Mountain States, and found that it was being used to a very much. larger extent there than in the East; and he writes me a letter inclosing a carbon copy of a letter addressed to one of the big electric light and power companies indicating his opinion that they would popularize themselves if they introduced electric heating in the East. In the letter he said:

The electric utilities as a whole have for five years past earned more money than they needed to obtain new capital, at fair prices, required for expansion of their operating properties. For proof of this statement the record of dividend payments on the common stocks of operating utilities, the rapid growth of their corporate surplus accounts, and the consequent amazing increase in market value of holding-company common stocks suffice. The electric utilities, and especially the holding companies, are as a result now under fire at Washington and shortly will be in various State capitals and city halls.

The CHAIRMAN. Who wrote that letter?

Senator WALSH of Montana. Frank Putnam. He was here on Saturday last, but was obliged to go away before an opportunity offered for him to make a statement. I was anxious that he should make the statement before your committee. But he will be available for an investigation if it is ordered.

I wrote him in regard to the paragraph in his report dealing particularly with heating, and asked him about the information in that respect, and he answered as follows:

Your committee has only to call as witnesses the treasurers of the holding companies and of their principal operating subsidiaries to learn beyond question that the electric utilities as a whole have for five years past earned more than they needed to earn in order to get new capital, at fair cost, for necessary expansion of their operating properties. How much more is indicated by the fact of public record that holding company common stocks have risen two to a dozen fold in open market value during the period indicated.

In my address last spring I called attention to some of these rises in stocks of these great companies. For instance, the American Gas Co. stock since 1921 is quoted on the market as rising from 49 to 79 in 1925. The American Light & Traction Co.'s stock was quoted at 112 in 1921 and 249 in 1925. The American Water Works & Electric Co.'s stock was quoted at 6 cents in 1921 and in 1925 at 260. The Middle West Utilities Co., and that is one of the Insull companies, was quoted at 24 in 1921 and at 112 in 1925. The North American Co.'s stock was quoted at 46 in 1921 and in 1925 quoted at 687 or the equivalent. The $100 shares have now been cut down into shares of $10. The Public Service Co. of Northern Illinois was quoted in 1921 at 82 and in 1925 at 126. I'do not need to give any more details on that subject.

Here is a communication from a gentleman who kindly called at my office this morning, Mr. R. Husselman, of Cleveland, Ohio. I took pains to inquire into Mr. Husselman's qualifications and I found that they are of the very best. He says:

I have considerable information relative to sales, attempted purchases, combinations, mergers, and financing of utility and holding companies which I believe would aid considerably in showing grounds for an inquiry such as you are sponsoring.

Mr. Husselman will be available if the investigation is authorized. Now, I want to call your attention to the last report of the Federal Trade Commission on this subject, particularly those portions that I shall read dealing with the effectiveness of State regulation and

the advantages and disadvantages accruing from these holding companies. I must read only extracts.

The obvious conclusion is that during the past 10 years the degree of control by large companies set forth by the Department of Agriculture in 1915 has increased considerably. No one group of interests can be said to exercise dominant control over the central-station industry as a whole, but the percentage of the total remaining in the hands of independent operating companies and municipals is steadily dwindling as one by one independent operating interests become affiliated with some holding-company group. In the competition of holding companies for desirable independents a few very large holding interests have emerged. Each year sees further consolidations and affiliations by which fewer and fewer large corporations are required to cover half or more of the country's total central station industry.

Senator SACKET. Is that out of the report that has already been put on our desks?

Senator WALSH of Montana. No, Senator. This has not yet been printed. It was sent in proof sheets a week ago.

In the preceding volume of this report on the control of the electric power industry the organization of the industry was described in some detail, and particularly the facts as to the existence of companies or groups of companies which possess a substantially complete monopoly of the sale of electric light and power over wide areas, which often transcends the boundaries of individual States. While none of these groups was shown to have anything approaching a monopolistic position in the country as a whole (the largest interest in 1924 being less than one-seventh of the total, measured by the quantity of power generated), nevertheless, these very extensive local monopolies involve large questions of public concern.

The electric-power industry is so affected with a public interest that it is classed as a public utility over which the right of Government regulation is firmly recognized everywhere in the United States. The Federal Government and most of the States exercise some degree of control in their respective jurisdictions over the organization or operations of electric light and power companies. The mere fact of such regulation, however, may not fully safeguard the public interest if the methods by which public authority intervenes to regulate it are adequate or ineptly applied.

The CHAIRMAN. Senator Walsh, this is from the second volume of the Federal Trade Commission's report, is it?

Senator WALSH of Montana. Yes, sir.

The CHAIRMAN. How much of that has been published? Do you know?

Senator WALSH of Montana. It has not been published at all.
The CHAIRMAN. These are advance sheets?

Senator WALSH of Montana. Yes; this is an advance proof that I have.

The CHAIRMAN. Do you know how far they go into the subject, Senator?

Senator WALSH of Montana. Well, I have not had an opportunity to study it with care. These are general observations.

The laws of about half of the States provide for some degree of State control over the issuance of securities by light and power operating companies within their respective jurisdictions. Apparently the original object of such provisions was to prevent or to correct speculative overcapitalization or stock watering found to occur even in the early days of the industry, in the initial formation of operating companies, in the construction of properties, and in consolidations in which the securities of one operating company were exchanged for those of another. The benefits anticipated from such regulation appear to have been the elimination of speculation, thereby protecting the investing public by insuring greater stability of electric-power security values, and the provision of a readily ascertainable and usable rate base by insuring that the books of the operating companies shall correctly show investments in the power business.

Present-day control is exercised mainly through the supervision of security issues as provided in the various State laws in order that they may bear a definite relationship to the investments used in the production and distribution of power. Prior to the establishment of State utility commissions it was customary for the State to pass in advance upon the amount of securities to be issued. To-day, in the States in which regulation is most effective, every issue must be passed upon in advance by the commission, and some States exercise considerable control over the use made of funds raised. The State, after authorizing the issuance of securities, is in a sense morally bound to safeguard the interests of investors by the allowance in future rate cases of rates that will yield a fair return upon the securities authorized. Thus the State must exercise great care in its authorizations, as its responsibility to both the consuming public and investors is involved in passing upon security issues. For these reasons new issues in a number of States are allowed only for the purpose of acquiring additional properties, expansion of existing plants or for the refunding purposes, or for the reimbursement of the company's treasury for legitimate expenditures already made for properties.

Direct State control of security issues is limited in general to operating companies. But beyond the operating companies are the pyramided corporate interests represented by the so-called holding companies, or combined holding and management companies, which, although not engaged in the actual operation of properties, control their managements, policies, and operations. Such companies generally have interests in more than one State; sometimes in 20 or more States. State commissions for the most part have no direct conrol over holding companies.

This constitutes a real defect in utility regulation, because the scope of a holding company's activities, as set forth in its character, is subject only to the laws of the State in which it is incorporated. In the exercise of charter provisions the holding company escapes direct regulation under State utility laws because it does not actually operate any properties. Yet t acts to a large extent as the financial agency of local operating properties, and in this capacity frequently is able, by various means, to evade State control of security issues of operating companies, or to carry on financial manipulations to bring about desired changes of security prices. As a result there is developing a strong demand that holding-company finances be brought under public control to protect the interests of both investors and consumers.

The CHAIRMAN. I am curious to know whether or not they intend to make a different finding in the second volume than the one they made in the first volume.

Senator WALSH of Montana. No; I think not, because in the first volume they say what they do here, that at the present time there has been no general monopolistic control; that is to say, no one company. The CHAIRMAN. No power trust?

Senator WALSH of Montana. Yes; practically so.

Senator SACKETT. Do you know whether they make any recommendation as to legislation as a result of their investigations? Senator WALSH of Montana. I have not had a chance to study it carefully. Now, they go on as follows:

Controlling interests in desirable properties purchased at figures far in excess of the capitalized earnings of the operating companies at the time of purchase, or of their probable earnings for years to come, may be consolidated and exploited in the formation of pyramided holding companies whose securities are sold to the investing public which may buy them under the assumption that State regulation of electric power companies properly safeguards investments in holding company stocks and bonds.

In this connection it is argued by holding company interests that State control of operating companies affords effective control over hold ng company finances. Obviously this is only partially true. State commissions apparently have no power to regulate the issuance of securities in mergers of holding companies. The financing of the two Ikew se is distinct and different. Consequently, the fact that the underlying properties are under state regula

tion offers no assurance or guaranty of a reasonable return upon money invested in holding company stocks and bonds.

Unless the holding company's financing has been done on a most conservative basis, the State commission's responsibility to maintain fair rates to the consumer may result later in inability on the part of the holding company to pay anticipated interest or dividends upon its outstanding securities. On this point William Z. Ripley, an authority on corporation finance, has this to say: "These public-utility holding companies thus financed are, as we have already seen, highly provocative of pyramiding of control. In much the same fashion they lend themselves also to magnification of returns in finance. Pyramiding in this second sense consists of making a little capital go a long way. It is otherwise defined as 'the custom of trading on a thin equity, control resting in the hands of the common stockholders, while the funds are supplied by the sale of preferred stocks and bonds.' By this simple expedient, then, the attenuation of the equity in the property brings about an abnormally accentuated rate of return upon a relatively small part of the total investment. This contingency of magnified earning power operates something like the nozzle of a hose pipe in speeding up the flow, so to speak. But the financial danger in such a set-up, customarily created on the crest of a wave of prosperity, arises from the little appreciated but simple mathematical proposition that declines are accentuated as truly as are increases in revenue. In other words, a minor drop in the income of the operating concern is at once translated into a major one for the holding company."

I continue:

The inability of State commissions to regulate such combinations where one of the parties is chartered in another State has been pointed out by the Massachusetts Department of Public Utilities in a report to the Massachusetts Legislature (El. Wed. December 18, 1926, p. 1288) and by the New York Public Utilities Commission in connection with the formation of the Northeastern Power Co. (Atlantic Monthly, November, 1926, pp. 684-685). Other State commissions are struggling ineffectually with problems of regulation growing out of pyramided holding-company control of operating companies and its concomitant problems of interstate ownership and interstate business in electric power.

In this article, dealing with this subject, Professor Ripley has asserted that "the impotence of State administrative agencies in the face of the growth of these great combinations is indubitable," and has suggested several lines that State and Federal legislation may take to alleviate the situation, but refrains from definite recommendation on the grounds, etc.

I continue as follows:

Various efforts have been made by State commissions to handle cooperatively the problems arising out of the interstate movement of power.

Such as we were told about this morning by Judge Ainey regarding the cooperative effort of the Pennsylvania and Maryland commissions.

If the view of the Rhode Island court prevails, however, it is evident that any accord established between the States can be nullified and rendered inoperative by any aggrieved company carrying its case to the courts. Such a condition of affairs points to the need of a Federal body to regulate interstate commerce in power; otherwise the growing movement of power in interstate commerce leaves the industry only partially regulated.

Much importance is attached in statements that appear from time to time dealing with conditions prevailing in the power industry to the fact that notwithstanding marked increases in the general price level of commodities of household consumption, as shown by the statistics of retail prices compiled by the Department of Labor, electricity for lighting shows little if any increase since 1913.

We have had evidence of that character here.

Specifically the report of the Bureau of Labor Statistics for December, 1926, shows that for 51 cities for which prices of electric energy are compiled the

rates on the first block show the following changes as compared with 1913; cities showing decreases, 36; cities showing no change, 8; cities showing increases, 6: and cities in which two companies operate, one showing decrease and the other no change, 1. In a majority of the 51 cities household lighting rates have, however, the price data of the bureau on the whole, decreased since 1913. Since the labor statistics cover but 51 of the larger cities of the country, it is unsafe to assume that household consumers generally have benefited in an equal degree.

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According to the statistics of the Electrical World, the small consumer, notwithstanding the fact that his rate is the subject of far more consideration from State regulation agencies than the rate of the power consumer, experienced an average increase in price from 7.07 to 7.36 cents during the 5 years covered, while the more fortunate power consumer had his rate reduced from 1.50 to 1.29 cents during the same period, and electric railways likewise saw their average rate decrease from 0.93 to 0.85 cents.

The data available for the five years, 1922 to 1926, indicate that small consumers whose rates are the principal subject of regulatory effort have been consuming about the same proportion of total energy generated and are paying slightly higher rates, while large industrial power consumers whose rates receive but little attention from regulatory agencies are consuming increasing proportions of total energy at lower rates. The result is that the smaller consumer is paying an increasing proportion of the total income of the power industry. It therefore appears that State regulation may well give greater consideration to the question of whether, in some cases at least, an undue burden is being placed upon the small consumer for the benefit of the large power consumer. In the recently decided Worcester Electric Co. case the question of the proportion of burden properly to be borne by each class of consumers received considerable attention from the Massachusetts Department of Public Utilities.

In certain instances, municipalities have themselves entered into the electric power business in competition with privately owned local companies because of dissatisfaction with rates of service. Cleveland, Ohio, is such a municipality. The city was served by the Cleveland Electric Illuminating Co. The city asked for a reduction in rates, the maximum of which was 10 cents per kilowatt-hour, but the company proved to the satisfaction of the public-utility commission and of the court that it could not net a reasonable rate of return on its investment if the rates were lowered. The city then established a municipal plant and later the company cut its rate from 10 to 5 cents per kilowatt-hour. Much to the company's own surprise its gross receipts did not suffer at the lower rates.

I have been in communication with the authorities of the city of Cleveland and the manager of the business is quite willing to come and give their experience to the investigating committee.

The CHAIRMAN. Have you any objection to publishing all this that you have read?

Senator WALSH of Montana. Certainly not. I am quite willing to have the whole report published.

The CHAIRMAN. I think it should all be published.

Senator WALSH of Montana. It will be published. It is being published now.

The CHAIRMAN. In such a way that it will be accessible?
Senator WALSH of Montana. Yes. I continue as follows:

It is also said that Lincoln, Nebr., established a small municipal plant for a like reason and that the local private company thereupon reduced its rate to 5 cents per kilowatt-hour.

Maquoketa, Iowa, built a generating plant with a Diesel engine as a prime mover and furnished current, first to the street-lighting system and the local industries and eventually to the residences. Its reason for doing so was dissatisfaction with the rates offered by the Iowa Electric Co., which served that municipality and many others.