Philadelphia Co. v. SECURITIES AND EXCHANGE COM'N

• Decision Date: 10 October 1949
• Docket Number: 9962.,No. 9961,9961
• Citation: 85 US App. DC 327,177 F.2d 720
• Parties: PHILADELPHIA CO. et al. v. SECURITIES AND EXCHANGE COMMISSION. STANDARD GAS AND ELECTRIC CO. v. SECURITIES AND EXCHANGE COMMISSION.
• Court: U.S. Court of Appeals — District of Columbia Circuit

85 US App. DC 327, 177 F.2d 720 (1949)

PHILADELPHIA CO. et al. v. SECURITIES AND EXCHANGE COMMISSION.

STANDARD GAS AND ELECTRIC CO. v. SECURITIES AND EXCHANGE COMMISSION.

Nos. 9961, 9962.

United States Court of Appeals District of Columbia Circuit.

Argued May 19, 1949.

Decided October 10, 1949.

Mr. H. Eastman Hackney, Pittsburgh, Pa., with whom Messrs. Robert J. Dodds, Jr., Pittsburgh, Pa., Helmer Hansen, Chicago, Ill., Howard M. Swartz, and Philip A. Fleger, Pittsburgh, Pa., were on the briefs, for petitioners.

Mr. Louis Loss, Associate General Counsel, Securities & Exchange Commission, Washington, D. C., with whom Mr. Roger S. Foster, General Counsel, Securities & Exchange Commission, Washington, D. C., was on the brief, for respondent.

Mr. William L. Fox, Philadelphia, Pa., filed a brief for Roman Olesnicki, Frederick Peirce, Jr., and William A. McCormick, Jr., acting as the Protective Committee of Public Holders of No Par Value Common Stock of Philadelphia Company.

Mr. W. Howard Dilks, Jr., Philadelphia, Pa., filed a brief for Philadelphia Company 6% Cumulative Preferred Stockholders Protective Committee.

Mr. Charles I. Thompson, Philadelphia, Pa., filed a brief for Roderick G. Kellett, George F. Tyler, Jr., and Robert S. Ingersoll, Jr., acting as Philadelphia Company Common Stockholders Protective Committee.

Before EDGERTON and PROCTOR, Circuit Judges, and H. CHURCH FORD, District Judge sitting by designation.

EDGERTON, Circuit Judge.

These petitions present for review orders of the Securities and Exchange Commission directing petitioner Philadelphia Company to dispose of certain gas and transportation interests, and to liquidate and dissolve, and directing petitioner Standard Gas and Electric Company to cause it to do so. Both these petitioners are registered holding companies under the Public Utility Holding Company Act of 1935. 49 Stat. 803, 15 U.S.C.A. § 79a et seq.

Philadelphia Company (Philadelphia) is in the middle of a large holding-company pyramid. It is a subsidiary of Standard Gas and Electric Company. Philadelphia has a number of subsidiaries, the chief of which are Duquesne Light Company, Equitable Gas Company and Pittsburgh Railways Company. Through these subsidiaries Philadelphia controls electric and natural gas properties, a street railway and motor-bus system, and some relatively small non-utility enterprises. The natural gas properties are in Pennsylvania, West Virginia, and Kentucky. The electric and transportation properties and the gas distributing system are in and near Pittsburgh. Management, administrative, and other nonoperating services are performed for Philadelphia's subsidiaries through arrangements called the General Department Organization. The Commission's findings and opinion give a detailed description of the Philadelphia system which we need not repeat.¹

The Commission held hearings in 1947 to determine what action Philadelphia should take to bring its system into conformity with the integration and corporate-simplification requirements that are the heart of the Public Utility Holding Company Act, Sections 11(b) (1) and 11(b) (2).² Section 11(b) (1) makes it the Commission's duty to require each registered holding company and each subsidiary to "take such action as the Commission shall find necessary to limit the operations of the holding-company system of which such company is a part to a single integrated public-utility system, and to such other businesses³ as are reasonably incidental, or economically necessary or appropriate to the operations" of the system; "Provided, however,⁴ That the Commission shall permit a registered holding company to continue to control one or more additional integrated public-utility systems⁵ if * * * it finds that" certain conditions specified in clauses (A), (B) and (C) are met. Section 11(b) (2) makes it the Commission's duty to require each registered holding company and each subsidiary to "take such steps as the Commission shall find necessary to ensure that the corporate structure or continued existence of any company in the holding-company system does not unduly or unnecessarily complicate the structure, or unfairly or inequitably distribute voting power among security holders, of such holding-company system."

Section 11(e)⁶ authorizes holding companies to submit plans for compliance with these requirements. Philadelphia submitted a plan which the Commission found would not comply.⁷ The Commission found that the electric properties were one single integrated system and the gas properties another. It held, as it had held repeatedly, that an integrated electric utility system and an integrated gas utility system cannot be "a single integrated public-utility system". It therefore decided that Philadelphia could not keep its gas system (in addition to its electric system) unless it met the cumulative conditions of clauses (A), (B) and (C) of the proviso, under which a holding company may retain "additional integrated public-utility systems".⁸

No question is raised regarding clauses (B) and (C). The condition of clause (A) is that the Commission find the additional system "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."⁹ The Commission did not find this to be true of the gas system. It did not find that the transportation system was "reasonably incidental, or economically necessary or appropriate to the operations" of the electric system. It found that without the gas and transportation systems, continued existence of Philadelphia would unnecessarily complicate the structure of the holding-company system. It therefore ordered Philadelphia to dispose of its gas and transportation interests and to dissolve. We stayed enforcement pending review.

I. "Single integrated public-utility system". By Section 2(a) (5) of the Act,¹⁰ "`Public-utility company' means an electric utility company or a gas utility company." By Section 2(a) (29), "`Integrated public-utility system' means — (A) As applied to electric utility companies, a system consisting of one or more units of generating plants and/or transmission lines and/or distributing facilities * * * physically inter connected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system * * * and (B) As applied to gas utility companies, a system consisting of one or more gas utility companies which are so located and related that substantial economies may be effectuated by being operated as a single coordinated system * * *."¹¹ Plainly there are two defined types of "integrated public-utility system" and the requirements of the gas type differ from those of the electric type.¹² Just as plainly there is no third type. The Commission rightly refused to formulate a third definition; "(C) As applied to combinations of electric utility companies and gas utility companies * * *." Any such addition to the Act would violate both its terms and its declared policy (Section 1(c) "* * * to compel the simplification of public-utility holding-company systems * * * and to provide as soon as practicable for the elimination of public-utility holding companies except as otherwise expressly provided in this title."¹³

Petitioners point out that Section 8 of the Act¹⁴ does not prohibit a holding company from acquiring interests in both electric and gas companies serving the same territory, unless the acquisition would violate the law of a State. But Section 8 does not authorize any acquisition. And Section 10(c) (1)¹⁵ forbids the Commission to approve any acquisition of securities, assets, or other interests "which is * * * detrimental to the carrying out of the provisions of section 11." An exception in Section 11 authorizes the Commission to permit a holding company to continue controlling two or more integrated public-utility systems (which, by definition, may be either gas or electric) if it finds that specified requirements (A), (B) and (C) are met. But this does not imply that an electric system and a gas system may be a single integrated public-utility system.

II. "Loss of substantial economies". Petitioners contend that if the combined gas and electric systems are not a single integrated system, the evidence required the Commission to find that the gas system is an "additional" system that "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."¹⁶ Coffman, a witness for petitioners, predicted that segregation would increase the annual operating expense of the gas system by about $500,000, chiefly by eliminating the General Department Organization.¹⁷ The Commission analyzed, criticized, and found defective the methods and assumptions by which the witness arrived at his prediction, including assumptions about the extent to which duplication of personnel would become necessary. The Commission was not convinced that his prediction would prove correct. We cannot say it was unreasonable in not being convinced. "Whether economy is achieved by centralized control is always a doubtful question and one peculiarly fitted for decision by an administrative agency staffed by experts. On such an issue a court cannot review or reweigh the evidence"¹⁸ beyond determining that the finding does or does not appear to be unreasonable. The rule that a specialized agency's findings on a question within its speciality "are not to be disturbed except in the plainest case * * * applies here with especial force just because the findings are necessarily prospective; time alone could decide their success or their failure."¹⁹

Moreover "the mere showing of a material saving in operational expense (which, to some extent at least, would normally be expected) does not necessarily show the...