Securities and Exchange Commission v. New England Electric System, 636

• Decision Date: 16 May 1966
• Docket Number: No. 636,636
• Citation: 86 S.Ct. 1397,384 U.S. 176,16 L.Ed.2d 456
• Parties: SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. NEW ENGLAND ELECTRIC SYSTEM et al
• Court: U.S. Supreme Court

384 U.S. 176

86 S.Ct. 1397

16 L.Ed.2d 456

SECURITIES AND EXCHANGE COMMISSION, Petitioner,

v NEW ENGLAND ELECTRIC SYSTEM et al.

No. 636.

Argued March 23, 1966.

Decided May 16, 1966.

Philip A. Loomis, Jr., Washington, D.C., for petitioner.

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

Mr. Justice DOUGLAS delivered the opinion of the Court.

New England Electric System (NEES) is a holding company registered under § 5 of the Public Utility Holding Company Act of 1935.¹ Its holdings include both electric and gas utility properties. The electric companies serve retail customers in New Hampshire, Massachusetts, Rhode Island, and Connecticut. The gas companies serve retail customers in Massachusetts alone.² The Commission, proceeding under § 11 of the Act,³ held that the electric utility subsidiaries of NEES constituted an 'integrated electric utility system' as defined in s 2(a)(29)(A).⁴ 38 S.E.C. 193. The question in this case does not concern these electric utility subsidiaries but only the gas utility subsidiaries of NEES, which both NEES and the Commission agree constitute an 'integrated gas utility system' within the meaning of § 2(a)(29) (B) of the Act.⁵

By § 11(b)(1)⁶ a holding company system is to be limited in operations by the Commission 'to a single integrated public-utility system,'⁷ provided, however, that it may be permitted to control one or more addi- tional 'integrated public-utility systems' if the Commission finds, inter alia, that '(e)ach of such 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.' § 11(b)(1)(A). (Italics supplied.) It is on the meaning of this proviso that the present controversy depends. The Commission found that divestment of NEES' gas utilities would not result in a 'loss of substantial economies' to these companies within the meaning of § 11(b)(1)(A). It construed Clause (A) 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.' The Commission ruled that it was unable 'to find that the gas companies could not be soundly and economically operated independently of NEES.' It found that any losses of economies would be offset by the benefits that would flow from the healthy competition between the independently controlled gas and electric companies, promotion of competition between gas utilities and electric utilities being an important purpose of the Act. Accordingly, it ordered that the gas utilities be divested.

On petition for review the Court of Appeals reversed on the ground that the Commission had misinterpreted the statutory phrase 'loss of substantial economies.' 346 F.2d 399. The court held that Clause (A) 'called for a business judgment of what would be a significant loss, not for a finding of total loss of economy or efficiency' (346 F.2d, at 406), and, believing that on this record and with the statute so interpreted there could have been a finding in favor of NEES, remanded the case to the Commission. We granted certiorari, 382 U.S. 953, 86 S.Ct. 436, 15 L.Ed.2d 358.

We agree with the Commission's reading of Clause (A) and remand the cause to the Court of Appeals so that there may be a review of the challenged order in light of the proper meaning of the statutory term.

The requirement in § 11 of a 'single integrated' system is the 'very heart' of the Act.⁸ The retention of an 'additional' integrated system is decidedly the exception.⁹ As originally passed by the Senate, § 11 would have limited all registered holding companies to a single 'geographically and economically integrated public-utility system.'¹⁰ The House version differed in that it permitted the Commission to make exceptions where limitation of the operations of the holding company was not found to be 'in the public interest.'¹¹ The version with which we deal emerged from a conference committee. The scope of the exception as it appears in the bill's final form was thus explained to the House:

'Section 11 of both bills (i.e. the House and Senate versions), therefore, authorizes the Securities and Exchange Commission to require a holding company to limit its control over operating utility companies to one integrated public-utility system.

'The conference substitute meets the House desire to provide for further flexibility by the statement of additional definite and concrete circumstances under which exception should be made to the form of one integrated system. * * *

'The substitute, therefore, makes provision to meet the situation where a holding company can show a real economic need on the part of additional integrated systems for permitting the holding company to keep these additional systems * * *.' H.R.Rep.No. 1903, 74th Cong., 1st Sess., 70—71. (Italics supplied.)

Additional light is shed on the purpose of § 11 by the remarks of Senator Wheeler, a member of the conference committee:

'Since both bills accepted the proposition that a holding company should normally be limited to one integrated system, my colleagues and I conceived it to be our task to find what concrete exceptions, if any, could be made to this rule that would satisfy the demand of the House for some greater flexibility. After considerable discussion the Senate conferees concluded that the furthest concession they could make would be to permit the Commission to allow a holding company to control more than one integrated system if (among other tests) the additional systems were in the same region as the principal system and were so small that they were incapable of independent economical operation * * *.' 79 Cong.Rec. 14479. (Italics supplied.)

As the Commission said in 1948:

'The legislative history of Section 11(b)(1) indicates that it was the intent of Congress to create only a limited exception to the general rule confining holding companies to a single system, and that this exception was created to deal with the situation in which the proven inability of the additional system to stand by itself would result in substantial hardship to investors and consumers were its relationship with the holding company terminated.' Philadelphia Co., 28 S.E.C. 35, 46.

While the Commission has variously phrased the rule, it has consistently adhered to that view.¹²

This suggests a much more stringent test than 'a business judgment of what would be a significant loss,' to quote the Court of Appeals. 346 F.2d, at 406. Promotion of 'economy of management and operation' and 'the integration and coordination of related operating properties' (§ 1(b)(4), 49 Stat. 804, 15 U.S.C. § 79a- (b)(4) (italics supplied)) is a theme that runs throughout the Act. But so does the theme of elimination of 'restraint of free and independent competition.'¹³ § 1(b)(2), 49 Stat. 803—804, 15 U.S.C. § 79a(b)(2). 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.¹⁴

In the present case the Commission said on this phase of the controversy:

'Although the NEES Gas Division handles sales and promotional activities and various other matters for the gas subsidiaries separately from the electric companies, final authority on all important matters rests in the top NEES management. The basic competitive position that exists between gas and electric utility service within the same locality is affected by such vital management decisions as the amount of funds to be raised for or allocated to the expansion or promotion of each type of service.'¹⁵

Competitive advantages to be gained by a separation are difficult to forecast. The gains to competition might well be in the public interest and might well offset the estimated loss in economies of operation¹⁶ resulting from a separation of the gas properties from the utility system. This is a matter for Commission expertise on the total competitive situation, not merely on a prediction whether, for example, a gas company in a holding company system may make more for investors than a gas company converted into an independent regime.

The phrase 'without the loss of substantial economies' is admittedly not crystal clear. But the Commission's construction seems to us to be well within the permissible range given to those who are charged with the task of giving an intricate statutory scheme practical sense and application. Power Reactor Development Co. v. International Union of Electricians, etc., 367 U.S. 396, 408, 81 S.Ct. 1529, 1535, 6 L.Ed.2d 924. And see Philadelphia Co. v. SEC, 85 U.S.App.DC. 327, 177 F.2d 720, 725.

Reversed and remanded.

Mr. Justice HARLEN, whom Mr. Justice STEWART joins, dissenting.

The question before the Court is the meaning of the phrase 'loss of substantial economies' as it appears in § 11(b)(1) of the Public Utility Holding Company Act of 1935.¹ The Court of Appeals ruled that the phrase 'called for a business judgment of what would be a significant loss,' 346 F.2d, at 406, and I agree with this rendering which is both sensible and, in my view, obvious. This Court's opinion on the other hand seems to hold that the phrase demands a loss great enough to imperil 'sound' corporate operations.² That holding, as I shall indicate, is at odds with the Act's wording, has little basis in legitimate statutory history or the aims of the Act, and cannot be sustained by agency or judicial precedent.

Inquiry naturally begins with the language of the Act, and with our reiterated principle that 'the words of statutes * * * should be interpreted where possible in their ordinary, everyday senses.' Crane v. Commissioner, 331 U.S. 1, 6, 67 S.Ct. 1047, 1051, 91 L.Ed. 1301; Malat v. Riddell, 383 U.S. 569, 571, 86 S.Ct. 1030, 1032, 16 L.Ed.2d 102. In this instance plainly...