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United Gas Improvement Co. v. Securities and Exchange Commission

November 17, 1943

UNITED GAS IMPROVEMENT CO.
v.
SECURITIES AND EXCHANGE COMMISSION



Author: Biggs

Before BIGGS, MARIS, and JONES, Circuit Judges .

BIGGS, Circuit Judge .

The petitioner, The United Gas Improvement Company, has filed two petitions with this court pursuant to the provisions of Section 24 (a) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79x (a), seeking to have us set aside two orders of the Securities and Exchange Commission requiring UGI, pursuant to the provisions of Section 11 (b) (1) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k (b) (1), to divest itself of certain interests.

UGI registered under Section 5 of the Act, 15 U.S.C.A. § 79e, and thus became "a registered holding company" within the meaning of Section 11 (b) (1) of the Act, 15 U.S.C.A. § 79k (b) (1). Section 11 (b) (1) provides that it shall be the duty of the Commission as soon as practicable after January 1, 1938, to require by order, after notice and opportunity for hearing, every registered holding company to take such action as the Commission shall find necessary to limit the operations of the holding company to a single integrated public-utility system and to such other businesses which are reasonably incidental or economically necessary or appropriate to the operations of such an integrated public-utility system. The section provides further, however, that the Commission shall permit a registered holding company to continue to control one or more additional integrated public-utility systems if it finds that the conditions specified in subparagraphs (A), (B) and (C) prevail in respect to it or them. The conditions imposed by these paragraphs require a showing (A) that such additional systems cannot be operated as independent systems without the loss of substantial economies; (B) that the additional systems are located in one State or in adjoining States; and (C) that the continued combination of such systems under the control of the holding company is not so large as to impair the advantages of localized management, efficient operation or the effectiveness of regulation. The section also provides that the Commission may permit as reasonably incidental or economically necessary or appropriate to the operations of one or more integrated public-utility systems the retention of interests in other businesses (other than public utilities) which the Commission shall find necessary or appropriate in the public interest, or for the protection of investors or consumers and not detrimental to the proper function of such system or systems*fn1

No question has been raised by UGI in the proceedings before us as to sufficiency of notice or the propriety of the purely procedural steps taken by the Commission. At every stage of the proceedings before the Commission, however, UGI has asserted as a matter of substance, as it now asserts before us, that the Commission has proceeded by its orders of divestiture to effect a piecemeal dismemberment of the UGI system without determining the single integrated public-utility system or additional systems to which UGI may be entitled under Section 11 (b) (1). As a corollary to this proposition UGI asserts also that the Commission has required it to divest itself of companies which are "non-utility operated businesses" within the definition contained in Section 2 (a) (5) of the Act, 15 U.S.C.A. § 79b (a) (5), as well as of various "investments" without determining the single intergrated public-utility system or additional systems to which it may be entitled. UGI contends further that, assuming that the Commission is not under a duty to determine first what constitutes UGI's single integrated public-utility system and additional systems, the orders made by the Commission are not required by the national public interest and that the retention of the interests ordered divested does not and cannot affect interstate commerce; that the Commission has no power to compel UGI to divest itself of "non-utility operated businesses", except after certain findings by the Commission which have not been made by it; that the Commission has failed to make basic findings necessary to support the ultimate facts as found by it and has also failed to make the ultimate findings of fact necessary to support its orders; that the Commission has failed to give adequate consideration to contentions of UGI as to its interest in certain companies; and last, that the provisions of Section 11 (b) (1) and the orders of the Commission entered thereunder violate the Constitution of the United States.

Before dealing with these contentions, it is necessary to state certain relevant facts. The UGI system is a large one. UGI has control of, or the interest prescribed by Section 2 (a) (7)*fn2 15 U.S.C.A. § 79b (a) (7), in, a number of holding companies. See, also, Section 2 (a) (8), 15 U.S.C.A. § 79b (a) (8). UGI controls through these holding companies, or itself controls directly, a number of "public-utility companies" (using that phrase as defined by Section 2 (a) (5) of the Act, 15 U.S.C.A. § 79b (a) (5) and non-statutory public utility companies). UGI also has interests in companies which are not public utility companies either statutory or non-statutory.

The nature of UGI's interests in the companies comprising its system at the time the orders here under review were entered may be summed up briefly as follows: (1) It owned 12.3% of the stock of Midland United Company, a holding company, which in turn owned 45.22% of the stock of Midland Utilities Company, Midland United Company and Midland Utilities Company in turn owned or controlled some forty companies most of which are statutory public-utility corporations, operating in the middle west, principally in and about the State of Indiana. Midland United Company and its subsidiaries, which were included in the original notice of the Commission (Document No. 1), were dismissed as parties by later orders of the Commission. Neither Midland nor its subsidiaries are affected by the orders complained of. (2) UGI owned also 97.3% of the stock of Philadelphia Electric Company which in turn controlled approximately twenty statutory public utility and other companies operating in Pennsylvania, New Jersey and Delaware. No interest of UGI in Philadelphia Electric Company or its subsidiaries is affected by the orders complained of. (3) UGI also had interests in approximately 28 other companies, many of which are statutory public utility companies operating in Pennsylvania, Delaware, New Jersey and Connecticut. UGI's interests in a number of these companies (viz., in Concord Gas Company, Manchester Gas Company, The Wyandotte County Gas Company, Nashville Gas and Heating Company, New Haven Gas Light Company, The Hartford Gas Company, The Bridgeport Gas Light Company, and Connecticut Railway and Lighting Company) were required to be divested by the Commission's order of May 7, 1942*fn3 UGI by this order is also required to divest itself of its interest in The Arizona Power Company, a subsidiary of Commonwealth Utilities Corporation, referred to in (5) infra. (4) UGI owned also 28.5% of the stock of Public Service Corporation of New Jersey, a holding company, which in turn owned or controlled the stock of some fifteen companies, a number of which are statutory public utility companies. The interests of UGI in these companies are not affected by the orders complained of. Proceedings have been pending before the Commission to determine the status of Public Service Corporation of New Jersey which has sought exemption by the Commission pursuant to Section 3 (a) (1) of the Act, 15 U.S.C.A. § 79c (a) (1). (5) UGI also owned 99.9% of the stock of Commonwealth Utilities Corporation, the holding company referred to in (3) supra, which in turn owned or controlled the stocks of ten subsidiary companies; viz., The Arizona Power Corporation, Arizona Ice and Cold Storage Company, Crystal Ice & Cold Storage Company, Home Ice Company, Galveston Ice & Cold Storage Company, Merchants Ice and Cold Storage Company, Crystal Ice Company, National Ice & Cold Storage Company, New State Ice Company, St. Louis County Water Company, Springfield Ice and Refrigerating Company. Only one of these, The Arizona Power Corporation, is a statutory public utility. The Commission by its order of July 30, 1941, directed UGI to divest itself of any direct or indirect ownership, control, or holding of securities in Commonwealth Utilities Corporation and in its subsidiaries named above except The Arizona Power Corporation, the latter company, as we have indicated, being included in the order of divestiture of May 7, 1942.

Some of the subsidiaries affected by the two orders of divestiture are electric utility companies. Some are gas utilities. The service areas of the electric utility subsidiaries are in Connecticut, New Jersey, Pennsylvania, Delaware, Maryland and Arizona. The service areas of the gas utility subsidiaries are in New Hampshire, Connecticut, Pennsylvania, Delaware, Tennessee and Arizona.

The total assets of UGI as shown by its consolidated balance sheet of December 31, 1939, amounted to $837,504,000, and the net corporate income in that year was $26,636,000*fn4 In its findings and opinion (Document No. 81) the Commission stated, inter alia, "There are two principal groups of subsidiaries in the system which operate gas and electric properties. One group is located in Pennsylvania, Maryland and Delaware, and the other in Connecticut.An examination of the balance sheets and income statements shows that the great majority of the system's assets is invested in these two areas. The combined property accounts of consolidated subsidiaries shows that as of December 31, 1939, those operating in southeastern Pennsylvania, Delaware, and Maryland aggregated approximately $467,275,000, and those in Connecticut aggregated approximately $113,042,000. Disregarding any excess of carrying value over book value of the subsidiaries' securities owned, the properties of companies in these two areas amounted to some $580,317,000, whereas the total consolidated property account was reported as approximately $626,000,000 as at December 31, 1939." It is obvious that UGI's single integrated public utility system, whether it be composed solely of electric utility properties or will include gas utility properties as well, lies in the three-state area; that is to say, in southeastern Pennsylvania, northern Delaware and northeastern Maryland, to which must be added a small portion of southern New Jersey if Deepwater Light and Power Company and Deepwater Operating Company, both of which are located in New Jersey on the eastern bank of the Delaware River, close to New Castle and Wilmington, Delaware, are included*fn5 We will assume that the Commission and UGI when they refer to the three-state system mean to include the two last-named companies. The electric and gas generating transmission and distribution facilities of UGI in the Pennsylvania-Delaware-Maryland region serve a territory approximately 2,400 square miles in area which contains a population of at least 3,000,000 people. An examination of the very extensive record in the case at bar leads inevitably to the conclusion that the single integrated public utility system of UGI, whether it includes gas utilities*fn6 or not, must lie in this area and can lie in no other.

In its opinion the Commission stated under the heading "The Issues Presented" that Respondents agree that the integrated electric utility system operating in the three state area (Pennsylvania, Delaware, and Maryland) as described in the staff's report and in our Tentative Conclusions*fn7, is at least a part of the primary [single] system contemplated by Section 11 (b) (1), and further agree that this primary system is confined to these three states. Although we are not here directly concerned with establishing the limits of the principal system or systems in this area, the position taken by respondents in this respect has enabled the Commission and the respondents to simplify the issues considered in this Opinion as well as the scope of the proof to be offered in subsequent stages of the proceeding. Respondents have specifically conceded that the properties which are under consideration at this time are not a part of the single integrated [electric-utility] system or systems in the three state area."

At page 33 of its brief, the Commission makes the following statement, "We concede that it may be necessary to identify the principal system, or at least make alternative assumptions with respect thereto, as a point of reference in determining the retainability of additional systems and other businesses * * *. For the same purpose it may also be necessary under some circumstances first to determine with some particularity the limits of the single integrated system because of the logical relevance of that issue to the questions relating to the retainability of an additional system or other business in question. No such situation is presented here. UGI does not suggest that any evidence might become relevant to the retainability of any property involved in the present proceeding if it knew the exact confines of its principal system; nor can we conceive of any such evidence. Thus UGI completely fails to show prejudice in the entry of the divestment orders at this stage, and imposes on this Court when it vaguely asserts prejudice to the presentation of its case by virtue of the procedure adopted by the Commission." UGI, however, as we have stated, has urged at every stage of the proceedings that the Commission is without power under Section 11 (b) (1) to compel UGI to divest itself of any interest in any company until it has determined what UGI's single and additional systems consist of; for otherwise, runs the argument, the Commission cannot determine what businesses are reasonably incidental or economically necessary or appropriate to the operations of such systems. There is logic in this assertion when viewed nudum against the Act without reference to the particular circumstances which led the Commission to make the orders complained of. But when we examine the record in the reviews at bar and the concessions which UGI has made*fn8 the logic of its assertion disappears. We can perceive readily that there may be circumstances in which the determination of a holding company's single integrated public utility system or additional systems is the primary necessity. Clearly, however, such circumstances are not presented by the cases at bar.

Directing our attention specifically to the proceedings subject to review at our No. 7888, we state that UGI seeks to set aside the order of the Commission entered July 30, 1941, requiring UGI to divest itself of direct or indirect ownership and control in securities issued by the companies designated in this opinion in (5) supra. But pending the proceedings for review of the order complained of, UGI caused Commonwealth Utilities Corporation to sell to its, UGI's, own top holding corporation, The United Corporation, all interests that Commonwealth had in all of Commonwealth's subsidiaries named in the order. Commonwealth, in fact, owned or controlled all the companies named except two; Welsbach Company and Camden County Land Company. UGI itself owns the controlling interest in Welsbach Company which in turn owns all of the stock of Camden County Land Company.The Commission accordingly dismissed its proceedings*fn9 as to all the companies included in its divestiture order of July 30, 1941, except Commonwealth Utilities Corporation, Welsbach Company and Camden County Land Company. All questions raised by this review in respect to UGI's interests in Commonwealth's subsidiaries, except The Arizona Power Corporation, have therefore become moot.

Commonwealth has retained Arizona Power as its sole subsidiary and this company carries on a statutory public utility business in Arizona. It further appears from the record that no later than May 6, 1941, the terms of a contract providing for the sale of Arizona Power's physical property*fn10, had already been agreed to and that the contract was awaiting the signature of a prospective purchaser. Furthermore, the Commission by its order of May 7, 1942, has required UGI to divest itself of any interest in Arizona Power for reasons which are found to be valid hereinafter. When this divestiture has taken place Commonwealth will stand without subsidiaries. Indeed, it appears from the record that Commonwealth's dissolution has been contemplated. It is obvious therefore that UGI's interest in Commonwealth is not reasonably incidental, economically necessary or appropriate to the operations of any integrated public utility system to which UGI may be entitled under the Act.

Welsbach Company, which was at one time engaged in the manufacture of Welsbach mantles, now exists solely as a holding company for the stock of Camden County Land Company which owned lands and riparian rights along the Delaware River at Camden, New Jersey. The petitioner states in its brief, p. 69, that Camden County Land Company's property has been taken under condemnation proceedings by the United States Government for war purposes. It is inconceivable therefore that Welsbach Company and Camden County Land Company could constitute businesses reasonably incidental, economically necessary or ...


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