Confessions of the Power Trust — Part V

Part 5: Some Typical Companies

Chapter 27: The Alabama Power Company
Chapter 28: Muscle Shoals
Chapter 29: The Insull Utilities
Chapter 30: The Foshay Company

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 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 cent.

However, we find that Mr. Robert J. Ryder, the accountant who examined and reported upon the accounts and records of the Alabama Power Company, and especially upon the capitalization of the company, “deducted approximately $10,000,000 appreciation and $18,000,000 undeveloped properties and intangibles” in arriving at the fixed capital of the company. [Pt. 30, p. 71; see also p. 320.] On this basis the fixed capital is given as $134,993,284 for 1929. At 6 per cent the capital charges on this amount would be $8,099,597.04. Adding this capital charge to the “total production costs,” as given on page 214, at $7,028,go1.07, we have a total cost of production and transmission of $15,128,498.11 for 1929, which is somewhat lower than the figures used by Mr. Dickerman.

On this basis the average cost per kilowatt hour is .882 cent for the 1,715,250,122 k.w.h. produced by the system.

On page 322 of this Part 30 Mr. Ryder, accountant for the Commission, has given us the amounts and percentages of the current sold to the various classes of customers and also the amounts used in “intra company business” and lost and unaccounted for. On page 220 are given the revenues derived from each class of service. From these various data Mr. C. F. Lambert of the engineering firm of Burns and McDonnell [Kansas City, Mo., and Los Angeles, Calif.] has compiled for us the following table which gives at a glance a general view of the financial operations of this company in the matter of service rendered to the various classes of customers, the cost of the service to the customers, and the profits earned by the company:

Alabama Power Company

Item:                              Residence

1929 K. W. H. Sold:                    40,856,914

Revenue:                         $2,273,413.65

Rev. Per K.W.H. Sold:               $5.56¢

% Current:                         2.38

% Revenue:                         13.10

Expense:                         $360,357.48

Ave. Cost Per K.W.H. Generated:          .882¢


Item:                              Commercial

1929 K.W.H. Sold:                    67,166,297

Revenue:                         3,332,576.51

Rev. Per K.W.H. Sold:               4.96¢

% Current:                         3.91

% Revenue:                         19.20

Expense:                         $592,406.63

Ave. Cost Per K.W.H. Generated:          .882¢


Item:                              Power

1929 K.W.H. Sold:                    658,463,053

Revenue:                         6,703,647.93

Rev. Per K.W.H. Sold:               1.02¢

% Current:                         38.39

% Revenue:                         38.62

Expense:                         $5,807,642.17

Ave. Cost Per K.W.H. Generated:          .882¢


Item:                              Other
Electric Util.

1929 K.W.H. Sold:                    652,047,341

Revenue:                         4,664,923.58

Rev. Per K.W.H. Sold:               .72¢

% Current                         38.01

% Revenue:                         26.88

Expense:                         5,751,055.55

Ave. Cost Per K.W.H. Generated:          .882¢


Item:                              Municipal
St. Lighting

1929 K.W.H. Sold:                    4,796,111

Revenue:                         266,815.36

Rev. Per K.W.H. Sold:               5.56¢

% Current:                         .28

% Revenue:                         1.55

Expense:                         42,301.65

Ave. Cost Per K.W.H. Generated:          .882¢


Item:                              Miscellaneous
Municipal K. W. H.

1929 K.W.H. Sold:                    10,391,364

Revenue:                         113,9976.31

Rev. Per K.W.H. Sold:               1.10¢

% Current:                         .61

% Revenue:                         .65

Expense:                         91,651.73

Ave. Cost Per K.W.H. Generated:          .882¢


Item:                              Intra
Co. Business

1929 K.W.H. Sold:                    22,575,732

Revenue:                         –––––

Rev. Per K.W.H. Sold:               –––––

% Current:                         1.32

% Revenue:                         .00

Expense:                         199,116.71

Ave. Cost Per K.W.H. Generated:          .882¢


Item:                              Losses
and Unaccounted

1929 K.W.H. Sold:                    258,953,310

Revenue:                         –––––

Rev. Per K.W.H. Sold:               –––––

% Current:                         15.10

% Revenue                         .00

Expense:                         2,283,966.19

Ave. Cost Per K.W.H. Generated:          .882¢


Total 1929 K.W.H. Sold:               1,715,250,122

Total Revenue:                         $17,355,353.34*

Total rev. Per K.W.H. Sold:               $1.01¢

Total % Current:                    100.00

Total % Revenue:                    100.00

Total Expense                         $15,128,498.11

Total Ave. Co                         .882¢


Add Miscellaneous                    *



$ 17,433,654.47

Deduct Discounts                    

$ 17,346,415.49

From the above data Mr. Lambert has also prepared for us the following table, showing the profits and per cent of increase. earned by the company on the different classes of service. Especial attention is called  to the fact that the current sold to “other electric companies” which constitutes a very large part of the total sold, is sold at a loss or considerably below the average cost of production as previously stated by the Engineer-Examiner, Mr. Dickerman. [Pt. 30, p. 215.]

Profit               PerCent Profit

Residence                              $1,913,056.04               528
Commercial                              2,740,170.39               464
Power                                          896,010.39                15.4
Other Elec. Utilities (Loss)       1,086,127.45                18.8*
Municipal St. Lighting                   224,513.71              530
Misc. Municipal Service                 22,324.58                24.5
Intra Co. Business (Loss)            199,117.73               ––-
Losses & Unaccounted (Loss) 2,283.965.60               ––-
____________        ______
Total                                         $2,226,864.33               14.7%


A Typical Example

Here we have in this financial set-up, methods, and operations of the Alabama Power Company a typical illustration of what is going on in the electrical industry. Certain characteristic features stand out in bold relief. These same features, however, may be found to a greater or less extent in many, if not most, of the electric utility corporations.

First of all, the Alabama Power Company is an operating company, subsidiary to one of the great holding companies of the country, the Commonwealth and Southern Corporation.

Secondly, the Alabama Power Company is very largely a wholesaling institution. More than go per cent of its current is sold for industrial and power purposes.

Thirdly, there are the usual inflations, appreciations, and “write ups” in the capital account.

Fourthly, when the inflations and appreciations are included, the rates-of return seem very reasonable, but when the inflations are deducted they are much higher.

Fifthly, the wholesale rates charged for the current are very low, whereas the rates to the ultimate consumer-the domestic user, are very high. In fact, a very considerable portion of the total current sold is sold at rates that are below the average cost of production, whereas the domestic rates are from six to eighteen times the cost.

Sixthly: Thus while much of the current is sold at a loss or at least at less than the average cost of production, and more of it sold at or near cost, a small portion is sold to the domestic users at rates that are from 15 to 500 per cent above the cost of production. In this way the large consumers, and especially the so-called “other utility companies” are favored with extremely low rates at the expense of the ultimate consumer or the domestic user.

Chapter 28: Muscle Shoals

Light on the Cost of Power

 What does it cost to produce and deliver electric power? That is a question upon which everyone is seeking light. Some light is shed upon this question by the reports of the various power companies which we are reviewing in this volume.

In the previous chapter, for example, we have found that the Alabama Power Company is buying current of the Government owned and operated power system at Muscle Shoals at 2 mills or one-fifth of a cent per kilowatt hour.

We have also seen that the total cost of current delivered, including capital charges in the Alabama Power Company, is less than I cent per kilowatt hour .882 cent or, at the highest figures, .891 cent.

But these costs are on the basis of a privately owned and operated system with its usual burden of obsolete equipment, its heavy over capitalization, and its usual high rates of return-6 to 8 per cent. What is the cost under a publicly owned system with modern, up-to-date equipment, especially hydroelectric equipment, operating on a large scale of production and at lower cost of capital- 4 per cent, and rendering service at cost?

Naturally, the answer to that question is not found in the records of the utility companies. But the clue is there. The answer is in the records of the Government owned and operated power system at Muscle Shoals.

Cost of Current from Muscle Shoals

Fortunately, there has recently been published by the United States Government a report of the Chief Engineers on the power possibilities at Muscle Shoals and of the Tennessee River and Tributaries, including navigation and flood control possibilities. The title of the report, which is in two parts, with 734 pages in the first part; the second part being given over chiefly to charts, maps, diagrams, etc., is “Tennessee River and Tributaries, Etc., Covering Navigation, Flood Control, Power Development and Irrigation, House Document No. 328, 71st Congress, Second Session.” [With letter of transmittal from the Secretary of War, United States Government Printing Office, Washington, D. C., 1930.]

According to this report the average cost of hydro power at Muscle Shoals at the switchboard is 1 1/3 mill per kilowatt hour, and the average cost of hydro power delivered at an average distance of 250 miles is only 2.470 mills per kilowatt hour. [See Pages 70, 528, 529, 530 and 532.]

The same engineering report shows that hydroelectric power developed by the United States Government Plant at Wilson Dam can be produced and delivered at a total cost as follows:

Mills                                      Per K.W.H.

At the switchboard                     1.352

Transmitted l000 miles               1.993

Transmitted 200 miles               2.310

Transmitted 250 miles               2.467

Transmitted 300 miles               2.625

Transmitted 350 miles               2.775

And these prices, according to the report, will provide “4 per cent on the investment in plant and transmission lines, cover the cost of operation and maintenance (indefinitely) additional installation and transmission lines, operating expenses, and depreciation.” [Idem, P. 530.]

The prices mentioned in the report of the Government engineers as possible within the 350 mile radius of Wilson Dam are, to . quote the words of the Government engineers, “tempting prices and are lower than any commercial company in the Southeast can show. And when it is considered that St. Louis can be reached at a distance of about 280 miles, New Orleans at a distance of 360 miles (air line), Memphis at a distance of 180 miles by an indirect route, and Nashville at 110 miles, it is easy to believe that the power would readily be taken.” [Tennessee River and Tributaries, Covering Navigation, Flood Control, Power Development and Irrigation, House Document No. 328, fist Congress, Second Session.]

If, now, to these Government costs of production and transmission we add .5 mill, which is the cost of distribution given by the accountant of the Federal Trade Commission as “distribution expense,” and to this we add another .4 mill to cover the capital charges on the distribution expense-we have a total average cost of current delivered to the ultimate consumer by the Government plant of 3.37 mills as compared to 12.1 mills, the total average cost of current delivered by the Alabama Power Company. In other words, the company cost to the consumer is over three and one half times greater than the Government cost.

Amortization Will Further Reduce Cost

These remarkably low costs of producing electric current at the Government owned plant at Muscle Shoals will be still further reduced as the capital account is amortized. The figures given above, it will be noted, are on the basis of a plan by which the capital investment will be amortized out of earnings. This is the plan followed universally in all public projects of this kind. When, therefore, in the course of 40 years the capital investment in the Muscle Shoals project shall have been amortized, the capital charge will then be eliminated and the cost of production still further reduced. And when it is recalled that a very large part of the cost of producing electricity, especially by hydroelectric power, is due to the capital charges, it will be seen that by this process the cost of production will be further reduced and very decidedly so. For, on the authority of Mr. Guy E. Tripp [See Superpower As An Aid To Progress, by Guy E. Tripp, Chairman of the Board of Directors, Westinghouse Electric 8c Manufacturing Co., G. P. Putnam’s Sons, N. Y., 1924, P. II.], two thirds to four-fifths of the cost of producing electric current by hydro power is due to the capital charges. These charges at Muscle Shoals will, in the course of 4o years or so, be entirely eliminated.

Greater Than Ontario

Here then is some real light on the question of the cost of power. And the struggle at Muscle Shoals is to secure the advantages of the full and complete development and utilization of the power resources of the Tennessee River and the Tennessee Valley in a hydroelectric and super power system which, when completed, will have a primary capacity Of 4,000,000 horsepower, serving an area more than one-fifth of the entire United States at rates only sufficiently above the actual cost of production to insure a margin of safety, a system with four times the possibilities of the Ontario Hydro Electric Power System.

Chapter 29: The Insull Utilities

Serving Four Thousand Communities in Thirty States

The so-called Insull group of utilities is one of the largest. According to the testimony, there are 221 “active” companies in the group and 27 “inactive,” making 248 in all.

The group serves 4,741 communities in 30 states and a population of 6,203,846. It operates in all but five states in the Union, east of the Rocky Mountains. Its total capitalization was $275,222,378 on September 30, 193o, and its gross earnings in 1929 were $162,337,274. Its interstate service is quite large, being 14.28 per cent of the whole, and its transmission lines cross 32 state boundaries. Its total production in 1929 was 4,354,179,970 k.w.h., which was 9.52 per cent of the whole current produced in the United States.

Coal Mines and Railroads

 The holdings of the Insull group cover a considerable variety of properties, including coal mines under the Peabody Coal Company; a standard railroad, the Chicago & Illinois Midland Railway, which operates railway lines in the mining district; a construction company; and the Great Lakes Broadcasting Company. This latter company owns and operates Station WENR in Chicago, which was recently leased to the National Broadcasting Company.

Growth of the System

 The Insull group of utilities is also characterized by an exceptionally rapid growth. The capital investment, for example, grew from $12,000,000 in 1912 to $275,222,378 in 1930. Through theacquisition of numerous new properties, along with the growth of the territory served, the subsidiaries, and with them the general group of utilities grew in extent and number in many different directions and different sections of the country. For example, the Central Illinois Company had expanded by the end of 1929 until it served an area of 18,000 square miles, more than one-third of the total area of Illinois.

Insull Interests Control

 By the various devices which are common to all similar groups in the utility field the control is highly centralized. In fact, as the testimony shows, “the control of the various components of the Insull group is vested in one place,” and that is the “Corporation Securities Company of Chicago and the Insull Utility Investments, Incorporated.” These two companies are the so-called “top companies” or “head” of the entire group. And of these companies 64.4 per cent of the voting control of the Insull Utility Investments, Incorporated, and 69.2 per cent of the voting control of the Corporation Securities Company of Chicago was owned by Insull interests. These Insull interests own 33.34 per cent of the total voting shares of the Middle West Utilities, which is the main subsidiary of the two “top” companies mentioned above, and this, according to the testimony, is “sufficient to insure practical control of the Middle West Utilities Company” by the Insull interests “in view of the wide distribution of the voting shares not held within the group.” Other devices still further insure control by the Insull interests. The “intercorporate relations,” so-called interlocking directorates which are common to all the utility groups of this kind are very effective in this Insult group also. And, too, there is that very clever device which is found in many, if not most, of these utility groups: the “voting trust.” We are told by the examining accountants of the Commission that “the Corporation

Securities Company of Chicago is controlled by three voting trustees.” And these three voting trustees are Mr. H. L. Stuart of Halsey, Stuart & Company, Samuel Insull, Sr., and Samuel Insull, Jr.

So this huge combination of utility corporations with its 248 companies may be said to be quite completely Insullated.

The Hierarchy of Power

 The financial structure of these Insull interests, with their two top companies at the head, their subsidiaries and sub-subsidiaries, and sub-sub-sub-subsidiaries down to the seventh degree, constitutes a very interesting and quite typical example of these organizations. As such we are presenting below a table showing the structure or set-up of these particular organizations. Of course, there are changes going on constantly in this connection, and the table given below will undoubtedly be out of date before this volume gets to the public, but it will serve at least to give a picture of the situation and to illustrate in a graphic manner the way these companies are superimposed, one upon the other, and the holding companies upon the operating companies and, finally, the parent or top financing companies upon the whole.

Of course, the Federal Trade Commission has not undertaken to examine all of these subsidiaries and sub-sub-subsidiaries, having contented itself with the examination of the more typical companies. The following table, however, presents the full hierarchy, using the data of the Federal Trade Commission for the most part, and supplementing this data in some cases from Moody’s Manual of Investments: Public Utility Securities, 1931

The Insull Utilities


Insull Utility Investments, Inc.


Corporation Securities Co. Of Chicago

First Subsidiaries

1. The Middle West Utilities Co.
2. L. E. Meyers Construction Co.
3. Commonwealth Edison Co.
4. Peoples Gas Light & Coke Co.
5. Public Service Co. of Northern Illinois.
6.Midland United Co.
7. Chicago, North Shore & Milwaukee R. R. Co.
8. Chicago Rapid Transit Co.
9. Western United Corp.
10. Chicago, Aurora & Elgin R. R. Corp.
11. Chicago Dist. Electric Generating Corp.
12. Superpower Company of Illinois.
13. Utility Securities Co.
14. Peabody Coal Co.
15. Chicago & Illinois Midland Railway.
16. Great Lakes Radio Broadcasting Co. WENR, leased to the National Broadcasting Co.

Second or Sub-Subsidiaries

The above 16 subsidiaries of the two top companies have, practically all of them, sub-subsidiaries. We take up the Middle West Utilities Company and list its sub-subsidiaries, which are as follows:

1. Albion Gas Light Co.
2. Allied Service Co.
3. Central and South West Utilities Co.
4. Central Illinois Public Service Co.
5. Central Power Co.
6. Commonwealth Light & Power Co.
7. Illinois Northern Utilities Co.
8. The Kansas Electric Power Co.
9. The Kentucky Securities Corp.
10. Kentucky Utilities Co.
11. Kincaid Water Co.
12. Michigan Gas and Electric Co.
13. Middle West Utilities Co. of Canada, Ltd.
14. Mississippi Valley Utilities Investment Co.
15. Missouri Gas and Electric Service Co.
16. National Electric Power Co.
17. North West Utilities Co.
18. Pecos Valley Power & Light Co.
19. Saline Water & Power Co.
20. United Public Service Co.

The Third or Sub-Sub-Subsidiaries

Of the above 20 sub-subsidiaries of the Middle West Company, many have other subsidiaries of their own.

Taking up first the Allied Service Company, indicated above as No. 2, we find that this particular company has the following sub-sub-subsidiaries:

(a) City Ice Co.
(b) Southland Ice Co.

Taking up next the Central and South West Utilities Company, indicated as No. 3 above, we find that this particular company has the following sub-sub-subsidiaries:

(c) American Public Service Co.
(d) Central Power and Light Co.
(e) Public Service Co. of Okla.
(f) Southwestern Gas & Electric Co.
(g) Southwestern Light & Power Co.

The Commonwealth Light and Power Company, indicated as No. 6 above, has the following sub.-sub-subsidiary:

(h) Inland Power & Light Co.
The Kentucky Securities Corporation, indicated as No. g, has the following sub-sub-subsidiary:

(i) Lexington Utilities Co.

The Kentucky Utilities Company, No. io, has the following sub-sub-subsidiary:

(j) Old Dominion Power Co.

The Middle West Utilities Co. of Canada, Ltd., No. 13, has the following sub-sub-subsidiaries:

(k) Algoma District Power Co., Ltd.
(l) Great Lakes Power Co., Ltd.
(m) National Utilities Corp., Ltd.
(n) Winnipeg Heating Co, Ltd.

The National Electric Power Company, No. 16, has the following sub-sub-subsidiaries:

(o) Harpers Ferry Paper Co.
(p) Michigan Electric Power Co.
(q) National Public Service Corp.
(r) New England Public Service Co.
(s) Ohio Electric Power Co.
(t) Penn Central Light & Power Co.

North West Utilities Company, No. 17, has the following sub-sub-subsidiaries:

(u) Lake Superior District Power Co.
(v) Northwestern Public Service Co.
(w) Wisconsin Power & Light Co.

The United Public Service Company, No. 20, above indicated, has the following sub-sub-subsidiaries:

(x) Kentucky Power Co.
(y) Southern United Gas Co.
(z) Southern United Ice Co.
(xx) United Public Utilities Co.

The Fourth or Sub-Sub-Sub-Subsidiaries

Taking up next the subsidiaries of some of the above sub-sub-subsidiaries, we find that the City Ice Company, designated as (a) above, has the following sub-sub-sub-subsidiary:

Dodson Water Co.

The American Public Service Company, designated as (c) above, has the following sub-sub-sub-subsidiary:

West Texas Utilities Co.

Inland Power & Light Corporation, designated as (h) above, has the following sub-sub-sub-subsidiaries:

Arkansas-Missouri Power Co.
Dalhart Public Service Co.
Michigan Public Service Co.
Missouri Edison Co.
Missouri Public Service Co.
The Kansas Power Co.

Lexington Utilities Company, indicated as (i) above, has the following sub-sub-sub-subsidiaries:

Kentucky Coach Co.
Kentucky Traction & Terminal Co.
Lexington Ice Co.

Old Dominion Power Company, indicated as (j) above, has the following sub-sub-sub-subsidiary:

Old Dominion Ice Corp.

Great Lakes Power Company, Ltd., indicated as (1) above, has the following sub-sub-sub-subsidiary:

International Transit Co.

National Utilities Corporation, Ltd., indicated as (m) above, has the following sub-sub-sub-subsidiary:

Northern Public Service Corp.
Harpers Ferry Paper Company, indicated as (o) above, has the following sub-sub-sub-subsidiary:

Harpers Ferry Electric Lt. & Pr. Co.

National Public Service Corporation, indicated as (q) above, has the following sub-sub-sub-subsidiaries:

Jersey Central Power & Light Co.
Municipal Service Co.
Seaboard Public Service Co.

New England Public Service Company, indicated as (r) above, has the following sub-sub-sub-subsidiaries:

Bucksport Water Co.
Central Maine Power Co.
Central Vermont Public Service Corp.
Cumberland County P. & L. Co.
Groveton E. L. Co. & Lyman Falls Pr. Co.
National Light, Heat & Power Co.
Public Service Co. of New Hampshire.
Salmon Falls Water Co.

Kentucky Power Company, indicated as (x) above, has the following sub-sub-sub-subsidiary:

Kentucky Power & Light Co.

Southern United Gas Company, indicated as (y) above, has the following sub-sub-sub-subsidiary:

Southwestern States Gas Co.

United Public Utilities Company, indicated as (xx) above, has the following sub-sub-sub-subsidiaries:

Alabama United Ice Co.
Bradford & Gettysburg E. L. & Pr. Co.
Brookville & Lewisburg Lighting Co.
Buckeye Light & Power Co.
Cap. F. Bourland Ice Co.
Citizens Heat, Light & Power Co.
Eaton Lighting Co.
Fort Smith Gas Co.
Georgia United Ice Co.
Greenville El. Light & Power Co.
Indiana-Ohio Public Service Co.
Louisiana Ice & Coal Co.
Lynn Natural Gas Co.
New Madison Lighting Co.
North Dakota Power & Light Co.
Northern Power & Light Co.
Peoples Service Co.
Texas Ice & Refrigerating Co.
Western Ohio Public Service Co.

The Fifth or Sub-Sub-Sub-Sub-Subsidiaries

Taking up the next subsidiaries of the above sub-sub-sub-subsidiaries, we find that the Arkansas-Missouri Power Company has the following sub-sub-sub-sub-subsidiary:

East Missouri Power Co.

Missouri Public Service Company has the following sub-sub-sub-sub-subsidiary:

Eastern Kansas Pipe Line Co.

Municipal Service Company has the following sub-sub-sub-sub-subsidiaries:

Altoona & Logan Valley El. Ry. Co.
Carbondale Gas Co.
Columbus, Delaware & Eastern El. Co.
Glen Rock El. Lt. Co.
Keystone Public Service Co.
Logan Valley Bus Co.
Scranton Railway Co.
Scranton Bus Co.
York Railways Co.
The Northeastern Ohio Transp. Co.

Seaboard Public Service Company has the following sub-sub-sub-sub-subsidiaries:

Eastern Shore Public Service Co.
Florida Power Corp.
Florida West Coast Ice Co.
Georgia Power & Light Co.
Tide Water Power Co.
Virginia Public Service Co.

National Light, Heat & Power Company has the following sub-sub-sub-sub-subsidiary:

Twin State Gas & El. Co.

The Sixth or Sub-sub-sub-sub-sub-subsidiary

And finally, we find that the Twin State Gas and Electric Company has the following sub-sub-sub-sub-sub-subsidiary:

Berwick & Salmon Falls El. Co.

Honorable Joseph B. Eastman of the Interstate Commerce Commission, commenting upon financial structures of this kind, and quoted by Bainbridge Colby in the Chicago Herald Examiner, characterizes the situation as the “intricate and vicious mazes of holding companies and interlaced subsidiaries.” And Mr. Colby, after struggling through only a part of the above list, concludes with the following:

“What sort of a front is this for an enterprise serving a great public with such vital necessities as power, light, heat and transportation to present to its huge body of consumers, to the public service commissions of the thirty states in which it operates, and to the federal power and trade commissions, to say nothing of its own shareholders and the holders of its bonds and other obligations.

What possible explanation that squares with reason or good intent can be offered for such a masterpiece of designed confusion?” (Our italics.)

Earnings and Profits

 The financial operations of this group of Insull utilities are very much the same as those of the other groups. We have, for example, the usual “write ups” or inflations, the profits from the financing, resale, and re-organization of subsidiaries, profits on construction, engineering, supervising, and other fees.

For example, on the sales of securities by the Middle West Utilities Company from 1912 to 1930, according to the testimony, a total profit of $28,196,229 was realized. On the sale of its own securities the company realized a profit of $732,694, and there was an appreciation through re-valuation of securities of $1,371,712. “In a number of cases,” the testimony reads, “such so-called profits have been nothing more in effect than a “write up” of investment security values and represent no realized earnings of the Middle West Utilities Company. On the sale of the securities of the Public Service Company of Oklahoma a profit of $220,896 was realized.

In the organization of the Southwest Utilities Company, a holding corporation which was formed to take over Middle West’s interest in the Southwest, the Middle West Company realized a “book profit” of $2,219,056 in 1925. On various services rendered by the Middle West Company to its subsidiaries, the Middle West received $317,893 in 1929. Upon the organization of the New England Public Service Company in 1925 the Middle West netted a profit of $1,227,994 In the transfer of properties by the Middle West to the Twin State Gas and Electric Company in 1912 it was brought out that properties which cost Middle West $424,115 were set up on the books of Twin State at $1,887,266. The leasehold of the Interstate Public Service Company, one of the Middle West subsidiaries, was valued at $3,000,000, although the cost was only $625,310.

As in the case of other holding companies, the Middle West made loans to its subsidiaries. In 1930 these loans amounted to $30,502,396.

In 1918 the Middle West Utilities Company acquired the Northwest Utilities Company. In the financial dealings involved in this transaction, one of the Commission’s examiners testified that it was “only a financing expedient resorted to by Northwest Utilities Company in order to show that par value of the preferred stock had been received for the original issue in compliance with legal requirements. After the stock was re-acquired and entered on the books at the discounted amount, it was available for sale at whatever acceptable price might be offered.” Practically all of this stock, the examiner said, was again sold to the Middle West at prices ranging from $80 to $85, and the excess of the amount received by Northwest over the amount paid for the stock, or approximately $500,000 was credited to “profit on sales of securities account.”

In 1929 there was a re-financing of the Middle West Utilities Company by some of the Insult companies, for which the Insult companies received a fee of $1,875,000.

In the course of the testimony it is disclosed that during the period from September, 1912, to 1930 the “cost of financing and other expenses” amounted to $53,379,018. Of this amount $21, 996,098.67 were premiums paid on redemption of securities. These premiums were paid to the preferred stockholders, so that these owners of the company received a considerable portion of that which was expense to the company. It is also shown that in the early days of the Middle West Utilities the subsidiaries that were taken over “were usually capitalized at a sufficient amount so that the Middle West Utilities Company received enough bonds and preferred stock to represent the cost of acquiring the properties and thus held the common stock at no cost.

Rate of Return.
The rate of return to the Middle West Company “on its invested capital” for 1929 was 5.35 per cent, and in 1930, 5.12 per cent, according to the testimony. However, on some of the subsidiaries the rate of return was much higher. For example, based on the ledger value of the Middle West Utilities Company investment on the Central Southwest Utilities Company, the return earned in 1928 was 12.56 per cent, and in 1929, 9.72 per cent. Again, based on the cost of the stock to Middle West Utilities Company, after deducting appreciation, the return to the Middle West Utilities Company on investment in the common stock of the Kentucky Utilities Company was 9.93 per cent in 1928, and 11.92 per cent in 1929.

“Write Ups.”
In the financial operations in connection with the Central Illinois Public Service Company there was effected a “write up” Of $4,496,246.90. In the case of the Central and Southwest Utilities Company a “write up” of $2,754,26° is recorded.

In the case of the North American Light and Power Company there was a “write up,” according to the testimony, of $23,180,934. This “write up” was brought about in a rather unusual manner. There was an appreciation of investments, according to the Commission accountant, of approximately $16,000,000, “largely on the basis of engineering appraisals.” Then there was an additional appreciation of nearly $8,000,000, which was created “by resolution of the Board of Directors.”

Political Activities

 The most notable political activity of the Insull group, of course, was in connection with the election of Frank Smith to the United States Senate from Illinois at the time that he (Smith) was chairman of the Commerce Commission of Illinois, which was the regulatory body of that state. Samuel Insull, in his testimony before the Reed Committee of the United States Senate, testified that he had borrowed from and paid back to the Commonwealth Edison Company of Chicago (a subsidiary of the Middle West Utilities Company) $272,000 for use in the Illinois political campaign of 1926, and that the money was distributed to Frank L. Smith, and the Lundeen and Harding organizations. This was the contribution which Samuel Insult made to the political campaign in 1926 that created such a sensation in Illinois and throughout the country. It was the publicity given to this matter that led Bernard J. Mullaney of the Illinois Utilities to send telegrams to the state organization of the power companies throughout the country, as shown by the records of the Commission, to inquire to what extent this action had been noted in their various states and what effect, if any, it had had upon the political situation with reference to the utilities.

It was a matter of common knowledge, was widely and prominently published in the Press throughout the Middle West, and especially in Chicago, openly admitted by Samuel Insull himself, and made a part of the official record. And yet when Martin J. Insull, President of the Middle West Utilities Company, was before the Federal Trade Commission on December 8 (1931) he testified that he had no knowledge of the use to which $44,100 had been put that appeared on the accounts of his company at that time. Exhibit No. 15, within the Federal Trade Commission’s Exhibit No. 4983, is an analysis of all the subscriptions to associations and donations made by the Middle West Utilities Company during the years 1926 to 1929, inclusive. But in this exhibit there were two items, one of $44,100 paid to Martin J. Insult during the year 1926, and another payment of $1,000 to L. E. Meyers in 1927, concerning which no detailed information could be secured by the examiner. It was in regard to this particular expenditure that Mr. Martin J. Insull was asked to testify. The checks were made payable to .cash and the expenditures were authorized by Samuel Insull. Vouchers were marked “for special expenditures,” and the $44,100 was charged on the books of the company to the account entitled “Subscriptions to Associations and Donations.” And yet Mr. Martin J. Insull testified that he did not know whether any part of the $44,100 went to make up the Samuel Insull contributions or not. He was not prepared to say on oath that the $44,100 was not used for political purposes, but did say on oath that “not to my knowledge was this money used for this purpose.”

Commissioner McCulloch then asked the witness if there was not some one in the organization who should know what the money was used for. And Mr. Insull replied:

“I don’t know of any one in the organization who would know. It happened six years ago and it was one of thousands of items.”

Whereupon Commissioner McCulloch asked if it was often that money was disbursed in this way so that it “disappeared in thin air.” To which Mr. Insull replied:

“It was for some purpose I deemed to be of interest to the company, I presume.”

And that was all that the Commission could get out of Mr. Martin J. Insull. And it seems that that was all that the examiners could get out of the records of the Middle West Utilities Company. The full facts and the full testimony, however, is available in the report of the Reed Committee of the Senate, to which Judge Healy had previously referred.

In the case of the Middle West Utilities, as in many other holding companies, a considerable number of municipal properties were acquired. According to the examiner, there were in this case some 38 municipal plants acquired.

The Final Collapse

 As is now well known, this huge structure of the Insull interests, with its numerous operating companies and superimposed holding companies has now completely collapsed. The same financial policies that brought about the final collapse of the Foshay Companies, which we will describe in the next chapter, has now brought about the collapse of this larger and much more powerful utility organization.

About the middle of April of 1932 various Insull companies were thrown into the hands of receivers, constituting one of the greatest and perhaps the most tragic failures ever known in the history of this country or possibly of the world.

The two big holding companies formed by the Insull interests, namely, the Insull Utility Investment, Inc., and the Corporation Securities Company of Chicago suffered an aggregate depreciation in their values of over $330,000,000. The stock of the Middle West Utilities Company, one of the largest and the most notable of the Insull properties, had depreciated in value from a high rating in 1929 of $57 per share to a low value of 25 cents in 1932. The Midland United Company stock had declined from a high $47 in 1930 to a low $1 in 1932. The People’s Gas Light and Coke Company stock had declined from a high $404 in 1929 to a low $50 in 1932. The Public Service Company of Northern Illinois stock had declined from a high $435 in 1929 to a low of $40 in 1932. The Commonwealth Edison Company stock had declined from a high $450 in 1929 to $50 in 1932.

In this tragic and far-reaching collapse Mr. Insull, long recognized as one of the Greatest leaders in the financial and utility world of the middle west, lost his entire fortune estimated at around $100,000,000; lost completely his prestige and standing in the utility field; is said to have surrendered his life insurance, as well as other personal assets together with a $3,400,000 country estate; gave up his connection with every financial, civic, and social organization in Chicago, and has fled the country. “I have gone from the bottom to the top,” he is reported as having said, “and now to the bottom again; I only hope to be able to keep a roof over my head and care for my wife.”[Chicago Tribune, June 9, 1932.]

Meanwhile, over 100,000 stockholders have lost disastrously in the collapse, the aggregate amount being placed by some at as high as $4,000,000,000. Hundreds of employees, including engineers, accountants, clerks, and innumerable others, have lost not only their jobs but in addition have lost heavily in the depreciation of the securities which they had been prevailed upon to buy in the various Insull companies.

Chapter 30:
The Foshay Company

Utility Methods Gone Mad

 With banners floating and slogans still resounding, the W. B. Foshay Company (Inc.) of Minneapolis sailed into receivership on November 1, 1929. The liabilities were over $19,000,000 exclusive of those of affiliated companies, and securities of $29,000,000 sold to the public “from which it seems doubtful if anything will be realized.” [Pt. 25, P. 263.]

“Never has an investor of the company lost any money,” was the reassuring banner the company floated, and the slogan, “For over 10 years, All your money-All the time-On time,” had and, we fancy, now more than ever has “such a poignant meaning.”

This Foshay Company, while differing in some details in its methods and practice from other utility companies, nevertheless followed quite generally the usual lines. Perhaps the game was overplayed but in most respects it seems to have been the same game, played along the same lines and on the same general principles as the other utility corporations. At any rate, the following review of the methods of the Foshay Company, as disclosed by the records of the Federal Trade Commission, will show how nearly and to what extent that company has followed the practices which were general among the utility corporations.

Some of the Usual Features

 Among the characteristic features of the Foshay Company which are similar to those revealed by the evidence in regard to other utility companies in the country may be mentioned the following:

Financial Structure. The Foshay Company, in common with all other utility organizations, had its various kinds of common stock with the voting rights vested in one particular kind which concentrated the control in the hands of a few stockholders and ultimately, as a matter of fact, in the hands of practically one man. [Pt. 25, p. 265]

Holding Company Organization. There were two principal holding companies, namely, the W. B. Foshay Company, incorporated in Minneapolis on August 22, 1917, and the W. B. Foshay Company, incorporated in Delaware on May 28, 1928. The principal company controlled by these Foshay holding companies was Public Utilities Consolidated Corporation. And there were two companies by this name, one incorporated under the laws of Delaware in 1926 and the other incorporated under the laws of Arizona in 1927. [Pt. 25, p. 2.]

These holding companies controlled operating companies in Kansas, Arizona, Colorado, Idaho, Montana, Washington, and Canada. In addition to these, subsidiaries were operated in Mexico, Alaska, Honduras and in Kansas, Illinois, California, Nevada, and Oregon. In all, according to the evidence, these companies owned and operated either directly or through subsidiaries “diversified public utility properties serving 244, communities” in the states and countries above mentioned, including a population of 331,000. [Pt. 25, pp. 2-3.]

Former Electric Bond and Share and Insull
Men at the Head

 It is interesting to note that “the men behind the W. B. Foshay Company” were men who had had previous training and experience in the utility field in connection with some of the greatest utility corporations in the country. The President, Wilbur Burton Foshay, for example, was first with the New York Central Railroad. Later he became manager of the United Gas Improvement Company at Tarrytown, N. Y., and still later joined the Electric Bond and Share Company of New York, so that he had a long and practical experience in the utility field. [Pt. 25, P. 319. 6 Idem, P. 320.]

The “President-Director of Utilities,” R. Joel Andrus, apparently second in control of the Foshay Company, was for a number of years on the Pacific Coast with the Electric Bond and Share Company and later joined the Martin Instill organization where he became assistant vice-president. For four and a half years he was vice-president of the New England group of the Insull properties in that section. Thus he too had had long and practical experience in the utility field with the larger utility corporations.’

Appreciation of Capital Account

 Following the usual methods of the utility companies, as shown in the evidence submitted to the Commission, the Foshay Company from time to time “wrote up” or “appreciated” its capital account. In the case of one of its California subsidiaries an appraisal by the company’s engineers placed a value on the properties which was 50 per cent higher than the valuation figures of the Railroad Commission of the State of California. The California Commission would not allow the appraised values, and adjustments were made aggregating in amount $778,877.94. And yet this item is shown among the assets on the balance sheet of the company under the caption, “Excess Appraisal Value Over Valuation Allowed by the State Commission.”

In July, 1928, an amount of $1,434,391-87 was set up on the . holding company books as “going concern value,” the corresponding credit being made to “value of Class A and Class B stock” account, the latter account being written up from $1,548,403.83 to $2,982,795.70, an increase of 92.6 per cent. [Pt. 25, p. 12.] The total appreciation mentioned by the accountants of the Commission amounted to $2,696,227.55. [Pt. 25, p. 263.]

Warned by State Commission

 Warnings of the danger of the issue and sale of additional stocks under the conditions and by the methods of the Foshay Company were given by the Commerce Commission of the State of Minnesota. When the Foshay Company asked to have registered, for sale in that state, I,000 shares of its preferred stock, which it received from Public Utilities Consolidated Corporation at $90, and 2,000 shares of Class A, No Par common stock, which it received at $22.50, the Commission declined to approve the issue and gave as its reasons the following:

(1) That the properties acquired are too scattered to permit economical operation by the holding company. Each unit will be operated independent of the rest, each with its necessary individual overhead and the resultant savings by the consolidation will be small, if any.

(2) That the values of the property and stock turned over to Public Utilities Consolidated Corporation are not sufficient to support the proposed capitalization.

(3) That the earnings of the respective operating companies are not such as to justify the proposed capitalization and the holding company is further handicapped by having an unusually large amount of note, bond, and stock discount, a very substantial portion of which would require charging off within the first year’s operation . [Pt. 25, P. 20.]

For the above and other reasons the Commerce Commission, in denying the application for the registration, expressed the opinion that the sale of these securities would “work a fraud on the purchasers thereof.” [Idem.]

Some of the Unusual Features

 Concentration of Control. Besides the usual methods used by the utilities in concentrating control the Foshay Company developed some new and clever devices. It perfected the device of trading non-voting shares for voting shares, so that the voting shares would 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. 12] As a result of these and other methods of concentrating control the company was owned and controlled almost completely by one man, W. B. Foshay. [Idem, p. 263, Item No. 3.] As President and Director of each of the controlling companies, he held about 52 per cent of the controlling stock in 1927, and 46 per cent on October 31, 1929. The other directors held only a small percentage at any time.

Thus the Foshay Company was following the well-known methods of the utility companies generally in concentrating the control in the hands of a few and pushing the process even further than the other companies had done.

Stock Selling Campaigns. The Foshay Company, like all the other utility corporations, carried on vigorous campaigns for the selling of their stock. Indeed in this as in many other matters the company seems to have been more aggressive than the other companies have been. These campaigns for the sale of stock were considered “the most important part of their business.”

By December of 1928 the stock selling organization of the company had 151 salesmen employed on full time and 30 on part time. From 1921 to 1929 there were 63,895,521 securities sold.

A great deal of emphasis was placed on the sale of securities under the management of the Foshay Company on the ground that they were “Foshay managed” and therefore supposed to be especially secure. In a prospectus issued in connection with one of these campaigns is the statement, “The control and management of the corporation is directed by W. B. Foshay Company which has an unbroken successful record in the operation, management and financing of properties of public utilities and whose officers are men with more than a quarter of a century of experience in the public utility field.” (Italics ours.)

In a booklet put out by the company we also find the following:

“Never has an investor of the company lost any money through purchase of securities which the company has underwritten. This is why the slogan “For over io years-All your money-All the time-On time” has such a poignant meaning to the investor and to the company. Those who find the slogan ambiguous will appreciate that it loses all this when once seen in its true light. It epitomizes the company’s io year’s record of faithful service to its investors. There is no flippancy in its meaning. The company has never failed to pay dividends-it pays them monthly; it meets its obligations to its shareholders ‘on time-all the time.’” [Pt. 25. p. 276. ]

Buying Newspapers. Besides their aggressive publicity campaigns the Foshay Company conceived the idea of buying up a chain or several chains of small town newspapers. “They are the ones,” Mr. Foshay wrote to Mr. Henley in 1929, “that really mold their readers’ ideas. If we had Zoo or 300 of them we would have a real power with the small-town people of this country and they are the ones who control our policies, as in the end they do the electing of our officials.” [Idem, p. 125.]

Following out this idea the Foshay interests engaged auditors to make an audit of a number of different newspapers, and by May, 1925, they had options on 15 which they were negotiating to purchase. The plan was to merge certain county-seat newspapers published in Minnesota and some in South Dakota. A man by the name of Waite was authorized to conduct the negotiations for the purchase of newspapers for the Foshay Company. Other negotiations were started with a representative in Texas who was said to have a million and a quarter’s worth of options on newspapers in that section. However, it seems that nothing came of these plans because, as is stated in the evidence, “the financial condition of the Foshay Company, which ended in bankruptcy” in November of 1929 brought all their plans to a close. [Pt. 25, PP. 126-27.]

Mr. Foshay’s aggression in this matter of acquiring newspapers alarmed Mr. R. F. Pack, vice-president and general manager of the Northern States Power Company, and led to some interesting correspondence between him and Mr. Foshay to which we shall refer later.

Advertising and Publicity. The Foshay Company was strong for publicity and advertising. [Idem, p. 57.] It employed the most skillful publicity men that it could reach. Mr. Edson R. Waite, for example, was paid $1,000 a month for his services because, as Mr. Foshay pointed out, he was “getting us more lines of publicity per dollar expended than any source we have ever had and he is covering the whole world.” “Just had a tear sheet from a Chinese paper published at Tientsin, China, with one of Waite’s articles about our tower in it.”[Idem, p. 458.] Mr. John F. Sinclair of New York City was also paid $1,000 a month for his publicity services.

Mr. C. W. Salisbury in one of his letters wrote that “I ran into an advertising and publicity man last evening of long experience in the Twin Cities with the larger papers…. He told me that in his opinion the Foshay Company had accomplished the most astounding results from a publicity standpoint of any concern he knew of in the country”; also, that “the Foshay Company `stole more space,’ to use a slang expression, than any other one concern in the country.” [Idem, p. 453.] The records show that in 1928 the company secured the publication of 660,000 lines of newspaper publicity, the value of which they claim would be $2,310,000. [Idem, p. 455.]

Overplaying the Game

 All along the line it would seem the Foshay Company overplayed the game. At any rate, the testimony shows a number of quite unusual features in connection with the Foshay operations. We shall mention a few of these.

Selling Stock to Pay Dividends. One of the unique and quite astonishing practices of the Foshay Company, according to the evidence, is that of selling stock and using the proceeds to pay dividends. [Pt. 25, P. 49.] This may have been practiced in some cases by other utility corporations but, so far as we have been able to discover, no evidence of such practice has been disclosed in the other companies.

Speaking of the campaigns of the Foshay Company for the sale of stock, the record shows that in spite of its vigorous sales policy this department “showed large losses for each year from 1925 to 1929, inclusive.” [Idem.] And the astonishing thing that develops from the testimony is that “it was through this branch of the business that the money was obtained to keep the organization going.”. . . (Italics ours.) “It was necessary,” so the accountant witness testified, “to sell the securities in advance of taking titles to the stocks and/or properties of utility companies, options, or contracts for the purchase of which had been entered into, in order to obtain the funds with which to exercise these options or meet the contracts.” [Idem.]

Coming more directly to the question of the practice of the Foshay Company in this respect, Judge Healy later in the examination asked whether “the company paid dividends out of capital or paid dividends that it did not earn?” In reply the accountant said that “the dividends were not paid out of net income and naturally would be paid out of capital.” It further developed that in those years in which there was a net income, the dividends paid were considerably in excess of the net incomes. For example, in 1920 the net income was $2,999.07, and the dividends paid were $5,293 In 1921 the net income was $7,003.45, and dividends were paid to the amount of $11,901.13.

But,most surprising of all, in the year 1922 there was a net loss of $21,229.21 and yet “in spite of that fact they paid $19,59312 in dividends and they had a surplus at the end of the year of $43,44942•” [Pt. 25, P. 112.]

“As I interpret your testimony,” Judge Healy queried later, “the Foshay Company was paying dividends while it was losing money?”

Answer: “Yes, sir.”

Question: “Where did the company get the money to pay the dividends?”

Answer: “Apparently from the sale of stock or borrowed money.” [Idem, p. 116.]

Thus we have the amazing picture of a utility company pushing vigorously the sale of their stock, losing money year after year, and yet while losing money continuing to pay dividends and paying the dividends out of the proceeds of the stock they were selling or out of money that they were borrowing.

Selling Securities in Advance of Delivery. Another quite unusual practice followed by the Foshay Company was that of selling securities on certain of its subsidiaries in connection with the purchase of properties under contract in advance of the sale of these securities and properties or their delivery to the companies to which they were to be delivered.

This practice comes out of the testimony bit by bit from several different sources and at different times. Piecing these parts of the testimony together the practice seems to have been about as follows: The Foshay Company in November, 1929, had approximately 25 contracts with the Public Utilities Consolidated Corporation for the acquisition of certain public utility properties that were to be purchased by the Foshay Company and turned over to the Public Utilities Consolidated Corporation? [Pt. 25, p. 97.]

In this connection, and for the purpose of enabling the Foshay Company to carry out its contracts to purchase these properties, the Public Utilities Consolidated Corporation issued its securities and turned them over to the Foshay Company in advance of the delivery of the properties or securities of the subsidiaries to be purchased by the Foshay Company. [Idem, p. 28.]

The record of the Federal Trade Commission at this point reads as follows:

“The different steps in the process of acquiring properties and securities and of paying for them, together with the concurrent bookkeeping procedures, may be briefly summarized as follows:

“(a) Public Utilities Consolidated Corporation would accept an offer from ‘W. B. Foshay Company, in which the latter would offer to sell and transfer to the former, or to a designated subsidiary, certain described properties and/or securities for a specified consideration which usually consisted of specified amounts of bonds and/or number of shares of preferred and/or common stocks of Public Utilities Consolidated Corporation. Immediately-without awaiting their delivery-Public Utilities Consolidated Corporation would set up these properties and securities contracted for as a contingent asset under the caption “Property and plant contracted for,” and would, at the same time, set up its contingent liability to deliver its own securities in the account “Proceeds of sales contracts on securities to be issued.”

“(b) Public Utilities Consolidated Corporation did not wait until it received the properties and securities contracted for before delivering its own securities to W. B. Foshay Company. As a matter of fact, Public Utilities Consolidated Corporation’s securities were delivered to the Foshay Company in advance of such receipt, evidently so that the latter company could sell them in order to obtain the funds with which to meet its own contracts with the vendors of the properties.” [Pt. 25, pp. 28-29.]

Now, the Foshay Company, in order to buy the subsidiaries which it had contracted to deliver to the Public Utilities Consolidated Corporation, issued its own notes and, according to the record, at the same time and for the same amounts the subsidiary companies that were to be purchased by the Foshay Company and delivered to the Public Utilities Consolidated Corporation issued their notes and turned them over to the Public Utilities Consolidated Corporation which, in turn, endorsed these notes and turned them over to the Foshay Company. [Idem, pp. 97-98.]

At this point the Foshay Company had in its possession first the securities which the Public Utilities Consolidated Corporation had issued and delivered to it before the securities or properties the Foshay Company was to purchase had been delivered and, secondly, the notes of the subsidiary companies just mentioned.

Next the Foshay Company used the notes of the Public Utilities Consolidated Corporation as collateral for its own notes and disposed of certain of them to various parties.

The record here is quite involved but the report of Mr. Joseph Chapman, receiver for the Public Utilities Consolidated Corporation, dated November 29, 1929, quoted in the Commission’s record, reads as follows:

“Investigation has disclosed that various subsidiary companies of defendant have executed promissory notes to the defendant as payee, which notes were indorsed by defendant and delivered to W. B. Foshay Company. I find notes of W. B. Foshay Company made payable to the order and within the possession of said respective subsidiaries for like amounts. The notes of the subsidiaries were used by W. B. Foshay Company as collateral security for its notes. Notes of subsidiaries so executed and outstanding at the present time are:

Public Utilities Georgia Corporation           $300,000
Citizens’ Light, Power & Water Co.          $ 50,000
Central American Power Corporation          $150,000
Public Utilities California Corporation          $50,000
Public Utilities California Corporation          $250,000

So far as I have been able to ascertain, the said notes are held by the following persons and companies as collateral security for notes of W. B. Foshay Company. E. C. Warner holds the $300,000 note executed by the Public Utilities Georgia Corporation; the $150,000 note executed by the Citizens’ Light, Power & Water Company; and the $150,000 note executed by Central American Power Corporation. The Metropolitan National Bank, of Minneapolis, holds the $50,000 note of the Public Utilities California Corporation; and the American Trust Company of Boston holds the note of $250,000 executed by the Public Utilities California Corporation . [Pt. 25, p. 98.

A Strange and Unusual Procedure

This rather strange and unusual procedure led Judge Healy to make some special inquiries in the matter as follows:

Question: There is one thing that you have quoted from the receiver’s report that attracts special attention. He said, your quotation discloses, that investigation had disclosed that various subsidiary companies of the defendant, which was P. U. C. C.Answer: Yes, Sir.

Question (continuing): Had executed promissory notes to P. U. C. C. as payment, which notes were indorsed by P. U. C. C. and delivered to Foshay Company. I have got that right so far, have I?

Answer: Yes, Sir.

Question: He says that he finds notes of Foshay Company made payable to the order of and in possession of said subsidiaries for like amounts?

Answer: Yes, sir.

Question: Do you happen to know whether those notes that Foshay made to the subsidiary were for the same amounts? Answer: The same amounts identically.

Question: What other points of similarity were there between the notes given by Foshay Company to subsidiaries for P. U. C. C. and notes given by those subsidiaries to P. U. C. C. and by it turned over to Foshay Company?

Answer: They were made on the same date and payable the same date.

Question: For the same amount? Answer: For the same amount.

Question: But the notes of the subsidiaries held by Foshay were used by it as collateral for its own notes?

Answer: Yes, sir.

Question: To other parties, I take it? Answer: That is right. [Pt. 25, pp. 98-99.]

Finally, it appears from the record that the Foshay Company in the course of these dealings disposed of the securities which had been turned over to it by the Public Utilities Consolidated Corporation but did not use the proceeds realized to acquire the properties of the subsidiaries which it was under contract to acquire and deliver. [Idem, p. 99.] And it further appears that at the time the company went into the hands of the receiver on October 31, 1929, the Foshay Company owed to the Public Utilities Consolidated Corporation a balance of $7,645,321, consisting of $5,133,426 on utilities contracted for but not delivered, and $2,511,895 on other accounts. [Pt. 25, pp. 30-31.] It further appears from the records that in order to complete the contract with the Public Utilities Consolidated Corporation, the Foshay Company would have had to pay $2,195,000. [Idem, pp. 84, 296.]

Non-Utility Operations

 The Foshay Company engaged, not only in the utility business, but also in manufacturing, banking, and a number of non-utility lines. [Pt. 25, p. 123] Among other things, there was a Foshay Drug Company, a Foshay Shoe Corporation, a Foshay Tower, a Foshay Tower Barber Shop, a Foshay Tower Beauty Parlor, a Foshay Tower Motor Park, a Foshay Tower Restaurant Corporation, a Foshay Tower Press (Inc.) [Idem, p. 97.] There was also a Foshay Hotel, a Foshay Steamship Line and possibly other enterprises in which the company was engaged. [Idem, pp. 462-63.]

Some of the officials of other utility companies in Minnesota took alarm at the fact that the Foshay Company was going into so many different lines of business, and particularly at their entering the newspaper field. R. F. Pack, Vice-President and General Manager of the Northern States Power Company, wrote to Mr. Foshay under date of May 11, 1929, as follows:

“Rumors have reached me that somebody claiming to represent you has been calling on some of the country newspapers to obtain an option for their purchase.

“Inasmuch as you are in the public utility business, these rumors have created a good deal of disturbance in certain quarters and should there be any truth in them I am seriously alarmed as to the effect any such purchase might have on the public utility business.

“You are, of course, aware of what has happened in the East, and if any similar attempts to purchase newspapers should be tried here, I believe a wave of resentment would be aroused all over the country that would be very difficult to quiet down.

“I am sure you will acquit me of any desire to interfere in your business and this letter is just a personal note to you expressing my real convictions.” [Idem, p. 462.]

In reply to this letter Mr. Foshay wrote to Mr. Pack under date of May 13, in part, as follows:

“Your letter is fully appreciated, and I am always glad to have you feel free to write me frankly, just as you have done in this case. Perhaps we are wrong and should not consider the newspaper field, but we can not see why it is not just as legitimate for us to own and operate newspapers as it is for us to own and operate hotels, buildings, printing companies, banks, ladies’ undergarment factories, shoe factories, ferryboat lines, steamship lines, ice plants, gas plants, electric plants, water works, drug stores, motor parks, and any other lines of business we may decide that we want to become interested in.

“We are not public utility operators nor investment bankers. We do not operate businesses for the purpose of producing securities and our only reason for having a security department is in order to provide the finances necessary to carry on our ownership and management of industrials, manufacturing concerns, and utilities.

“If we secure the control of any newspapers it will be in no underhanded methods and the publications will show they are under “Foshay management,” just as all our enterprises, regarding which we frankly tell the public that they are owned, controlled, and managed by us. Is there any crime in this or anything that anyone can censure us for? We do not think so.

“We have been criticized for every line of business we have gone into. Utility operators criticized us for buying utility properties, the investment bankers criticized us for selling securities, the printing people criticized us for going into the printing game, the drug people objected to our being in the drug game, everybody in town who owned a building anywhere near us objected to the erection of our tower, the hotel people are beginning to holler now because we bought one hotel and have signed a contract for another, and so it goes. The newspaper people will holler if we get into that game and the politicians might talk some, but as in all other lines of endeavor that we have gone into, we first know we are right in deciding that we can operate economically and efficiently and, secondly, we know we are right from a moral standpoint, and knowing we are right on these two scores, we have no hesitancy in going into any line of business and taking our chances at what some politician or some selfishly interested party may say.” [Pt. 25, pp. 462-63.]

Officers Paying Themselves Enormous Salaries

 Another quite unusual and astonishing feature of the Foshay Company has to do with the salaries paid to the officers and especially to the president.

The record shows that, including the value placed on bonus stocks, W. B. Foshay’s average salary for the 13 years of the company’s operation was about $53,000 a year; that of Mr. H. H. Henley nearly $36,000, and that of R. J. Rosenfeldt $17,100 per year. [Pt. 25, p. 89.]

In one year Mr. Foshay received in salary and bonus $3o6,000 [Idem.] During 1929 Mr. Foshay and Mr. Henley were on a special arrangement for compensation but they had drawing accounts on the same basis as their salaries for the latter part of 1928, namely, Mr. Foshay, $1,300 per week, and Mr. Henley, $650 per week. [Idem, p. 306.]

At a special meeting of the Board of Directors of the W. B. Foshay Company, in October, 1925,”comment was made by Wilbur B. Foshay that the favorable position thus attained by the W. B. Foshay Company was due in a great measure to the extraordinary services rendered by the officers and the directors of the W. B. Foshay Company (italics ours), and that in view of the results obtained, that certain extra compensation should be voted to such directors and officers in appreciation and payment of such services.” (Italics ours.) And then the minutes proceed as follows: “A motion was made by Mr. Wilbur B. Foshay, and seconded by Mr. H. H. Henley, that additional compensation be voted the officers and directors at this time and in the following amounts, and that the treasurer be authorized to disburse said amounts to the following named officers. On being put to vote, it was unanimously carried:

“Wilbur B. Foshay          $ 50,000
H.H. Henley                    $25,000
R.J. Rosenfeldt              $ 20,000
C. W. Salisbury               $ 8,750
H. E. McGinty                  $ 7,500 $111,250″ (Pt. 25, p. 308.)

Later on a complaint was made by some of the stockholders to the Securities Division of Commerce of the State of Minnesota at the action of the Board of Directors in voting these bonuses. This fact was called to the attention of the company when it requested the registering of certain securities with the Minnesota Securities Division and was one of the reasons given by said Division for refusing to register these securities.

A special meeting of the stockholders was called for July 30, 1927, at which time the action of the directors in voting the bonuses was ratified by a majority vote of the stockholders. These bonuses, although ratified by the stockholders (the majority of votes being cast by the officers themselves) are involved in a suit now pending in the Minnesota courts: [Idem, pp. 308-09.]

In other words, it appears from the records that these gentlemen who were the officers of the company first voted themselves bonuses amounting to $111,250 per year and then when some complaint was made these same gentlemen called a meeting of the stockholders in which they themselves had a majority of the votes and thus approved their own action in increasing their own salaries by this amount.

The total amount of salaries paid the principal officers during the period of 1917 to 1929 amounted to $836,530.30, and a bonus was paid in common stock valued by the company at $336,679.70, and the federal income taxes on the value of the bonus of $31,165.23, making a grand total of $1,204,375.23. [Pt. 25, p. 89. For further details see page 85 within Commission’s Exh. No. 4654, p. 306.]

Acquiring Municipal Plants

 The Foshay Company, like all the others, was very active and aggressive in acquiring municipal plants. As this is a matter of especial importance and the methods of the Foshay Company are somewhat typical, we shall deal with this phase of the company’s operations in another chapter. [See Chapter LI, especially p. 476 ff.]


 Summing up the findings of the Federal Trade Commission with reference to the operations of the W. B. Foshay Company, the Commission sets forth the following as “the principal noteworthy facts contained in this report.” [See Chapter 11, especially p. 476 ff.]

1. This company was organized with a very small capitalization and operated for a period of 12 years, going into receivership November 1, 1929, at which time the liabilities of the W. B. Foshay Company alone were over $19,000,000, exclusive of the liabilities of the affiliated companies, which also went into receivership under the same date.

2. The securities of this company and affiliated companies sold to the public during the years 1927, 1928, and 1929 amounted to over $29,000,000, from which ‘it seems doubtful if anything will be realized.

3. This company was controlled absolutely and dominated at all times by Mr. W. B. Foshay.

4. The Foshay securities were not listed on any of the stock exchanges but were sold through the company’s own selling organizations,’ except some miscellaneous sales made through other brokers.

5. Small operating utilities were purchased and sold to holding companies organized and controlled by the Foshay Company.

6. Securities of these holding companies were taken by Foshay Company in payment for these utilities and (with the exception of the voting stock) were sold to the public.

7. The usual method of procedure followed by the Foshay Company was to purchase either the stock and/or physical properties of an operating company, appreciate its value, then sell it to a holding company. The appreciation in the case of disposals to Public Utilities Consolidated Corporation amounted to $2,696,227.55.

8. Many securities were appreciated on the books of the Foshay Company, which appreciation was credited to the “surplus” account at times when this account would otherwise have shown. a deficit, and these items of appreciation taken from the surplus account and credited to “income” at times when the net income would otherwise have been shown as a loss.

9. Some difficulties were encountered in connection with the registration of some of the Foshay securities, and in one instance, apparently because of this difficulty one holding company, known as Public Utilities Consolidated Corporation was transferred from a Delaware corporation to an Arizona corporation.

10. Salaries paid to officers were quite liberal, and bonuses of substantial amounts were voted to the officers by themselves (as directors). At the present time such action is involved in suits pending in the Minnesota courts.

11. Dividends were paid almost from the inception of the business. The income being insufficient to pay such dividends, they were paid out of capital. Total dividends from the year i92o to October 31, 1929, amounted to $1,104,994.88.

12. The uncertain financial conditions of the Foshay organization was evidenced by the fact that on August 12, 1929, in order to purchase a piece of real estate for $395,231.31 and negotiate a loan for $500,000, making a total of $895,231.31, Foshay securities amounting to $5,102,985 were pledged as collateral. This. was greater than a 5 to 1 collateral pledge.

13. All the Foshay companies went into a friendly receivership on November 1, 1929. The requests for receivership were made by H. H. Henley, vice president of the company, and by a subsidiary corporation, and the outcome is yet to be determined by the Minnesota courts. [pt. 25, pp. 263-64.]

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