Appendix — Securities & Exchange Commission v. New England Electric System

SINAAIN [ : thes FILED -

| BE IPREME COURT. U. 5. y glean meet |

baal .f , NOV’ 22 1967 3

__ APPENDIX oD. JOHN F, DAVIS, CLERK. |

In the Sugeene Court of the. United States

' OCTOBER TERM, 1967

7 ae

SECURITIES AND. EXCHANGE COMMISSION, ,

. Sense. MR

Vv.

_ NEW: ENGLAND ELECTRIC SYSTEM, ET AL.

-

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIRST CIRCUIT

PETITION FOR CERTIORARI FILED JUNE 28, 1967 |

| CERTIORARI GRANTED OCTOBER: 9, 1967

_____ APPENDIX TO-THE BRIEFS

In the Supreme Cased: of the United States

OCTOBER, TERM, 1967

No. 305°

SECURITIES AND EXCHANGE COMMISSION,

‘PETITIONER °

v. :

NEW ENGLAND ELECTRIC SYSTEM, ET AL.

ON WRIT OF. CERTIORARI TO -THE UNITED STATES

COURT OF APPEALS FOR THE FIRST €IRCUIP

pe 3 %

ze .

otras _ °° \ CONTENTS

Docket Entries

Findings and Opinion of the Securities and Exchange Com-

spmllommiioin, Dienmai, 0, RIBG canescens

Opinion and Judgment of the Court of Appeals, June 4, .

1965

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DOCKET ENTRIES _—_*

| Before the Securities and Exchange Commission -

Augus me, Bs 1957 Notice and order of the Securities and .

Exchange Commission for, a hearing

pursuant to ‘section 11(b)(1) of the

| . Public Utility Holding — Act of -

os “ 1935.

September 30,1957 Answer filed jointly ef New England

a Electric System and all other ene:

ents.

March ‘ 19; 1964 . Findings and Opinion of the Commis- ‘

“ sion Order of the Commission

ae May 14, 1964. Application of Respondents for stay. of

_ order ' pending. judicial review.

June 25, 1964 Order of ‘Commission granting stay, °

Before the Court of aeinthia for the First Circuit

May 15, 1964 Petition to review the order of the Com-

mission filed in the Court of. ——.

for the Fitst Circuit.

January 6, 1965: Heard before Aldrich, Sweeny and.

.Wyzanski, JJ.

June - 4, 1965 Opinion of the Court of Appeals

Decree entered by: the Court of Appeals

vacating the order of the Commission’

and remanding the case to the Commis-

sion for further action not inconsistent

with the mts opinion.

4,

Before the Supreme Court ,

October . oe 1965 Petition for a writ of Certiorari filed —

in the Supreme Court. ,

December 13, 1965 Order of the Supreme Court filed grant-

_ ing the Petition.

Tete

e oe

October -

x March we $1, 1967. :

| -_ Decree entered by the Court of Appeals

‘vacating the order of the Commission

.and remanding the case to the Commis-

sion. for further action not inconsistent

’ June

- October

: 16, 1968

_ 8, 1966

emparaee

Opinion. of -the Saino, Court filed

reversing the judgment of the Court of,

Appeals and remanding the cause for

review by the Court of Appeals in light

of the Supreme Court’s opinion. —

Before the Court of Appeals for the First Circuit

Heard a Aldrich, Woodbury and.

' Coffin, JJ.

Opinion of ‘the Court of f Appeals,

with the conte opinion. .

v

Before the ran Court

28,, 1967

9, 1967

Petition. for a writ of Certiorari filed —

in the Supreme Court.

Order of Supreme Court filed granting

_ the Petition. a

>»

BY

e*

.,

«

FINDINGS AND OPINION OF THE COMMISSION .

By Whitney, Commissioner pat a

This is the final phase of. fprocsedings instituted — us

under Section 11(b) (1) of the-Public Utility Holding’

Company Act of 1935 (“Act”) for the purpose. of -deter-

. mining the extent to which the electric, gas, and other _

_ operations of the. holding-company system of New. Eng-"

‘land Electric System (“NEES”), a registered; holding |

company,-may be retained under common control. :

We previously found that the electric utility assets of

the NEES subsidiaries meet the definition of a single

integrated public-utility system,! and NEES has elected

to retain those’ assets as its principal system. The chief.

remaining issue. now before us is whether the gas utility

subsidiaries of NEES, which concededly constitute a sin-

gle integrated gas utility: system as defined in the Act,? .

“may also be retained as an additional integrated utility

system under the standards: erie in 1 Section 11( b)

(1) of the Act. i |

‘Hearings were held at which diideries’t in ‘support of re-°

tention was presented by NEES and. its ‘subsidiaries

(“respondents”) and by the Department of Public. Utili-

ties of the ‘Commonwealth of Massachusetts (“Massachu-.

setts DPU”) and evidence.in opposition to retention was .

adduced by our Division of Corporate Regulation (“Divi-

sion”). Proposed findings and briefs were filed, and we

‘ heard oral argument. Our findings are e base on an inde-

pendent review of the’ record.

_ 1 New England Electric : Bietem, 38 S.E.C. 193 (1958).

2 Section 2(a) (29) (B) of the Act defines an integrated gas utility

system as “. ... a system consisting of one or more gas utility com-

_ panies which : e so located and related that’.substantial economies -

. .- may be effectuated by being operated as a single coordinated system -

confined in its operations to a single area or region, in one or more ©

States, not so large as to impair (considéring the state of ‘the art

and the area or region affected) the adyantages of localized manage- ~

ment, efficient: operation, and the effectiveness of regulation: Pro- .

vided,.That gas utility companies derivipg natural gas from a com-

mon source of supply may be deemed. to be included in a single area

. OF . Fegion.” f.

; 4 ‘ ek ‘ : | i ae . = e ,

ee Description of the NEES System.

NEES ‘is a holding company controlling. seven 1 electric

“utility subsidiaries and eight gas utflity subsidiaries. It .

‘** also owns thirty percent of the outstanding. stock of

: , Yankee Atomic Electric Company through one.of its elec-

: trie utility subsidiaries and all the comrnon stock of New

England Power Strvice Company (“NEPSCO”), ‘which

provides various services to the entire system. The retail

electric operations ‘serve 824,000 customers in- the states

> of New Hampshire, Massachusetts, Rhode Island,. and.

- © Connecticut comprising a franchise area of about 4,600:

_ square-miles with a total population of over 2,300, 000

people. As .of December 31, 1958, the gross investment

in electric plant and equipment was approximately $600,-

‘ * 000,000 and gross revenues from sales of electricity in

’ 1958 were approximately $143,000,000.2 The NEES gas

‘subsidiaries. provide retail service to about 237,000 cus-

tomers in Massachusetts only, in an area of 660 square’ -

-.miles with ‘a population of approximately 1,032,000 peo-

ple. Of this gas franchise area, about 494 square miles,

or 75%, is also part. of: the franchise area of NEES’

electric. subsidiaries, and approximately 78% of the gas

customefs are also served with electricity. by the NEES

electric companies. The NEES gas subsidiaries and

NEES’ ownership of their common stock are as follows: —

% Common Stock

- Company. . Ownership by NEES

Central Massachusetts Gas ennai .

(“Central Massachusetts” ). i - 100.00

.. Lawrence Gas Company (“Lawrence”) 90.43"

Lynn Gas Company (“Lynn”) © i 93.76.

_. Mystic Valley Gas Company (‘Mystic’) - ~*... $041

North: Shore Gas Company (“North Shore”) 97.52

Northampton Gas Light Company ;

.°- (“Northampton”) ar - 100.00

Norwood Gas Company (“Norwood”) — 99.38

Wachusett Gas — (“Wachusett”) ; 100.00

menagtniioes

The basic figures in the pasend are for the year ended Decem-

_ber 31, 1958, the latest year ‘for which audited financial statements

were available atthe time of the Hearings, an 1958 has an used

as a-test year for the purposes of these proc ings.

5

Most of. these gas properties were acquired by NEES

in. the period from 1926 to 1931. As of December 31,

1958, the NEES investment in gross gas plant and equip-

_ ment was approximately $56,300,000 and gross revenue

from gas sales in 1958 was approximately $22,700,000.

The bulk of the gas sold by the NEES subsidiaries. is

natural gas produced in the southern United ,States, prin- -

cipally Texas, and purchased from pipeline companies:

that deliver it to Massachusetts.‘ Each of the gas subsidi-

aries also owns and operates facilities for the production

of manufactured gas for peak-shaving and emergency

stand-by purposes.

After an attempt to sell the gas. properties in the early

1950’s which was not consummated because of the pros-

pective purchaser’s inability to obtain required cing,

' in 1952 NEES separated various aspects of th ‘activities

_ of the gas subsidiaries from those of the e i

‘nies. It established a Gas Division with headquarters at

Malden, Massachusetts,® to supervise the 8 gas companies.

‘The executive head of the Gas Division is also president

“of each of the gas companies and the staff of that Divi- .

sion are all part-time employees of each(of the gas com-

panies, and the selaries of those person® are paid pro

rata by those companies. The Gas Division has four func-

tional departments—management, marketing and supply,

operations, and merchandising—and pr ides centralized

service to’ the gas companies withwrespect to sch matters

as gas acquisition and distribution, engineering, sale- pro-

motion, and-new business development. Each of the gas

companies has a vice-president and general manager who

is in immediate charge of the company and reports li-

rectly to the head of the Gas Division; the latter, in turn,

is responsible to the NEES top management.- —

Other aspects of the gas and electric business ‘have

continued to’ be handled on a joint: “basis. Such joint ac-

“

‘ Seven of the gas companies, purchase | natural gas from one

pipeline, and the- remaining cofhpany purchases such gas from,/

another pipeline. About 98% of the natural gas is sparse snag

' the first pipeline company.

5 All of the gas companies are va 48 miles of Malden, except

one which is 80 miles distant.

tivities include treasury and accounting services, meter.

reading, customer billing, labor negotiations and adminis-

tration of employee programs, procuring insurance, pur-

chasing: operations, and- joint use of office and other space

and equipment. Some of these services are performed by

NEPSCO ona contract basis with the individual system

companies. NEPSCO’s services include supervision of

‘local accounting departments, preparation of tax returns:

and regulatory reports,- and handling of rate, personnel

and public relations matters. In 1958 NEPSCO’s charges

to the gas companies aggregated $317,000. 4

‘Statutory Standards

Section 11(b) (1). of the Act, imposes requirements for

geographic and economic integration. which were designed

to eliminate evils that Congress found to exist “when the

growth and extension of holding companies bears no rela-

tion to . ... the integration and coordination. of related

operating properties.” * Congress recognized that in the

absence of clearly overriding considerations a utility sys-

tem should have a management Single-mindedly devoted

to advancing the interests of its investors and consumers

and not engaged, through the mieans of the holding com-

pany device, in operating other separate or ‘competing

utility or non-utility business. It accordingly laid down

the basic requirement in Section 11(b) (1) that registered

holding companies and their subsidiaries limit their oper-

-ations to a single integrated public utility system and any

other businesses reasonably incidental or economically

necessary or appropriate to the operations.of such system:

‘Exemption from this requirement was provided in excep- .

tional cases meeting specific geographic and- economic

tests. Under Clauses A; B and C of that Section, we .

must permit a holding company to continue to control one —

or more additional integrated public utility systems if we

‘find that: oe

P (A) Each of such additional systems cannot be ;

operated as an independent system without the loss

6 Section 1(b) (4) of the Act.

b

oe

of substantial. economies which can be secured by the

retention of ‘control by such holding company of such

system; - a eae fd eee :

“(B) All of such additional systems are located

‘in one State, or in adjoining States, or in a contigu-

ous.foreign country; and ape es

“(C) The continued combination of such systems

under the control of such holding company. is not so

‘large (considering the state of the art and the area

or region affected) as to impair the advantages of -

- localized management, efficient operation, or the ef-

fectiveness of regulation.” vet :

It is well settled that gas properties and electric prop- .

erties, since they pertain to different and competing util-

ity businesses, do not constitute a single integrated public

utility ‘system,7? and as noted- NEES concedes that its

electric and -gas properties constitute.two separate inte-

grated public utility systems. Since NEES has elected to

retain the electric properties as its principal system, the

gas properties can be retained as an additional system

under NEES’ control only if the tests of Clauses A, B, ©

- and C-above are satisfied. There is no question under

- Clauses B and C. Since all the NEES gas subsidiaries

are located within Massachusetts, the standard of Clause _

B is. met. Also the Division acknowledges, and we find, —

that the size of the combined gas and electric operations

is not so large as to raise any substantial question under

the standards of Clause C with respect to the advantages

of localized management, efficient. operation, and the ef-

- fectiveness of, regulation. The issue remains, therefore,

whether continued control by NEES of the gas companies

is’ necessary.to prevent the’ loss of substantial economies.

within the meaning of Clause A. . . er

Clause A was intended to limit the retention of: utility

systems in addition to the principal system controlled by

7 See Columbia Gas & Electric Corp., 8 S.E.C. 448, 462-63 (1941);

The United Gas Improvement Co., 9 S.E.C. 52, 77-83 (1941); The

North American Co., 11 S.E.C, 194, 215-16 (1942), aff’d on other

grounds sub nom. North American Co, V. S.E.C., 133 F.2d 148

(C.A. 281943) ; Philadelphia Co., 28 S.E.C. 35 (1948), aff’d sub nom.

Philadelphia Co. v. S.E.C., 177 F.2d 720, .723 (C.A.D.C., 1949).

|

Sj aah Risch ral ahem eee ie

"s 8

a holding company to situations where it could be shown

that the additional systems were integrated in-nature and

“were so small that they were incapable of independent

‘- économie operation” * and had a “real economic need” for

management together with the principal system.® Con-

gress was aware that some loss of economies would usu-

_ally result from the separation of jointly controlled utility

systems,” but considered that continued joint manage-

_ ment should be permitted only where separation would

entail a loss of economies which would be substantial in

‘the sense that they. were important to the ability of the

additional system to operate soundly. As stated by the

United States Circuit Court for the District of Columbia:

“Substantial economies,” means something different —

and, we think, something more than substantial sav-

ings in operational expenses. Congress could -have- -

said that the divorcement shall not be decreed if the’

controlling utility.or the controlled utility show at a

hearing that the cost to operate the latter separately

from the former would be substantially greater. If

‘the Act can be construed as meaning just that, then

.

-

8 Remarks of Senator Wheeler following passage of the Act, 79th

CONG.;. REC. 14479. (1985): “After considerable discussion the

Senate ‘conferees, concluded that the furthest concession they could

make would be fo permit the Commission to allow a Kolding com- .

pany to control more than one integrated system if the additional:

systems wére in the same region as the principal system and were —

so small that they were incapable. of independent economical opera-

és <

® H.R. Rep. No. 1903, 74th Cong., 1st Sess., p. 71 (1935). See

also The North American: Co. v. S.EC., 327 U.S. 686,. 696-97

(1946): “In essence [Section’ 11(k)(1)] confines the operations of

each holding company system to a single integrated public utility

system with provision for the retention of additional systems only

‘if they are relatively small .. . and unable to operate economically

under separate management without the loss of substantial econo-

‘mies.” (Emphasis added.)

"20 See Hearings before Committee on Interstate and: Foreign

‘Commerce on H.R. 5423, 74th Cong., 1st Sess. (1935), Pt. 2, pp.

1249, 1402-03, 1530-31, Pt. 3, pp. 2257- 77, and before Committee

on Interstate Cotamerce on S. 1725, 74th Cong:, Ast Sess. (1935),

p. 65.

9

the severance ordered here is wrong. “Substantial. _

economies” must mean, as was said in-North Ameri- .

can Co. v. Securities and Exchange Commission, 2

Cir., 133 F.2d 148, 152, “important economies.” - The

required importance must relate to the healthful con-

tinuing business and service of the freed utility. But

Congress was not so much concerned with the profit

motive of utilities 2s with the evils that had become

prevalent through combinations of utilities. It~was

first concerned with the wiping out of the evils which

the practice of utility combinations had produced,

and Congress only consented to dull the blade of its

chosen weapon in proved. hard cases. (Italics in

original)" 1 oo pee

In light of the legislative background, as buttressed by

court interpretation, demonstating that Clause A was -

meant to provide for a limited, exception to the general

policy expressed in the Section, we have held that the

clause must be strictly construed and that a registrant

seeking to retain an additional system-has the burden of ».

showing by clear and convincing evidence that such addi-

- tional system cannot be operated under separate owner-

ship. without. the loss of economies so important as to

cause a serious impairment of that system.” : :

Estiniated Loss of Economies from ‘Severance of Gas

System

In support of their position that severance of the gas

subsidiaries from the NEES system would result in the

loss of “substantial economies” within the meaning of

11 Engingers Public Service Co. Vv. S.E.C., 188 F.2d 936, 944

(C.A.D.C., 1943). oy -

12 Engineers Public Service Co., 12 S.E.C. 41, 60 (1942); Phila-

delphia Co., 28 S.E.C. 35, 45-47 (1948), aff’d sub nom. Philadelphia

Co, v. S.E.C., 177 F.2d 720 (C.A.D.C,, 1949) ; Middle South Utilities —

Inc.,-35 S.E.C. 1, 11. (1953); The North American Co., 11 S.E.C.,

194, 208-9 (1942), aff’d on other grounds sub nom. North American

Co. Vv. S.E.C., 183 F.2d 148 (C.A. 2, 1943) ; Cities Service Power &

Light Co., 14 S.E.C. 28,°187 (1943); The Middle West Corp., 15

S.E.C. 309, 318 (1944); Cities Service Co., 15 S.E.C. 962, 984

(1944). | . a . “te

Pe

Clause A, respondents rely essentially upon a study made

_. for them by Ebasco Services Incorporated (“Ebasco”),

- Management consultants with extensive experience in the

utilities field, which showed. that severance would bring

an increase in operating costs. Based on- Ebasco’s supple-

‘ mented study," respondents’ estimated increase in’ annual

8 The study as initially presented assumed that eaeh of the gas

companies would -be operated separately, it being respondents’ view

that, notwithstanding the gas companies ‘are presently operated as

a single integrated public-utility system, the fact that they might ©

-be disposed of individually or in groups made it proper to consider

the increase in costs which would be incurred under individual

operation. Following objections by the Division that the proper.

approach required the. assumption that the gas’ companies would

continue to be operated together as a single- system, rather than

’ separately,.the study was supplemented ,So as to provide for a

Central Organization for the eight gas: companies after sever-

ance. The study, as thus modified, indicated the estimated increase

- in annual operating costs of the gas system after severance would ~

be $329,400 less than the increase estimated on the initial assump-

tion of-.eight separate gas companies without any Central Organi-

zation. aiken: *E

It would be inappropriate to give any weight to the estimates °

of increased costs to the gas companics on the assumption of sep-

_ arate operations by each of them after severance. Both. we and

the courts have held that the loss of economies to be considered

under Clause A is that pertaining to the additional integrated .

system sought-to be retained (See Engineers Public Service Co.

V. S.E.€., supra note 11 at 944; The North American Co. v. S.EC.,

supra note 12 133 F.2d at 152; Philadelphia Co., supra note 12, 28

_ §.E.C. at 52; General Public Utilities Corp., 32 S.E.C. 807, 838-9

(1951)), and we find no basis for departing from this established

interpretation of the Act in-this case. Moreover, we noted in the

General Public Utilitieé case at. p. 835, note 33: “The severance

study alsp estimated the ‘loss of economies’ upon the assumption °

< oF

that each’ of the gas divisions was a separate integrated public ~ y

- tility system. Since we have determined that the gas properties

constitute a single integrated public-utility system, we have given.

no consideration to this aspect of the study.”

Respondents’ assertion that a sale of the gas propertiés as a single

system may be difficult if not impossible to achieve is not borne |

out by the record and overlooks the fact that in 1951 NEES obtained

three bids for its gas properties as.a whole, which were thén more

extensive than those now held, even though as has been indicated the.

contract which was signed with the highest bidder was subsequently

terminated because of the latter’s failure to arrange necessary

a

. ie Pas - 11 .

oo cist of the gas system after severance -would

be $1,165,600."

In analyzing’ the Ehasco ést setimate of increased costs *

the gas.system, it is necessary at the beginning to make

a’ downward adjustment in the amount of $67,000, the

- amount by which NEPSCO’s charges to the gas companies

in 1958 would have been increased had a revised basis

of payments authorized by us at the end of 1959 been in

effect in 1958.

We accordingly turn to the’ questions of whether the |

Ebasco estimate, thus reduced to $1,098,600, is an accept-

able basis. on which’ to determine the present issues and

whether it indicates that the tést of Clause A -is met.

The Division contends that the estimate is not valid be-

cause it attributes excessive amounts of expenses to the

pro forma. combined gas operations And that, even assum-

ing increased costs as estimated,/they do not represent.

financing. Moreover, it fails to consider other methods of divest-

- ment of the gas system as a whole, Thus, NEES’ stock holdings in

the gas companies could be placed in a new company the stock of

which could be sold or distributed as dividends to the NEES stock-

holders over an appropriate period of time.

14 The study also estimated that the costs of the- NEES electric

subsidiaries would be increased after severance by $804,800 per

year. However, such increase is not a/factar which could justify

retention of the: gas system if it is fdind that the latter can be ©

economically. operated independent f NEES. General Public

Utilitiés Corporation, 32 S.E.C.

the statute is the limitin rstate utility holding company

operations to a single integyated utility system managed exclusively

in the interest of its. o investors and consumers and the re-

stricting of ownership or domination of such a system by interests

principally engaged in otKer activities. The Act is not directed

at preserving the benefits which the principal activity derives from

the joint ownership with the other activities. Moreover, it may be

noted that in any event the asserted $804,800 loss of economies to

the electric system cannot properly be viewed as “substantial” in

light of the fact that it is but 0.56% of that system’s electric

operating -revenues and 0.76% of its electric operating revenue

deduttions before Federal income taxes.

15 Under. the revision approved in 1959, NEES’s payroll and

related expenses were transferred to NEPSCO and were ‘allocated

to the companies benefiting from the services according to a desig-

nated formula. ‘ :

, 838-9,(1951). The thrust of -—

12°

the loss of substantial economies warranting retention.of —

the gas properties under common control with the NEES

electri¢ system. Jae oe

The Ebasco estimate is inadequately supported.in a

number of important aspects and leaves considerable

. doubts which respondents have not satisfactorily overcome

in the record. Of the total estimated increase in the ex-

penses of the gas companies after severance, $472,100 is

attributed by Ebasco to:so-ealled treasury and accounting

, costs, which ‘comprise the categories of customer account-

ing, general accounting, machine accounting, stores ac-

‘counting and miscellaneous services. 'The largest single

, item is with respect-to customer accounting, as to which

an increase in costs is estimated in the amount of $415,-

600 or approximately 40%. of the total $1,098,600 esti-

mated increase. In light of the fact: that the supplemented ©

Ebasco study, which assumed that the gas system would

be operated on a combined basis, estimated the same in-

‘crease in customer accounting costs as appeared in the

_ original Ebasco. study, which was based on the assump-

tion that the companies would be operated separately, and.

‘in light of respondents’ and Ebasco’s failure adequately

to explain why combined operations would not result in

lesser amounts for such costs, we conclude that. the $415,-

. 600 figure is overstated. id :

More specifically, one of the important items making .

up the estimated increase in the cost of customer account-

ing after severance is customer billing. Ebasco projected

the gas billing costs on the basis of separate billing oper-

ations by each of the gas companies. Its estimate provides

’ for the employment of additional personnel and rental of

additional equipment by ‘those companies to do their’ own

billing. At present, gas billing is done on a combined

basis with one or more of the NEES electric companies

in the case of each of the gas companies except Norwood,

e

16 The exact cost. attributable by Ebasco to the.additional billing

personnel and equipment in the case of each of the gas companies

is not identified in the estimate, but in the case of Mystic and

Lynn they would total $34,700. |

A a

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4

er

2 ape oS ee oe

the smallest of the companies.’7? However, respondents

have not given any satisfactory reason why at least some

form or forms of combined billing procedure could not be

employed advantageously by. the gas companies, in light

of the fact that their aggregate of 237, on customers is

- located in a relatively compact area.”

Also inadequately explained and casting doubt on: 1 the

estimates of increases in customer accounting expenses. is

the disparity between the increases attribuated to the gas

companies and those attributed to the electric companies.

Thus, for example, in 1958 the cost of customer account-

ing jointly performed for Northampton and Northampton

'. Electric Lighting Company was allocated $17,000; or ©

$2.12 per customer, to the. gas company, and $34, 200, or

$3.60 per customer, to the electric company; whereas un-

‘der the pro forma estimates, the gas company’s costs after

severance would amount to $48,400, or $6.03 per customer,

representing an increase of 184%, and those of the elec.

. tric company would be $38,500, or only $4.05 per cus-

tomer, an increase of 13%. Even accepting MES’ con-

tention that customer accounting costs should be viewed

together with the other treasury and accounting costs, a

substantially similar disparity appears. Total treasury ©

and accounting payroll costs of Northampton, according

to respondents’ estimates, would increase by 85% to $89,-

' 800, or $11.13 per customer, while those of the North-

_—_. \

17 Wachusett and Central Massachusetts have their billing done

by the NEES Central District Treasury Organization at Worcester.

The billing for Lawrence is done jointly with that of Merrimack.

Electric Co. Lynn and Lynn Electric Company and Northampton:

and Northampton Electric Company also have joint billing opera-

tions for their respective gas and electric customers. Mystic’s and

North Shore’s billing is done at Malden, degen? with the billing

for Suburba Electric Company.

18 The testimony of respondent’s Ebasco witness clearly indicates

that centralized billing is predominant in the utilities industry, and

' that savings would be effected thereby. However, although he

expressed the opinion that central billing would not effect “too

\ _ substantial” a saving for the severed gas companies, no attempt was

. made to determine whether, and the extent to which, such savings

would be substantial.

14 ;

ampton Electric Company would increase by only 24% to

— $88,900, or $9.35 per customer. Again in the case’ of

Lynn and Lynn Electric Company, which jointly serve:

fo approximately the same territory and a comparable num-

ber of customer's, and which have done their treasury and

accounting work jointly, in 1958 the payroll costs allo-

- cated to the gas company amounted to $228,300, or $5.58.

per customer, and those charged the electric company were’

$64,000, or $8.02 per customer. Under respondents’ es- .

_ ,timates the pro forma costs would increase by 71% to

_ $390,133, or $9.58 per customer, for the gas*company and

_ only by 22% to.$445,323, or. $9.81 per. customer for the

electric company. The record fails to indicate the validity

of these disproportionate effects.on the customer account-

ing and the total treasury and accounting costs of the

gas and electric companies upon severance. These areas

of expense, in general, are related to the number of cus-.

tomers served and not the type of utility business con-

. ducted. os - : ieee

In view of respondent’s burden of proof and the ab-

-sence of a persuasive explanation on the record, Ebasco’s

failure to consider employment of combined billing proce-

dures and its inadequately explained disparate treatment

_ of certain effects of severance-on the gas and electric

companies, réspectively, substantially impair the credibil-

ity and preclude the acceptance of its estimate of a $472,-

100 increase in treasury and accounting costs and, in

turn, of its over-all estimate of increased costs (of.which

that figure is-a material part) in the determination of

whether severance would result in a substantial loss of,

economies. | ae 3 Teme ice

Respondents contend that-in addition to the estimated

- “Increased expenses to’ which they have assigned dollar

_ amounts there will be other significant losses as a result

of severance which are not measurable in dollars. They

assert in particular that there.would be a loss of experi-

enced administrative, supervisory and long-range plan-

ning personnel and services. However, the Ebasco study’

‘purportedly estimated the costs of providing, organizations

for the .gas companies which would supply appropriate

Pd | . . § z ; * | 4 mn ai

a Ss be . "15. /

petlotninnee ‘and standards.* Moreover, even’ ‘assuming

there would be some “intangible” losses, they must be

-, regarded as part of the over-all effects of severance which

normally accompany any reorganization of operations and

which Congress must have anticipated when. it provided

that, other than in exceptional circumstances, separate

utility systems should be under separate control. Fur-

' ther, we are unable to accept the suggestion thdt the

-NEES integrated gas system; the second, largest gas

utility operation in. Massachusetts, would not be able to

provide. management and service comparable to that pro-

vided ° by other gas utilities in the, state.” In that effort

_ 19 The Central Organization for the gas ‘niin provided for

.under the supplemental Ebasco study is estimated to have an

-. annual cost of $574,000 and would include executive and supervisory

officials and personnel. It would be headed by a president with an *

annual salary of $40,000, as compared to the $25,000 salary paid

in 1958 to the President of the NEES Gas Division, who is also

president of the eight gas subsidiaries. A new position of Executive

. Vice President would be created, with the incumbent, whose duties

would includewassisting the. president and supervising the other

executives, receiving a salary of $25,000. Like the NEES Gas

Division, it would have three assistants to the president and a

sales manager, with functions and salaries similar. to those at

present éxcept that the latter’s salary would be $17, 500, repre-

senting an. increase.of $4,000 per year, and reflecting additional

sales promotion “duties which would be delegated to him by ‘the

president. Twelve additional employees would be provided to

handle public and personnel relations. and safety and purchasing

matters. The salaries of these latter employecs would total $87,000,

approximately the same amount paid in 1958 as salaries. to locally

employed personnel and NEPSCO for similar services. ‘

20 See Cities Service Co., 15 S.E.C. 962, 982 (1944), where in

rejecting a contention that deprivation of the services of a system

service company would result in loss of substantial economies, we -

observed that: o

“to accept an estimate of. present benefit ‘from services rendered

by system service companies as a measure of economies which

would be lost as a result of independence requires us to assume

that financial severance will cast ‘operating units completely

adrift, incapable of providing themselves with comparable bene-

fits as cheaply either directly or through mutual arrangements .

with other operating units. We cannot make that assumption.”

: See also The North American ——* i S.E.C. 194, 210 (1942).

. 16

it would ‘also have the benefit of the experience in unified

gas operations gained by the Gas Division since its for-

mation in 1952. . |

‘ “Even were we to accept the $1, 098,600 estimate of loss

‘of economies to the NEES gas companies, it would not:

-lead .us to conclude that such a loss is so substantial,

-- when compared with the loss of ‘economies involved in.

. prior divestment cases and viewed in light of the objec-

‘tives of the Act, as to warrant retention of the gas prop-

_ erties under common control with the NEES electric sys-

tem. Although that amount is larger than the amounts —

, involved in prior severance cases, we. have. previously

pointed out that, the test of: the. substantiality of the esti-

_ ‘mated loss is not in absolute terms but rather in relation

-. to total revenues, expense. and income.” In the. instant

“ease, the amount: of the estimated loss of economies would

be equal to 4.83% of the gas system’s operating revenues, .

6.03% of operating revenue deductions (excludirig fed-

eral income taxes), and 23.28% -of gross income and

29.94% of:net income before federal income taxes. These ,

. } ratios are lower or not significantly higher than corre-

sponding ratios of gas systems whose divestment we have

required on the ground that the e&8timated loss of econo-

mies was not substantial .within the meaning of Clause

a” -

Respondents and the: ‘Menaebanaits DPU argue that

an increase in operating costs Would have an exceptionally

21 Philadelphia Co., 28° S. E.C. at ; General Public —

. Corp. 32. S.E.C- at’ 837, .

22 Attached as an Appendix ais a table are compares the ad-.

justed Ebasco estimate of loss of economies to the NEES gas sub-

., Sidiaries with the estimated losses in the prior cases where similar

computations were made, in all of which we ordered divestment of

the additional system. We do ‘not attribute any comparability ‘to

the present case to the gross-income and net income ratjos of the

_ gas properties of Jersey Central Power & Light shown in. that table,

which are substantially higher than those of the NEES gas group,

because the gross income of Jersey Central’s gas department prior . -

‘to any severance adjustments was found to be so low as to repre-. - :

seat an unusually low rate pf return on the amounts invested in that-

property. See General Pablic Utilities Corp. . ‘32 S.E.C. 807, 837

(1951): *

©

17

adverse impact in the case of the NEES gas subsidiaries

and therefore should be viewed as: more serious than an

equal dollar amount of increases in other cases because

of the. highly competitive position of gas in relation to

fuel oil in the Massachusetts area. They point out that:

; natural gas is piped from Texas and ‘the price is higher

in the New England area thafr-in any other part of the .

country, whereas oil-is brought in by tanker and: its price

is virtually the same as or lower than in any other part

of the United States. The chief market for gas in the.

NEES area is residential. space heating, and Ebasco

estimated that the annual cost of gas for heating a typical

_New England house is $166, as compared with the cost

of oil of $173, whereas in other parts of the United States

the differential ranges from $27 to $118 in favor of gas.

It is contended that: an increase in the cost of gas oper-

ations as a result of severance would force an increase in

gas rates to customers; and that such an: increase. would

impair the slight competitive advantage now held by gas.

However, even assuming tijat the described competitive

conditions in Massachusetts will continue to pregail, de-

’ spite efforts to improve the cost position of gas through.

such means as storage of off-peak natural gas, those con-

«ditions obtain generally throughout Massachusetts. There

is no evidence that they do not affect in the same manner

other.independent gas utility companies in thé state which

. nevertheless have been able to conduct their operations

and, apparently, earn a fair return without the alleged

advantages of common control with electric utilities by

a holding company. ‘The situation’ of the independent

companies is different, respondents contend, because the

opportunity for increased sales in the NEES gas service

area is limited by a -.more moderate rate of economic

_ growth, population increase, and suburban housing con-

- struction than in other parts°of the state, However,

respondents failed to show that, because of these factors, ._

28 Respondents point out that between 1950 and 1960 the popu-

lation in the NEES franchise areas increased by only 11% while

_ in the franchise areas of* seven. independent Massachusetts gas

companies used by the Division for comparison (see p. 13; infra)

* the increase was 18%. :

18

the impact of severance would be such that the cumbia

NEES gas operations, which are larger than those of

most of the other gas utility companies in Massachusetts,

would be unable. to compete effectively with oil, even

though the nonaffiliated companies are able to do so.**

_ Moreover, the operating ratio® of the NEES gas sys-

‘tem after severance of 76.41% would. be more favorable

or only slightly higher than that of nine nonaffiliated

Massachusetts gas companies selected by respondents for

comparison that have no joint electric operations, which

have a composite ratio of 79.14% and median and mean |

ratios of- 74.87 and 76.85%, respectively.** In light. of -

the fact that the operating ratio of the NEES gas compa-

: nies, even considering Ebasco’s estimated increased costs,

would still be substantially favorable in comparison with

the independent Massachusetts companies, we would, be

entering the realm of speculation at this time to asstme

that rate increases would ensue from severance. Espe-

cially is this so in view of our finding that these increased

cost estimates, on which respondents and the Massachu-

setts DPU rely i in stating that gas rates would have to be

increased upon severance, are overstated. © . /

24 Of 12 nonaffiliated Massachusetts gas companies which respond-

ents selected for comparison with NEES, only one exceeded the

NEES gas utility system in size of gross plant, gross annual reve-

nues, and number of customers. It may.also be noted that the

NEES gas system is substantially larger than systems we have

ordered divested.in prior cases, such as those whose pertinent data

are set forth in the Appendix table. We found that several of

those systems in turn were larger than companies that had demon- .

strated conclusively their ability to operate effectively free of

holding company control. See Philadelphia/Co., 28 S.E.C. 35, 46-7 ‘i

(1948) ; Middle South Utilities, Inc., 35 S:E.C. 1, 11 (1953).

25“Qperating ratio” as used above is the percentage of total

operating revenue deductions (other than depreciation, amortiza-~

tion of conversion costs,. and Federal income taxes) to total operat-

ing revenues.

26 The nine’ independent Massachusetts gas companies wai their

operating ratios are: The Berkshire Gas Co., 74.06%; Boston Gas

-Co., 82.5% ; Brockton Taunton Gas €o., 74. 59% ; ; Buzzards Bay Gas

Co., 73.77%; Fall River Gas Co., 77.31%; Haverhill Gas Co.,

74.87%; Lowell Gas .Co., 75.75%; Springfield Gas Light Co., .

74.65% ; and Worcester Gas Light Co, 79.64%.

tt

19

_ We also find no merit in respondents’ contention that —

in order to avoid reduction of gas net earnings after

‘severancé, gas operating revenues would have ‘to be in-

creased by additional revenue of approximately $1,500,-

000, consisting of $1,098,600 to offset’ the estimated in-

creased. costs plus about $400,000 to offset, on a two- |

dollar for one-dollar basis, the asserted nonavailability to

the gas companies of an estimated $200,000 of tax reduc-

tions presently resulting from joining in the consolidated

income tax return filed by the NEES system. The test.

of Section 11(b) (1) governing the retainability of addi-

tional public-utility systems. is not based upon reduction

of net earnings upon severance but rather solely upon

whether ‘the increased operating costs occasioned by. sev-

erance are “substantial.” With respect to the claimed

nonavailability of consolidated tax savings, we have held

oni prior occasions that: any.such’ saving is not related

to. any operational function of retention of control and

is not an appropriate factor upon which to determine

retainability of an additional system.*’ In addition, it,

does not appear that « gas holding-company system that

’ would emerge after severance would not be able to secure

all or substantially all of the tax benefits. now available

to the: gas companies under NEES ownership. Moreover,

respondents did not show any reason why the consolidated

debt ratios (including the effect thereon of NEES’ own —

corporate debt) that now appertain to. the NEES gas

companies and affect the system’s consolidated income tax

liability would not also be imputed to the new gas hold-

ing-company system. | a. | |

Respondents have also argued that in reaching the con-

clusion in prior-cases: that estimated losses of economies |

were not substantial we considered that separation of the

management of the gas or other properties of. the addi-

tional-system from that of the principal system would

result in offsetting advantages. They assert that there

- would be no such advantages in separation of the NEES

gas companies because, as a result of the creation of the

2? Philadelphia Co., 28 S.E.C. 35, 73 (1948) ; Cities Service Co.,15 *.

S.E.C. 962, 985 (1946).

’

20 ia ae

NEES Gas Division in 1952, the benefits that flow from

centralized and separated’ operation of the ~~ business

have.already been achieved. .

We cannot accede to the view that such a separation

of the gas from the electric operations has been effected

as to secure the kind of single-minded management for

each that would obtain upon actual divestment. Although -

the NEES Gas Division handles sales and promotional

aetivities and various other matters for the gas subsidi-

aries separately from the electric companies, final author-

ity. on all important matters rests in the top ‘NEES man-

‘agement. The basic competitive position that exists be-

tween gas and electric utility service within the same

locality ** is affected by such vital -mManagement: decisions

as the amount of funds to be raised for or allocated to.

the expansion or promotion of each type of service. It. is

asserted by’ respondents and the Massachusetts: DPU that

NEES has made all such decisions with: full regard for

the needs of the gas companies, has vigorously promoted

the gas business, and has not suppressed that business

in favor of the NEES electric business.- The Division

' points to the fact that of twelve independent Massachu-

setts gas companies used by respondents for comparison

_ with NEES, seven which the Division considered compara-

ble had: substantially higher mcf sales and revenues per

. customer than the NEES gas companies * and their cus-

28 See Philadelphia Co., 28 S.E. C. at 48; anes Public Serv-

ice Co., 12 S.E.C. 41, 58 (1942).

22 The NEES gas companies sold 44.2 mcf per outniiae in 1958

while sales of the 7 independent gas. companies compared to NEES

- were 78.8 mcf per customer, 78% greater. In 1959 the NEES

sales were 51.5 mcf per customer compared with sales of 83.7 mcf

per customer by the independent group, or 63% greater.

Respondents object to the Division’s ‘elimination of Boston Gas

Co. in making its comparisons. The Division considered that com-

_ pany not to be comparable to the NEES gas companies because ~

it remained a ‘distributor of lower btu manufactured or mixed ©

gas until 1960, whereas the NEES companies distributed natural

gas only. The difference in the nature-of the gas sold is a ma-

terial factor affecting comparability, but even were Boston Gas

Company included the over-all comparison would not be substan-

tially changed. Boston Gas Company’s total gas sales were greater

than those of the —— group, being 57. rie mef per customer com-

2 ae

tomers — less per mcf of gas ‘ieee than the NEES

gas customers.” It must be recognized that prima facie

this disparity in favor of the independent companies, if

it is. at all meaningful, tends to indicate that the inde-

pendent gas operations have been more effe¢gtive than

those of NEES gas management. Although the Massa- .

chusetts DPU argues that much of this disparity is caused

by the difference in population characteristics of the

NEES franchise areas and those of the independent com-

panies because the latter had a more rapidly growing

suburban residential population, no specific demonstration

of the existence or extent of such a causal-relation was

presented. In any event, it is clear that the determina-

~ tions respecting the basic interests of the gas companies

are made by NEES officials who occupy a dual position

in which they must weigh the needs and objectives both.

of those companies and of the electric companies. which —

represent the principal and most profitable business of

the NEES system. On the basis of the facts presented

in this case we cannot conclude that a management solely

interested in and devoted to the gas operations would not

be able to advance them more effectively. “s

Respondents and the Massachusetts. DPU further con-

tend that in deciding whether substantial economies would.

be-lost by severance of the gas companies we must accord

* great if not conclusive weight to that Department’s views

in favor of the retention of the gas properties within the

NEES system. They argue that the Act reflects a Con-

pared with 44.2 mcf for NEES in 1958, and 62.3 mcf per customer

compared with 51.5 mcf for. NEES in 1959,.although in the ‘area

of domestic gas sales, Boston Gas sold less than the NEES group,

its sales being 34.0 mcf per customer compared with 34.9 mcf for

NEES in 1958 and 37.4 mcf compared with 56.1 mcf in 1959.

Revenue from gas sales by the NEES companies in 1958 was

$95.44 per customer compared with $135.19 per customer for the.7

independent companies. In 1959 the comparable figures were

$104.49 for the NEES group and $142.10 ber customer for the

independent group. :

?

30 The cost of gas to NEES clientes in 1958 was $2.16 mcf

sold compared with $1.72 per mcf for the independent group, and

: in 1959 NEES customers paid $2.03, per mcf while customers of

the independent gas companies paid only $1.70 per mcf.

?

22

gressional recognition that the desirability of combined

gas and.electrie operations is essentially a local question .

and indicates a policy of accommodation to the desires of

local regulatory authorities on that question. They point |

to the fact that we have in prior cases granted exemp-

tions from the Act under Section 3 and permitted separa-

tion from our jurisdiction pursuant to reorganization

plans filed undgsSection 11(e) of companies having com-

‘bined gas and electric operations. They cite in particular

Northern States Power Company** which . referred to

those cases and expressly followed the recommendation of

the local regulatory authorities in granting such an ex-

emption. . : Lee

We of course agree that the views of interested regu-

latory authorities should always be carefully considered, '

_-and-have done so-in this case: However, we do not view

the statutory pattern as contemplating that the standards

of Section 11 should yield to the views of state or local

authorities whenever the: properties whose joint retain-

- ability under that Section is in question are gas and elec-

tric properties. - Section 8 of the Act, to which the Massa-

chusetts DPU points particularly, requires state approval

of acquisitions of gas and electric properties to be jointly

owned or operated if state law prohibits or requires ap-

proval of such combination. However, it merely serves to

prevent circumvention of express state restrictions. against

such’ acquisitions by imposing’ a condition of state .ap-

proval even though acquisitions are otherwise permissible ©

under the standards.of the Act, and does not relate to

the divestment of properties under the policy embodied

. in Section 11(b) (1).. It must be read. together with the

’ provisions of Sections 9 and 10 which impose other condi-.

tions to acquisitions that apply even if. all state laws are

met and which are directed toward and embrace the

stahdards of Section 11.. Section 10(c) expressly provides

that we shall not approve an acquisition which is unlaw-

. ful under Section’8 or detrimental to the carrying out of

the provisions of Section 11 or which we are unable. to

find would tend. to promote the economical and efficient

3186 S.E.C. 1 (1954).

23

development of an integrated public utility system. It is

clear that the economic and geographic integration ob-

jectives of Section 11 were uppermost in Congress’ mind

in adopting Sections 9 and 10,** and that Section 8 was

not intended to permit any relaxation of those objectives.

There is significantly no reference in Section 11 to con-

siderations of state or local policy, as there is in various

other sections of the Act,** and the federal poucy embodied

in that Section is clearly paramount.*

' We do not take the view that the Act expresses a fed-

eral policy against combined gas and electric operations

as such. The Act~is concerned with interstate holding

company activities and within that area it prescribes:

tests of retainability which must be met. In the cases

where we granted exemptions or otherwise released ju-

risdiction despite the existence of combined gas and elec-

tric operations, the hol@jng companies involved did not

come within that area because they and their subsidiaries

were entirely intrastate or were primarily operating com-

panies or because under the Section: 11 (e) reorganization

plan which was to be effected no interstate holding com-

pany system with combined operations would survive. In

exemption situations we are not .required to- determine

whether. the requirements of Clauses A, B and C of Sec-

tion 11(b) (1). are satisfied; where the applicable geo- |

: graphic and operational requisites are otherwise met our

inquiry with respect to the combined operations aspect is

limited to determining whether it affirmatively appears

that such operations would be-detrimental to the public

' interest or the interests of investors or consumers. - The

. Northern States case involved an application by a holding

company which. was also an operating company for. an-.

exemption from ‘the Act pursuant to- Section 3(a) (2),

which ares for the exemption of a. 9s, company

382 See S, Rep. No. 621, 74th. Cong., ist Sess. (1935), pp. 29-30;

“<— R. Rep. No. 1318, 74th Cong., 1st Sess. (1935), p. 15.

oe. —, 6(b), 7(g), 8, 9(b)(1), 9(b) (2), 10{£) and

0(b)

. 34 See Public Service Commission v. S.E.C., 166 F.2d 784, 787

(C.A. 2, 1948),- cert. denied 334 US. 838.

eer

‘~

\and ‘its subsidiaries where the holding company is -pre-

dominantly a public utility company. We found that the

predominance test and ‘geographic requirements of Sec-

tion 3(a)(2) were met, and it was on the question of

. whether the record showed that the exemption would have

a detrimental effect th

we considered the favorable

In the present case > the i issue is whether respondents, an

interstate holding company system headed by NEES, have

made the requisite showing under Clause A of Section

11(b) (1) that the losses from severance of the gas com-

panies would be substantial. As has been stated, respond-

ents rely on the Ebasco study. The Massachusetts‘ DPU

- which has made no study itself, states that the estimates

contained in the study conform to the losses of economies .

that its own familiarity with the NEES system. would

lead it to anticipate, and it joins in Ebasco’s opinion that

such losses would be substantial. We have seen that the

study is deficient with respect to its principal item of

estimated loss, thus materially impairing its persuasive-

. hess and making it unacceptable. We have also been. un-

able on ‘the basis of the record before us to accept the

3 Respondents ‘end the Mashhchuastts DPU also cite Middle

South Utilities, Inc., 35 S.E.C. 1 (1953), where in proceedings under

Section 11(b)(1) the City of New Orleans recommended retention

by New Orleans Public Service, Inc., a subsidiary of Middle South

whose principal business was electric, of gas and transportation

properties and we did not order divestment of those properties.

However, one of the factors presented by the City was that it had.

purchase option rights which would have been lost by severance.

It was partly because of that situation that we decided not to order

divestment at that.time but rather to defer decision on that issue,

which is still pending. See S.E.C. 26th Annual Report, 133 (1960).

‘ In that same opinion we erdered separation of. the gas properties of

Louisiana Power & Light Company, another subsidiary, from its

electric properties, and we subsequently refused to revoke or modify

that order despite the position of the Louisiana Public Service Com-

mission that independent operation of the gas system would in- -

crease expenses. Middle South Utilities, Inc., 36 S.E.C. 383 (1955).

o

~

oS

«

contention that there wuld be other significant losses -not

reflected in the dollar estimates or to find that the gas

companies could not be soundly, and economically operated

independently of NEES, even assuming the validity of

the estimates in the Ebasco Study.. On the basis of our

consideration of the entire record as to the nature and —

extent of the claimed losses, we cannot find that respond-

ents have met their burden of showing that the test of

Clause A for the retention of the gas: Dipperties under

the control of NEES is satisfied. —

Conclusions

In view of the foregéing’: we shall direct NEES to take

appropriate action to divest itself of its interests in the.

system’s gas properties,

The’ remaining issue in these proceedings relates to the ,

it appears that the operations of NEPSCO are reason-

.ably incidental and economitally necessary and appropri-

ate to the operations of the integrated electric utility sys-

tem of NEES, the proceedings will be dismissed ansofar

as they relate to the retatnability of that company. “

An appropriate order will ‘issue..

Chairman CARY and Commissioners WOODSIDE and

| COHEN join in the above opinion. — he, ?

> .ORVAL L. DuBois

Secretary .

- retainability by NEES of its interest in NEPSCO. Since ;

°

“96 - |

ORDER OF THE COMMISSION

The Commission having instituted proceedings pursu-

ant to Section 11(b) (1) of the Public Utility Holding

Company Act of 1935 with respect to New England Elec-

trie System (“NEES”) and its subsidiary companies to

_ determine what action, if any, should be required to limit

the operations of the system to a single integrated public

utility system and to such additional systems and other

businesses as are retainable under the provisions of Sec-

- tion 11(b) (1) of the Act; .

The Commission having previously found that the elec-

trie utility properties of NEES constituted a single inte-—

; grated public utility system within the definition set forth

_in Section 2(a) (29) (A) of the Act and having dismissed

the proceedings relating to that issue while retaining ju-

risdiction over the remaining issyes (38 .S.E.C. 193:

(1958) ) ; hes : —

A public hearing having: been held after appropriate

notice, at which evidence was adduced with respect to

the remaining issues whether the gas utility assets of’

_NEES are retainable by NEES as an additional inte- .

“grated utility system and whether NEES may retain its

interest in New: England Power Service Company as a

business whose operations are reasonably incidental or

economically necessary or appropriate to the operations .

of the integrated electric utility system; and briefs and

proposed findings and conclusions. having been filed, and

oral argument having been heard; and 1 '

The Commission having considered the record, and hav- .

ing this day issued its Findings and Opinion herein; on

the. basis of such Findings and Opinion

IT IS ORDERED, pursuant to Section 11 (b) (1) of the

Act, that the New England Electric System dispose of

the gas utility properties presently controlled by it and

terminate its relationship with the following companies "

by disposing of or causing the disposition, in an appro-

priate manner not in contravention of the Act or the

Rules, Regulations or Orders of the Commission there-~ —

under, of all interests, direct or indirect, which it: holds

in those companies: : : ORS ah

Central Massachusetts Gas Company

‘Lawrence Gas Company

- Lynn Gas Company.

Mystic Valley Gas Company

North Shore Gas Company .

Northampton Gas Light Company

Norwood Gas Company

-. Wachusett Gas Company

IT IS FURTHER ORDERED that the proceedings be,:

and they hereby are, dismissed insofar as they relate to

the issue of whether the operations of New England

_ Power Service Company are reasonably incidental and

economically necessary and appropriate to the operations

of the. integrated electric utility system of New oe

Electric System and are fetainable as such.

IT IS FURTHER ORDERED that jurisdiction be, and —

it hereby is, reserved to take such further steps as are ©

necessary and appropriate to carry out the terms of this

order.

By the Commission.

ORVAL L. DuBois

Secretary

we beat eesteadine

Engineer Public Service Co. j The North American Co. > Philadelphia Co.

Gas Properties of Guif_ Gas Properties of Virginia ‘ Gas Properties of The | .

— Utilities Co.—1940 Electric and Power Co.—1940 St. Louis County Gas Co.—1942 Gas Group—1946

Per cent of es- Per cent of es- Per cent of es-- Ny Per cent of es-

a timated loss of timated loss of : ‘timated lossof . E, ’ timated loss of

a aa Amount ; economies to: Amount economies to: Amount economies to: Amount economies to:

Operating revenues $688,711 6.58 $1,057,000 3.38 $2,748,770 585 °° $16,656,560. 3.00

Operating ti reven : | |

deductions (excluding mii. knit Soe, ne mS

Fed. inc. taxes) $444,006 * 9.46. $ 735,294 4.86 -- $2,009,757 . .\ 8.01 $13,197,846 ~ 3.79

Gross income<(before 7 i, :

_ deducting Fed.: inc. i ae riers a os

taxes) . $201,594 20,85 ; $ 317,890 11.25 $ 742,027. 21.68 $ 3,565,357 14.03 « ‘

Net income (before —- | A watt

deducting Fed. me ee . Sex . meta “ “yo ”.

taxes) 2 $166,402 25.25 $ 168,412 21.23 $ 661,110 | 24.34 NA N.A,

Estimated loss of — ' a Oe 7 yr : ’ F ‘ "s ; .< :

"economies claimed $42,024 “~~. BR T50 oF $ 160,900 $ . 500,328

- : ewe : ‘ 3 a ee Re Re | o '

General Pyblic Utilities Corp. _ Middle South Utilities, Inc. NEES

Electric Properties of Gas Properties of a Ceth Gas Properties of © Gas a of

‘Northern Pennsylvania Jersey Central Power & Louisiana Power & 8 Subsi

Power Co.~—6/30/49 Light Company—6/30/49 Light Company—1954 Combined 1988

Per cent of es- ; Per cent of es- *Pegcent of e5- — Per cent of es-

loss of timated loss of *: timated loss of oe timated loss of

ind: Soe _ Amount economies to: Amount __—-_—seconomiesto: §§ Amount economies to: Amount - economies to:

_ Operating revenues $4;027,081 144 —. $4,714,958. 4.87 $5,264,186 5.18 $22,752,270 . 4.83

Operating revenue: * , r si

_ deductions (excluding ~ : ! . Liens | or | mts ar :

Fed, inc taxes) $3,046,479 1.90 $4,235,661 . 5.42 $4,112,285 . 6.63 $18,207,191 6.03 nh

Gross income (before. ee Ee ea |

es) .. $ 981,980 . 5.90 $ 479,477 - 47.84 $1,151,901 23.68 $ 4,718,864 - 23.28

/"Net income adie , ween | "a" | ate ;

deducting Fed. inc. 5 ee ae. on, 3 Soe sare

taxes) me $ 855,101 677° $ ae 113.24 N.A. N.A. ’ $ 8,669,931 29.94

“ “Estimated loss of = | : , KGaes: .: nits

_ economies claimed $ 57,890: 5 208 398 $ 272,816 * $. 1,098,600

: . ,—____ __ ______} J 2 = = ti

N.A. Not Available eae : : :

OPINION OF THE COURT OF APPEALS

"Tune 4, 1965

ALDRICH, Chief Judes: This is a vistitdon seeking to

review and set aside a divestment.order of the Securities

and Exchange Commission pursuant to section 11(b) (1)

of the Public Utility Holding Company Act of 1935, 15

U.S.C. § 79k(b) (1), requiring the petitioner, New Eng-

land Electric System (NEES) to dispose of its gas utility

properties by terminating its relationship with its eight

subsidiary gas companies. The ultimate question in the

case, which the Commission resolved against NEES, was

whether divestiture would cause. the loss of “substantial

economies” within the meaning of the cited section.

Briefly, NEES is a registered holding company con-

trolling, at .the time of the hearing, fourteen: electric °

- utility subsidiaries and eight gas subsidiaries, with some

824,000 retail electric customers in the states of New

Hampshire, Massachusetts, Rhode Island and Connecticut,

and. some 287,000 retail gas customers in Massachusetts.

Seventy-eight percent of its gas customers are also served

by the electric companies. Except for certain peaks and -

emergencies the gas distributed’is natural gas supplied

by pipe line companies from the southern United States.

The gas companies have separate offices and management,

but their top officers are responsible to the top officials

of NEES. There was a lengthy hearing before an exam-

iner at which ‘NEES -sought to show that the cost of .

. divestment to the electric system would be $804,000 an-

nually, and to the gas system, if operated as a single

unit after severance, $1,098,000.1 The Commission held,

inter alia, that the. financial effect upon the electric sys-

tem was not a relevant inquiry, but that if it was it was

not significant. This we do not reach. It also held, which .

A OR

1 NEES’ actual figure was $1,165,000, but the Commission re-

duced this by $67,000 as a result of a “revised basis of payments”

authorized by it. NEES does not presently dispute this adjustment,

but points out that the reverse adjustment must ms made to the

estimated electric system losses. .

*

30.

_ we do reach,’ that the claimed financial consequences to

the gas system were not substantial as it construed the-

statute, but that if they were they had not been adé-

quately proven. : is tye

Basic to its decision, as the Commission recognized at .

- the outset of its opinion, is the meaning of the Act and

the standards which it imposed. Briefly, section 11(b) (1)

required: divestiture unless NEES could satisfy the, pro-

visos or exceptions? contained in subparagraphs, or

clauses, (A), (B) and (C). Clauses (B) and (C) were

admittedly met. Clause (A) reads as follows: .

(A) Each of such additional systems cannot be

operated as an independent system without the loss:

‘of substantial economies which:can be secured by the

retention of control by such holding company of such

system ; .

Before considering whether the Commission’s interpreta-

tion of this clause was correct we must determine what

its interpretation was. At the beginning of its opinion

the Commission stated that to prevent divestiture NEES .

must show, — ni -

that the additional systems were integrated in nature

and “were so small that they were incapable of inde-

‘ pendent economic operation” and had a “real .ee0-

nomic need” for management together with the prin-

_ cipal system. Congress was aware that sonie.loss of’

- economies would usually result from the separation

of jointly controlled utility systems, but considered .

that continued joint management should be permitted

only where separation would entail a loss of econom-

. les which would be substantial in the sense that they

were important to the ability of the additional system —

to operate soundly. [Footnotes omitted.]-

The Commission then quoted at length from a decision by

*The Commission uses the word “exceptions,” and criticizes

NEES’ word “proviso’.”: NEES’ distinction, as we read it, was in

response to a heavy burden of proof which the Commission sought

~to attach to-exceptions. “See fn. 4, infra.

31

the Court of Appeals for the District of Columbia,* from

which it drew the conclusion that clause (A) required a-

“showing by clear and convincing evidence‘ that such |

additional system cannot be operated under separate own-

ership without the loss of economies so important as to.

cause a serious impairment of that system.” Lastly, at

the end of its opinion, the Commission concluded that on

the retord it was unable “to find that the: gas companies

- could not be soundly and economically operated independ-

ently of NEES,-even assuming the validity of * * * [its]

estimates.” whee i

Thus: the statutory phrase, “cannot be operated as an:

. independent system without loss of substantial economies,”

was said to mean, “incapable of independent economic

operation ;” “important to the ability * * * to operate

soundly ;” “so important as to cause a serious impairment

of that ‘system;” and “could not-be soundly and econom-

ically operated.” ; ao

In Middle South Utilities, Inc., 835 S.E.C. 1, 11 (1953),

its most recent decision cited in its opinion for the sup- >

.

a

8’ Engineers Public Service Co. v. S.E.C., 1388: F: 2d 936, 944

(1943). This case is extensively relied on in the Commission’s

opinion without noting that certiorari was granted, 322 U.S. 723

(1944), .and the decision subsequently’ vacated as moot. 332 U.S.

. 788. (1947). This omission was remedied in its brief. We do not

know whether the view of the majority, or the dissent of Judge

Soper which accords with ours, would have ultimately prevailed. —

* The Commission has been criticized before for using this phrase,

_ the court allowing it to pass, however, on the ground that it meant

’ no more than the fair preponderance of the evidence, the ordinary

’ burden of. proof. Philadelphia Co. v.. S.E.C., D.C. Cir.,. 1949, 177

F.2d 720, 725. We do not agree. ‘This phrase has’ well recognized

meaning, and is applied in special cases, such as fraud, Lacka-

wanna Pants Mfg. Co, v. Wiseman, 6 Cir., 1943, 133 F. 2d 482,

486, or mistake, Philippine Sugar Estates Devel. Co., Ltd. v.

Philippine Islands, 1918, 247 U.S. 385, 391, as applied in Aetna

Ins. Co. V. Paddock,*5 Cir., 1962, 301 F.2d 807, 811. The Com-

mission is to be criticized for continuing to use this language,

which by its tone suggests fo laymen, as well as to lawyers, a

heavy burden. We suspect, from other statements in its opinion,

that it accurately revealed the Commission’s approach. If so, in any

future proceedings phe Commission should readjust its receptivity

as well as its phraseology. oe ; ba ie

32

port of its interpretation, the Commission ordered a di- .

vestment because it had not been shown that it would

“cause the serious economic impairment of the system or

that the gas properties could not operate effectively and

efficiently under separate ownership.” [Italics supplied.]

Since presumably the Commission did not intend to voice

‘simultaneously two different standards we read the word

“or” as introducing ‘an explanation or equivalency. -Es-

sentially this second Middle South Utilities phrase is the

sole standard that the Commission adopts in its brief

before ‘us. ’ iat

Also may be noted the Commission’s statement, in refu-

tation of one of NEES’ contentions, that “other independ-

ent gas utility companies in the state * * * nevertheless |

have been able to conduet their operations and, apparent-

ly, earn a fair return without the alleged advantages of

common control with electric utilities by a holding com-

pany.” a

Taking the record as a whole we find its brief accu-

rate, and that the Commission’s interpretation is that a

loss is not “substantial” unless it: would render impossible

- “economical or efficient operation.” ® | |

_ As to the correctness of this interpretation we have not:

considered before the meaning of’ clause (A), and there

is no. uniformity of judicial view elsewhere. It is true

that in -North American Co. v. S.E.C., 1946, 327 U.S.

686, 696-7, the court referred to section 11(b) (1) as per-

mitting retention only of “relatively small [companies] .

* * * unable to operate economically under separate man-

agement without the loss of substantial economies * * *.”” —

This was a passing summary, and did not purport to be

an. exact characterization. The precise meaning was not

’ SNEES suggests there is no practical difference between pre- |

venting economical operation and bankruptcy. The Commission does

not address itself to this question. We assume it believes there to ~-

be a difference, but except to the extent suggested in. fn. 7, infra,

we cannot find from its opinion what the difference is, or, more

important, what is the standard by which uneconomical operation is

determined. The very serious problem which this would present we

do not reach because we disagree with the Commission’s basic ~

interpretation.

/

33

relevant to the constitutional questions then under con- .

sideration, and even if the court’s language is not con-

sidered ambiguous we do not take it as an attempt to

_ resolve: possibly intricate questions of construction. We

turn, therefore, to other considerations. -

Although we do not regard the legislative history as

determinative, we begin there as fhe Commission ‘makes

much of it. Its principal reliance is upon the concluding

remarks of Senator Wheeler on the floor after the bill

had finally passed both branches. Senator Wheeler stated,

inter alia, that the act permitted a holding company to

retain more than one integrated system only when the

additional systems “*.* * were so small that they ‘were

incapable of independent economical operation.” 79th

Cong. Rec. 14479 (Aug. 24, 1935). We. may note, at the

outset, that only by a most generous interpretation is

this statement part of the legislative history. Having

come. afterwards, it could not have affected the voting.

The best reason for considering it as evidence of Congres-

sional intent, see United States v. United Mine Workers,

1947, 330 U.S. 258, 279-80; Duplex Printing -Press Co.

v. Deering, 1921, 254 U.S. 433, 477; cf. State Wholesale

Grocers v. Great Atlantic & Pacific Tea Co., D.C.N.D. *.

Ill., 1957, 154 F. Supp. 471,.485, rev’d on other grounds,

258 F. 2d. 831, cert. den. 358 U.S. 947, is accordingly

absent.® Furthermore, coming from the leading Congres-

sional advocate of strict separation, see é.g., 79 Cong. Ree.

1525, Feb. 6, 1935; id:, 4903 (radio address of April 2,

1935) ; Id., 14470, Aug. 24, 1935 (remarks of. Senator

*See Hart and. Sacks, The Legal Process: Basic Problems in

the Making and Application of Law (tent, ed. 1958) 1285: :

“The views of individual members. of the legislature as to the

meaning of -a statute which were not. officially communicated ‘to _

the legislature prior to its enactment are not competent to be con-

sidered in determining the meaning which ought to be attributed

* to the statute.”

hee

/

/

Nor could it have invited a presidential veto, since the Presi-

dent was a known advocate of a strong bill. See 79 Cong. Rec.

3425-26, 3469-70, March 12, 1935 (Message to Congress); id. at

9042, June 11, 19385 (letter to Senator Barkley and Senator

tinsel id. at 14164, Aug. 22, 1935 (letter to Representative

yburn). a ;

4

i sh secs

34 me a

Norris), it would seem natural to regard it, at that stage

of the proceedings, as a. self-serving declaration. To the

- eynically minded it would seem to have been merely a

post-contest attempt to raise the score, recapture what

had been lost in the compromise with the House discussed

infra, and to serve, just as is now being sought, to influ-

~ ence subsequent history. The best that should be said for

Senator Wheeler’s statement under these circumstances. ©

is that it is not to be given the weight to which it might

have been entitled if. made at another time.

The other pieces of legislative history related in the

Commission’s brief are a quotation from remarks by Rep-

resentative O’Connor speaking “of ‘a little power plant

in Florida’ or ‘a little plant in Oklahoma’ (79 Cong. Rec.

14168, Aug. 22, 1935)” and one .from Representative

Cooper, “who had opposed the motion, [and] had referred

to systems retainable under Clause (A) as ‘unprofitable

companies * * * too weak to stand alone’ (id. at 14165-

14166).”° Examination of Representative O’Connor’s full

statement rebuts the economic implication the Commis-

sion wishes us to attach to the word “little.” It is evident

that the remarks were addressed to geographical aspects,

- the absentee landlordism ‘condemned in clause (B). It is

_ true that Representative Cooper was speaking of clause

(A). But it seems apparent that as an opponent of the

bill he was strategically engaged in blackening it. . Ac-

cording to him the compromise was no compromise what-*

ever, a position demonstrably unsound. His interpreta-

tion of particular ‘clauses must be. read in: that light.

Labor Board v. Fruit & Vegetable Packers & Warehouse-

men, Local No. 760, 1964, 377 U.S. 58, 66.

ar much more pertinent characterization. of thé phrase

“substantial economies” is found in the, statement of the

. . House Managers attached to the conference report recom-

mending passage of the compromise draft, that the reten-

-tion of additional systems was to be permitted where

there was a “real economic need.” H.R. Rep. No. 1903,

74th Cong., 1st Sess.,.71. This language, however, is it-

self ambiguous. Obviously there would. be a real economic

need to prevent a loss that would preclude efficient or :

ht slid operation. But there. could also be said to be a

\ > om om

35

real ‘economic need to avoid any truly sizable financial

loss notwithstanding the utility’s ability to absorb it and

- remain efficient in some absolute sense,’ For reasons we

now come to we believe the statute is to be given this more

- general meaning.

The declaration of legislative objectives is found in sec-

tion 1(b). Subsection (1) thereof concerns improper ac-

counting practices, capitalization, ete., that may injure

investors. Subsection (2) refers to excessive charges and

other effects of transactions among companies within a

holding company system. It also, together with subsec-

tion (3), refers to impediments occasioned by the holding

company device to state regulation. We quote in full the

remaining subsections, which declare. the public interest

to be adversely affected, © -.- atta

.(4) when the growth and extension of holding

companies bears no relation to economy of manage-

ment and operation or the integration and coordina-

tion of related. operating properties ; or “Y

(5) when in any other respect there is lack of

economy of management and operation of public-

utility companies or lack of efficiency and adequacy .

_ of service rendered by such companies, or lack of

effective public regulation, or lack of economies in

the raising of capital. . [Italic supplied.]

Pausing here we note in ‘the italicized phrases two con-

cepts, economy of management and operation, . and @ffi- ”

7 We have already commented upon the Commission’s failure ‘to |

enunciate any standard beyond this broad generalization of economy -‘

or efficiency. See fn. 5, supra. Possibly its views are partly implied

by the points made in its opinion when assuming that an annual

loss of $1,098,000 had been adequately ¢stablished. The first was

that while this amount is larger, absolutely, than losses required

to be accepted in any previous case, it is not larger relatively.

Secondly, that the loss. would be only 23.28%: of gross income, and .

29.94% of net income before federal income taxes. (The -word

“only” is ours.) Third, that there are “other independent gas

utility companies in the state which nevertheless have been able to

conduct their operations and, apparently, earn a fair ‘return * * * °

and * * * compete effectively, * *. *” Finally, that it “would be

entering the realm of speculation at this time to assume that-rate

increases would ensue from severance.” sae

Sitn.

enaentnsmemesmneneaamaes

-

36

ciency (and adequacy) of service. The word..“or” in

clause (5) is clearly used in the disjunctive. This sepa- .

rate: meaning is emphasized when we.come to section 11 .

(b) (1) clauses (A) and (C), infra.. It will be sufficient

to note here, for both present and future purposes, that

the Commission has taken the word “efficient” from this |

use in cohnection with service and joined it with the

phrase “economy of management and _p wioencigh and has

then “built out of the combination the concept that until

: a loss of economy and efficiency is shown\to be total there

\. has been -no loss of substantial “oor under clause

.. (A). within Congressional concern. We may‘ note, also,

‘\an omission which we take seriously, that on the sole occa- --

Sion that the Commission quoted clause (4) it substituted

‘asterisks for the phrase we have italicized, and, although

the legislative meaning of economies is the specific matter

under consideration, has never referred to it.. Clause ( 5),

likewise, is never mentioned.

_ The definitions of “integrated public-utility ayeteins”

are found in section 2(a) (29). Subsection (A) defines

an integrated electric system as one which, inter alia,

“may be economically operated as a single interconnected .

and coordinated system.” Subsection (B) defines a gas

system as where, inter alia, “substantial economies may

be effectuated by being operated as a single coordinated

system.” During argument we inquired the reason. for |

this difference. .No - ‘suggestion was forthcoming. The

only reason apparent to us is that:in order for electric

companies to constitute.an integrated public utility sys-

tem they must meet a technical requirement not applica-

ble to gas companies seeking to qualify as an integrated

system. Unlike gas companies, General Pub. Util. Corp.,

1951, 32 S.E.C. 807, 834-35, electric companies must be

“physically interconnected or capable of physical inter-

connection.” Where this requirement is met, so that ac-

tual’ interchanges of power could be made to meet power

requirements at different points in the system, it was

enough for Congress that.the system as a whole “may

be economically operated as a ‘single interconnected and

coordinated system.” Assuming the other qualifications

were met electric companies would not have. to prove that,

oe

system ownership would be. cheaper than independent

ownership, probably because this could safely be assumed

where there would be a sharing of power. mats

Coming to section 11(b), the primary provision, sub- —

section (1) requires,that holding companies be restricted

_ to a single integrated public utility system except when

subclauses (A), (B) and (C) are satisfied. For clarity

we quote in full. af |

(A) Each of such additional systems cannot be

operated as an independent system without the loss

of substantial economies which can be secured by the

retention of control by such holding company of such

system; a

(B) All of such additional systems are located in

one State, or in adjoining States, or’ in a contiguous

foreign country; and _ : OGL a Fee be

(C) The continued combination of such systems —

under. the control of such holding company is not so

large (considering the state of the art and the area

or’ region affected) as to impair the advantages of

localized management, efficient operation, or the ef-

fectiveness of lation. ee 7

- These exceptions to section 11(b) (1) were added as a

result of a Compromise with the House. The original

Senate bill had flatly restricted holding companies to a

single integrated System. S. 2796, 74th Cong., Ist Sess.

(1935). The House sought to permit as many systems as

were consistent with the public interest. See H.R. Rep.

_ No. 1318, 74th Cong., Ist Sess. 17 (1935). The Commis- -

sion’s then chairman objected that this would be intoler-

ably indefinite. 79 Cong. Rec. 10838 (July 9, 1935) ; see

also H.R. Rep. No. 1318, supra, at 45. Clatises (A),

(B) and (C) were proposed as a compromise to estab-

lish--“definite‘and concrete circumstances” where reten-

_ tion of more than one system would be allowed. State-

/-Mment of House Managers, supra, at 70. }

It is basic to the Commission’s position that the phrase

_ j‘substantitl economies which can be secured by the re-

tention of control” in clause (A) is fundamentally differ-* .

, ent from “substantial economies [that] may be effectuated |

Sh

a:

by being’ operated as a single co-ordinated system”. in

section (29) (B).* Such a: contention, of course, is’ op-

posed to the common principle that the same words in

* different portions of: an act are presumed. to have the

same meaning. In this case they are exactly the same.°

‘To overcome the presumption ealls for an affirmative

‘showing. ako | |

Furthermoré, we find thé Commission’s interpretation —

-ef clause:(A) opposed to the initial. statement. of the pur-

; posés of, the Act, supra, the tenor of which was that hold- .

ing companies had been found uneconomical to investors

and.to the publié. It is not inconsistent with this ‘to say

that systems which: do not offend in-this respect, or in

the other respects-defined in clauses (B) and (C), should

“be continued instead of broken up, and that occasioning

_a loss of impressive proven-economies was not: the. Con-

gressional purpose. This was a business ‘reorganization

act designed to produce a healthier economic . structure

8 The Commission is committed, to this, and-expressly so recognizes.

in its brief, because it rejected*certain important evidence offered

by NEES solely on. the ground’that the eight gas companies were

conceded to be: “a single integrated system.”. Since the. Commission

«

ad

_ eould not, either in good conscierice or in law, accept a8 a con. ©

cession a'matter so fundamental, not only to the present proceed-

ings, but for the future, if it were contrary to the fact, it stands

‘ that the Commission feels ‘that ‘saving. $329,400 annually by. inte-

grating-the eight gas companies is effectuating substantial. econo-

mies under section: (29)(B), but .that $1,098,600 annually, is not _

substantial economies under clause (A). + 9

®The Commission’s brief goes to some length in emphasizing

the word’ “loss” in section 11(b}GQ) (A). Sections 2(a) (29) (B)

and 11(b)(1)(A) are not incomparablewecause the former speaks

in, terms of effectuating and: the latter: in terms of losing, The

‘important comparison is the word “effectuated” in the one section

“and “secured” ‘in the’ other. Both relate directly to “substantial

- economies.” Far ear ae er ae 0

10 In a special effort to make this sKowing counsel argues that

‘there is a policy in. the Act against an electric utility system being ©

‘. combined with a gas’ system. “The short answer to this is that.

. -heither the Act, nor the Commission. itself, says so, Since, how-

ever, counsel’s argument is extensive we will reply in. kind, but in

.order not to prolong this footnote we will do so in an appendix,

infra:

389

. in a vital indestey. It established what; in the opinion of

Congress, accomplished the best overall conditions. At the

same time, Congress’ remained receptive to what, in a

- particular” ‘instance and within the limits established by

clauses (B) and-(C), might be affirmatively shown to-be.

a more economical arrangement. ‘We hold that clause (A)

called for a business judgment. of what: would be a sig-

. nificant less, not for a finding of total loss of economy or

efficiency. Louisiana Pub. Serv. Comm’n Vv. S.E.C., 5 Cir.,

1956, 235 F.2d 167, rev’d on _furiedictional grounds, 353

USS. 368.

We are confirmed in this view by the fact that not only |

do clauses (B) and (C) contain additional conditions of

retention, so that clause (A) need not be interpreted so

as to cover the entire Congressional inteat, but that these

otlier clauses relate back. fully to counterparts of the dec-

- larations of purpose madé in section 1(b), and the at-

tempts to effectuate those purposes through the defini-

.~. tions made in section 2(a) (29), supra. Clause (A) would °

do the same were it not for the special restricted meaning’ »

that the. Commission seeks to give it. The Commission,

in other. words, has attached to “substantial economies”

in this one. particular place a special meaning | that noth-

ing in the Act points to, and which, in fact, destroys its —

symmetry."

It might not be inappropriate to conclude with.the quo-

* tation with which the Commission began a-section of its

brief. “As was stated [the brief says] in the report of

the National Power Policy Committee: . ‘[I]ntensification

of economic power beyond the point of proved economies

-not only is susceptible of grave abuse but is a form of

private socialism. inimical to the functioning of demo-

11 Drawing an equivalence beloenn the proviso contained in clause

(A) to section 11 and the corresponding requirements for an in-

tegrated gas system under section 2(a) (29) (B) nullifies no technical

requirements in the definition of an integrated gas system because

there are none. The definition of an integrated electric system

under section 2(a)(29)(A). does contain’ some technical require-

ments, as has been pointed out, but these, also are. not nullified

‘by our interpretation of clause (A) since it : remains stricter than

section 2(a) (29) (A)’s requirement that the ‘electric system: “may be

economically operated.”

' 40

cratic institutions and the welfare of a free people.’ * * *

H. Doe. No. 137, 74th Cong., 1st Sess. 4 (1985), appended

to S. Rep. No. 621, 74th Cong. 1st Sess.” We cannot think

that “proved economies,” any more than “substantial

', economies,” mean anything other than economies which.

in ordinary business parlance and by ordinary business

standards are of a substantial nature, considering, of

course, the size of the companies to which the economies

relate.” Clearly that was what was meant. elsewhere in

the Act. If in clause (A) Congress meant, instead, “can-" .

not be operated efficiently as an independent system”. it

could readily have done so not only more clearly, but in

fewer words. | ac >. he.

Te Commission’s only answer is “the policy of the

Act.” We think the poliey of the Act is to be found in

the whole Act, not in one part. NEES has the: burden .

of proving that it falls within ‘an exception. This is

enough, without a forcéd reading into that exception of

. Some special meaning. : Acg

We regret. the length of this discussion? Since, how-

ever, we find the Act not only consistent, but entirely

. responsive to analysis, we feel such analysis called for in. —

fairness to those persons, whether investors or consum-

ers,’* who must absorb perhaps a million dollars a year

(quite. apart. from over $800,000 allegedly lost to the

electric system) which the Commission feels insubstan-

tial. ' 7 ant

The Commission having applied the wrong standard;

its decision must: be reversed unless on the record there

could, have been no finding in NEES? favor on the ap-

propriate standard. We think clearly there could have

been. NEES’ case’ was based essentially upon a study

made for it by Ebasco Services, Inc., (Ebasco), a man-

12In this case the claimed losses are over 23% of gross income.

- See fn. 7, supra: :

13 The Commission's finding it significant that it was insufficiently

shown that this loss would require an increase in rates “at this

time,” fn. 7, supra, not only disregards the fact that the cost of

' doing a utility business normally is passed on.to consumers eventu-

ally, but the fact that one of the purposes of the Act was to benefit

legitimate investors. © .

« &’

Al

agement consultant which the Commission found possessed

extensive experience in the utilities field. No rebuttal

evidence, other than some exhibits, was offered on behalf

of the Commission, which grounded its rejection of the

report, to the extent that it. did reject it, solely on criti-

cism of the report’s conclusions in the light of NEES’

evidence or its own expertise. Its specific criticisms re-

_ lated to that portion of the report which dealt with cer- |

tain costs totalling $472,100 or, more specifically, for the

most part, customer and accounting costs included there-

_in, for which the Ebasco estimate was $415,600. The.

first criticism concerned billing. The circumstances wére

these. -Ebasco’s' original study was made on the assump-

tion that the gas companies would be individually man-

aged. On this hypothesis it naturally assumed that each

‘company would conduct separate customer ‘billing.. When

the Commission took the position that the gas companies

constituted a single integrated system and.should be sold

.as such, Ebasco was required to reduce its estimate by -

the amount attributable to operating the. gas companies °

individually rather than as a unit. It made no reduction

with respect to customer billing. =

_ °On this subject NEES called three witnesses. One

Quig, a representative of Ebasco with ample qualifica-

tions, testified to-certain accounting savings that could be

effected if the gas companies were operated collectively

rather than individually.- He stated, however, that Ebasco

would not recommend, at least at the outset, céntraliza-

tion of certain matters, iricluding billing; that 4 continu-

ing study might show that further centralization would

prove useful, but that it was by no means clear that

economy lay in that direction, and that it would depend

en such factors as business growth, new developments in

mechanization, ete. Subsequently one Dalbeck, the prin- .

cipal officer of NEES’ gas division, testified that it was

conceivable that centralized billing migh: be effected to

some degree, but that in his opinion it was. not really im-

portant cost-wise; that he had made many studies of

. customer accounting procedures and had never found any

real economies, in centralization of billing. Thereafter one

Johnson, an Ebasco representative with perticular experi-

“42 -

ence in customer accounting, testified that a detailed study

would have to be made, which Ebasco had not done; that

based uipon his experience he had considered centralized

_ pilling for the combined operation. and had made the judg-

ment that there would be no economy, or at least “any

substantial savings.” The witness was crpss-examined at

length and showed a wide knowledge not only of special-

ized mechanical equipment in this area and the problems

involved, but also of the particular practices of a large

- number of named utilities in various parts of the-country.

He recognized that in many instances centralized billing |

prevailed, but continued to express doubts as to how much

‘was *saved thereby.

The Commission’s response to. this was to point out

: that some of the NEES gas companies presently combined -

their billing with the electric companies in their areas.

This matter had been explained by NEES’ witnesses, who

pointed out, inter alia, the duplication of customers, which

would not exist in the case of gas companies operating

alone. The Commission concluded, however, that. NEES .

had not “given any satisfactory reason why at least.some

form or forms of combined billing procedure could not be.

employed advantageously by the gas companies, in light ,

of the fact that their aggregate of 237, 000 customers. is

located in a relatively compact - area.’

We have serious doubts as to the extent that the Com-

mission is entitled to disregard an. opinion on a matter —

obviously requiring expert, specialized knowledge with. no

further evidence before it than what had been considered

by the accepted-expert. Cf. United Shoe Mach. Corp. v. .

Industrial Shoe Mach. Corp., 1 Cir., 1964, 335 F. 2d 577, >

579, cert. den. 379 U.S. 990; Security-First National

Bank v. Lutz, 9 Cir., 1968, 329 F, 2d 348, 355; Alvary .

v. United States, 2 Cir., 1962, 302 F. 2d 790, 794; Cullers

v. Commissioner, 8 Cir, 1956, 237 F. 2d 611, 616. This

is not a matter on which a body having such broad juris-

diction as the Commission can have detailed expertise

upon which to base ‘affirmative findings. Compare Market —

St. Ry. v. Railroad Commission, 1945, 324 U.S. 548, 560.

Without finally passing upon this- point, sinte the case.

must -go back in any event, we suggest that on this record

sro dtac

43

_ the maximum the Commission was warranted. in inferring

was that the difference in costs between separate and

combined billing would not, if significant at all, consti-

tute a sizable portion of the total added billing expense.

This brings us to what was the added: billing expense,

and hence the amount of error attributed to the Ebasco

report because of its failure. to- assert the saving which,

in the Commission’s opinion, could be effected by having

centralized billing. Thé Commission concluded merely

that Ebasco’s failure caused the estimate to be .“over-

stated.” It did not concern itself with discovering even ou

what were the total increased billing costs, let alone the

portion (obviously not the whole) which might. be saved

' if centralized billing were adopted. It did find that the

increased billing costs estimated for two of the eight gas

companies, billing singly after divestiture, was $34,700

for the two. These companies covered more than half of

‘NEES’ gas customers. On a pro rata basis: this would

make the total billing increase for all companies $60,000.

While doubtless such a projeetion is not precise, it seems >

significant that the Commission was not sufficiently inter-’.

ested to make any at all. Under the circumstances we do

not think it. unreasonable for us to point out that while:

_ the Commission was purportedly criticizing a‘ cost esti-

mate. of over $400,000, strictly it was speaking of perhaps

$60,000, only a portion of which could have been over-

stated. ‘ ; ‘ : :

We might have more sympathy with some, but not all,

counting disparities. Frankly, we are not sufficiently

‘versed, nor do we find the record sufficiently helpful; to

permit our analyzing them. in every: detail. However, it

has not been contended that, even cumulatively, they re-

move from the Ebasco $472,000 cost estimate many siz-

able items. Ai

iad discussing the above matters the Commission

sald, a t See

In view of ‘respondent’s. burden of proof and the

‘absehce of a persuasive explanation on the record,

‘basco’s failure to consider employment of combined

- of the Commission’s criticism of certain other alleged ac-_

ca]

billing procedures and its inadequately explained dis-

parate treatment of certain effects of severance on

’ the gas and electric companies, respective, substan-

tially impair the credibility and preclude the accept-

* ance of its estimate of $472,100 increase in treasury ©

and accounting costs and, in turn, of its over-all

‘estimate of increased costs (of which that figure is

a material part) in the determination of whether

severance would result in a substantial loss of econo- — ~

mies.

‘If this. constitutes a finding that the ‘deficiencies which

the. Commission believes it has found are so serious that

the Commission was entitled to reject the balance. of the

report from that very fact, we cannot agree. The doc-

trine of “falsus in uno, falsus in omnibus,” so far as it

has * value, ordinarily applies to cases of deliberate

falsehood. See 3 Wigmore, Evidence § 1013 (3d ed.-1940).

The Commission has not suggested, and we see no possi-

ble basis for suggesting, that the discrepancies it con-

plains of indicate bias or dishonesty. Absent a finding

that the errors found are related to, or‘ infect, other mat-

ters not directly discredited, if the “falsus in uno” doc-

' . trine, or a corollary, is to be used on any further basis

to impeach an expert’s report, it must be shown that the

errors are so- serious that they indicate substantial care-

lessness, or otherwise impugn the expert’s qualifications.

See e.g., Hoag. v. Wright, 1903, 174 N.Y. 36, 43; 66 N.E.

579, 581. ‘Again, the Commission made no such findings.

If there was a ‘ground for them it has not been suggested.

Indeed, the Commission demonstrated its confidence in

Ebasco elsewhere by accepting its cost estimates as the

basis for concluding that the gas companies constitute an |

integrated system.

On the record there is a large, residual showing in the

Ebasco report. Even at minimum it is $1,098,000 minus ©

some fraetion of $472,000.. ‘However, we do not think it

presently appropriate for us’ to consider whether -such

_ minimum showing meets our interpretation of “substan-

tial economies.” We do state, however, that on remand

the Commission must address itself to this problem - by

2

45

».

making ‘specific findings, and not content itself with gen-

_ eral conclusions. One illustration of this will suffice. The

Commission states in jts brief that it “had the right to

consider competitive advantages of separation in offset-

_ting alleged alosses of economies.” We do not question

this. What we do question is the Commission’s failure to

find or articulate any specific or approximate financial

benefit that such a change would occasion. Free competi- -

tion, as the Act recognizes is normally beneficial. It is

not necessarily so, nor in any assumed amount. The vari-

ous automotive divisions ef General Motors. seem to do

very well. More close to home, the Massachusetts Depart- —

ment of Public Utilities, which -voices no apparent criti-

cism of a number of combined local gas and electric com-

panies within the Commonwealth, affirmatively appeared

in opposition to the Commission’s proceeding in the. pres-

ent. case. The Commission statés that the Department’s

views have been “carefully considered,” but it goes no

further. If the Commission is of opinion that substantial

gains will accrue to the gas. system by placing it in com-

petition with the electric companies rather than, in part,

_. under the same roof, specific findings should be made,

and not just a general reference to the advantages of

_ competition. This is particularly called for where the evi-

-- dence shows that NEES has made a special effort to ob-

tain for its gas system many of the benefits-of independ-

ence, ,

? Decree will be entered vacating the order of the Com- - |

mission and remanding for further action not inconsistent

herewith. Lahn

st

APPENDIX

In the -Commission’s ‘brief counsel argues that section -

11(b) embodies a federal concern with use of the holding

company form to.combine a gas system with an electric

system. There .are several answers to this. In the first

place, it is too specialized an approach. The meaning of

this section and of sub-clauses (A), (B) and-(C). must

be the same whether the principal system and the addi- ~

tional systems are of like nature or are different. “Sub-

stantial economies,” in ether .words, should have the same

connotation in the one case as in the other.

_ Secondly, nowhere in the Act is there a condemnation

. of the retention .of gas and electric systems, provided the

tests congained in clauses’ (A), (B) and (C) are met.

To the contrary, section 8 prohibits a holding company’s

acquisition 0fgas and electric utilities serving thg, same

territory, where state.law prohibits combined gas and

electric operations, without express: approval of the state

commission. If anything, this is a negative pregnant, as

.the Commission has recognized and the legislative. history

makes clear. See Northern States Power Co., 1954, 36

S.E.C. 1, 8; S. Rep. No. 621, 74th Cong., Ist Sess., 29- 30;

H.R. Rep. No. 1318, supra, ‘at 14- 15;. Report of National

Power Policy Committee, H.R. Doce. No. 137, 74th Cong.,

Ist Sess. 10 (1935), appended to S. Rep. Né. 621, supra,

at 59; Hearings Before House Committee on Interstate

and Foreign Commerce on H.R. 5423. 74th Cong., Ist

Sess. 330 (1935) (statement of Rep. Rayburn). How.

‘far such an inference may be carried in the light of the .

fact that section 10(c), which prescribes the standards

for acquisitions, expressly incorporates the retention

standards, and requires further that an acquisition tend

toward the development of an integrated system, may be

questioned. Cf. American Water Works & Elec. Co., 1937,

_2 S.E.Ce 972, 983 & n. 3; ColumbiaxGas & Elec. "Corp. a

“1941, 8 S.E. C. 443, 462-63: American Gas & Elec. Co.,

1946, 22 S.E.C. 808, 815. But at the least we find neither

there nor elsewhere in the Act a general policy of opposi-

~ tion to gas and electric company joinder.

Nor, if the matter could be thought to be illuminated

’ by administrative practice, has the Commission previously

i*

wows | 4 et an

made such an intefpretation, nor does it now. In-its opin-.

ion the Commission stated, “We do not take the view that

‘ the Act expresses a federal policy against combined gas -

and electric operations as such.” -Counsel’s attempt to

explain this away by saying the Commission’s phrase “ag

such” mearit simply that. the Commission was disclaiming

interest when the interstate holding company forni was

not employed, attributes to the Commission the banality

that it was not claiming jurisdiction in those cases where

. obviously it does not have it. .We believe the Commission

was Saying something more than this, and that, counsel,

in the brief is merely seeking some new ground to support

the Commission’s result. 3

r

\

| 48 _ us

OPINION AND JUDGMENT BELOW .

March 31, 1967

” CoFFIN: Circuit Judge. This petition for review: of a

Securities and Exchange Commission order is before us .

for a second time, on remand from the Supreme Court.

The petitioner, New- England Electric System (NEES),

_ is a registered holding company controlling fourteen elec-

-tric utility and eight gas utility companies in the New

England states: In August 1957 the Commission institut-

ed proceedings to determine whether NEES was entitled

to retain. that control under the standards of section 11

(b) (1) of the Public Utility Holding-Company Act of

1935, 15 U.S.C. § 79k(b) (1). Extensive hearings, result--

ing in a record of nearly- 1,500 pages, culminated in the

Commission’s order reh 19, 1964, requiring NEES

to divest itself. of: all its gas companies,

In our earlier opinion,.as here, we focused primarily

on ‘the Commigsion’s application to the NEES ystem of

the “substantial economies” test of section 11(b (1) (A),

15 U.S.C. § 79k(b) (1) (A). Generally, section 11(b) (1)

allows a holding company to controt only one system of

operating utility companies. However, control of an ad-

ditional. integrated public utility system ? is permitted if,

in addition to size and location requirements not here in

dispute, the Commission finds that the system “cannot

‘ be operated as an independent system without ‘the loss.

of substantial economies which can be secured by the re-

tention of control” by the holding company.

We held that the statutory words, “loss of substantial

economies”, called for. “a business judgment .of what

would be a significant loss, not for a finding of total loss

of economy or @ficiency”. New England Elec. System v.

1 As applied to gas companies, an integrated public utility system

‘is “a system consisting of one or more gas Utility companies which

are so located and related that substantial economies may be effecu-

ated by being operated as a single coordinated system confined in .

- its operations to a single area or region... : .” 15 U.S.C. § 79b(a) .

(29)(B). The Commission held, and it is assumed _ that the

eight gas companies constitute such a system.”

4 e : . ° 49

SEC, 1 Cir., 1965, 846 F.24 399, 406., Since we read the

Commission’s opinion as holding incorrectly that lost econ-

omies would not be substantial unless divestment would

‘render “economical or efficient operation” imposssible, and

since we believed that under the appropriate standard the |

‘Commission could have found for NEES on the record

before it, we ordered the case remanded. The Supreme

Court reversed, holding that the Commission’s interpreta-

‘tion of the-statute was correct, and remanded the case

to us for review of the Commission’s order in light of

the proper meaning of the statutory term. SEC v. New -

England Elec, System, 1966, 384 U.S. 176. A

In approving’ the Commissicn’s ‘interpretation of section

11(b) (1) (A), the Court said that it required a showing

that the “additional System. cannot be operated under

Separate ownership without the loss of economieg§so im- -

portant as to cause a serious impairment of that system.”

384 U.S. at 179. In illustration the Court quoted the

language of the House report, that there must be a show-

ing of “a real economic need”; of Senator Wheeler, speak-

ing after the bill was passed, that the exception would

apply only: to systems “so small that they were j capable

of independent operation”; and of the Commission itself,

in Philadelphia Co., 1948, 28 S.E.C. 35, 46, that there

must be a “situation in which the proven inability of the

system to stand by itself would result in substantial hard-

_ Ship to investors and consumers were its relationship with -

the holding company terminated.” Finally, the Court con-

cluded (1) that the proper test was “much more strin-..

~ gent” than a business judgment of significant loss; (2)

that while economy in management was one theme of the

act, eliminating restraint of free competition was another;

‘and (3) - that offsetting gains to competition, difficult to

forecast, were “a matter for Commission expertise on the

total competitive situation, not merely on a prediction

whether, for example, a gas ‘company in a holding ¢om- -

' pany system may make more for investors than a gas

company converted into an independent regime.” 384 U.S.

at 185, | | me

The only area remaining for definitional dispute is

whether the holding company, to justify retention, must

“BO

prove severance will result in imminent bankruptcy

of the subsidiary,,or something less—a condition allowing

‘survival but not on a sound or “healthful continuing”

basis, Engineers Pub. Serv. Co. v. SEC, D.C. Cir., 1948,

138 F.2d 936, 944: We think the answer lies in the latter

definition. This, we-think, sterhs from a careful reading

of the Court’s opinion, ‘particularly’ in the light of the

-Commission’s opinion which it was interpreting: >.

We .have taken pains; to: summarize the sequence of

.quotations cited by the Court, all of which have been

relied. on by the Commission, ‘because, while they are in-

ternally consistent in militating against a test of business

judgment of probable significant loss, they suggest that * -

the Commission has not always been clear as to whether

it considers “serious -impairment” or “inability to sur-

vive” the standard. The first two quotations are consis-

tent with the fermer; the last two, with the latter. |

That the Court’s use of the “serious. impairment}ylan-

guage reflected the fair import of the Commission’s opin-

ion is clear. That opinion contained only one reference—

to Senator. Wheeler’s language above quoted—consistent

with an “inability to survive” test. Its remaining verb- |

alizations were “real economic need” (House Report lan-

guage above quotéd); “ability of the additional system

- to operate soundly” -(Commission’s~ own formulation) ; |

“important economies” (North American’Co. v, SEC, 2 —

Cir., 1948, 183 F.2d‘ 148,.152) related to “the healthful

“continuing business and service of the freed utility” (Zn-

_ gineers Pub. Ser. Co. v. SEC, supra) ; and the conclusion

of the Commission in its own words that “a registrant .

seeking to retain an additional system has the burden of —

- showing .. . that such additional system cannot be oper-

’ ated under separate ownership withoyt the loss of econo-

‘mies so important as to cause a serious impairment of

that system.” The Court, therefore, advisedly chose this -

language as “the Commission’s reading of ,Clause (A)”.

_- We also observe that if Congress had meant to allow — |

‘retention only when the alternative was extinction, the

test of section 11(b) (1) (A) could have been shortened

to require a finding that the subsidiary “cannot be op- — |

erated as an independent system.” Furthermore, the .

» 8

<

Court’s emphasis on the likelihood of offsetting -gains to

competition. presupposes” the continued operation of the

gas companies—we cannot imagine that competition

would gain from the elimination of competitors, Finally, .

it is as impossible to say that “serious impairment” of

_ an additional utilities system means “inability. to survive” -. °

_ as to say that “serious injury” means “death.” - ‘s

. We take the trouble to distinguish between these tw

remaining possible approaches because of hints in the

. ‘Commission’s supplemental brief; signed by its General |

Counse] and argued. by its Solicitor, that it sees the test

-in terms of likely death of'a system if divestment is or-

dered.. This brief articulated the “Question Involved” as

follows: — | 3

_ “(T]he only question remaining for this Court’s con-

.Sideration is whether the Commission correctly held '

.that petitioners failed to sustain their burden of

proof that NEES integrated gas utility system was.

unable to stand by itself so that substantial hardship

- to that system’s investors and consumers would re-

sult. from: a termination of its relationship with

NEES.” Cahn ae

(Emphasis added.) - ge

_ This manner of stating the question ignores the “seri-.

ous impairment” language to which the Court gave first °

attention in its opinion, but draws exclusively from the:

language quoted ‘from Philadelphia Co., supra. The Com- —

mission’s wording of the “Questign” also makes it clear

that a ‘system’s inability “to stand by itself” is the event -

bringing about: the “substantial hardship” to investors

and consumers. This reading of the test is made more

_. Clear by the brief’s truncated quotation of Philadelphia

_-gC0. in saying that that case places “upon petitioners the

burden of proving the ‘inability of the additional system

to stand by itself.’””. The significance of hardship to in-

vestors and consumers is ignored. As final corroboration,

it is ta be noted that this abbreviated quotation from

Philadelphia Co. is immediately followed by the state-

ment, “im the light of this test . . . . there is no basis for.

petitioner’s arguments that [the statute means] ‘such

52°

loss [as] .would impair the gas companies’ ability to com-

pete effectiyely... 2" °° 5 Hea Me | |

It seems too probable to us, therefore that the Com- .

“mission, at least in ‘its. supplemental brief, now views the

statute as requiring divestment unless petitioners can

--prove that they could not operate as an independent sys-

tem, Such a test would, we think, read out of the statute

the phrase “without the . loss of substantial economies”

and would distort the Court’s imprimatur on the words ,

“serious impairment”. - : : me. a

Even without the burden of proving likely demise, pe-

titioner’s burden is, as‘the Court said, to meet “a much

more stringent test” than that of a probable significant

loss. But, if the standard to be. ap lied to petitioner is

stringent, so is the level of analysi§ and expertise to be ,

exercised by the Commission. We have, only after a fresh

review of all the evidence in the light of ti

>

is most strin-

gent practical standard, concluded that the Commission’s

opinion -does not reveal that application of both reason

and experience to facts which merits endorsement as the

“responsible exercise of expertise. poh es

To make intelligible our difficulties it is necessary to.

review again the Basic facts in evidence .and the- Com-

mission’s express bases for decision. The eight gas com-

‘panies involved are operated under the general control

of the NEES Gas Division, whose officers are responsible

directly to the general offcers of the holding company and

have no duties regarding the electric eompanies. Seven

of the eight operate in areas overlapping the service

areas of one or more NEES electric companies and share

some facilities, such’ as office space, meter readers, and

accounting personnel and equipment. Both the gas and

the electric companies obtain services such as supervision

of accounting, purchasing, insurance, legal counsel, labor

relations administration, and handling of rate matters

from the New England Power Service. Corporation, an-

other subsidiary of NEES. In most. other respects the

gas companies are’ operated as an independent system,

’ in competition with NEES and other electric companies

and with numerous unregulated oil companies. an

To support retention, NEES offered‘ the report of a |

study by a professional utility engineering and consulting —

%@

rm . 7 ai . | 53

firm, Ebasco Services, Inc. (Ebasco), projecting the re-.

_ Sults of severance‘on the gas companies, in terms of in-

creased cost of operations. The report presented a de- _. .

tailed description of the organization and operation of the -

gas companies as of 1958-1959 and as projected after :

severance, with an estimate of the actual and pro forma

@ costs assigned to eaeh phase of. the operations. It con- |

cluded that severance would result in recurring additional.

costs of $1,495,000 per year, on the assumption that the

gas subsidiaries would be operated at eight wholly in-

dependent companies. A supplemental report reduced the

figure to $1,098,600, on the assumption adopted by -the

Commission that the companies would be operated as a

single integrated system.’ The increase represented pri- «

marily. the increased cost of the personnel repuired . to

¢<. duplicate the-essential functions now being performed

. by. the service company, and the loss of economies of: scale. .

now obtained by joint operation with the electric com:

panies. The latter category included the increase in the. —

cost of customer accounting, the loss of quantity discounts |

in purchasing, and the substantially increased cost of

obtaining insurance against disaster losses.

The Commission rejected the Ebasco report’s conclu-

sion, on the grounds (a) that the supplemental report

and the witnesses did not satisfactorily. éxplain why the

cost of customer billing could not be reduced -by usirig

a centralized system for all eight companies, rather than

individual billing by each company; (b) that the report

projected greater increases in the per-customer costs. of

customer accounting to some gas companies than to the

NEES electric companies sharing the same facilities,

without satisfactory explanation; (c) that, since the in-

creased cost attributed to customer accounting ($472;100) —

constituted a large part of the total increase claimed, .

NEES’s failure to justify the whole of that item “substan-

tially impaired” the credibility of the entire estimate; and

» (d) that the estimated additional salaries and/or posi-

2 The latter figure also reflects a reduction of $67,000 to account —

for a Commission-approved increase in Service Company charges

to the gas companies that took effect after 1959.- -

*

- §4 |

tions for the top executive staff of the gas system were

also suspect. . Bia ae a

Nothing in the Court’s opinion: causes us to change our

views on this issue as expressed in 346 F.2d: at 407-09.°

We do not necessarily criticize- the Commission for its

skepticism in the specifics; but we do. think. that even °

taken together these items constitute at most a basis for

‘reducing the estimated figure by some amount, not for

concluding that no increased costs have been proved. In }

_ fagt, the record here’ demonstrates conclusively that some

increased cgsts are inevitable—the only doubt possible ~

concerns the amount. Furthermore, we think that if-the

Commission is to use its expertise to assess the impact

of the-costs in:“the total competitive situation”, it must

attempt to determine some acceptable figure as a predi-

cate for. its assessment. Since, however, thé Conimission

: here proceeded ‘on the alternative grourid that the full

amount of the Ebasco loss estimate- ($1,098,600) was

proven, we pass further discussion of the amount of losses

and turn to their impact.

On this issue,.NEES presented. evidence that, . because

of their position at the end of the pipelines, the high cost

~~ —ef-manufacturing gas locally, and the absence -of storage

‘facilities, the gas companies of New England pay the

highest price in the country for the gas they sell, and

consequently enjoy little or no price advantage ‘over oil

in the important ‘house heating market. Electricity is

competitive, apparently, only in a quality market, but has

shown better progress than expected. The growth of gas

_ sales in New England, while Showing a high percentage ———

- increase from a. very low _base,-has lagged substantially

behind the rest of the country in saturation of the mar-

* The Commission made another error, which we pointed out in

. our previous opinion, 346 F.2d at 401 n.4, namely, the imposition

. Of too Heavy a standard of proof. The Commission persists in

Saying that “by clear and convincing evidence” means the ‘same

thing as “by a fair preponderance of the evidence.” With the ex-

‘ception of one court of appeals decision, which we stated before

we would not follow, all courts that we know of consistently recog-

nize what to us seems self-apparent, ‘that there is a significant

difference. McCormick, Evidence. (1954) ch. 36, § 320.- For a recent

observation on this subject, see Woodby v. INS, 1966, 385 U.S. 276.

age 7 aes a or

ket. Evidence was offered that, although. the NEES gas

companies have shown a higher ‘rate of growth, of reve-.

hues, of increase in saturation, of earnings, and of re-

turn on sales expenses, and lower operating expenses

than other gas companies in Massachusetts, - they have

also shown a lower sales revenue per customer. NEES

officers and representatives of the Massachusetts Depart-

ment of Public Utilities testified that the NEES. com-

panies operate in areas of slow population growth, as

compared to other companies in the ‘state. :

To this the Commission responded (a) that as to the

geographical disadvantage of operating in New England,

_ the NEES gas companies were in no worse position that

_the non-affiliated Massachusetts companies which have “a

parently” been able to earn a fair return; (b)- that the

NEES companies, being: the ‘second largest: gas utility

operation in Massachusetts, should be able to provide it-.

self with management comparable to the others’; (c) that

the NEES gas companies’ operating ratio* of 76.41 per:

cent would-compare favorably to others in the area; (d)-

that there was no “specific demonstration” of a causal’

relation between population growth and gas sales; (e)

‘ that the projected losses, even if assumed to.be proved,

Were not substantial within the meaning of section 11 |

(b) (1).(A), because the ratios of the losses to revenues

(4.83 per cent), to operating expenses (6.03 per cent),

to gross income (23.28 per cent), and to net income

(29.94 per cent) —“the test of substantiality of the es- .

‘timated loss’—were lower or not substantially higher

than similar ratios in prior ‘cases where divestment had

been ordered; and (f): that in any event, despite the

relatively. independent operation of the gas subsidiaries,

the operation did not secure the competitive advantages

obtainable from -sirigle-minded independent management.

We have taken the trouble of including all of the Com-’

mission’s expressed bases for decision because of our con--

‘viction that they do not communicate to us the application

of agency expertise in this critical area. For it is here

* “Operating ratio” is defined as the percentage of total operat-

ing deductions (excluding depreciation, -amortization of conversion .

‘ costs, afd federal income taxes) to total operating revenues. . ©

e.

\

‘

\

o

that thers delicate judgments—informed by experience, -

sharpened by closé analysis, and ripened into the soundest

56.

possible intuition about what is likely to happen—that =

we call expertise, come’ into play. ‘Cost accountants, effi-

ciency experts, and engineers can arrive “at figures for

the likely increases of costs. But a wider-ranging in-

quiry must: be made to arrive at. an: educated guess

whether the increased burden, falling on a company in

the economic and competitive situation of the gas ‘com-

panies involved here, will amount to substantial lost econ-

omies—whether its effect will be undue harm-to the com-

panies’ investors and customers. The importance of care

and discrimination in the conduct of this inquiry is un-

derscored by the Supreme Court’s clarification of the stat-.

utory standard. That the line of “serious impairment” is

drawn so close to the. point of probable business failure

makes the holding company’s burden of proof more diffi-

cult to carry; but it also makes, the risk more substa-

tial that a divestment order based on erroneous findings

. will result. in economic disaster

With this in mind, we must conclude that the Com-

-mission’s ‘analysis in the present case does not adequately |

_ address the considerations relevant to. the ultimate issue oe

it is required. to resolve. To be. sure, the evidence sumi-

marized above is far from conclusive; and it cannot be

‘denied that there are imponderable factors. At the time

of the’hearing, the gas companies in New England: were

-eonsidering several ways of reducing their basic costs,

+ such as development of local storage areas, construction

of.a plant to manufacture liquefied natural gas, and im-

portation of gas by ocean tanker. At the same time they

feared that existing oil import restrictions might be loos-

‘ ened. .It may be that in the intervening years some of

_ these possibilities have ripened to change the basic com-

-. petitive circumstances. Nevertheless, we can only con-.

clude on the present record that all gas in New England

operates on, as one witness testified, a small cushion. The

significance of this i is not negated by observing that non-

NEES companies in Massachusetts seem to he surviving,

for the ‘focts must be on the specific characteristics of

the NEES companion, the only ones affected by the Com-

‘

' mission’s order. Similarly, that the NEES gas companies

es together would be the second largest system. in Massa- - :

chusetts is: a ‘descriptive, not an analytical proposition. -

_—It offers little help in assessing ability to survive. In-

- deed, the record here is silent oh the economic~health of

. the largest system. ) , ee

- A more precise basis for the Commission’s decision’ lies:

‘in its use of ratios of the estimated’ losses to revenues,

: , expenses, and income, in comparison. with those adduced

Y of from previous divestment. cases. ‘The use of these ratios

; as a test is positedon\the undeniable observation that,

, “in the context of clause (A) , the ‘substantiality’ of as-

a Serted losses of economies cannot be tested in absolute

: _ terms but rather must be evaluated in’ relation to total

_ yevenues, expenses and income.” Philadelphia Co., 1948,

28 S.E.C. 35, 48-49, aff'd, D.C. Cir., 1949, 177 F.2d 720.

- But we observe further that, where the Statutory test

-- ef substantiality is understood in terms of potential harm

to the investor and consumier, even these ratios are sig-

nificant only as. they affect the investment structure of

the companies in the particular case, and different com-

panies may be-compared only on the assumption that both

operate at the same level. ae :

For example, suppose two utility companies, one “éarn- |

ing a rate of 6 per cent return on its investment and —

the other a rate of 5 per cent,’ both suffer losses amount-

ing.to 15 per cent of net-income. -The result would be

to reduce the rates of return to 5.1. per cent and 4.25

_ ‘per cent respectively. It-is entirely possible that the form-

er company would be able: to maintain its. investment

position and operate without ‘a rate increase, while the

latter would be unable to produce what would be con-

Sidered a fair return. In fact, in the present case the

projeeted loss to the NEES gas companies amounted to

— 80 fer cent of net income. At the hearing the Commission -

staif adduced evidence showing that this loss would de-

oe

57

5 Rate of return is defined as the percentage of net operating t

- Income to the rate base, which. is fixed ‘by a rather complicated ‘ °

formula tied generally to the value of capital assets. It may be

-. noted that where only the percentage change is being considered,

, the amount of the rate base is irrelevant. .

a

58 (oe are: i Ae oth sa ek ;

~ _ erease the companies’ rate of return from 6.4 per cent :

- in 1959 to-4.1.per cent’on, the projected basis. This may

be compared with an average rate of 5.9 per cent for. the

non-affiliated Massachusetts gas companies, and is below

the minimum of 4.5 per cent. Yet, despite the staff’s .

initiative in’ securing this obviously important data, the

Commission failed even to discuss it, except to. observe

that “apparently” the non-affiliated companies were earn-

ing a fair return.. We cannot assume, without reason, ~

that a projected rate of return for the NEES companies

which is 30 per cent below the average for their.counter-.

parts is irrelevant to: the issue of “serious economic im-

pairment”. . Soran : ae 4)

Nor is it sufficient that the loss ratios considered here.

are “not significantly higher” than the corresponding

ratios of companies ordered divested in. preyious ‘cases.

It is obvious from our discussion above that, even if the .

companies compared were operating at the.same level be-.

fore divestment, the point must come where a smal] in-

- erease in the percentage loss of income crosses the line

. between a fair feturn on investment and one so low as to

trigger disinvestment or require rata. increases. More-

over, where that line is drawn must depend, among other

things, on the market position of the company involved.,

_ Comparison with figures. derived from the situations of

other ‘companies in other: places at other, times cannot

be conclusive.© : ' 3 ;

. 6 The same reasoning makes irrelevant the comparison of operat-

' ing ratios, since a business may operate relatively efficiently, yet at

_a level too low to attract: investo Re

The comparison-of-ratios test first acquired ‘the status of “the

test of substantially of the claimed losses” in Philadelphia Co., 1948,

28 S-E.C: 35, aff'd, D.C. Cir., 1949, 177 F.2d.720, where it was

explained as “nothing more than the normal decisional technique of

referring to’and compaping the facty in prior decisions as a guide

- in: adjudicating’ the pending case”. 28 S.E.C. at 50 n.24. The -~-

validity of this technique presupposes that the facts selected for’.

comparison were significant factors’ in the prior decisions. But it —

appears te us that the figures selected for use in Philadelphia Co.

-were either ignored or considered mere makéweights in the earlier

cases, except in a few where the percentages wére so small as to

_ .demonstrate’ that the claimed losses were de minimis. The basis for

_our conclusion is outlined in the Appendix to‘this opinion. ~

=, 9° ; Pe

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~ - 59

‘In short, ‘we think the standard ae econo-

mieS”, developed ‘by the Commission itself and . affirmed |

hy the Supreme .Court in this case, requires the Com-

“tmhission—having, established its best estimate of the ex-

tent of the definable losses likely to result from sever-

-- ‘ance—to address itself to a prediction of. the effect’ of

those losses on ‘the economic health ‘of the particular com-

panies involved, in their. particular circumstances, With- .

out pretending to define the one true test, we think it

clear that relevant factors might include.whether the

effect of the loss will be (a) to make new equity financirig

only difficult, or impossible: (b) to reduce the rate of

‘return on investment only slightly, or enough to provoke

. either disinvestment: or a rate increase; (c) to raise the

cost of borrowing money a little, 6r a lot; (d) if rate

increases seem probable, to injure eeply, hurt slightly,

or affect not at all the companies’ ability to survive, The

Commission considered none of these. hela

,We recognize, of course, that the selection of relevant

factors is for the Commission’s determination in the first

instance, in the exercise of its expertise. But this prin-

ciple does not isolate the Commission’s conclusions from

‘review to determine whether that expertise has been ex-

ercised, and, if exercised, communicated. We do not think

_ that the-Comniission’s: obligation, which is at the root .

_ of the respect to which its expertise is entitled, is satis-

fied by the invocation of Jargely irrelevant ratios or of

Sf

other data concerning other’ companies; at other times, in

other areas, facing possibly different conditions. Were’

‘Such ratios sufficient, the resolution of divestment cases

. could be as well entrusted to electric desk caleulators as

- to an expert administrative agency. <i

Finally, the-Commission attributed some significance

in this case to its doubt that,gsuch a separation of the

gas from the electric operations has been effected as to

secure: the-kind of single-minded management for each

that would obtain upon actual divestment.” This conclu-

KI

‘sion was supported by the observation. that other Massa-:

_- chusetts companies had: been “more efféctive” in their

_ Soperations, and by language best considered. in the -con-

text of its quotation by the Suprenie Court: -

AR oS Loe Re. Pew

«/*; 4

¥ ant pod " J

‘ s meg & read

’ . qs

-

“Tp the present case the Commission said on this

phrase of the tontroversy: ic aad

‘Although the NEES Gas Division handles sales

and promotional activities and various. other”

matters for the gas subsidiaries separately from

| SERRE. BN SS the electri¢ companies, final authority on all im-

sN _. portant matters rests in the top NEES man- _

4 ace? agement. The basic.competitive position that ex- .'

; __ ists between gas and electric utility service-with-

. in the some locality is affected by such vital

- Management decisions as the amount: of funds to

3 Chai ah ons be raised or allocated 'to the expansion or pro-

a oo ze .. motion of each type of service.’ — Lat

;- . “Competitive advantages to be gained by a sepa-

F “ration are difficult to forecast. The gains to competi-

® : tion might well be in the public interest and might

4q well offset the estimated loss in economies of opera-

. tion resulting from a separation‘of the gas properties

4 Cera from the utility. system. This is a matter for Com-

mission expertise on the total competitive situation,

i eee not merely on a prediction whether, for example, a .

; gas company in a holding company system may ‘make »

oe Ske more for investors than a gas company converted

into an independent regime. a et"

~ “The phrase ‘without the loss of substantial econo-

mies’ is admittedly not crystal clear. But the Com-

. Mission’s construction seems to us to -be well within

the permissible range given to those. who are charged -

with the task of giving an intricate statutory scheme

_ practical sense and’ application.” 348 U.S. at 184-85.

- We: havé quoted at such length because we think it

important to- understand precisely the meaning of this

_ part of the Court’s opinion. It is possible to read it .as

-_ Saying, in effect, that the Commission’s expertise always |

«entitles it to say that the compensating advantages. of

increased competitiveness outweigh the loss of economies _

‘in a given case, and that when the Commission has. so

spoken, its judgment is unreviewable. Were this, how-

ever,.the Court’s intent, there would have been no occa-

sion for remand for our further deliberation. The order

-

/

' significance in an individual case

61

. of remand would have ‘directed us to affirm the Com-. . ;

mission’s order. oe a

Furthermore, we note that the shared management on

which the Commission posits its language quoted above {

_is common to utility holding company systems, not pecul- —

lar to NEES. In effect the Commission says that an in-"

dependent gas company is always likely to do better than

one affiliated with electric companies. Cf.. The North —

American Co., 1945, 18 og 611. That is precisely the

sort of empirical judgment that the Commission is best _

qualified to make in the. light of its expertise, acquired

from dealing with utility company systems over the dec- °

ades. And we read the Court’s opinion as saying that-

- the Commission is entitled to take that judgment into ac-:

count as justifying a stringent. test of: “substantiality”. .

But, that dome, the gerieral judgment has no independent

ere this not so; a

Single statutory standard would/be' read to set forth two

test: first, is the loss of ecopemies so substantial 1s to

_ cause serious impairment of. the companies’ ability to sur- ©

vive; and, second, even if a loss of such magnitude is

probable, is its impact sufficently offset by efficiencies of

independent operation so drs it is no longer substantial? .

We cannot escape the conglusion that expert judgment on

the impact ef gains from\increased competition must be

involved in answering the first question and that a ge:

step approach is both artificial and unrealistic.

. Absent a finding, therefore, that the company to be di-

vested has been suppressed for the benefit of its affiliates;

“See The North American Co., supra, or that-some defin-

able particularized benefit’ will- acerue from divestment, .

we think the Commission should confine itself to a quan-

_ titative analysis of the substantiality of the proved losses.

Since we read the Commission’s opinion as improperly .

attributing independent significance to the generalized

competitive advantages here, and since—as we have ex-

. plained above—we do not read the pinion as expertly .

' evaluating the evidence in the light ofthe proper meaning

of the statutory term, we-are compelled to vacate the

order of divestment and remand the case foy’ further pro-

ceedings and an analysis by the Commisglon responsive

t6 the difficulties which we have set: forth.

62

APPENDIX

The following table is ‘derived entirely from figures —

appearing in‘ the Commission’s opinions in. five utility

divestment cases before 1948: Its purpose is to indicate

the significance of those figures in the Commission’s rea-

soning in each case, and their reliability as a guide. for

the decision of later. cases. It may be noted, for instance,

that in the three cases where the claimed losses consti-

tuted relatively large percentages of net income (Vir-.

ginia Elec. & Pow. Co.; Gulf gas ;.St.:Louis Co.) the loss —

estimate was held to be substantially overstated, so that.

the Cothmission: had no need to consider the “substan-

tiality” of the resulting percentages. LY sida! when. the

‘Commission adverted directly to: the pércentages given

it did not attempt a prediction of their economic impact

on the companies involved. ee

_. We must disapprove entirely of the practice adopted

by the Commission after 1948 of comparing the ratios

before it with similar ratios derived, not from.the opin-

ions in’ previous cases, but from the papers and records

in its files. In those circumstances there can be no as-

surance that the figures relied upon played any part in

_the decision of the cases. ras :

*The North American Co., 1945, 18 S.E.C. 611 [NoAmer]; The

Middle West. Corp., 1944, 15 S.E.C. 309 [MidWest]; Cities Serv.

Co., 1944, 15 S.E.C. 962 [CitServ}; Cities Serv. Power & Light Co.,

1943, 14 S.E.C.. 29 [CSPowL]; Engineers Pub. Serv. €o., 1942, .12

S.E.C. 41, rev'd on other grounds, D.C. ‘Cix., 1943, 138 F.2d 936,

dismissed as moot, 1947, 332 U.S. 788 [EngPS]. A

* General Pub. Util. Corp., 1951, 32 S.E.C. 807. We note more in

sorrow than in anger that in-the present case. the Commission in-

_ cluded for comparison the 1954 operating figures of the gas proper-

ties of the Louisiana Power and Light Co., which. were ordered

divested in 1953, in Middle South Util. Inc., 1958, .85 S.E.C. 1, .

_ vacated sub nom: Louisiana. Pub. Serv. Comm'n. v. SEC, 5 Cir.,

1956, 235 F.2d 167, rev’d on other grounds, 1957, 358 U.S. 368.

e

ae

}

4

wg

: Per Cent -of.

Case. utiinth 4 Laas Operating . Op. Rev, Gross Net :

Claimed . Revenues Deductions Income Income Remarks —

[. Va. E&P Co.* $ 71,500> 3.4 n/a 13.2 29.5 Held, existing misallocation of

; : costs between gas and electric

operations seriously inflated loss

. ; | : figures.

EngPS . Savannah E&P . 28,000 n/a 22 £34 5.5 g ;

Gulf gas - 42024" °&# n/a 8.7. 25.6 82.6 . Held, claimed loss figure includ-

tes ed cost of unnecessary outside

supervision and _ substantially

~ overstated projected payroll.

| El Paso .elec.° 32,8007 n/a . 18 3.6 7.4 pris

f St. Joseph elec. 78,8655 2.7 * Siren ae n/a Held; claimed loss figure over-

ET el eat stated salaries and included cost .

| ay of unnecessary personnel.

CSPowL { Sheridan Co.° n/a . nfa 7.08 n/a n/a . See note © below.

Rawlins elec. 7,600" 5.0. 11.0 “n/a n/a’. Held, claimed .loss figure sub-

. “Sy : _ 3% , stantially overstated, ee Ter

nT a Salaries.

.CitServ .— Arkansas gas poh, 96,1814 1.1 rt | n/a n/a

Ky. Util. 135,000¢ 1.0 n/a ‘n/a n/a

= Central IIl.< 80,0000 .04 - n/a. -nf/a.. n/a

Midwest | Wisc. Powers _146,000# 13 n/a n/an/a

Lake Super.* 50,500° - 19. n/a n/a n/a-

NoAmer . St. Leuis Co.* 182,900° 5.8. TA 27.6 32.1 . Percentages not calculated by’ |

, : - Commission or relied on in opin- —

. ‘ eo ion. Evidence indicated that gas

ae : . . €ompany was being suppressed

‘ te . for benefit of affiliated electric

companies.

* The percentage figures were not given in the opinion or relied on by the Commission to support its decision;

they are calculated here from other figures given in the opinion.

> These figures were held not to be proved and were disregarded, for the reasons indicated under “Remarks”,

© In these cases it was ‘held that the companies to be divested failed to meet the requirement of geographic com-

pactness, 15 U.S.C. § 79k(b)(1)(C).

4 These figures were held not proved by the Commission, and displaced by. Commission entionttes. The Commis-

sion’s figures are peemee in the — ey aS “ :

* 65

ALDRICH, Chief balis (Condarring{t I concur in the =

court’s opir ion with one possible reservation. The court

Speaks of “hints in the Commission’s supplemental brief

that it sees the test in terms: of likely death of a syste

if divestment is ordered.” The 2 supplemental brief

.to me very explicit; the-word “hints” is a judicial euphe-

mism ° for “statements. ”- If this now stated principle is -

ne ‘an unwarranted frolic on the part of counsel it is

regrettable, but no: harm is done: The thought lingers,

however, that counsel would not ‘make: such statements

without. reason for so doing, and behind thé back of their -

client. While, like the court, I would not myslf read the

. Commission’s opinion. as laying down the rule now as- °

serted in the suppleméntal brief, if in truth this was the -.

principle that the Commission applied, then its findings

" are even more vulnerable than we have held them to be.

For example, the matter of the asserted reduction in aie

the new system’s rate of return, discussed-in the court’s

‘Opinion, which the Commission considered to be of inade-

quate . consequence, might / ‘well be insufficient to make

bankruptcy imminent, ifAhat is the test the Commission

in fact applied. On the other hand, it could well be of

great. consequence if the test is simply. one of serious im-

pairment in the system’s financial circumstances.

I would hope that on the new review this matter will

‘be cleared up, and if it so happens that the Commission x

did weigh the evidence in the light of the. test it now -

espouses in ‘its supplemental brief, appropriate reconsid-

: eration will be given. ;

Pe Re

rk AGEL re Odie Hr DP Moe tae

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Oe ME ree

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ee Sree

7 -Enter:.

- DECREE

® /

- March 31, 1967

This cause came on to be heard on petition for review

of an order of the Securities and Exchange Commission,

and was.argued by counsel.

Upon’ consideration whereof, It. is now here ordered,

adjudged and oO follows: The order of divestment

of the Securities and Exchange Commission is ‘vacated ° :

and the case is remanded for further proceedings not in-

consistent with the opinion filed today.

By the Court:

“ Jg/ RoGer- A, SrINCHFIELD

“Clerk,

.

“ s

/s/ ALDRICH,Chd. 8