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MAY 12, 1914.
COMMITTEE ON INTERSTATE COMMERCE,
UNITED STATES SENATE,
Washington, D.C.-10.25 a. m. Present: Senators Newlands (chairman), Pomerene, Robinson, Thompson, Cummins, Brandegee, Oliver, and La Follette.
STATEMENT OF MR. BERNARD FLEXNER.
The CHAIRMAN. Will you give your occupation and residence address?
Mr. FLEXNER. Chicago, Ill. I represent the Middle West Utilities Co., which is organized under the laws of the State of Delaware for the purpose of holding the securities of subsidiary companies engaged in the business of public utilities.
The CHAIRMAN. What is your number in Chicago?
The CHAIRMAN. Well, Mr. Flexner, will you kindly go on and make your statement?
Senator POMEREN E. Where is this company located?
Mr. FLEXNER. This company, as I stated, is organized under the laws of the State of Delaware. It has an office in Wilmington, Del., and one in Chicago. It holds the securities of various operating companies operating in the States of Illinois, Indiana, Kentucky, Oklahoma, Missouri, Michigan, New York, Vermont, New Hampshire, Maine, Wisconsin, and Nebraska. The operating companies, whose securities it holds, operate in all in 315 municipalities. The business done is that of gas, electricity, water, and some street and interurban electric railways.
Senator POMERENE. The Wilmington office is maintained simply for the purpose of complying with the law?
Mr. FLEXNER. Yes, sir.
Mr. FLEXNER. The business is maintaining an active office in the city of Chicago.
Senator POMERENE. For what reason did it not organize under the Illinois law ?
Mr. FLEXNER. For several reasons. In the first place, it is very doubtful under the Illinois law as to whether or not one corporation can hold the stock of another. In the next place, one of its subsidiaries, which is operating in the State of Illinois, is an Illinois corporation. Finally, the law requires, in most of the States, that a corporation carrying on a public utility must be a domestic corporation, and, as a matter of fact, in order to get the privileges that a corporation engaged in this business must have, such as, for instance the right of eminent domain, it is necessary to organize under the laws of the particular State where the corporation is operating. The Middle West Utilities Co. is not organized as an operating company, but as an investment company for the purpose of holding the securi
ties of its subsidiaries as investments. There is, therefore, no reason why it should have organized under the Illinois law, and, furthermore, there was legal objection to its doing so.
Senator POMERENE. You sought to evade the laws by incorporating in Delaware?
Mr. FLEXNER. The Delaware incorporation laws are liberal, and the Middle West Utilities Co. was organized in Delaware for the reasons I have heretofore stated.
Senator CUMMINS. I think your name is signed to this brief which is before us?
Mr. FLEXNER. Yes, sir.
Senator CUMMINS. I wish that before you enter the subject that you will discuss-you would point out in what respects this bill prevents the things in which you are engaged, in which your company is engaged. It seems to me the brief rather fails in that regard.
Mr. FLEXNER. I am particularly concerned with sections 9, 10, 11, and 12 of the proposed bill-section 9, relating to community of directors or officers; section 10, which forbids intercorporate steekholding; section 11, which forbids holding companies; section 12, requirements with reference to full-paid stock. I desire to say at the outset that in so far as the bill may be aimed at certain evils for the purpose of stifling competition in situations where competition should be kept alive I am in sympathy with the proposed legislation. Fer Congress, however, to include utilities in the class of corporations just referred to by me is to go counter to what the various commissions in the States have specially held and as to what public writers and economists have held, including the President of the United States. The first quotation in the addenda to our brief, which we filed here, is a statement taken from an address before the students of the University of California by the President of the United States, in which he refers to public-service corporations as natural monopolies. To legislate against the particular kind of holding companies which I represent here, further, is to take the chance of working a very serious injury to the public and to corporations that legitimately have played a tremendous part in the industrial and social development of this country. Nothing illustrates better the extent to which these companies have taken a part in the development of the country than to state that the total capital invested in electric, gas, and interurban railway companies in this country is estimated to exceed $8,000,000,000; that of this capital nearly five and a half billion dollars are controlled by holding companies and their subsidiary companies; and that of the approximately 89,000,000 people served by electric light and power and gas companies over 62,000,000—approximately 70 per cent—are served by holding-company systems. Furthermore, that in order to provide the service which the public has every reason to demand, new capital at the rate of approximately $100,000,000 per year, or $8,000,000 per week, will be required for several years to come, if the present rate of progress is to be maintained. Sections 9, 10, and 11 are all directed to the preservation of competition, and I repeat that legislation based on the policy of preserving competition in utilities is economically unsound and wasteful. The whole history of regulation of public service corporations by commissions in this country is illustrative of this statement. Thirty States in the Union, including Colorado and Maine, whose statutes are to be submitted to a referendum, and including the District of Columbia, in the creation of public service commissions, recognize this disposition as economically sound. Sections 10 and 11 of the proposed bill in undertaking to prohibit intercorporate stockholding would exempt public utilities.
Senator Cummins. Now, with regard to this, what companies' stocks or securities are held by your Delaware company, which are competitors in the business in which they are engaged?
Mr. FLEXNER. I can probably answer your question best by giving you a concrete illustration of a company that conceivably might be. The Middle West Utlilties Co. owns the stock of the Twin State Gas & Electric Co., which is a company engaged in commerce between the States. It does business in Maine, New Hampshire, in Vermont, and in New York State.
Senator POMERENE. What kind of business?
Mr. FLEXNER. Public utilities, gas and electricity. That company operates, among some of its properties, certain properties in Vermont. It is proposing at the moment to acquire a competing company in one of the towns in Vermont where it is now operating. It is likewise proposing presently to acquire a competing property in one of the towns in New York State, where it is likewise operating. The acquisition of both of the properties which I have mentioned will be with the acquiescence and consent of the public authorities and the consent of two State public service commissions. We have, therefore, a corporation clearly engaged in interstate commerce proposing to acquire the securities of two other competing companies. The acquisition of these properties would, it seems to me, be clearly within the inhibition of section 10 of the proposed bill, in that competition would be either destroyed, or competitive conditions substantially impaired; and, notwithstanding the fact that the public interest would be served by permitting the acquisition of these two companies, and notwithstanding, further, that the public authorities of the communities directly concerned consented thereto and that the two State commissions of the States that were particularly interested also consented, Congress is proposing to forbid the thing being done. Every consideration as regards public interests, in so far as a public utility is concerned, is fully met in 30 States and in the District of Columbia, as I have stated, through the regulatory power of their public service commissions.
The companies are compelled to give safe and adequate service at reasonable rates and without discrimination. They are, likewise, compelled to set apart annually a depreciation fund, to adopt approved accounting methods, and to install sa fety devices. The issuance of securities is under the control of the commission, the amount of the securities to be issued, the amount that they must yield, the purpose to which the proceeds may be applied. Here, then, we have the States, through State agency, exercising every power necessary in the public interest, and I dare say that the most ardent advocate of preserving competition will not urge it as a means of securing the best results from utilities. No better illustration of this last statement could be given than arises out of the situation in Chickasha, Okla., with which I am personally familiar. A short time ago there were two companies in Chickasha engaged in generating and distributing electricity. The Middle West Utilities Co. acquired the securities of one of these companies. The two companies, in an effort to get business, engaged in a bitter competitive warfare, with the result that one went into the hands of a receiver; the other was unable to render either the kind of service it should render the public, or to keep up its property adequately. Under the constitution of Oklahoma one public utility may not acquire another, or consolidate with another, except by a special legislative act upon the recommendation of the corporation commission of the State. The business interests of Chickasha were so disgusted with the situation that they petitioned the corporation commission to consent to the consolidation and to secure the necessary legislative authority. The commission made an independent investigation; was convinced that the interests of the public would be best served by one company; petitioned the legislature for the necessary authority, and one of the companies acquired the other, with the result that as soon as this was done new money was put into the property for the purpose of enabling it to give to the citizens of Chickasha improved service.
Senator Cummins. You propose to carry on those two companies in the same community as though they were rivals of each other?
Mr. FLEXNER. No; they will be operated as one company, and competition there will not only be impaired, but will be destroyed. In carrying out this arrangement the public will be benefited, inasmuch as the protection of the public arises out of regulation and not out of competition, as previously stated by me.
Senator CUMMINS. Granting that, why can not you acquire the property?
Mr. FLEXNER. It may be possible in certain instances to acquire the physical property, but, on the other hand, a situation might arise in which this might not be possible; for instance, where there is an outstanding minority stock interest, that would prevent the conveyance of the property itself.
Senator CUMMINS. Is there any other instances in which your company holds the stock of a rival or competing company?
Mr. FLEXNER. Yes; and the instances might be multiplied, depending upon what the courts will finally hold to be interstate commerce. As the committee doubtless knows, the majority of all utilities are operated by companies doing an intrastate business. As I stated at the outset, that is due in large measure because the laws of the State require the organization of domestic corporations in order to get certain privileges and powers. Many of these intrastate companies deliver current at the State line to a company operating in an adjoining State. The courts have not held whether companies engaged in doing this are engaged in commerce between the States.
Senator CUMMINS. I am not speaking about the character of the business, whether it is interstate or intrastate. I am speaking about
I the business as being competitive. Of course, the street car system of one town is not competitive with the street car system of another, no matter if they are both interstate. The electric lighting system of one town is not competitive with an electric lighting system of another town. That is a situation of very rare occurrence anyhow. I do not know of any.
Mr. FLEXNER. The New England situation that I have given you
Senator CUMMINS. That is one situation where you propose to consolidate two competitive systems in a particular town or community, but I mean the great mass of your business or the business of the companies which you control is not in any sense competitive, and is separated by distances so that it can not be competitive.
Mr. FLEXNER. That is perfectly true.
Mr. FLEXNER. The general proposition is true, but, on the other hand, gas and electric lighting companies in the same district are competitive or generally recognized as competitive.
Senator CUMMINS. I think that is true myself.
Mr. FLEXNER. Addressing myself further to the question asked by Senator Cummins, the company I represent is interested in an operating company engaged in the production of electricity in the eastern part of the State of Kentucky and through the eastern Kentucky coal fields. It is likewise interested in operating a company across the line in the State of Virginia, practically occupying the same field in that State and adjoining the Kentucky situation of which I have just spoken. If not actually competing, they are potentially competing, and no possible advantage to the public will arise out of a competitive warfare between two companies of this kind. The burden and waste would in the end be borne by the public.
Senator CUMMINS. You think that the gas business and electric light business of a particular community ought to be controlled, if they are separate companies, by one holding company?
Mr. FLEXNER. It has been permitted over and over again.
Senator CUMMINS. One company may do both kinds of business, but if they are separate companies, is there any reason for their being controlled by a single company?
Senator ROBINSON. What public interest could be served by that method of control?
Mr. FLEXNER. All of the advantages that arise out of a unified system of management and the economies and the improvements that would result. Where operation is subject to regulation throughoutservice rendered, issuance of securities, etc.—public interests will be amply protected.
Senator Robinson. Conceding that is true, the question I asked you, you do not seem to be answering. I asked what public interest would be served by permitting, for instance, a gas company and an electric company operating in the same town, as a public utility, to be controlled through a holding company. How would the public be benefited by that kind of manipulation, and what could be the purpose of it except the suppression of the competition that ought to exist between those two companies ?
Mr. FLEXNER. I can only repeat what I have just said in answer to the Senator's question.
Senator CUMMINS. That argument leads to the conclusion that a complete monopoly is wise wherever the public undertakes to regulate the service or price of the service at all. That argument would lead to a consolidation of all the railroads of the country, all suburban lines in the country, and all the street car companies, with the electrict lighting companies, and with the gas companies, and with the telephone companies, and everything else that the public undertakes to regulate.