Opposition Brief — American Power & Light Co. v. Securities & Exchange Commission

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Questions presented

Statute involved

Oo W =1 & Oo bo

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CITATIONS

Cases:

Alabama Power Co. v. Federal Power Commission, 134 F.

American Power & Light Co. v. Securities and Exchange

Commission, 325 U. 8. 385

American Power & Light Co. v. Securities and Exchange

Commission, 329 U. 8. 90

American Telephone & Telegraph Co. v. United States, 299

California Oregon Power Co. v. Federal Power Commission,

150 F. 2d 25, certiorari denied, 326 U. S. 781 15, 16, 17

Colorado Interstate Gas Co. v. Federal Power Commission,

Niagara Falls Power Co. v. Federal Power Commission, 137

F. 2d 787, certiorari denied, 320 U. S. 792

Norfolk & Western Railway Co. v. United States, 287 U.S

North American Co. v. Securities and Exchange Commission,

327 U. S. 686

Jorthwestern Electric Co. v. Federal Power Commission, 321

8, 11, 12

Pacific Power & Light Co. v. Federal Power Commission,

141 F. 2d 602

Pennsylvania Power & Light Co. v. Federal Power Commis-

sion, 139 F. 2d 445, certiorari denied, 321 U. S. 798__ --

Puget Sound Power & Light Co. v. Federal Power Commis-

sion, 137 F. 2d 701

United States v. New York Telephone Co., 326 U. S

741410—47 -1 (1)

I

Statutes: Page

Communications Act of 1934, Sec. 220, 48 Stat. 1064, 47

U. 8. C. 290.......-.-----.------------------------ 10

Federal Power Act, Secs. 208 and 301, 41 Stat. 1063 as

amended, 49 Stat. 846, 16 U. 8. C. 824g, 825 rgetne hm 10

Public Utility Holding Company Act of 1935:

Section 1 (b)..-.-------------------------2-------9°" 19

Section 12 (c)...----------------------------------"" 12

Section 15 (a). ...--------------------------2--"----> 10, 20

Section 15 (f)..-.----------------------------------°° 10, 21

Section 15 (i)... .--------------------------------2-"° 10, 21

Section 20 (a)... ------------------------------9"--°° 10, 22

Miscellaneous:

Federal Power Commission, 26th Annual Report-- ------ 17

U. 8. Treaury Dept., Bureau of Internal Revenue, Bulletin

“FP” revised January, 1942---..--------------------- 14

YInthe Supreme Gourt of the Wnited States

OcrToBeR TERM, 1946

No. 1214

AMERICAN Power & Liagot CoMPANY AND FLORIDA

Power & LicHt COMPANY, PETITIONERS

Vv.

SECURITIES AND EXCHANGE COMMISSION

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE FIRST

CIRCUIT

BRIEF FOR THE SECURITIES AND EXCHANGE

COMMISSION IN OPPOSITION

OPINIONS BELOW

The opinion of the Circuit Court of Appeals for

the First Circuit (R. 2002-2025) affirming an order

of the Securities and Exchange Commission, issued

under the Public Utility Holding Company Act of

1935 (49 Stat. 803, 15 U. S. C. § 79), is reported

in 158 F. 2d 771. The findings, opinion and order

of the Commission in this matter, dated Decem-

ber 28, 1943, and the order denying petitioner’s

application for rehearing, dated January 12, 1944

(1)

2

(R. 57-103, 109-110), have not been officially re-

ported, but are contained in Holding Company Act

releases 4791 and 4824.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered on December 9, 1946, and rehearing

was denied on January 8, 1947 (R. 2025).

The jurisdiction of this Court is invoked under

Section 24 (a) of the Public Utility Holding

Company Act of 1935 (49 Stat. 803, 834-35; 15

U. S. C. § 79 x (a)) and Section 240 (a) of the

Judicial Code, as amended (28 U. 8. C. 8 347

(a)).

QUESTIONS PRESENTED

Did the Commission, in passing on a proposed

public offering of securities by a_ registered

holding company’s subsidiary under the Public

Utility Holding Company Act of 1935, properly

require the subsidiary :

1. To eliminate from its plant accounts and

charge to earned surplus $1,815,655 which the

Commission found represented intrasystem profits

paid by the subsidiary to an affiliated service

company in the guise of construction and engi-

neering fees;

2. To create a contingency reserve by annual

appropriations from earned surplus of $700,000,

so that over a period of fifteen years provision

will be made for the possible disposition of

$10,500,000 estimated by the Commission and not

3

disputed by petitioners to be approximately the

amount of the excesses of unamortized actual cost

(not including writeups) of purchased utility

operating properties over the original cost of such

properties to the person first devoting them to the

public use, pending final determination by the

Commission of the exact amount and final dis-

position to be made of such excesses?

STATUTE INVOLVED

The applicable provisions of the Public Utility

Holding Company Act of 1935 are set forth in the

Appendix.

STATEMENT

The Electric Bond and Share Company’

holding company system, of which petitioners are

constituent companies, has been examined by this

Court in at least two other cases, Electric Bond

and Share Co. v. Securities and Exchange Com-

mission, 303 U. S. 419, and American Power and

Light Co. v. Securities and Exchange Commis-

sion, 329 U.S. 90. In the latter case reference was

made to the fact that the Commission had found

that the book figures of various operating compa-

nies of the system required revision.* The present

case is concerned with the adjustments required by

1 Florida Power and Light Company and American Power

and Light Company are hereinafter referred to respectively

as “Florida” and “American”, and Electric Bond and Share

Company is referred to as “Bond and Share”.

2 American Power and Light Co. v. Securities and

Exchange Commission, 329 U.S. 90.

4

the Commission in the book figures of Florida, an

operating subsidiary of American, a holding com-

pany registered under the Holding Company Act,

which is in turn a subsidiary of Bond and Share,

also a registered holding company.

Florida was organized in December, 1925, and

represented a consolidation of various electric and

gas utilities and related companies located in

the state of Florida, which had been acquired by

American in 1924-1925. This was at the time

of the historic Florida real estate boom, which

lasted from 1923 to 1926. As soon as control of

each company was obtained Bond and Share em-

ployees were placed in active charge as officers

and directors, and the operating company was

made to enter into a service contract with Bond

and Share by which operations were controlled

in detail by Bond and Share (R. 855, 869-884)

and the Bond and Share ‘‘fee’’ system was ap-

plied to an extensive program of construction

which was undertaken (R. 544, 1070).

The books of Florida’s predecessor companies

contained an aggregate of $3,314,740 in their

plant accounts in excess of cost to the predecessor

companies, and American paid a total of $2,302,-

363 in excess of predecessor book cost for these

properties (R. 93, 953-954, 1069, 1385, 1389).

The total of these sums, $5,617,103, was included

on the books of Florida at the time Florida was

5

organized.’ After its organization Florida con-

tinued to purchase and construct additional prop-

erties on a large scale until 1930 (R. 1070). By

then, the purchases resulted in an additional $4,-

881,014 excess over the original cost of the prop-

erties appearing in Florida’s accounts (R. 1385-

1389). While there has not been a definitive

determination thereof by the Commission, it is

not disputed that a total of approximately $10,-

500,000 in the plant account represents an excess

over the original cost of the properties (R. 153,

276-278, 2005). In addition, the Commission

found that Florida added to its plant account

$1,815,655, which represented profits included in

fees paid to affiliated companies for construction

and engineering services (R. 92). The items

making up the foregoing sums were admittedly

not depreciated on Florida’s books (R. 2017),*

*The Commission found that Florida’s plant account on

its opening balance sheet also contained approximately

$32,000,000 in excess of American’s cost of the property

(R. 65). Substantially all of this sum has been removed

from Florida’s books, $27,615,044 since the institution of

this proceeding and $3,675,000 just prior thereto (R. 68,

1368).

* As a matter of bookkeeping, for reasons primarily relat-

ing to the depreciable tax base allowed by the United States

Treasury Department for income tax depreciation purposes,

Florida carried all or substantially all of its property on its

detailed property ledger at approximately the original cost

of the physical property, and the surplus over original cost

was carried in a lump sum “balloon” account, which was not

depreciated (R. 947-51).

6

remaining a capital asset at the time the Com-

mission’s order was entered. :

Pursuant to a notice and order for hearing is-

sued July 10, 1941, an extensive inquiry was

_conducted into Florida’s capital structure, and

petitioners ultimately submitted a plan involving

the issuance of new securities to bring that struc-

ture into conformity with the standards of the

Publie Utility Holding Company Act. The Com-

mission approved the proposed financing and the

proposed accounting adjustments, but made two

additional accounting requirements, which are the

subject of this review. First, the Commission,

having found that $1,815,655 of the plant account

represented profit to affiliates, ordered this sum to

be eliminated by a charge to earned surplus.

Secondly, pending the final determination of the

nature and precise amount of the remaining items

in Florida’s piant account in excess of original

cost, which determination was to be based on an

original cost study Florida had previously been

required to make, the Commission ordered the

establishment of a contingency reserve by annual

charges to earned surplus of $700,000 so that all

or any portion of the amount of approximately

$10,500,000 in excess of original cost which might

be required to be eliminated from Florida’s plant

account over a fifteen year period from the date

of the order, could be charged to the contingency

reserve ‘so accumulated.

7

The order of the Commission was affirmed by

the Circuit Court of Appeals (R. 2025).

ARGUMENT

1. The petitioners ask this Court to bring up

for review the affirmance of the Commission’s re-

quirement that Florida eliminate from its plant

accounts, by charge to earned surplus, the $1,815,-

655 of profits paid to affiliated service companies

under the Bond and Share “‘fee’’ system. In so

doing, petitioners seek to reopen a question set-

tled by an unbroken line of decisions. United

States v. New York Telephone Company, 326

U. 8. 638;° Colorado Interstate Gas Company v.

Federal Power Commission, 324 U. 8. 581, 606-

608; Alabama Power Company v. Federal Power

Commission, 134 F’. 2d 602, 609 (C. C. A. 5) ; Puget

5In the Vew York Telephone Company case, the company

conceded the Federal Communication Commission’s powers

with respect to an affiliate’s profits “remaining in appellee’s

property accounts” and questioned only the commission’s

power to direct readjustment of depreciation accounts in

order to eliminate underdepreciation resulting from profits

to an affiliate previously included in plant accounts. 826

U. S. at 648. Furthermore, the Court’s opinion in that case

disposes of the present petitioners’ attempt to invoke the

decision in American Telephone & Telegraph Company v.

United States, 299 U. S. 232, for the Court points out that

the Commission’s finding in the New York Telephone Com-

pany case that the amount was a profit to an affiliate, brought

its order within the reservation of the American Telephone

& Telegraph Company opinion as involving, not a true in-

vestment, but only a “fictitious or paper increment.” 326

U.S. at 652-654.

741410—47——2

g

Sound Power & Light Company v. Federal Power

Commission, 137 F. 2d 701, 703 (App. D. C.);

Niagara Falls Power Company v. Federal Power

Commission, 137 F. 2d 787, 792-795 (C. C. A. 2),

certiorari denied, 320 U. S. 792; Pennsylvania

Power & Light Company v. Federal Power Com-

mission, 139 F. 2d 445, 450 (C. C. A. 3), certiorari

denied, 321 U. 8S. 798; see also Northwestern Elec-

tric Company Vv. Federal Power Commission, 321

U. S. 119. As this Court pointed out in the

Colorado Interstate Gas Company case (324 U. 8.

581, 607-608), the end result of a transfer from

one subsidiary of a holding company to another at

an intercompany profit is a write-up or inflation

of capital assets, and it was the prevalence of that

practice in the holding company field which gave

rise to an insistent demand for federal regulation.

Petitioners’ contention that the no-profits-to-

affiliates rule may not be applied where the record

contains evidence tending to show the fairness or

reasonableness of the profit, and petitioners’

reference to fields of law outside the regulation

of utilities, in which the legality of reasonable

profits to affiliates is recognized (Petition, pp.

14-15), merely repeat the arguments of another

Bond and Share company, petitioner in the Penn-

sylvania Power & Light Company case, supra, in

that company’s unsuccessful attempt to bring the

same question before this Court. See the peti-

tion for certiorari, No. 769, October Term, 1943,

pp. 6, 9, denied, 321 U. 8. 798..

That case also completely answers petitioners’

contention that the required elimination of the

$1,815,655 profits to affiliates is not properly sup-

ported by the findings and record.’ The Commis-

sion, upon its consideration of the record in this

case, which included substantially everything that

was in the record underlying the Federal Power

Commission’s order affirmed in the Pennsylvania

Power & Light Company case, supra,’ agreed with

the administrative conclusion and findings in that

case and made similar findings (R. 86-93). That

case involved the same controlling factual situation

and an administrative order the relevant part of

which was similar to the part of the present order

now under consideration. The opinion of the

Cireuit Court of Appeals for the Third Circuit

discloses that that court had carefully considered

the support for the Federal Power Commission’s

determination in that case. The consistent deci-

sions of two circuit courts of appeals, upholding

the sufficiency of substantially the same record on

the principal factual questions and the adequacy

of similar findings to support similar accounting

requirements, is persuasive that no question is

now presented meriting review by this Court, par-

° This contention is apparently applicable to that part of

the Commission’s order as well as the part hereinafter dis-

cussed. See the second and third reasons relied on for grant

of writ. Petition, p. 10.

™ See R. 1391-1589, 1681-1961. See, in addition to the rec-

ord from the Federal Power Commission proceeding, R.

228-261, 415-425, 847-851, 869-884, 872-883.

saan eee eee tac Aate Ia eet AC EOP ARE S

10

ticularly where certiorari has already been denied

in one of the cases (321 U. S. 798).

Although petitioners question the application

of the non-profits-to-affiliates rule ‘‘under the

Act here involved,’’* they do not point to any

distinction between Sections 15 (a), (f), (i), and

20 (a) of the Public Utility Holding Company

Act (infra, pp. 20-22) and Sections 208 and 301 of

the Federal Power Act (41 Stat. 1063, as amended,

49 Stat. 848, 16 U. S. C. 824g, 825), or Sections 220

(a), (c), (g) of the Communications Act of 1934

(48 Stat. 1064, 47 U.S. C. 220 (a), (¢), (g)), under

which the orders involved in the above cited

decisions were issued. A comparison of the pro-

visions of the three statutes indicates the com-

plete absence of any material difference relevant

here.

Petitioners attack upon the constitutionality of

the foregoing provisions ° is clearly without merit.

As this Court has reiterated, the regulation of

public utility holding companies is a valid exercise

of the Congressional power over interstate com-

merce. Electric Bond and Share Company Vv.

Securities and Exchange Commission, 303 U. S.

419; North American Company v. Securities and

Exchange Commission, 327 U. 8. 686; American

Power & Light Company v. Securities and Ezx-

change Commission, 329 U. 8.90. Florida is a sub-

sidiary of American and of Bond and Share, and

* See the fourth reason relied on for grant of writ, Peti-

tion, p. 10.

* See the third specification of errors, Petition, p.9. °

11

is one of the instrumentalities through which those

holding companies have conducted and continue to

conduct their interstate transactions. Through in-

terstate control those holding companies have

caused the entry upon the books of Florida of the

write-ups and other excesses over original cost dealt

with by the Commission’s order and caused also the

distribution by Florida of its securities which

the Commission’s order passed on under Section

7 as preliminary to a public offering of these

securities through the facilities of interstate com-

merce. It is such interstate activities of the Bond

and Share System, of which Florida is a part,

which bring Florida’s accounts within the reach

of the commerce power. ;

Petitioners’ contentions as to American’s rights

to dividends as common stockholder in Florida

and its alleged deprivation of property in con-

travention of the Fifth Amendment are disposed

of by the decision in the Northwestern Electric

Company case, supra, where similar contentions,

advanced upon behalf of the same American

Power & Light Company, petitioner there, as a

common stockholder in Northwestern Electric

Company (see petitioners’ brief, No. 195, Oc-

tober Term, 1943, pp. 6-7, 13-14, 43-54), were

overruled by the Court. 321 U. 8S. at 125.”

%” American has recognized that its rights as a stockholder

were similarly involved in the Northwestern case. American

Power & Light Company v. Securities and Exchange Com-

mission, 325 U. S. 885, No. 470, October Term, 1944, Peti-

tioners’ Brief, p. 10, note 1.

12

The scope of the ruling in that case is not

limited by this Court’s subsequent decision in

American Power & Light Company v. Securities

and Exchange Commission, 325 U. 8. 385. For

there this Court, merely holding that a parent

corporation was a ‘“‘person aggrieved’’ within the

meaning of Section 24 (a) of the Public Utility

Holding Company Act by an order directed to its

subsidiary’s accounts which might affect its right

to dividends so that it may challenge the validity

of that order, did not pass on the merits of that

challenge.

A similar order in the Northwestern case was

held to present ‘‘only a question of proper account-

ing’’ as to which the Court was ‘‘not called upon

to make any decision as to the ability of the com-

pany legally to declare and pay dividends.”” 321

U. S. at 123, 125." See also Norfolk and Western

Railway Company v. United States, 287 U. 8.

134, 141, and Kansas City Southern Railway Com-

pany v. United States, 231 U. 8. 423, 453, where

the Court, speaking of the regulated companies’

preferred stockholders, said: ‘‘Supposing, how-

ever, that the enforcement of the accounting sys-

tem does require them to forego their current

1 The letter from the Chairman of the Securities and Ex-

change Commission, printed as Appendix D to the Federal

Power Commission brief in the Northwestern case, described

the possible effect of the accounting order there involved upon

Securities and Exchange Commission control over dividends

under Section 12 (c) (at pp. 103-105).

dividends, we do not concede that this amounts to

an unlawful taking of their property.”

2. As we have seen, page 5, supra, it is not

contested that the difference between the cost to

Florida of its properties (after elimination of

intra-system profits) and the original cost of the

properties is approximately $10,500,000, all of

which is contained in Florida’s plant account.

The Commission did not order the immediate

elimination of Account 100.5 items, but directed

the accumulation of a reserve therefor at the

rate of one-fifteenth of the total sum per year.

Definitive disposition of these items will be made

after the Commission has considered their nature as

disclosed by the original cost study being con-

ducted by Florida, and further opportunity to

review the determination will be afforded at that

time.” In considering the narrow issue of the

propriety of the Commission’s action it should

be emphasized that the Commission entered its

order at the same time it granted Florida authority

to make a public offering of securities. The or-

der, directing the estabiishment of a contingency

reserve against a future order likely to require the

elimination of these items, does no more than pru-

dent accounting requires.

2 At the time of the accounting directions under review

Florida had not completed its original cost study for sub-

mission to the Commission. This study was submitted to the

Commission only this year, but additional information has

been requested. It is likely that the entire study will be com-

pleted within a year.

14

As the Commission stated (R. 96) :

* * * since all present indications are

that there will be approximately $10,500,-

000 of * * * acquisition adjustments

ultimately to be disposed of, conservative

accounting requires that the company

should begin now to make provisions for

such disposition.

The Commission’s conclusion that such an

amount may be required to be disposed of is

fully supported by the reasons it adduces and the

undisputed facts. Each item making up this

excess over original cost must ultimately be de-

termined to be one of two things: cost of acquiring

tangibles or cost of acquiring intangibles. If and

insofar as the items may be determined to be

tangibles, the record shows that they had

been acquired from 15 to 20 years previously,

were not new when acquired, and therefore

have either already been retired from service or

in all likelihood will be retired during the 15-year

period in which the reserve is to be accumulated

(R. 815-816, 948, 1070).* Furthermore, the

Commission found that Florida had made no

provision in its depreciation reserves for these

amounts, depreciation having been computed on

original cost only; admittedly Florida had not

'’ The average life of steam-electric property is 31 years.

U. S. Treasury Department, Bureau of Internal Revenue,

Bulletin “F”, revised January, 1942, p. 61. This document

was contained in the record before the Commission (Tr. Doc.

No. 75).

%* See footnote 3, supra, p. 5.

PO eee

made any charge to the depreciation reserve upon

any retirement of any such tangibles (R. 2017).

If and insofar as this $10,500,000 excess over

original cost represented intangibles, the Commis-

sion stated that it constituted payment for ex-

pected earnings which prudent accounting would

not permit to continue indefinitely in the plant

accounts. As the court below pointed out

(R. 2018) :

The property that American transferred

to Florida was acquired during the height

of the Florida real estate boom and the

major portion of the subsequent purchases

of Florida were made prior to 1930. This

was an era of inflated values and specula-

tion. Prices at that time reflected ex-

pectancies of continued ‘‘prosperity.”’

15

Clearly the Commission was warranted in finding

that intangibles of this nature would have to be

amortized over a reasonable period of years. Con-

clusions similar to that of the Commission, and

similar requirements for disposition of such in-

tangibles, have repeatedly been affirmed. Calt-

fornia Oregon Power Company v. Federal Power

Commission, 150 F. 2d 25 (C. C. A. 9), certiorari

denied, 326 U. S. 781; Pacific Power & Light

Company v. Federal Power Commission, 141 F. 2d

602, 604-605 (C. C. A. 9); see also Niagara Falls

Power Company v. Federal Power Commission,

137 F. 2d 787, 792-795 (C. C. A. 2). In the

In the Niagara case, the court, in an opinion by Judge

L. Hand, said with respect to the price paid for a plant built

16

California Oregon Power Company case this

Court denied certiorari on this very point.

Whether tangible or intangible, the items rep-

resented by this $10,500,000 excess will thus have

been retired or have ceased to exist before the end

of the 15-year period. This brings them within

the reservation recognized in American Telephone

& Telegraph Company v. United States, 299 U. 8.

232, 241, where the Court upheld the accounting

requirements there under review, upon the under-

standing that they permitted assets to be retained

in capital accounts ‘‘until such assets cease to

exist or are retired ;’’ adding that “‘in accordance

with paragraph (C) of account 100.4, provision

will be made for their amortization.”’

In this case it is not, however, necessary to de-

termine whether the Commission could require the

excess to be so treated, but only whether it could

require a contingency reserve to be built up to care

for the possibility of a final order of such nature.

Creation of such a reserve, whether pursuant to

- requirement of regulatory authority for the pro-

tection of investors, consumers, or the public

generally, or by voluntary act of management to

provide against a possible impairment of capital

and in operation: “The only factor which determines its

price is the ‘prospective revenues’ which it will produce.

These may be larger or smaller than the ‘original cost,’ or the

‘reproduction cost’; but that will not affect the purchase

price, except as the scrap value of the plant serves as a ‘floor,’

or bottom price, below which the value will not go” (137 F.

2d at 794).

17

or to guard against declaration of dividends out of

capital, is no more than a prudent provision for

the possibility ** of a subsequent order dealing

. ith the disposition of the items, or, as the Com-

mission found, ‘‘conservative accounting.’’ Ob-

viously it is not ‘‘ ‘so entirely at odds with funda-

mental principles of correct accounting’ as to be

the expression of a whim rather than an exercise

of judgment.’’ United States v. New York Tele-

phone Company, 326 U. S. 638, 655.

The statutory and constitutional objections ad-

vanced in the petition, insofar as they pertain to

the portion of the order involving this $10,500,000

excess over original cost, are disposed of by what

has already been said with respect ‘to similar ob-

jections to the portion involving the $1,815,655 of

affiliates’ profits. See pp. 10-13, supra. For it fol-

lows from what was said there that there is no

such difference in the statutory or constitutional

bases of the accounting jurisdiction of the Securi-

ties and Exchange Commission as to differentiate

its powers with respect to ultimate disposition of

the $10,500,000 excess from the accounting powers

of the Federal Power Commission upheld in the

Pacific Power & Light and California Oregon

Power cases, supra. Hence petitioners’ conten-

1° The Twenty-Sixth Annual Report of the Federal Power

Commission, Fiscal Year Ended June 30, 1946, on p. 46 shows

that 138 electric utility companies have already disposed of

or made a provision to dispose of a total of $347,656,454.11

of such excesses (other than write-ups) over original cost

from their plant accounts.

18

tion that there is such a want of statutory or con-

stitutional power in the Commission with respect

to ultimate disposition as to make the possibility

of such disposition too remote to constitute a real

contingency is without merit.

CONCLUSION

The decision of the Court below is correct and

no question is presented which would warrant

further review by this Court. Accordingly, the

petition for certiorari should be denied.

Respectfully submitted.

J Georce T. WASHINGTON,

Acting Solicitor General.

/ Howarp E. WAHRENBROCK,

Assistant General Counsel,

Federal Power Commission.

Roaer 8S. Foster,

Solicitor,

/ Rosert 8. RvusBin,

Associate Solicitor,

Harry G. SLATER,

Chief Counsel, Public Utilities Division,

Davin FERBER,

Special Counsel,

Myer FELDMAN,

Attorney,

Securities and Exchange Commission.

J

May 1947.

APPENDIX A

Public Utility Holding Company Act of 1935,

49 Stat. 803, 15 U. S. C. § 79 et seq.:

Sectionl. * * *

(b) Upon the basis of facts disclosed by

the reports of the Federal Trade Commis-

sion made pursuant to S. Res. 83 (Seven-

tieth Congress, first session), the reports of

the Committee on Interstate and Foreign

Commerce, House of Representatives, made

ursuant to H. Res. 59 (Seventy-second

ongress, first session) and H. J. Res. 572

(Seventy-second Congress, second session)

and otherwise disclosed and ascertained, it

is hereby declared that the national public

interest, the interest of investors in the

securities of holding companies and their

subsidiary companies and affiliates, and the

interest of consumers of electric energy

and natural and manufactured gas, are or

may be adversely affected—

(1) when such investors cannot obtain

the information necessary to appraise the

financial position or earning power of the

issuers, because of the absence of uniform.

standard accounts; when such securities

are issued without the approval or consent

of the States having jurisdiction over sub-

sidiary public-utility companies; when such

securities are issued upon the basis of

fictitious or unsound asset values having no

fair relation to the sums invested in or

the earning capacity of the properties and

upon the basis of paper profits from inter-

company transactions, or in anticipation of

excessive revenues from subsidiary public-

utility companies; when such securities are

issued by a subsidiary public-utility com-

pany under circumstances which subject

(19)

— ,

20

such company to the burden of supporting

an overcapitalized structure and tend to

prevent voluntary rate reductions ;

(2) when subsidiary public-utility com-

— are subjected to excessive charges

or services, construction work, equipment,

and materials, or enter into transactions in

which evils result from an absence of

arm’s-length bargaining or from restraint

of free and independent competition; when

service, management, ‘construction, and

other contracts involve the allocation of

charges among subsidiary public-utility

companies in different States so as to pre-

sent problems of regulation which cannot

be dealt with effectively by the States;

(3) when control of subsidiary public-

utility companies .affects the accounting

practices and rate, dividend, and other

policies of such companies so as to com-

plicate and obstruct State regulation of

such companies, or when control of such

companies is exerted through dispropor-

tionately small investment ;

(4) when the growth and extension of

holding companies bears no relation to

economy of management and operation or

the integration and coordination of related

operating properties ; or

(5) when in any other respect there is

lack of economy of management and opera-

tion of public-utility companies or lack of

efficiency and adequacy of service rendered

by such companies, or lack of effective pub-

lic regulation, or lack of economies in the

raising of capital.

* * * * *

Sec. 15. (a) Every registered holding

company and every subsidiary company

thereof shall make, keep, and preserve for

such periods, such accounts, cost-accounting

21

procedures, correspondence, memoranda,

rs — and other records as =

ommission deems necessary or appropria

in the public interest or for the protection

of investors or consumers or for the en-

forcement of the provisions of this title or

the rules, regulations, or orders thereunder.

* * * * *

(f) All accounts, cost-accounting pro-

cedures, correspondence, memoranda,

papers, books, and other records kept or

required to be kept by persons subject to

any provision of this section shall be sub-

ject at any time and from time to time to

such reasonable periodic, special, and other

examinations by the Commission, or any

member or representative thereof, as the

Commission may prescribe. The Commis-

sion, after notice and opportunity for hear-

ing, may prescribe the account or accounts

in which particular outlays, receipts, and

other transactions shall be entered, charged,

or credited and the manner in which such

entry, charge, or credit shall be made, and

may require an entry to be modified or sup-

plemented so as properly to show the cost

of any asset or any other cost.

* * ” ~ *

(i) The Commission, by such rules and

regulations as it deems necessary or ap-

propriate in the public interest or for the

protection of investors or consumers may

prescribe for persons subject to the pro-

visions of subsection (a), (b), (e), or (d)

of this section uniform methods for keep-

ing accounts required under any provision

of this section, including, among other

things, the manner in which the cost of all

assets, whenever determinable, shall be

shown, the methods of classifying and

segregating accounts, and the manner in

22

which cost-accounting procedures shall be

maintained.

* - * * *

Src. 20. (a) The Commission shall have

authority from time to time to make, issue,

amend, and rescind such rules and regula-

tions and such orders as it may deem neces-

sary or appropriate to carry out the pro-

visions of this title, including rules and

regulations defining accounting, technical,

and trade terms used in this title. Among

other things, the Commission shall have

authority, for the purposes of this title,

to prescribe the form or forms in which in-

formation required in any statement, decla-

ration, application, report, or other docu-

ment filed with the Commission shall be set

forth, the items or details to be shown in

balance sheets, profit and loss statements,

and surplus accounts, the manner in which

the cost of all assets, whenever determi- ~

nable, shall be shown in regard to such

statements, declarations, applications, re-

ports, and other documents filed with the

Commission, or accounts required to be kept

by the rules, regulations, or orders of the

Commission, and the methods to be followed

in the keeping of accounts and cost-account-

ing procedures and the preparation of re-.

ports, in the segregation and allocation of

costs, in the determination of liabilities, in

the determination of depreciation and de-

pletion, in the differentiation of recurring

and nonrecurring income, in the differenti-

ation of investment and operating income,

and in the keeping or preparation, where

the Commission deems it necessary or ap-

propriate, of separate or consolidated bal-

ance sheets or profit and loss statements for

any companies in the same holding-com-

pany system. U.S. GOVERNMENT PRINTING OFFICE: 1947