Weadock, New York City, William J. Hagenah, Chicago, Ill., and Martin V. Callagy, New York City.

Mr. TINGLEY. If Your Honor please, we want to put in just a short bit of testimony supplementing the testimony heretofore taken in connection with Middle West Utilities Co. I will call Mr. Carl H. Depue to the stand.

Examiner HUDSON. You may proceed.

CARL H. DEPUE, called as a witness for the Commission, having been previously duly sworn, testified as follows:

Direct examination by Mr. TINGLEY:

Question. Mr. Depue, you have already been sworn, have you not?

Answer. I have.

Question. Your qualifications are already a matter of record in these proceedings?

Answer. They are.

Question. At the instance of the Commission did you make a study of the property and affairs of Central & South West Utilities Co. and its subsidiaries?

Answer. I did.

Question. Of what company is Central & South West Utilities Co. a subsidiary?

Answer. It is a subsidiary of the Middle West Utilities Co.

Question. To your knowledge is the Federal Trade Commission in receipt of a letter under date of July 24, 1934, from the office of the receiver of Middle West Utilities Co. and signed by N. P. Zech, comptroller of that company?

Answer. It is.

Question. I hand you herewith a letter and ask you if that is the original of that letter?

Answer. It is.

Question. Will you read that into the record, please?

Answer. It is addressed to the Honorable Francis Walker, chief economist, Federal Trade Commission, Washington, D. C.

DEAR SIR: Receipt is acknowledged of your letter of July 18 transmitting copy of volumes I and II comprising your report on examination of accounts and records of Central Power & Light Co. and subsidiaries.

As to reference in your report regarding appreciation write-ups, etc., will state that early in 1933, after careful consideration, a policy was adopted whereby, through the creation of capital surplus (either by restating commonstock capital or by surrender of common-stock shares), and using this capital surplus as well as existing accumulated surplus and reserves, the operating companies made balance-sheet adjustments consisting of writing off (a) abandoned property; (b) appreciation and profits arising from intercompany sales, mergers, or consolidations; (c) unamortized discount and expense on refunded bond issues; (d) unbilled income; (e) losses on investments, and also to make other necessary adjustments. Naturally, due to the wide-spread Middle West Utilities System, made up, as it is, of a great many moderate-size communities, it entailed a considerable amount of very careful analysis and the supporting facts for all operating companies could not possibly be compiled in a short time; therefore, they had to follow in the order completed.

Central Illinois Public Service Co. was the first one and it created a capital surplus of $11,495,730 in March 1933, which together with accumulated surplus, enabled the company to make balance-sheet adjustments-the most important items written off being $8,445,000 abandoned property and $4,063,000 unamortized discount and expense on refunded bond issues.

Wisconsin Power & Light Co. in March 1933 created capital surplus of $7,309,250, which together with accumulated surplus enabled the company to

make various balance-sheet adjustments, the most important items written off being $4,678,000 abandoned property, $928,000 stock commissions and expense, and $469,000 unamortized discount and expense on refunded bond issues.

Northwestern Public Service Co., in October 1933, created capital surplus of $1,696,000, which together with earned surplus and reserves, enabled the company to make balance-sheet adjustments for writing off $1,200,000 abandoned property and $926,000 unamortized discount and expense on refunded bond issues.

Central Power & Light Co. created capital surplus in September 1933 amounting to $7,556,000, which, together with accumulate surplus, was used for balance-sheet adjustments, the principal items written off being $2,689,000 abandoned property, $1,818,000 excess of intangible values over cost, $1,766,000 unamortized discount and expense on refunded bond issues, and $848,000 stock commissions and expense.

As the result of studies begun about a year ago, tentative figures for proposed restatements of common-stock capital were developed, as referred to in the published annual reports for 1933, for Central & South West Utilities Co., Southwestern Gas & Electric Co., Public Service Co. of Oklahoma, Southwestern Light & Power Co., American Public Service Co., and West Texas Utilities Co. Southwestern Gas & Electric Co. in June 1934 created capital surplus of $3,271,500, which, together with earned surplus, was used for balance-sheet adjustments, the principal items written off being $2,142,000 appreciation arising from intercompany sales, mergers, or consolidations; $343,000 stock discount and expense, and $814,000 unamortized discount and expense on refunded bond issues.

West Texas Utilities Co. in July 1934 created capital surplus of $3,775,000 which was used for balance-sheet adjustments, the principal item written off being $3,275,000 appreciation arising from intercompany sales, mergers, or

consolidations.

Public Service Co. of Oklahoma will, in about 30 days, take steps to create capital surplus of over $8,400,000, which, together with about $2,000,000 accumulated surplus, will be used for balance-sheet adjustments, the principal items to be written off being $4,519,000 appreciation arising from intercompany sales, mergers, or consolidations; $2,080,000 recognizing balance-sheet adjustments which its subsidiary, Southwestern Light & Power Co., will make, and $2,600,000 writing down its investment in common stock of Southwestern Light & Power Co. to the latter's underlying adjusted book value.

Southwestern Light & Power Co. will shortly create capital surplus of over $2,000,000, which, together with accumulated surplus, will enable it to make balance-sheet adjustments consisting principally of writing off $1,234,000 appreciation arising from intercompany sales, mergers, or consolidations; $700,000 abandoned property, and $222,000 unamortized discount and expense on refunded bond issues.

American Public Service Co., as set forth in its published annual report for 1933, has anticipated the capital surplus adjustments subsequently made this month by its subsidiary (West Texas Utilities Co.), and has also recorded the effect on its common-stock investment in Public Service Co. of Oklahoma.

Central & South West Utilities Co., as set forth in its published annual report for 1933, has also anticipated the proposed balance sheet adjustments of all of its subsidiaries.

Middle West Utilities Co. of Canada (a wholly owned subsidiary holding company), although foreign to your activities, you might, however, be interested to know, created captail surplus of $4,383,930 in December 1933, which was used to eliminate intercompany appreciation profits and to adjust for losses and shrinkage in its investments.

Middle West Utilities Co., in its published annual report for 1933, has recognized the adjustments already made as well as those proposed to be made by its various subsidiary holding and operating companies mentioned in this letter. I might also add that wherever a restatement of common stock capital has taken place, or is in process as outlined in this letter, the book value has been adjusted downward on the books of Middle West Utilities Co. to give effect to the adjusted underlying book value of the subsidiary company.

From the foregoing, you will, I am sure, appreciate that real progress has been made under the receivership of Middle West Utilities Co. with the result that the financial statements of Middle West Utilities Co. and its subsidiaries more correctly reflect actual conditions. The studies now under way which will form the basis of balance sheet adjustments yet to be made

by a few subsidiary operating companies are expected to be completed before the close of this year.

Enclosed you will find the annual published reports of the subsidiary operating companies for the year 1933, referred to in this letter, together with the report of Charles A. McCulloch, receiver of Middle West Utilities Co., dated June 28, 1934, on pages 48, 49, and 51 of which reference is made to write-offs or reserves for adjustments amounting to over $205,000,000 during the period of the receivership.

As to your justified criticism of inadequate provision for depreciation, will state that in addition to some upward adjustments for depreciation charges which were made for the year 1932 over prior years, the charges for 1933, however, were further increased over 1932 by about $2,750,000, namely, about 65 percent. Further increases will receive consideration when uncontrollable expenses become more reasonable and when the substantial rate reduction made throughout the Middle West system have become more productive.

It was during a visit to Washington in December 1932 that the late Mr. Edward N. Hurley introduced us, at which time it afforded me an opportunity to briefly summarize to you the high lights of accomplishments during the receivership and I also explained in a general manner the large program still ahead of us. Inasmuch as considerable adverse testimony has recently been published, I thought you might be interested in a few of the many constructive policies which have been developed and adopted during the receivership period and I hope it has not taken up too much of your time to read about them. Very truly yours,

N. P. ZECH, Comptroller.

Question. Mr. Depue, in view of your investigation and study to which you have just referred, what comment, if any, have you to

make on that letter?

Answer. It constitutes an acknowledgment by the comptroller of the Middle West Utilities Co. and also by the receivers that to a very large extent at least, the adjustments which were made (Commission exhibit 5612) were justified and it also indicates that the receivers of the Middle West Utilities Co. have gone a long way toward eliminating the inflation which was previously in the Middle West Utilities Co. and its subsidiaries. It also constitutes an acknowledgment of the justification for the Commission's criticism of the use of the retirement theory and necessity for adequate allowances for depreciation.

Question. Have you any substantiating data to indicate to what extent the action of the receivers has confirmed the findings of the Commission as to write-ups and other appreciation in the property accounts of the companies in this system?

Answer. I have with respect to the Central and Southwest Utilities Co. and its subsidiaries in particular.

Question. It has to your knowledge, been the practice of the Commission to make available to receivers and other representatives of the creditors who have taken possession of the property and assets. of any of these companies, the reports of the Commission as they are put in the records, has it not?

Answer. Yes, sir.

Question. And that was done in this case?

Answer. Yes, sir; and moreover their accountants were familiar with the investigation while it was made by the Commission.

Question. What was the total amount of appreciation and writeups found by the Commission and its examiner in connection with these properties?

Answer. The Commission's exhibit no. 5612, on page 245, shows the common stock equities of the Central & Southwest Utilities Co. and its subsidiaries for 1933, according to the books of those

companies amounted to $90,118,889.10, and an adjustment made as set forth on that page amounted to $48,128,220.49, thus indicating actual combined equities for that group of $41,990,668.61.

Question. That is only one of the subsidiary holding companies of the Middle West Casualty Co., is it not?

Answer. Yes, sir, the letter which has just been introduced into the record does not specifically state what adjustments have been made of the American Public Service Co. and the Central & Southwest Utilities Co., but the adjustments which the letter states have been made by the Central Power & Light Co., Republic Service Co. of Oklahoma, the Southwestern Light & Power Co., the Southwestern Gas & Electric Co. and the West Texas Utilties Co., all operating subsidiaries of the Central & Southwest Utilities Co., amount to $25,050,000. The adjustment made with respect to the common stock equities of those companies as shown on page 245 of Commission exhibit 5612, amount to $34,916,220.27. It is thus evident that the companies have eliminated approximately 70 percent of the inflation referred to in the Commission report.

Question. Against what account were those items written off? Answer. Surplus, both capital surplus created by a reduction of the stated value of the common stock and the earned surplus which was already on those companies' books.

Question. Have you any other comment to make with reference to this letter, Mr. Depue?

Answer. No.

Mr. TINGLEY. I will ask that that report be put in the record and be marked with a proper exhibit number, which is 6082. That is all that we have.

Examiner HUDSON. Without objection the exhibit will be received and marked.

(The paper referred to was received in evidence and was marked "Commission's Exhibit No. 6082, Witness Depue.")

Witness DEPUE. Reference made by Zech in the next to the last paragraph of his letter to the Commission's justified criticism of inadequate provision for depreciation coincides with the arguments. and representations made by the Dallas Power & Light Co., with respect to the subject of depreciation as stated in the Commission's exhibit 6080.

Question. And with what group is the Dallas Power & Light Co. affiliated?

Answer. Electric Bond & Share Co. The arguments and representations just referred to were set forth in briefs filed by or in behalf of the Dallas Power & Light Co. with the officials of the city of Dallas in connection with their proposed rate reduction, and in those briefs filed by the Dallas Power & Light Co. argument was made for the justification of straight-line 4 percent depreciation per

annum.

Mr. TINGLEY. If Your Honor please, that concludes the testimony I want to take this afternoon.

Examiner HUDSON. Until tomorrow?

Mr. TINGLEY. We have nothing to put in tomorrow, if Your Honor please. I would suggest an adjournment until further call.

Examiner HUDSON. All right, the hearing will be adjourned until further call.

(Whereupon, at 3.45 p. m., Sept. 6, 1934, the hearing in the aboveentitled matter was adjourned without date.)

EXHIBIT NO. 6079

REPORT OF THE EXAMINATION OF ACCOUNTS AND RECORDS OF PEOPLES LIGHT & POWER CORPORATION (FORMERLY CONTROLLED BY TRIUTILITIES CORPORATION)

(By John H. Crabtree)
NOTE

This report was prepared with reference to that part of Senate Resolution 83 (Feb. 15, 1928) which relates to the actual investments, financial transactions, business operations, earnings, and other economic results of electric power and gas utility companies, their holding companies, and their associated or affiliated companies. It does not purport to go into questions of the fair value of the property of these public utilities (operating companies) or fair rate of return or reasonable rates for services rendered, and the Senate resolution in question did not call for such information, which would have required, among other things, an appraisal of all the properties of the utilities in question. The subjects of this inquiry, directed by the Senate, are fundamental for an understanding of how these utility companies and the utility holding companies have developed and the present position of the holding companies as business corporations and in their relations to these public utilities.