible partnership" between the bankers of his section and the utility companies, and he was writing to Mr. Robertson of The Philadelphia Company to explain to him how the plan was worked. The letter, of course, was supposed to have been strictly confidential, and Mr. Robertson was urged to treat it as a personal communication, saying that "we have already been suspected of undue connivance with bankers." Nevertheless, the letter has gotten into the records of the Federal Trade Commission and it is of such significance and importance that we present it here substantially in full:

The Hockenbeamer Letter

“Owing to the fact that for about 25 years we have operated an interconnected system serving a large number of communities and requiring one or more bank depositaries in each of these centers, we "discovered" the country banker quite a number of years ago. In this there was no particular prescience on our part, as what was at first merely a necessary business relationship took on, gradually but in an increasing degree, the additional aspect of public.policy and of public relations. The bankers, as a rule, are economically minded about as we are, but, nevertheless, we came to the conclusion about 15 years ago that as a practical incentive to get them to work with us, there is no substitute for deposits. A worthwhile account has, therefore, been the keystone of our policy, and to assure its application, it is our practice to regulate balances in country banks from the head office. I may add, in passing, that we have at this time accounts with 230 country banks scattered all over our territory, and while our policy keeps an average of around a million and a half dollars tied up in balances in these country depositaries, we believe it is well worth while: First, because the service they render to us as banker is worth something, and secondly, because it cements their friendship and co-operation. Incidentally, we require no interest on these deposits.

“A second step in retaining friendly relations with our country bankers has been to have our local managers keep in close touch with them. This they do, and I feel safe in saying that our district managers not only enjoy the friendly acquaintance of the presidents of these banks but of all the directors, usually influential business and professional men, and of practically the entire personnel.

“Saying It with Deposits”

“A third thing. we have done is to have representatives from the head office visit the bankers. While I was treasurer of the company, I did this personally on two occasions in company with division managers and the secretary of the company. It took from six weeks to two months for each round of visits, but I soon realized that the time was well spent, and if there was one thing I hear more frequently than anything else, it was expressions of satisfaction over the "nice account you keep with us," all of which went to confirm my faith in the policy of "saying it with deposits."

“Before beginning our first customer ownership campaign in 1914, we saw to it that every one of our bankers was fully informed as to the stock we were about to offer and what our plans were for disposing of it. Every banker was also told at that time that any checks drawn on his bank in payment for any of the stock sold by us would be immediately redeposited with him and the money left there as long as we did not need it. This removed the fear of deposits being drawn down to pay for stock. Some of this money stayed in the banks for quite a long time, and the result was that, with one sole exception, the bankers became, and still are, boosters for our stock and an effective influence in spreading its sale.

“On the whole, the relations with our bankers are about as cordial as they possibly could be. We have had occasion to test their friendliness on a number of occasions and they have never failed us. During our two big campaigns against the so-called water and power act—a scheme to put California in the power business with an initial issue of half a billion of bonds—they literally sent out hundreds of thousands of personal letters and pieces of literature to their depositors and stockholders, as well as campaigning against the act personally.

“My impression is that the other power companies in California follow pretty much the same policies as I have above outlined. We have here an association, of which I am vice chairman, which meets once a month and is representative of all of the power companies of any consequence in the state, and it is my thought to bring the subject up for discussion at the next regular meeting of the light and power council. I believe this is about all that needs to be done in California, and but little would be gained, even if it were feasible, to ask the bankers to come to some general meeting. They know as well as we do the economic dangers against which we must present a united front, and the most necessary thing is for the individual power companies to maintain the individual contacts that lead to personal acquaintance, friendship, and cooperation.

Accused of Undue Connivance

“I would like to have you treat this as a personal communication and not as an official report by the chairman of your subcommittee. If any thoughts have been expressed which you deem useful, you can probably present them without undue publicity of ourselves. We have already been suspected of undue connivance with bankers.

“There is a subject which I would rather not touch upon in a letter but which I should like to discuss with you the first time I see you. I will probably not forget about it, but if I should, please feel free to remind me that I have something in my system that I want to get out.

Very sincerely yours,

A. F. Hockenbeamer.

“P. S. We also keep in touch with our bankers by means of annual letters, notifying them of their reappointment as depositaries. Attached is a typical sample of these letters and also a compilation of the acknowledgments received. We happened to have an extra copy of this in our files and I thought you might be interested in looking it over.” [Exh. Pts. 10-16, pp. 978-79.]

The utility companies were urged to "call on every bank in your territory." [Exh. Pt. 1, p. 136.] And James F. Owen, Chairman of the Public Relations Section, at the Seventh Annual Convention of the Great Lakes Division, urged that the utilities must get in contact with every banker in the country. He said:

“We have contented ourselves in the past in our relations with investment bankers in an attempt to secure approval and secure legislation throughout the states that would enable acceptance on the part of banks of our securities for investment. This year that committee will broaden its activities that a contact shall be made with every banker in the country. No man outside of an editor has greater influence on the public opinion in the communities we serve than the local banker and, above all, he should know our industry and the job we are doing. We should have his cooperation in doing the job, and I hope this committee shall be organized so that there will be contact made with every single banker in the communities we serve. (Our italics.) [Pt. 3, pp. 285-86.]

Here we have as clearly illustrated as can be the whole modus operandi of this phase of the work of the utility corporations.

Saving Bank and Trust Funds in Utilities

One of the matters to which the utilities have given especial attention is that of securing the passage of laws in those states where it was necessary so that the funds of saving and trust companies could be legally invested in utility securities. Such a law was passed in New York after it had failed in two previous sessions of the Legislature. [Pt. 4, p. 221.] A measure was fostered in Michigan to make savings banks deposits legal investments in utility Securities. [Pt. 3, p. 206] Steps were taken to secure a similar law in Minnesota and several of the New England states. [Exh. Pt. 1, p. 477.] Similar legislation was sought in other states.

Helpful in Legislatures

We also find that the utilities count on the help of friendly bankers in securing the passage of legislative measures which they desire. In this connection, we are told, the bankers are very helpful before the committees of the legislatures.

R. V. Prather, Secretary-Treasurer of the Great Lakes Division, N. E. L. A., in a postscript to one of his letters, made this interesting comment:

“The Investment Bankers Association in matters affecting legislation have been very helpful. Personally, I have had the greatest success by using them as speakers before legislative committees regarding legislation. (Our italics.) [Exh. Pt. 2, p. 205.]

Chapter 25—Utilities and Insurance Companies

The Tie that Binds

By 1926, we are told, there was something over $300,000,000 of the funds of the life insurance companies of the country invested in public utility securities. [Exh. Pt. 4, p. 69; see table.]

It is not hard to see and understand the significance of that kind of an intertie.

Battling for the Utilities

The close relation ahd co-operation between insurance companies and the utilities is brought out in connection with a letter sent out by Haley Fiske, President of the Metropolitan Life Insurance Company to six million policy holders of that company. Mr. Oxley, in writing to the directors of the various state committees on this matter, said that "several hundred thousand of these letters have already been distributed in the premium notices to policy holders and that it is expected that the message ultimately will be placed in the hands of all of the twenty-one million policy holders of the Metropolitan Life Insurance Company." [Exh. Pt. 3, p. 656.]

Mr. Haley Fiske, in his letter to the policy holders, points out that "it is not an abstract corporation that owns millions of dollars of securities of the electric light and power companies." The Metropolitan Life Insurance, he says, has in force thirty million policies insuring twenty-one million individual lives. Its assets of nearly $1,500,000,000 belong to its policy holders and a very considerable portion of this fund is invested in the securities 0f the electric light and power companies.

Addressing himself to the policy holders, he says:

You are the foundation of political power. You have the right to fair treatment on the part of supervising and regulating officials. When an electric light and power corporation is unfairly treated, it is the people of the community, the voters and their dependents who suffer. It is their savings that are depleted.

Further on he says:

United We Stand

“The American people are the owners of the bond capital of the ' companies; every policy holder is ipso facto a capitalist, and an attack upon capital investments is an attack upon the wage earners of the country.... Plans for municipal, state, or federal ownership of public utilities often sound well as presented by their advocates.... The municipality, the state, and the federal government have enough to do in financing the proper government agencies. The late President Harding said truthfully: ‘There should be less government in business and more business in government.’

“The ownership of the electric light and power companies is now in the hands of more than two million direct investors in public utility stocks and indirectly in the hands of millions more of bank depositors and holders of life insurance policies through their ownership of public utility bonds. This is true people's ownership under proper public regulation, and the function of government is not to own and operate such utilities but to regulate them under the police powers of the state.” [Exh. Pt. 3, pp. 656-57.]

The utilities, of course, made good use of this letter of President Haley Fiske, of the Metropolitan Life Insurance Company, and a later revision was made in June of 1925 and sent out that year to more than ten million more policy holders of the Metropolitan, and in addition used in some of the advertising of the Metropolitan in popular magazines and newspapers.

Mr. M. S. Sloan, chairman of the committee on the relationship with investment institutions, reported in 1922 that his committee was meeting with co-operating committees of the Bankers Association and insurance companies to the end that the assets of these organizations be invested in electric light and power company securities. Several meetings had been arranged by this committee with committees of savings bank and insurance company organizations. Thus the inter-connection between the banking and insurance companies of the country and the utilities was being very effectively completed.

Beware the Public Ownership Menace!

In 1924 the Casualty Information Clearing House in Chicago issued a folder which was sent to some 30,000 agents throughout the country, entitled "A Message to Policy Holders." The folder was furnished free of charge in any quantities desired, so that the agents might include one with each policy renewal or premium notice sent out by them. It was estimated that there would be an ultimate circulation of many millions of copies of this folder.

In this message to the policy holders of the insurance company a strong appeal is made to rally to the support of the utility companies in their fight against the "public ownership menace." The message reads as follows:

“In America there are more than 65,000,000 policy holders, not counting those having an indirect interest. They rule the Republic. They elect legislators and executives. They are the foundation of all political power. But despite all of this they often approve of economic and political policies directly aimed at undermining the property rights which insurance not only represents but protects.

“The present widespread agitation, largely manufactured by demagogues, for the political ownership and operation of steam railroads, electric light and power plants, and other so-called public utilities is a case in point.

“It is the money of the people largely invested through insurance companies and savings banks which has developed these great and very necessary public service organizations. Each insurance policy holder has a vested interest in them, whether he knows it or not. The interest is part of the value of an insurance policy as property. And it ought to be quite apparent that the policy holder has a very vital concern in protecting such interests.

“Sound insurance companies must maintain at all times funds in reserve to meet future losses. The money so held must, of course, be made to earn its "keep." The electric light and power companies, the steam railroads and other like enterprises have offered exceptionally safe and conservative opportunities for such investments. In buying the bonds and other securities of these very necessary organizations the insurance companies aid in their development as well as safeguarding their own resources, and thus supply a real public service.

“As a matter of fact the insurance investments in industry represent a collective ownership of industry by insurance policy holders who either have an actual title or claim to the invested reserves, or have a very substantial equity in them. And it is these industries which must be saved from socialization if the insurance policy holder desires to protect his investments in insurance. He has the power to do so, if he has the will and the vision.

“The foundation of our national prosperity rests upon private enterprise. It ought to be quite clear that if such great institutions as the electric light and power industry, the business of transportation and the other similar public service institutions be confiscated by the government, forced out of business by government competition, or subjected to repressive and unreasonable regulation by the government, that every property owner, and particularly the owner of insurance policies, will suffer materially. The result is as inevitable as is death and taxes.

Insurance Companies—The Shock Troops

“Insurance itself is threatened directly with the public ownership menace. The stock casualty companies are furnishing the "shock troops" to combat this agitation, and many policy holders already have awakened to the danger to their own property rights and to the privilege of freedom of contract which they now enjoy because of the invasion of state governments into the insurance business.

“Every insurance policy holder should stop and think of the result of having the institution of insurance operated by a political bureaucracy. The vast investments-more than $ii,000,000,000of insurance in the primary industries of the nation would be a sweet morsel for spoilsmen. And what indeed would become of individuals and privately conducted business enterprises now relying in part on insurance investments for their industrial needs?

“These are things which every owner of an insurance policy ought to think about seriously, and while thinking to remember that he, as a policy owner, is likewise financially interested in the prosperity of every industry, from railroads and electric light plants to the farm and factory, in which insurance funds are invested. This country can not exist half socialist and half free any more than it could have existed "half slave and half free," and no class of people is more vitally concerned with maintaining the integrity of private enterprise than is the class composed of insurance-policy owners.” [Exh. Pts. 5 & 6, pp. 1070-71.]

Banking, insurance, utilities-these three; and the greatest of these is utilities.

Chapter 26—Customer Ownership

"A New Crop of Investors Is Born Every Day"

Customer ownership was devised originally as a plan for helping the utilities in financing. It was soon discovered, however, that customer ownership served another and even more important purpose, namely, that of enlisting the public on the side of the utilities in their various campaigns and especially of counteracting the public ownership movement.

"Customer ownership," says one of the reports of the customer ownership committee of the National Electric Light Association, 1924-1925, "born of the financing necessities of ten years ago and with doubt and hesitancy sent out into the world to battle for recognition, is today the backbone of utility financing." [Exh. Pt. 1, P. 208.] But while it is the backbone of utility financing, a mimeographed publication of the National Electric Light Association makes clear the other phase of customer ownership. It says:

“Customer ownership is primarily a political rather than a financial device, useful though it has been from the financial standpoint. It is an extraordinarily clever and astute flank attack upon the forces which advocate and fight for public ownership.” [Exh. Pts. 10-16, P. 287.]

Volume and Extent

The extent to which the customer ownership movement has grown is quite significant. According to the report of the customer ownership committee of the National Electric Light Association, the utility companies raised more than $236,000,000 of capital by this means in 1926 and thereby added more than 248,800 stockholders. Through this customer ownership activity, since its inception in 1914, the electric power and light companies have acquired more than 1,430,000 share holders who, through their investments, have provided more than $1,100,000,000 of new capital for the industry. In all there are said to be 15,531,660 customers, of which 1,432,277 are share holders, or "customer owners," holding 13,138,030 shares up to 1927.

Thus it will be seen that the customer ownership movement is very widely extended. Furthermore, vigorous efforts are being made to have it further developed. According to the minutes of the customer ownership committee, held in Chicago April 6, 1926, regret was expressed at the apparent "waning of interest in customer ownership during the present year." Renewed activities were urged in order to increase and promote the customer ownership movement. In this, as at other times, emphasis was laid upon the value of customer ownership in financing, but the even greater importance of the movement as a public relations factor as an effective force in favor of private and opposed to public ownership...... .A stalwart army of sound-thinking owners of private property is the nation's greatest defense against socialism or communism-and every step toward public ownership is a step toward communism." [Exh. Pt. 10-16, pp. 267-69.]

In order to stimulate the development of new energy and enthusiasm for the customer ownership movement, the committee urged a thorough organization of the leaders of the industry who control the policy and financing of the larger utility companies to be active in developing the movement, and especially to enlist the co-operation of investment bankers. [Idem, p. 275.]

The plans for the development of the customer ownership movement in the country were thoroughly organized and very efficiently conducted. There was, first of all, a national committee on the subject, the purpose of which was stated to be "to assist and encourage electric-light and power companies to put into practice the policy of selling their securities to customers. To accumulate information for the benefit of member companies on the methods of putting on customer ownership campaigns and compiling records of securities sold through said companies: [Exh. Pt. 1, P. 57. ] Plans for selling customer ownership securities were carefully studied and developed, with instructions given to those who are undertaking the works. [Idem, p. 136. ] These campaigns developed an army of friends for the utilities, according to the enthusiastic reports of those who are promoting the movement. [Idem, p. 138]

What Customer Ownership Has Accomplished

According to the various reports submitted by the committees on customer ownership, the following are among some of the results claimed for the movement

(1) First of all, it has won over the conservative investor and made him willing to invest his money in utility securities.

(2) The customer ownership movement has also solved the problem of financing.

(3) By this movement "big money" has been attracted to the utility field. "Investment in the soundly financed electrical utility has become a safe, conservative investment." [Exh. Pt. t, P. 208.]

(4) Customer ownership has offered a safe investment to the wage earner, according to the utility committee's reports. Sixty per cent of the customer owners are said to be among the wage earners. [Idem, p. 213.]

Defense Against Socialism, Communism, Public Ownership

(5) But, above all, customer ownership has become the greatest safeguard to the utility interests, and surest defense against radicalism, socialism, political demagogues, etc." [Exh. Pt. 1, p. 209 ff. ] Customer ownership is presented as "a natural reaction to the fulminations of rabble-rousing political demagogues and the attacks of the radical press.... Today while the customer owners still recognize that the utility represents big investments and big business, they see behind it the mighty millions of their own Main Street. . . . Once these plain people added their voices to the hue and cry of denunciation of the utility raised by the professional agitators, socialists, and public ownership advocates. Today they say with pride, `This is my company; I'm one of its stockholders)"' [Idem, p. 209.] And again, customer ownership "protects the company from unjustified political attacks and discourages municipal ownership." [Idem, p. 467.] (Our italics.) And, again, customer ownership is "needed to combat public ownership." [Exh. Pts. 10-16, p. 268.] . . . "It is the greatest defense against socialism, communism, and public ownership."

And, finally, when put to the actual test, according to these reports of the utility corporations, customer ownership has proved a great help in defeating public ownership measures in the states, especially 'in California. A weekly publication' of the National Electric Light Association has this to say in this respect. "In the fall of 1922 a special election was held in California to vote upon a number of important measures, including the $500,000,000 water and power act, which provided that the state, in partnership with municipalities should enter the power business in competition with the private companies. Obviously the extraordinary number of customer stockholders in proportion to tire population of the state was not unconnected with the severe defeat of the proposal." [Exh. Pts. 10-16, P. 287. ]

(6) Customer ownership, according to the utility committees, works in close harmony with local banks, and particularly with the Better Business Bureaus, affiliated with the National Vigilance Committee of the Associated Advertising Clubs, etc. [Exh. Pt. 1, p. 210. ]

The Real Public Ownership

(7) Customer ownership is also urged as the real public ownership. "Customer ownership establishes public ownership," they argue, "through direct investment by citizens and at the same time retains management responsible to the business, as opposed to political practice." [ Idem, P. 212.] This idea that customer ownership constitutes "the real public ownership" is constantly reiterated throughout the literature of the customer ownership movement. "It is public ownership in the sense that it is at once progressive and honest. It is public ownership with the favors and prejudices of politics eliminated." [Exh. Pt. 1, p. 136.] As a matter of fact, of course, such customer ownership is not public ownership at all for the very obvious reason that the stock which these so-called "customer owners" hold has no voting power and, therefore, no voice in the control of the properties.

Even the Little Children

(8) Customer ownership enlists the children. Following their policy of not allowing any opportunity to escape them to extend their influence over and upon the community, the utilities have conceived the idea of extending their customer ownership efforts so as to reach the children. A. Emory Wishon, Chairman of the Customer Ownership Committee in Fresno, California, writes to Mr. M. H. Aylesworth, Managing Director of the National Electric Light Association under date of December 29, 1925:

“I believe that you appreciate the great psychological value of having minors as stockholders, and the stock being in the name of the minor, and that the procedure be as simple as possible so as to encourage this practice. I know that it has been your personal experience if you once buy something for your children, and place it in their names, it immediately takes on a sentimental aspect that the balance of your properties do not possess.

“I have written Carl Jackson at length, and hope that I have put my idea over to him.... This is one field of investment that is of importance to us, for a new crop of investors is being born every day.”

Mr. Wishon, in his letter to Carl Jackson, tells of a canvass that he had made of a number of companies as to their methods of handling this subject. The results he reported were very interesting. "Several companies," he said, "were selling to minors direct without requiring guardianship papers, our own company being one. Others required guardianship papers at the time of sale; others required such papers only in the event the stock was transferred." He then went on to urge that this selling of utility stocks to the little children "has certain psychological value; in fact, a very definite one, of having little Billy Smith's stock in the name of little Billy; Billy's dad is much less apt to forget that he intended the stock for him and hesitates to sell or mortgage it. The fact that it is in the child's name puts a certain sentiment behind it." [Exh. Pts. 10-17, p. 720.]

In a bulletin prepared by the Speakers' Bureau of the Oklahoma Utilities Association containing "interesting and reliable facts and historical data for use in public addresses, with suggestions for speakers," there are several pages devoted to the growth and advantages and extent of customer ownership. In this connection there occurs the usual thought that "the result of the customer owner ship movement is that the public is rapidly becoming the owner as well as the regulator of its public utilities." Here also is repeated the claim that is. often made by the utility agencies that this customer ownership "in our opinion is true public ownership, as the people will own the public service companies that serve them and at the same time secure the advantages and efficiencies of private management and the protection of state-wide regulation by their own public representatives." [Exh. Pts. 9 & 61, p. 1320 Chapter IX., p. 63.]

The Fallacy of Customer Ownership

The fallacy of this whole program of customer ownership lies in the fact that the stock which is sold to these so-called "customer owners" is, except in very rare instances, stock that has no voting rights. As we have explained in a previous chapter' the stock that is sold to these "customer owners" is generally the preferred stock or at least non-voting stock. Therefore, the owners have no voice or vote in the affairs of the companies and, therefore, no control. Those who have nothing to say about the property in which they have invested certainly have very little rights of ownership. What this customer ownership, therefore, amounts to is simply this, that those who have invested their money in the securities of these companies have in substance loaned them their money. They have acquired nothing in the way of control and in addition have often assumed the risks of an unprofitable investment.

Part 5—Some Typical Companies

Chapter 27—The Alabama Power Company

Domestic Current at Eighteen Times the Cost

"In most of the great centers of population, in America at least, the consumers pay for household service around six cents per kilowatt hour, fifteen to twenty times its cost."

Such were the words of Frederic M. Sackett, American Ambassador to Germany, speaking at the World Power Conference in Berlin June 18, 1930.

The world was astonished. According to press reports, Samuel Insull asked that the speech be suppressed. It referred only to the cost of production and was sure to be misunderstood and misinterpreted. For the cost of production is only a small part of the cost of the current, delivered to the ultimate consumer. And the matter was all the more serious, coming as it did from a man of experience and knowledge in the power field.

But the speech was delivered. And Mr. Sackett, in further explaining his position, said:

“I know of no other manufacturing industry where the sale price of the product to the great mass of the consumers is fifteen times the actual cost of production of the article sold. My purpose is to sharply define a weakness that calls for the keenest thought in your deliberations. Until the power business is brought in line with other industries in the relationship of its cost of production to the price paid by the consumer of the product, there can be little justification for the thought that this great power industry is rapidly approaching its perfection.

“Whether electric current is produced from water power with its stand-by plants or by modern steam units, you have by constant improvement driven down the bus bar cost of electricity until it can be fairly said that the economic station produces current at from three to four-tenths of a cent a kilowatt hour. In most of the great centers of population, in America at least, the consumers pay for household service around six cents per kilowatt hour, fifteen to twenty times its cost.”

Here then was the testimony of a power company man to power company men, urging the necessity of lower rates to the ultimate consumer in the interests of the power industry itself. But the thing that astonished and gripped the public mind was the statement that charges were fifteen to twenty times the cost of production.

Meanwhile, the Federal Trade Commission has been delving into the records and accounts of the utility companies and disclosing the facts regarding the costs and charges for electric service to the ultimate consumer. And it is interesting and important to find that, according to this investigation, the charges for electric service to the smaller household users are just about what Mr. Sackett says they are.

In the case of the Alabama Power Company, which has rates claimed to be among the lowest in the country, the charge to the ultimate consumer, the household user, is just about eighteen times the cost of production.

What the Current Costs

On pages 214 and 215 of Part 30 of the findings of the Federal Trade Commission we have the statement of Mr. Judson C. Dickerman, engineer-examiner, as to the total cost of producing current by the Alabama Power Company. The amount given is $1,529,215.59, and the cost per kilowatt hour as 0.1066 cent. In the same table there are also given the costs of transmission, distribution, etc., and finally the grand total operating expense. This latter is $7,068,901.07, and per kilowatt hour the figure is .4904 cent.

Mr. Dickerman analyzes these figures and then makes a statement covering the total cost of producing and delivering current, covering not only the direct production costs but in addition the costs of transmission, of depreciation, taxes, and capital charges. In this way he arrives at a total cost of production per kilowatt hour of 0.746 cent supplied to the system, or 0.891 cent sold. The whole statement at this point is important because it shows in so many different respects the method by which the conclusions are finally reached. The full statement is as follows:

“From the accountant's report it appears that the direct book costs of the generating plants and transmission system at the end of 1929 totaled $113,244,761.87. To this probably should be added some portion of the intangible and unclassified fixed capital standing on the books at $28,540,958.67, making up the total of $166,461,574.13, which latter includes $5,305,964.87 of directly classified street railway fixed capital. On an assumption that the intangible and unclassified should be proportionately assigned to the production and transmission system, the total fixed capital for those divisions of investment becomes approximately $136,795,000. With 8 per cent allowed for return, 1 per cent for taxes, and 0.57 per cent as retirement expense as last experienced by the company, if for purposes of presenting the picture of the costs as set up from the books of the company, io per cent is taken to cover return, taxes, and depreciation, then $13,679,500 should be added to the operating expense in 1929 for transmission and production to give within a close approximation the total cost of producing and transmitting power. This sum was approximately $15,540 000, equivalent to 0.905 cent per kilowatt hour supplied the system or 1.083 cents per kilowatt hour sold. If only 6 per cent were allowed for return, more nearly the actual return earned by the company in 1929, the corresponding kilowatt hour costs (including 6 per cent return on the investment) would be 0.746 cent and 0.891 cent, which are more than the revenue received from the sale of nearly 90 per cent of total kilowatt hours sold.”

Eighteen Times the Cost

Keeping in mind this figure of Mr. Dickerman of a total cost of 0.891 cent per kilowatt hour (on the basis of current sold and with 6 per cent allowed for return on capital) we turn to page 216 of the same volume. There we find that the maximum rate charged for domestic service is 16 cents per kilowatt hour ("8o cents for the first 5 kilowatt hours per month"). This is almost exactly 18 times the 0.891 cent which is given above as the total cost, and thus coincides very closely to Ambassador Sackett's figures. These are the rates, paid by the smallest users of domestic service.

Six Times the Cost

Now, of course, these rates of 16 cents per kilowatt hour are not paid by all domestic users. After the first 5 kilowatt hours the rates drop to 5 cents per kilowatt hour for the next 45 kilowatt hours, and then to 3 cents for the next 15o kilowatt hours. [Pt. 30, p. 216.] On page 221 of the same volume the average revenue per kilowatt hour sold to residential consumers is given as 5.56 cents. This is almost exactly 6% times the average cost of production.

Again, according to the same record, municipalities buying current from the Alabama Power Company for street lighting and other municipal purposes also pay an average of 5.56 cents per kilowatt, or 6 1/4 times the average cost of production. [Idem, p. 221, Exh. 5 at top of page.]

Buys of Government at 2 Mills

It must also be noted that the Alabama Power Company buys a considerable part of its current from the United States Government at Muscle Shoals. For this it pays approximately 2 mills (.2 cent) per kilowatt hour. To that must be added, of course, the costs of transmission and distribution-also capital charges. The cost of transmission is given in the table on page 214 of Part 30 as .0231 cent (not quite 1/4 of a mill) ; and of distribution as .0500 cent (exactly ½ mill). Other expenses are given but. capital charges are not segregated, but are included in a total cost of production which is given, as above, at .891 cent (not quite 1 cent). It does not seem possible to determine from the data available just what the capital charges would be on the transmission and distribution of the current purchased from the Government. It is not likely that these items, if they could be determined and were added, could bring the total cost of this current to the average cost of current delivered, viz., .891 cent. It would probably be much less since there would be no capital charges due to generation expense, for the Government carries that expense on the Muscle Shoals operation. So it is evident that on the current purchased of the Government at Muscle Shoals the Alabama Power Company, selling some to domestic consumers at 16 cents per kilowatt hour; [Pt. -30, P. 221.] and to residential consumers at an average of 5.56 cents; to municipalities at 5.56 cents; to power users at 1.02 cents; and at an average to all consumers of 1.21 cents per kilowatt hour,' the company is making a very satisfactory profit.

Ninety per Cent Wholesale

At this point it is important to emphasize the fact that the business of the Alabama Power Company is very largely wholesale. "Approximately 90 per cent by volume of its entire sales of energy are to industrial customers and to other electrical utility corporations." [Idem, p. 217.] Birmingham, the largest city in the state, is served by another company which, however, buys its current wholesale from the Alabama Power Company. [Pt. 30, PP. 2, 218.] The same is true of many other municipalities in the state.

In other words, the prices at which 90 per cent of the current is sold are wholesale prices, and to them must be added the costs and the profits of the other institutions and companies delivering the current before the prices to the ultimate consumer are determined.

Sold Below Cost

It is also important to note that most of the current that is sold wholesale is sold below the average cost of production. On page 215 of Part 30 the statement is made that the total average cost of production which is given, as above, at .891 cent per kilowatt hour "is more than the revenue received from the sale of nearly 90 per cent of the total kilowatt hours sold." From which it would appear that the wholesale customers, some of them no doubt their own subsidiary companies, are enjoying low rates even below the average cost of production, while the other classes of service are charged proportionately higher rates to make up the difference.

Unutilized Investment

A close study of the financial set-up and operation of the Alabama Power Company shows that there are rather heavy investments in plants and equipment that are not very well utilized. This runs up the unit cost. For, as the engineer examiner of the Commission says, "as the steam plants reduced their output and became more and more idle as standby plants, the unit cost of the small amount of power generated therein, arose to a seemingly astonishing figure of 8.13¢:" [Pt. 30, P. 214.] This, however, does not seem to tell the whole story. There is invested in steam plants in the system $12,993,595.97, [Idem, p. 243.] allowing 2 per cent for taxes and depreciation, following the methods of the Commission's accountants, and 6 per cent return on the investment, we find a direct cost of production of $1,039,487.68, or 11.84837 cents per kilowatt hour. Upon the same basis the total production costs are $1,752,683.12, or .19.97757 cents per kilowatt hour. [These deductions from the accounts of the companies have been made for us by Lloyd Bemis, Certified Public Accountant of The Bemis Company of Chicago, who has been very helpful in analyzing the financial features of the findings of the Federal Trade commission and checking up on our statements.]

This enormous cost of production of nearly 20 cents per kilowatt hour can be accounted for only upon the assumption that there is a heavy capital investment in these steam plants that are very little used or more or less obsolete. Of the three main steam plants the examiner of the Commission reports that one is "a second reserve plant, since the first demand for steam power will be taken by the newer, more efficient Gorgas No. 2 plant operating under a 475 pounds steam pressure and fired with pulverized coal." [Pt. 30, p.10.] None of these three plants is operated regularly. They "are not kept under fire, but each plant is in charge of a skeleton crew of key men who on short notice could call in labor and put the plant in operation." . . . "At Montgomery and Mobile are old, almost obsolete steam plants, installed by prior owners of electric power systems in those cities." [Idem, p. 11.] Others of the steam plants are "small fuel burning plants," in one case a "bark burning plant" and some have not been used at all for years.

All this investment in stand-by, inefficient, obsolete, and nonused steam plants is in the capital account, of course, and the consumers must ultimately pay a return on the investment.

Cost of Hydro Power

According to the records, there were generated by water power in the system 1,447,568,520 k.w.h. in 1929. [Pt. 30, p. 212.] The investment in the hydro plants was $63,863,990. 49. [Idem, p. 243.] Allowing fixed charges of 2 per cent for taxes and depreciation, and 6 per cent return on investment, we get as direct production cost by hydro plants.

These deductions from the accounts of the companies have been made for us by Lloyd Bemis, Certified Public Accountant of The Bemis Company of Chicago, who has been very helpful in analyzing the financial features of the findings of the Federal Trade Commission and checking up on our statements. $324,954.87 for .02244 cents per k.w.h.; and a total cost of $5,434,074-07, or 37539 cents per k.w.h. This is for generation only.

Purchased Power

There were 258,908,346 k.w.h. purchased by the system in 1929. Of this amount 165,137,000, or more than one-half, was purchased from the U. S. Government plant at Muscle Shoals. [Pt. 30, p. 212.] The cost of the power purchased from the Government was at a contract price of .2 cent (2 mills) per k.w.h. But by terms of the contract a minimum of 250,000,000 k.w.h. at $500,000 per year is to be paid, [Idem, pp. 328-29.] and having taken less than the stipulated amount of current, the unit cost was .30278 cent (a little over 3 mills) for that year. Other purchased power cost $103,867.73, or .11077 cent (a little over 1 mill) per k.w.h.

So the total amount of purchased power was 258,908,346 k.w.h. and the total cost $603,867.73 or .23324 cent (a little less than 21/3 mills) per k.w.h.

Total Cost of Power

Returning now to the report of the Engineer-Examiner of the Commission, Mr. Dickerman, we find that the total cost of producing and transmitting current, including the costs of generating by water power and fuel, and of purchased power; and including capital charges, at 8 per cent, taxes, retirement, and total costs of operation, is approximately $15,540,000, as quoted above. And upon that basis the total cost per kilowatt hour was .905 cent "supplied to the system," or 1.083 cents sold. Or, upon the above basis, and with a 6 per cent return on capital, the cost would be .746 cent per kilowatt and .891