# Appendix — Securities & Exchange Commission v. New England Electric System > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386412_0132%3A01 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1968 - **Citation:** 390 U.S. 207 ## Text 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 Se ee ee ee eee eee eee eee eee . e ° , 3 Z . . , . * ° &° Ld . oe = ; . ° ° . . at, . > ‘a 5 6 ‘ ST ae . - —_ o- - attial - - . . ——— ° _ . . i” F 3 . . - -_ . - * e A . .* e . a ’ e ‘ . * e : ‘ ; : ‘ ; \ ns . . : . j - . Fa 4 . e .% base 4 - ai ° s . *- , . - . bs : a iw o- e, . . - . 7 vad * .* e ‘? . : . m. . . . “a . . & ee . : : . ° i. : \ “. . ° i . . . e * . Bo a ih . : . - . . “ts P : ; “d *23 . ‘ e . x “4 Hs . . f . : a 2 4 ‘ e . . oe tt se . , A ° xg ° . - . . ’ . ‘ : - . 2 * . 5 z e . ee S . . - ® o . . > . . . e ° —_ . « > . . 7 * site * “= e e e% ai @. ~ v ae v : . | . « ad - . ? : U v e . . “ ’ . “ , 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 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 . 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 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 ¢ 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. 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 ° aor P Oe ME ree < . 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386412_0132%3A01. Public record. Not legal advice.