New England Electric System v. Securities & Exchange Commission (346 F.2d 399, 1965)

ALDRICH, Chief Judge.

This is a petition seeking to review and set aside a divestment order of the Securities and Exchange Commission pursuant to section 11(b) (1) of the-Public Utility Holding Company Act of 1935, 15 U.S.C. § 79k(b) (1), requiring the petitioner, New England Electric System (NEES) to dispose of its gas utility properties by terminating its relationship with its eight subsidiary gas companies. The ultimate question in the case, which the Commission resolved against NEES, was whether divestiture would cause the loss of “substantial economies” within the meaning of the cited section.

Briefly, NEES is a registered holding company controlling, at the time of the hearing, fourteen electric utility subsidiaries and eight gas subsidiaries, with some 824,000 retail electric customers in the states of New Hampshire, Massachusetts, Rhode Island and Connecticut, and some 237,000 retail gas customers in Massachusetts. Seventy-eight percent of its gas customers are also served by the electrict companies. Except for certain peaks and emergencies the gas distributed is natural gas supplied by pipe line companies from the southern United States. The gas companies have separate offices and management, but their top officers are responsible to the top officials of NEES. There was a lengthy hearing before an examiner at which NEES sought to show that the cost of divestment to the electric system would be $804,000 annually, and to the gas system, if operated as a single unit after severance, $1,098,000. The Commission held, inter alia, that the financial effect upon the electric system was not a relevant inquiry, but that if it was it was not significant. This we do not reach. It also held, which we do reach, that the claimed financial consequences to the gas system were not substantial as it construed the statute, but that if they were they had not been adequately proven.

Basic to its decision, as the Commission recognized at the outset of its opinion, is the meaning of the Act and the standards which it imposed. Briefly, section 11(b) (1) required divestiture unless NEES could satisfy the provisos or exceptions contained in sub-paragraphs, or clauses, (A), (B) and (C). Clauses (B) and (C) were admittedly met. Clause (A) reads as follows :

“(A) Each of such additional systems cannot be operated as an independent system without the loss of substantial economies which can be secured by the retention of control by such holding company of such system;”

Before considering whether the Commission’s interpretation of this clause was correct we must determine what its interpretation was. At the beginning of its opinion the Commission stated that to prevent divestiture NEES must show,

“that the additional systems were integrated in nature and ‘were so small that they were incapable of independent economic operation’ and had a ‘real economic need’ for management together with the principal system. Congress was aware that some loss of economies would usually result from the separation of jointly controlled utility systems, but considered that continued joint management should be permitted only where separation would entail a loss of economies which would be substantial in the sense that they were important to the ability of the additional system to operate soundly.” [Footnotes omitted.]

The Commission then quoted at length from a decision by the Court of Appeals for the District of Columbia, from which it drew the conclusion that clause (A) required a “showing by clear and convincing evidence that such additional system cannot be operated under separate ownership without the loss of economies so important as to cause a serious impairment of that system.” Lastly, at the end of its opinion, the Commission concluded that on the record it was unable “to find that the gas companies could not be soundly and economically operated independently of NEES, even assuming the validity of * * * [its] estimates.”

Thus the statutory phrase, “cannot be operated as an independent system without the loss of substantial economies,”

346 F.2d — 26 was said to mean, “incapable of independent economic operation;” “important to the ability * * * to operate soundly;” “so important as to cause a serious impairment of that system;” and “could not be soundly and economically operated.”

In Middle South Utilities, Inc., 35 S.E. C. 1, 11 (1953), its most recent decision cited in its opinion for the support of its interpretation, the Commission ordered a divestment 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.” (ital. suppl.) Since presumably the Commission did not intend to voice simultaneously two different standards we read the word “or” as introducing an explanation or equivalency. Essentially this second Middle South Utilities phrase is the sole standard that the Commission adopts in its brief before us.

Also may be noted the Commission’s statement, in refutation of one of NEES’ contentions, that “other independent gas utility companies in the state * * * nevertheless have been able to conduct their operations and, apparently, earn a fair return without the alleged advantages of common control with electric utilities by a holding company.”

Taking the record as a whole we find its brief accurate, 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, 696-697, 66 S.Ct. 785, 792, 90 L.Ed. 945, the court referred to section 11(b) (1) as permitting retention only of “relatively small [companies] * * * unable to operate economically under separate management 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 relevant to the constitutional questions then under consideration, and even if the court’s language is not considered 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 the 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 Congressional intent, see United States v. United Mine Workers, 1947, 330 U.S. 258, 279-280, 67 S.Ct. 677, 91 L.Ed. 884; Duplex Printing Press Co. v. Deering, 1921, 254 U.S. 443, 477, 41 S.Ct. 172, 65 L.Ed. 349; 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, 7 Cir., 258 F.2d 831, cert. den. 358 U.S. 947, 79 S.Ct. 353, 3 L.Ed.2d 352, is accordingly absent. Furthermore, coming from the leading Congressional advocate of strict separation, see, e. g., 79 Cong.Rec. 1525, Feb. 6, 1935; id., 4903 (radio address of April 2, 1935); id., 14470, Aug. 24, 1935 (remarks of Senator Norris), it would seem natural to regard it, at that stage of the proceedings, as a self-serving declaration. To the cynically 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 influence 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 Representative 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 Commission 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. According to him the compromise was no compromise whatever, a position demonstrably unsound. His interpretation of particular clauses must be read in that light. National Labor Relations Board v. Fruit & Vegetable Packers & Warehousemen, Local 760, 1964, 377 U.S. 58, 66, 84 S.Ct. 1063, 12 L.Ed.2d 129.

A much more pertinent characterization of the phrase “substantial economies” is found in the statement of the House Managers attached to the conference report recommending passage of the compromise draft, that the retention 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 itself ambiguous. Obviously there would be a real economic need to prevent a loss that would preclude efficient or effective operation. But there could also be said to be a 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 section 1(b). Subsection (1) thereof concerns improper accounting practices, capitalization, etc., 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 subsection (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,

“(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 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.” (ital. suppl.)

Pausing here we note in the italicized phrases two concepts, economy of management and operation, and efficiency (and adequacy) of service. The word “or” in clause (5) is clearly used in the disjunctive. This separate 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 connection with service and joined it with the phrase “economy of management and operation,” 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 economies under clause (A) within Congressional concern. We may note, also, an omission which we take seriously, that on the sole occasion 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 systems” 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 system they must meet a technical requirement not applicable 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 interconnection.” Where this requirement is met, so that actual 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 inter-connected and coordinated system.” Assuming the other qualifications were met electric companies would not have to prove that system ownership would be cheaper than independent ownership, probably because this could safely be assumed where there would be a sharing of power.

Coming to section 11(b), the primary provision, subsection (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.

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