Confessions of the Power Trust — Part IV

Part 4: Financial Methods

Chapter 15: Overcapitalization
Chapter 16: Watered Stock
Chapter 17: Other Instances of Watered Stock
Chapter 18: The Defense of Inflations
Chapter 19: Inflations Challenged
Chapter 20: Do Inflations Affect Rates?
Chapter 21: Rates
Chapter 22: Prodigious Earnings
Chapter 23: Holding Company Earnings
Chapter 24: Utilities and the Banks
Chapter 25: Utilities and Insurance Companies
Chapter 26: Customer Ownership

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. & Lt.Co Nov.1920 $33,578,006.27 $13,326,323.80 $20,251,682.47 152
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.]

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: Of 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, 68th Congress, 2nd 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, 68th Congress, 2nd 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, 68th Congress, 2nd 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, 68th Congress, 2nd 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, 68th Congress, 2nd 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 endorses 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.

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 and 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.

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