Securities and Exchange Commission v. New England Electric System

Decision Date05 March 1968
Docket NumberNo. 305,305
Citation19 L.Ed.2d 1042,88 S.Ct. 916,390 U.S. 207
CourtU.S. Supreme Court

Daniel M. Friedman, Washington, D.C., for petitioner.

John R. Quarles, Boston, Mass., for respondents.

Mr. Justice BRENNAN delivered the opinion of the Court.

Respondent New England Electric System (NEES), a holding company registered under § 5 of the Public Utility Holding Company Act of 1935,1 controls both an integrated electric utility system and an integrated gas utility system. 2 Section 11(b) of the Act requires the Securities and Exchange Commission to limit the operations of a holding company system to a single integrated public utility system, except the Commission may permit the holding company to continue control of any additional integrated utility system that the Commission determines, among other things, "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. * * *"3 In 1957 the Securities and Exchange Commission instituted proceedings to determine whether NEES should be permitted to retain control of both the electric and gas systems. The Commission initially found that the electric companies constituted a single integrated electric utility system, 38 S.E.C. 193 (1958), and NEES elected to retain those companies as its principal system. NEES urged, however, that it should also be permitted to retain the gas system. After extensive hearings, the Commission refused respondent permission to do so, and ordered the gas system divested. 41 S.E.C. 888 (1964).

In reaching its conclusion the Commission construed the statutory phrase "loss of substantial economies" in Clause A of § 11(b)(1) to require a showing that the "additional system cannot be operated under separate ownership without the loss of economies so important as to cause a serious impairment of that system." In its first review of the Commission's order, the Court of Appeals for the First Circuit held that the Commission had erroneously construed the statute; in the court's view, "loss of substantial economies" merely "called for a business judgment of what would be a significant loss. * * *" The court therefore set aside the Commission's order and remanded for reconsideration in light of that test. 346 F.2d 399, 406. We reversed, approving the Commission's construction, and remanded to the Court of Appeals for review of the challenged order in light of the proper meaning of the statutory term. SEC v. New England Electric System, 384 U.S. 176, 86 S.Ct. 1397, 16 L.Ed.2d 456 (NEES I). On remand, the Court of Appeals again set aside the Commission's order. 376 F.2d 107.4 That court, "after a fresh review of all the evidence," 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." Id., at 111. We granted certiorari. 389 U.S. 816, 88 S.Ct. 81, 19 L.Ed.2d 65. We reverse and remand to the Court of Appeals with direction to enter a judgment affirming the Commission's order.

The question for our decision is whether the Court of Appeals properly held that, on the record, the Commission erred in finding that NEES failed to prove a case for retention of the integrated gas utility system. We address that question against the background of a congressional objective to protect consumer interests through the "elimination of 'restraint of free and independent competition.' * * * One of the evils that had resulted from control of utilities by holding companies was the retention in one system of both gas and electric properties and the favoring of one of these competing forms of energy over the other." NEES I, 384 U.S., at 183, 86 S.Ct. at 1401.5 Congress therefore ordained separate ownership—and divestiture where necessary to reduce holdings to one system—as the " 'very heart' of the Act." Id., at 180, 86 S.Ct. at 1399. Although Congress was aware that some economic loss might be suffered by the parent holding company or the separated integrated utility, Congress relented only to the extent of authorizing the Commission to permit retention of an additional integrated utility if that permission might be granted under the narrow exception provided by § 11(b)(1). But "retention of an 'additional' integrated system is decidedly the exception," and the burden is on the holding company to satisfy the "stringent test" set by the statute. Id., at 180, 182, 86 S.Ct. at 1399; cf. United States v. First City Nat. Bank, 386 U.s. 361, 366, 87 S.Ct. 1088, 1092, 18 L.Ed.2d 151.

Congress committed to the Commission the task of determining whether a holding company has met the burden of showing that its situation falls within the narrow exception under § 11(b)(1). The Clause A determination whether separation entails a loss of economies likely to cause a serious impairment of the system involves an element of prediction which necessarily calls for difficult and expert judgment. That judgment requires the assessment of many subtle and often intangible factors not easily expressed in precise or quantifiable terms. This is the very nature of economic forecasting. The task calls for expertise and is not simply "an exercise in counting commonplaces." United States v. Drum, 368 U.S. 370, 384, 82 S.Ct. 408, 415, 7 L.Ed.2d 360; see NEES I, 384 U.S., at 184-185, 86 S.Ct. at 1402-1403. Judicial review of that expert judgment is necessarily a limited one. See Gray v. Powell, 314 U.S. 402, 412-413, 62 S.Ct. 326, 332-333, 86 L.Ed. 301; NLRB v. Hearst Publications, 322 U.S. 111, 131, 64 S.Ct. 851, 860, 88 L.Ed. 1170; Atlantic Ref. Co. v. FTC, 381 U.S. 357, 367-368, 85 S.Ct. 1498, 1505-1506, 14 L.Ed.2d 443; United States v. Drum, supra, 368 U.S. at 375-376, 82 S.Ct. at 410-411. Congress expressly provided that "(t)he findings of the Commission as to the facts, if supported by substantial evidence, shall be conclusive." 15 U.S.C. § 79x(a); see Universal Camera Corp. v. NLRB, 340 U.S. 474, 71 S.Ct. 456, 95 L.Ed. 456; cf. NLRB v. Erie Resistor Corp., 373 U.S. 221, 236, 83 S.Ct. 1139, 1149, 10 L.Ed.2d 308. In our view, the Court of Appeals in this case indulged in an unwarranted incursion into the administrative domain.6 The Commission's order has adequate support in the record and should have been affirmed.

As of 1958, the test year selected for purposes of these proceedings,7 NEES' eight gas subsidiaries provided retail service to some 237,000 customers in a relatively compact 660-square-mile franchise area in Massachusetts. NEES' electric companies also served 75% of this area and about 78% of the gas customers were also electric customers. NEES' gross investment in gas plant and equipment was about $56,300,000 and gross gas revenues for 1958 were about $22,700,000. The eight gas companies were organized administratively as a Gas Division with centralized management, marketing and supply operations, and merchandising departments.8 The chief executive of the Gas Division was also president of each gas company and ultimately responsible to NEES' vice president in charge of management; in short, top management rested with executives having joint control over both electric and gas operations.

The Commission had before it a "severance study," a cost analysis and projection prepared for NEES by a professional public utilities management consulting firm, Ebasco Services, Inc. This study projected a loss of economies of approximately $1,100,000 annually for the gas system as the result of its separation from NEES. The Commission dealt with this study in alternative ways. It analyzed the study and concluded that "(t)he Ebasco estimate is inadequately supported in a number of important aspects and leaves considerable doubts which (NEES has) not satisfactorily overcome in the record." Then it went on to find that even if the estimated $1,100,000 in loss of economies were accepted as accurate "it would not lead us to conclude that such a loss is so substantial, when compared with the loss of economies involved in prior divestment cases and viewed in light of the objectives of the Act, as to warrant retention of the gas properties. * * *" 41 S.E.C., at 895, 897. Because we conclude that the record supports the Commission's decision on the latter ground, we have no occasion to consider whether the Commission's strictures on the reliability of the Ebasco study are well founded.

The Commission's ultimate finding that the projected $1,100,000 loss of economies annually did not constitute a loss of "substantial" economies within Clause A of § 11(b)(1) was reached primarily upon the basis of its subsidiary findings upon three matters: (1) That NEES' estimated losses were not significantly out of line with those found insubstantial in previous cases; (2) that other nonaffiliated Massachusetts gas companies,9 all but one of them smaller than the NEES gas system, are apparently able to operate successfully without electric utility affiliations; (3) that NEES did not establish that independent management devoted solely to promoting gas sales would not result in benefits to offset some of the projected losses. The Court of Appeals held that none of the three subsidiary findings was supported by substantial evidence. We disagree.


The Commission, consistent with its practice in prior cases,10 weighed NEES' estimated $1,100,000 losses in relative rather than absolute terms, calculating the losses as a percentage of NEES' 1958 revenues, expenses, and income.11 It found these loss ratios to be "lower or not significantly higher than corresponding ratios of gas systems whose divestment we have required on the ground that the estimated loss of economies was not substantial within the meaning of clause A." 41 S.E.C., at 898. The cases with which these particular comparisons were...

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