New England Electric System v. SECURITIES & EXCHANGE COM'N, 6332.

• Decision Date: 04 June 1965
• Docket Number: No. 6332.,6332.
• Citation: 346 F.2d 399
• Parties: NEW ENGLAND ELECTRIC SYSTEM et al., Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — First Circuit

346 F.2d 399 (1965)

NEW ENGLAND ELECTRIC SYSTEM et al., Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 6332.

United States Court of Appeals First Circuit.

Heard January 6, 1965.

Decided June 4, 1965.

John R. Quarles, Boston, Mass., with whom Richard B. Dunn, Richard W. Southgate, John J. Glessner, III, and Ropes & Gray, Boston, Mass., were on brief, for petitioners.

David Ferber, Sol., with whom Philip A. Loomis, Jr., Gen. Counsel, Ellwood L. Englander, Asst. Gen. Counsel, Martin D. Newman, Atty., and Solomon Freedman, Director, Div. of Corporate Regulations, S. E. C., Washington, D. C., were on brief, for respondent.

Before ALDRICH, Chief Judge, and SWEENEY and WYZANSKI, District Judges.

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, $1,098,000.¹ 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 exceptions² 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,³ from which it drew the conclusion that clause (A) required a "showing by clear and convincing evidence⁴ 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," 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."⁵

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.⁶ 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....