Securities and Exchange Commission v. New England Electric System

PETITIONER:Securities and Exchange Commission
RESPONDENT:New England Electric System
LOCATION:Baconsfield Park

DOCKET NO.: 636
DECIDED BY: Warren Court (1965-1967)
LOWER COURT: United States Court of Appeals for the First Circuit

CITATION: 384 US 176 (1966)
ARGUED: Mar 23, 1966
DECIDED: May 16, 1966

Facts of the case

Question

Audio Transcription for Oral Argument – March 23, 1966 in Securities and Exchange Commission v. New England Electric System

Earl Warren:

Number 636, Securities and Exchange Commission, Petitioner, versus New England Electric System et al.

Mr. Loomis.

Philip A. Loomis, Jr.:

May it please the Court.

This case is the final stage of fairly extensive proceedings to determine what action if any was needed to bring the public utility system of respondent New England Public — New England Electric System into compliance with the requirements for Section 11 of the Public Utility Holding Company Act of 1935.

Section 11 in turn is the integration and simplification provision which has been characterized by this Court and in the congressional reports as the heart of the Act.

In prior proceedings it was determined that the principle system of respondent is its electric system which meets the requirements of Section 11.

The issue in the present proceeding is whether it could also retain its gas system.

This in turn was found to depend upon whether or not within the meaning of a proviso contained in Clause A of Section 11 (b) (1) of the Act, the gas system cannot be operated as an independent system without the loss of substantial economies which can be secured by the retention of such control by such pol — public — such holding company of said system.

As the case comes to this Court, the question presented is whether the Court of Appeals for the First Circuit erred in rejecting the Commission’s established and theretofore judicially approved interpretation of Clause A in specifically of the phrase substantial economies and in substituting it’s own noble and far more lenient interpretation.

The Commission held in line with its prior cases and with decisions of the Court of Appeals for the District of Columbia, substantial economies means not a mere saving and expenses which in almost every instance will recur — occur from combined operations but rather economies which are substantial in relation to the ability of the gas companies to operate independently in a sound and economical way without significant impairment.

The Commission concluded that respondent’s evidence which rested largely on the so-called severance study made by Ebasco Services Inc. did not demonstrate that there would be such a loss of substantial economies.

Earl Warren:

Could you speak a little louder —

Philip A. Loomis, Jr.:

Surely.

Earl Warren:

— Mr. Loomis please or move closer to the microphone.

Philip A. Loomis, Jr.:

Surely.

Excuse me.

The First Circuit reversed not upon the ground that the Commission’s decision was not supported by a substantial evidence but rather upon the ground that substantial economies means merely economies which “In ordinary business parlance and by ordinary business standards are of substantial nature.”

We believe that this question of interpretation as to substantial economies is the only question before this Court for two principle reasons.

First, that was the question which we presented in our petition for certiorari and respondents agreed that that was the question, although, they endeavored to rephrase it.

And secondly, because the court below did not accept the respondent’s argument, its primary argument to that court that the Commission’s decision was wrong.

That it misconstrued the evidence.

That it didn’t analyze the evidence properly.

And it didn’t — and the fact that it wasn’t supported by the record.

The Court of Appeals didn’t choose to decide on that ground.

It did not find that the Commission’s findings were not supported by substantial evidence under the Commission’s test or even under its own new test remanding the case of the Commission for determination as to that latter feature.

Consequently, I think the question of the Commission’s analysis of the evidence which is discussed here and there in respondents brief is at pages 5, 7, 40 and 41 is not here.

In considering this question, some discussion of the statutory background and provisions maybe helpful, the primary —

William J. Brennan, Jr.:

If I understand that Mr. Loomis, what you’re suggesting is the only issue is whether the Commission standards or that suggested by the First Circuit is —

Philip A. Loomis, Jr.:

Is the correct one.

William J. Brennan, Jr.:

— is the proper stand.

Philip A. Loomis, Jr.:

Is the proper stand.

William J. Brennan, Jr.:

They don’t have to be concerned with –-

Philip A. Loomis, Jr.:

With whether —

William J. Brennan, Jr.:

— if we agree with you whether or not the —

Philip A. Loomis, Jr.:

Whether you’d dis —

William J. Brennan, Jr.:

— the facts of —

Philip A. Loomis, Jr.:

— agree or disagree with us.

I don’t think you have to be concerned with the question of whether the Commission’s decision was supported by substantial evidence in the record.

Potter Stewart:

There isn’t a meeting of the minds between you and your Brothers on the other side as to how well-establish this so-called Commission standard is?

Philip A. Loomis, Jr.:

That is quite correct.

Potter Stewart:

(Inaudible)

Philip A. Loomis, Jr.:

Yes.

That question —

Potter Stewart:

You hypothesized a situation with which they don’t agree, isn’t it correct?

Philip A. Loomis, Jr.:

Well, no, I don’t — I think they agree that the question —

Potter Stewart:

You referred to the well-established Commission standards.

Philip A. Loomis, Jr.:

They say it is —

Potter Stewart:

It’s a question that there is any such thing, isn’t that right?

Philip A. Loomis, Jr.:

They questioned that’s it well-established, that’s correct.

They questioned as well-established but I think that doesn’t change the issue as to whether the Commission’s test or the First Circuit’s test or the right test — is the right test, is the matter before you.

That is simply an argument that the Commission’s test is not well-established and therefore carries less weight than it otherwise would.

Potter Stewart:

The question is what is the proper test under the statute?

Philip A. Loomis, Jr.:

Yes.

We —

Abe Fortas:

Mr. Loomis, do you understand that the respondent agrees that if we should conclude that the Commission’s standard is correct then there is no dispute about the substantial — substantiality of the evidence supporting the Commission’s result?

Philip A. Loomis, Jr.:

Well, there’s certainly a dispute between the respondent and ourselves about that.

There certainly was in the Court of Appeals but I don’t think that dispute was brought up to this Court.

Abe Fortas:

I see.

What you’re saying is that a plea should find that the Commission’s standard is correct and we would have to remand, (Voice Overlap) —

Philip A. Loomis, Jr.:

Well, either remand or we would hope you could see your way clear to reverse the Court of Appeals and affirm the Commission because the Court of Appeals did not suggest that the Commission’s findings were not supported upon the Commission’s test.

Abe Fortas:

But it hadn’t ruled on that one way or the other, has it?

Philip A. Loomis, Jr.:

No.

It ruled that the Commission applied the wrong test.

And therefore, we would have — it would have to see whether or not applying the right test there might be a basis for a contrary finding and it said apply its own test, there might be.

Abe Fortas:

So, a remand would be necessary if we should agree that the Commission’s standard is correct?

Philip A. Loomis, Jr.:

That may well be Your Honor.

The primary purpose of the Holding Company Act was to reorganize and in part to dismantle the far flung and often unsound holding company empires that were build up during the depression.

These were regarded as creating undue concentration of power, unsound financial practices, and injury to investors and consumers as well as frustrating impart state regulation of utilities.

The Act was the most — one of the most significant and controversial of the new deal reforms and I think it might startle the framers of the Act a little, to see it characterized as respondents and the First Circuit tend to do as a simple straightforward businessman statute.

It is perhaps because the Act was successful as it was in accomplishing its purpose that there is so little controversy about it today and that it is possible for it to be viewed in the spirit apparently adopted by respondents in the First Circuit.

The Act sought to accomplish its primary purpose in two principal ways.

The Commission after examining each holding company system to determine whether or not it met the standards of Section 11 and after provisioned for voluntary adjustments if necessary was to — it provided in 11 (b) (1) required divestiture of those properties and subsidiaries which didn’t meet the statutory standards.

And that that is the section — subsection here involved and the Section 11 (b) (2) to require simplification of the internal structure elimination of unnecessary holding companies, financial reorganizations and so forth.

In considering the controversies and the compromises that — and the legislative history which respondents now and again refer, it’s necessary to keep the distinction between 11 (b) (1) and 11 (b) (2) in line.

For example, if they’re — in their brief, they cite or remark in Footnote 28 to the effect that a beneficial holding company such as theirs might continue in existence.

I think that meant that it would not be required to be dissolved by 11 (b) (2) and had no reference to retention of the gas systems.

In 11 (b) (1), initially provides that the utility operations of a holding company system shall be “limited to a single integrated public utility system.”

In the original Senate version of the legislation, there would be no exceptions to this.

That was it.

While the House version gave the Commission discretionary power to approve exceptions, the House objected to the rigidity of the Senate version and the Senate objected to the breadth of administrative discretion in the House version.

And in conference, a compromise was adopted which entitles the holding company to remain — to retain one or more additional integrated systems.

If the Commission finds a lost of substantial economies as mentioned above and also finds that the additional systems satisfied certain requirements as to size and location.

The latter re — well, that is, they’re in one area and that they’re not too big to be contrary to the public interest.

These latter requirements are concededly satisfied in the present case.

Since Section 11 (b) (2) speaks of one integrated public utility system or additional public utility systems in the provisos, it is initially necessary to identify what that is?

The term integrated public utility system is defined in Section 2 (a) (29) of the Act separately for gas systems and for electric system.

As to the two definitions are — rather similar in their basic characteristics speaking in terms of coordinated systems located in the single area in the region and not unduly large and capable of being operated economically or with substantial economies together.

The definition of an integrated gas utility system provides that the companies must be so located and related that substantial economies maybe effectuated by being operated as a single system.

With respect to the meaning of substantial economies in Section 11 (b) (1), we believe that the Commission’s interpretation is supported by the pattern and purpose of the Act established precedent and legislative history to the extent there is relevant history, and that in any event, the First Circuit’s interpretation lacks that support.

As respondents and courts in earlier cases have pointed out substantial is a “relative in the elastic term.”

Philip A. Loomis, Jr.:

In applying it to a given situation, the first inquiry is substantial in relation to what?

The sum of money which would be substantial in our budget would hardly be substantial to the Department of Defense.

In the Commission’s view substantial is used in Section 11 (b) (1), mean substantial in relation to the issue to be decided.

That is, whether the additional system should remain under the holding company or be operated independently.

And accordingly, inquiry is focused on the substantiality of the economic impact favorable and unfavorable which independent operation would have on the system.

Exactly, what the First Circuit’s test of business judgment as to the substantiality of an increase in expenses relates to if not very clear?

We believe that the statutory purposes and pattern also point to the conclusion that the economies have to be really substantial to permit the retention of an additional system for several reasons.

In the first place, it appears to be the general policy of the Act to encourage holding companies to arrange their operations so as to have a single integrated public utility system and then to confine them to that.

The provisos, at the end of Section 11 (b) (1), should not be so expanded as to devour that fundamental principle.

As the Court of Appeals for the District of Columbia put it in the Engineers case cited in our brief and quoted in the Commission’s opinion, the Congress was first concerned with wiping out of the evils which the practice of utility combinations had produced and “Congress only consented to dull the blade of it’s chosen weapon improved to hard cases.”

Not only is this interpretation consistent with what the Act says but is fully supported by the legislative history recited in our brief.

I won’t recite it all again here except to — that differ with the respondent suggestion that Senator Wheeler’s remarks, a few minutes after the bill, the conference report was adopted are not properly applied to the legislative history and that he was an opponent of the provision.

Senator Wheeler was the chairman of the interstate and foreign commerce committee which considered the bill.

He was the author of the bill.

He was the floor manager of the bill in the Senate.

He was a member of the conference committee and presented the conference report for adoption.

I think that he’s version of what he thought he was doing has considerable weight.

In reference to Senator Norris’ saying in debate, that Senator Wheeler was not really in favor of what had been done that he wasn’t satisfied with it relates I believe to the compromise made at the same time as to 11 (b) (2), the elimination provision and specifically as appears from Senator Norris’s speech to the inter-elimination of intermediate holding companies which Senator Wheeler had wished to see happen to a greater extent and ultimately did.

Contrary so — contrary to respondent’s assertions, we also believe that there has been a test in — which in essence has been continuously utilized ever since 1942 when the meaning of Clause A first came before the Commission.

That was the North American Company case cited in everybody’s brief.

There have of course been some variations in the words used to express this interpretation depending upon the context in the issues in particular cases.

And there probably has been some refinement of the doctrine particularly between the North American case which used rather general language and the Engineers case of the Commission which came only five months later, still in 1942, and which rather clearly adopted the present test.

In viewing the history of the interpretation of Clause A of Section 11 (b) (1), a few points stand out, neither the Commission nor in our view any courts until the present case has ever held that a case for retention is made out simply by showing a substantial increase in expenses.

The Commission has rejected this construction from the beginning as has the Court of Appeals and the Engineers and the Philadelphia cases.

In all of these cases, the Commission has insisted that all aspects of the situation be canvassed and explored and that saving — the savings and expenses attributable to combined operation be measured against the advantages measurable and immeasurable of independent operation including the freeing of potential competitors from common control.

Not even the Fifth Circuit which reversed the Commission in the Louisiana public service case and was in turn reversed by this Court on jurisdictional grounds in our view went so far.

That Court we believed held essentially that substantiality must be judged in relation to the ability of the independent system to an effect do business as usual to operate without a substantial change.

And as I say that decision did not have any consequences in the law that followed because of this Court’s jurisdictional holding.

The Commission on the other hand has never held as respondents in the First Circuit seemed to suggest that in considering the substantiality of economies, you consider only the ability of the additional system operating independently to survive.

In practice as in this case, the Commission considers the amount of the savings and weighs the economic advantages of retention against the benefits tangible and intangible of independent operation including the desirability of single-minded management and the promotion of competition.

Philip A. Loomis, Jr.:

This incidentally is somewhat what the respondent’s urged the Commission to do in the present case when the case was before the Commission.

But the Commission’s judgment came out the opposite way from theirs on the facts.

And here, in reaching such a judgment, the Commission is of course influenced by what — might re (Inaudible) — be regarded as a statutory presumption against having multiple systems in the same holding company and particularly in cases involving combinations of gas and electricity, the advantages of freeing a potential competitor.

And I think it is only in this last area that we and respondents were initially might — far apart on the law, I mean, as a — we were far apart on the facts in the beginning.

We still are but we have grown further apart on the law.

It seems to me clear therefore, that the Commission’s view of Clause A of Section 11 (b) is a reasonable one.

Consistent with the statutory purpose and that it has been consistently held and supported by at least the weight of judicial authority and conver — conversely that the First Circuit substitute test which was not even advanced in respondent’s briefs to that court but was evolved on the court’s own motion lack such support.

I might stop here, except that the respondent in the First Circuit have advanced certain additional objections to the Commission’s decision including the so-called symmetry between Clause A of Section 11 (b) (1) and Clause D of Section 2 (a) (29) defining the section which both refers substantial economies and the alleged lack of any policy in the Act against combined gas and electric systems or alternatively, the contention that formulation of policy in that area was in effect delegated to the states.

I believed that these objections spring from certain inherent difficulties in the application of the definitions in Section 2 (a) (29) and the provisions of Section 11 (b) (1) to a situation such as this.

Involving a holding company owning both a group of gas companies which appeared to constitute a single integrated gas system together with a single integrated electric system located in the same area and that the Commission resolved these difficulties in a reasonable way.

In such a situation, there will normally be operational economies in such matters as customer accounting, combined billing, etcetera which result from operating the gas companies together rather than from operating them separately, and assuming that the size and location standards of 2 (a) (29) (b) are met there is no reason not to find the gas companies to be a single integrated system.

There is no policy objection to — say, putting together an integrated system.

The fact if you can find there is one, that’s what the statute wants you to have.

Since this appeared clearly to be the case here and the respondents and the Commission staff were in agreement about it by the time the case reached the Commission for decision the Commission, as it is done in a number of the prior cases, simply found the gas companies to be a single integrated system without making subsidiary findings.

We see no particular objections to this but respondents make considerable — of a point of it and they cite the City Service case 14 S.E.C., where the Commission declined to accept a concession by its staff and where they had in — found independently.

That however, was not a 2 (a) (29) case.

That was an 11 (b) (1) case and the Commission’s action there illustrates the fact that there is a sort of a presumption against finding retention under Section 11 (b) (1).

And the Commission does not do so without weighing the arguments for independents and for combined operation which kind of arguments just don’t arise in the case of identifying a single independent — a single integrated system under the definitions.

For — proceeding in a situation such as this, there will probably be even further operating economies of the same general nature, billing, meter reading, and so forth which accrue from combining the gas companies and the electric companies.

It is, however, impossible to treat the gas and electric together as a single integrated public utility system because, although, earlier drafts of the statute would probably have permitted this.

Congress ultimately wrote the definition of an integrated public utility system in 2 (a) (29) in a manner which precludes such treatment.

As the Court of Appeals explained in the Philadelphia Company case, there is one definition of an integrated gas system in the second definition of an integrated electric system and there is no third definition of a combined system nor is the Commission permitted by the Act to formulate one.

Confronted with this situation, the First Circuit and respondents reasoned that in this type of case, the Commission must permit retention of a gas system under Section 11 (b) (1) because if economies amounting to X and attributable to combining the gas companies are substantial economies as that term is used in Section 2 (a) (29) (B) then economies of X plus Y resulting from the further combination of gas and electric are a fortiori substantial economies for purposes of Clause A of Section 11 (b) (1).

While this at first blush seems logical, it nullifies the congressional decision expressed in the dual definition in Section 2 (a) (29).

It makes that meaningless in this type of case because you still always keep the gas and electric together.

And it also nullifies the apparent purposes of that distinction.

The pertinent policy is expressed in an excerpt from Senate Report 621 discussed in our brief at pages 35 through 37 dealing with Section 8 of the Act.

Section 8 in the original draft would have prohibited holding companies from acquiring or retaining combined gas and electric systems in states where combination of gas and electric operating companies were contrary to this local policy.

The Committee deleted the prohibition against retention which is a combination systems would carefully explained that this was a change in the procedure and not in policy.

It said that Section 8 was designed to prevent the use of a holding company in the future to deprive the public of the benefits of competition between gas and electric energy and went on to say, this is where I quote, “The committee felt that while the policy upon which this Section was based was essential in the formulation of any federal legislation on utility holding company act companies it did not think that the Section should make it unlawful to retain”, and I emphasize, “up to the time that Section 11 may require divestment interest lawfully acquire.”

Philip A. Loomis, Jr.:

The Commission has considered since it’s first case involving Clause A, the North American case, referred to in the briefs that a similar policy underlay the congressional decision to refer decision as to combi — combinations of gas and electric properties to proceedings under Section 11 (b) (1) as just as it left the question of retention which was dealt with in the original Section 8 to proceedings under Section 11 (b) (1).

Thus, in the original North American proceeding, the issue arose in the context of a gas company and an electric company both in the Saint Louis area and both in the North American system.

The Commission, in its decision 11 S.E.C.of 317, referred to the alleged operational savings from retention which were the same general nature as those alleged here concluded that the record was inadequate to permit comparison of those economies with the possible benefits of independent operation including the promotion of competition and sent the case back for further hearings.

After these hearings and in the decision reported in 18 S.E.C. 611, the Commission first ascertained the amount of the savings and expenses which would result from severance and then said, “To accept these estimates without further inquiry would be to distort the Act.”

The provisions of Section 11 (b) (1) under which additional utility systems maybe retained are exceptions, the basic policy that holding companies be limited to the control of the single system.

The benefits of terminating widespread control subtle and apparent must be considered as offsets to the claims of lost economies.

Only the balance or it maybe inexpressible in money terms conform the basis of decision.

The instant case points out the necessity for that rule.

We are asked to permit electric and gas utility companies serving the same territory to be held together.

The businesses in many aspects of their operation are competitors.

It is the inevitable tendency of the joint control to favor that business which is mo — in which it is most interested and which is most profitable.

The Commission then went on to consider the evidence with respect to the competitive advantages of independent operations and ordered severance.

We believed that this analysis answers a number of problems raised by respondent in the First Circuit including the a fortiori or symmetry argument about substantial economies meaning the same thing in both places which would largely foreclose the complete examination made in the usual Section 11 (b) (1) case.

The point is not so much that the word substantial economies mean different things in the two sections as it is that the nature of the issues and inquiries and the determination under Section 11 (b) is ordinarily rather different from that involved in a 2 (a) (29) case, the latter being preliminary to the former.

In the cases where they sought to retain an additional electric system along with the principle electric system — or an additional gas system, along with the principle gas system, the policies against systems which were too large or too scattered expressed in 2 (a) (29) carryover to some degree into Section 11 (b) which is the explanation or the statement in the prior Commission brief that there is some overlap.

But the issues with respect to economies would be quite different.

If the additional system was capable of coordinated and integrated operation with the principle system, the question probably would never be reached under 11 (b).

If the systems are not capable of coord — coordinated operation, they’re presumably would be few if any operational savings from combining them.

The economies would relate to such matters as the common services provided by the holding company.

And that’s the case when you look at these electric and electric or gas and gas cases under 11 (b) (1) the usual savings relate to the service of the holding company.

The Commission weighs these against the disadvantages of absentee ownership and widespread control and reaches a judgment which is quite different and more difficult than the judgment under 2 (a) (29) with respect to the economies of combining a group of coordinated companies.

Where the question involves combining gas companies and electric companies as here while — where true operating economies may result.

This is we have seen characterized by definition in the 2 (a) (29) determination that there is a single integrated system and is referred to 10 (b) — 11 (b) where there must be a weighing against the saving and expenses of the advantages both the utility and for the public of freeing a potential competitor in giving it a single-minded management solely devoted to it’s welfare.

This type of determination is almost never called for in a 2 (a) (29) proceeding involving only gas companies or only electric companies since gas utilities rarely if ever compete with other gas utilities, the same is true electric systems.

Byron R. White:

Well Mr. Loomis when you — when the Commission is deciding whether to allow electric and gas companies to stay together, in making that judgment do you inquire at all or predicted all what will happen to rates?

Philip A. Loomis, Jr.:

Not to any great degree.

Byron R. White:

Why not?

Philip A. Loomis, Jr.:

That — there are two types of determinations which are made when you just have electricity or you just have gas.

There is first the 2 (a) (29) determination —

Byron R. White:

I’m not interested in that, I’m administering the question you have in this case whether the — whether they can retain the two systems together?

Philip A. Loomis, Jr.:

The gas and electric systems together.

Byron R. White:

Yes.

And in making that this decision which was made in this case —

Philip A. Loomis, Jr.:

Yes.

Byron R. White:

— was there any prediction or consideration whether the rates would go up or down?

Philip A. Loomis, Jr.:

There was some evidence introduced to the effect that because of the increase in expenses the rates might have to go up.

The Commission —

Byron R. White:

In both systems?

Philip A. Loomis, Jr.:

No, just in the gas system.

The Commission concluded that this was, I believe, I said, remote and speculative and that —

Byron R. White:

Not going to be if they — if some — if a regulatory body has been doing its job on the rates and you had the expenses of a million or whatever — a million dollars a year whatever, why wouldn’t the rates have to go up?

Philip A. Loomis, Jr.:

Well, there might be advantages, offsetting advantages derived from having the gas companies freely operate it.

They might become more competitive.

They might have a more effective promotion of their interests and consequently, we can’t reduce the precise figures to dollars.

Byron R. White:

Well, you think it’s irrelevant — apparently it’s just irrelevant to raise (Inaudible)

Philip A. Loomis, Jr.:

No, I think that — I think it could well be relevant on the merits, that is, if it turned out that the loss of economies was so substantial that the rates would have to go up?

If the system was separated that might well be a good reason not to separate it.

Byron R. White:

Well, if —

Philip A. Loomis, Jr.:

All I’m saying is that —

Byron R. White:

How about if they would go up a million dollars?

Philip A. Loomis, Jr.:

Well, if that depends on whether a million dollars, it is substantial in the particular context you have whether they’d go up one half or 1% or 10%.

Byron R. White:

Well, if the Commission decide in this case was a — try to decide whether rates would or wouldn’t go up and if so —

Philip A. Loomis, Jr.:

No.

Byron R. White:

— how much and therefore put this factor into the balance or not?

Philip A. Loomis, Jr.:

The Commission considered this matter, included in effect that it was unable to determine whether or not the rates would go up, they might or they might not.

But as I’ve say — attempted to say earlier whether the Commission’s treatment of rates was or was not the best treatment.

If not I think here, you’re — you merely — considering the proper test to be applied.

Now, I would agree with you that if it was clear from the evidence that the rates would have to go up that would be a very strong reason for retention under the Commission’s test or any other test.

Byron R. White:

Well, why would it be and why would it be under your test and unless — because rates — if rates can go up and will go up, there isn’t going to be any interference with the sound the — the economical operation under your care?

Philip A. Loomis, Jr.:

Well, I think we would feel if the operation —

Byron R. White:

Could it be — (Voice Overlap) wholly irrelevant to your case?

Philip A. Loomis, Jr.:

No, I don’t think so Mr. Justice White.

I think it would be relevant to sound and economical operation.

If they had to raise their rates, the operation would not be a sound or as economical as it had been before.

And if that — that is this part of the question under our test.

Another question is the presence or absence of a policy in the Act with respect to combined gas and electric systems.

As the Commission pointed out in it’s opinion in this case, there is no overall general policy applicable in all circumstances against such a combination and the Commission has permitted the continued existence of combined systems for granting exemptions from the Act, the wholly intrastate holding companies or the holding companies which are primarily operating companies, and in allowing companies to come out from under it’s jurisdiction when they ceased to be part of a holding company system.

The reference in the Commission’s opinion to this statement was in answer to an argument that if you allow combined companies to exist in this context, why not to encourage them in an 11 (b) (1) proceeding.

But as we have seen there is such a policy when the question arises in proceedings under Section 11 (b) (1) because under Section 11 (b) (1), the Commission has consistently held that the merits of competition both from the viewpoint of the company itself as — in its more vigorous operation and the public merit advantages are to be considered.

The First Circuit sort of suggested that maybe you could look at them but said you had to reduce the amount of — determined the amount of money which would be saved by competition and in effect subtract it from the expenses.

This is just an impossible process because you’re dealing with the public and intangible advantages which will occur from more vigorous competition in the future.

It’s like in an antitrust case involving a merger to say that the Federal Trade Commission or the antitrust division would have to prove how many dollars competitors would lose as a result of the merger and subtract that from the savings to the merged companies and come up with the dollar fee.

You just can’t analyze future competition —

Abe Fortas:

Mr. Loomis, I —

Philip A. Loomis, Jr.:

— that way.

Abe Fortas:

I beg your pardon.

I have — may have missed your point.

Has the Commission ever permitted and integrated a holding company to retain both the gas — an integrated gas system out of an integrated electric system?

Philip A. Loomis, Jr.:

Yes.

There have been several such cases which are cited in our brief.

These were small systems where it was felt that the type of consideration that Mr. Justice White is referring to outweighed the advantages of independent operation.

(Inaudible)

Philip A. Loomis, Jr.:

Well, I think so.

As to the question of delegation of policy making to the states, the Act defers to state policy in a number of cases but it does not so defer in Section 11.

In the first place, while Section 8 gives the states a veto over the formation of gas and electric systems within their jurisdiction without any findings with respect to substantial economies or anything else the state policy is not altogether binding on the Commission.

Under Section 10 (c) of the Act the Commission cannot approve an acquisition which would violate Section 8 or it concludes that the acquisition would be detrimental to carrying out the provisions of Section 11.

Thus, even if the state does not exercise it’s veto and entirely proves the combination the Commission may nevertheless disapprove the acquisition if it finds it detrimental to the provisions of carrying — carrying out the provisions of Section 11 which is precisely the type of determination which was made here.

Section 11 expresses the major policy decision of the Act.

It is a federal policy and where necessary it overrides state policy.

This is illustrated by Section 10 (f).

Philip A. Loomis, Jr.:

Section 10 together with Section 9 in general make it unlawful for holding companies to acquire utility assets and other interests unless the Commission finds the acquisition is consistent both with the requirements and policies of the federal act and with applicable state requirements and policies.

Section 10 (f) however provides that the Commission may approve an acquisition even if contrary to state law if it finds that “Compliance with such state law could be detrimental to the carrying out of the provisions of Section 11.”

In other words Section 11 policies and this is a Section 11 case are not delegated to or subject to the control of state law.

We believe therefore that not only does the Commission’s interpretation conform to the statutory purposes and policies but that most of the specific objections to it advanced by respondents tend to diminish on analysis.

As I have said there are probabilities in applying these Sections to a factual situation like the present one but we believe that the Commission’s approach to resolving this problems as it has evolved from experience over nearly a quarter of a century conforms to the congressional intent.

May I reserve the balance of my time?

Earl Warren:

Mr. Quarles.

John R. Quarles:

Mr. Chief Justice, may it please the Court.

At the outset, let me say that I would agree with a great deal what Mr. Loomis had said about the function of this Act and its interpretation.

I would agree with him that the sole question raised is the meaning of the phrase substantial economies as used in Section 11 (b) (1).

If the test applied by the Commission in this case however, had been as I understood him to state it to be, I do not think we would have been here today.

Because there is in our view a sharp distinction between a test of substantial or serious or significant laws which I understood him to say was the test applied and the test as stated in the question raised, namely the test of capability for sound and economic operation.

The Commission has not explained just what that phrase means.

We’re not quite sure.

Reading it in the context where it was first used in the Philadelphia case, we think it means economic survival.

But in any event the test is not one of whether on the overall picture there has been economy or loss of economy that is serious.

The test as it has presented in this case is the ability to continue in sound and economic operation.

Abe Fortas:

I didn’t understand the — perhaps I misconstrued Mr. Loomis’ statements Mr. Quarles, I didn’t understand him to concede that that was the issue.

That is to say, I thought his position was that it’s not merely a matter of construing those words substantial economies as they appear in the 11 (b) (1) (A) that the question was to construe that entire subsection in light — and to construe it in light of the broader general provisions of the Act?

John R. Quarles:

Yes, Mr. Justice Fortas.

But in construing it is the test one of serious and important loss of economy or is it one of loss of economy so serious that a continuation to operate economically becomes impossible and there is the principle issue between us.

Abe Fortas:

I thought his point was that the 11 (b) (1) (A), there is really a maintenance stated negatively and in — and is referenced by the Court of Appeals’ decision and that the question is whether there has been a showing in this record as determined by the SEC that the gas utility system cannot be operated as an independent system without the loss of substantial economies rather than whether substantial economies result from the retention of the gas utility system.

It’s kind of a — an abstruse difference but perhaps in legal terms, I wonder if it is — may not be a substantial difference with respect to burden.

John R. Quarles:

Whether it’s phrased negatively or positively or whichever has the burden we come back to the crucial difference between us of whether the test is to be one of really serious by whatever standards you measure it, looking at the total picture, really serious which we agree is a proper test.

Or the test is to be so serious that continued operation sound and economically becomes impossible.

And in considering this, although, you have the same words in the two Sections, I think that it is essential that we read the two together and I’d like to deal with that briefly before going to the substance of this issue.

In defining the circumstances under which utilities can be held together, the Act specifies the three basic requirements that Mr. Loomis has mentioned, the critical one for our purposes here being economic justification that must be substantial economies from the joint operation.

These requirements as you said are parallel and appear in the two sections as applied to utilities in a single integrated system.

They are in 2 (a) (29) and as applied to more than one in a single system, they appear in 11 (b) (1).

In the instant case, the Commission was required to apply them to the eight gas companies of the new system under both of these sections.

John R. Quarles:

First, to determine under 2 (a) (29) whether the eight gas companies could be held together with each other as a single system then under 11 (b) (1) to determine whether they could be held together with the electric companies in a single holding company system.

As was pointed out, there was no question with respect to the geographic or the size requirements.

It’s a small system relatively speaking in a very compact area in Central New England.

They were clearly met and the Commission affirmatively so found not merely conceded.

This limited the inquiry to their economic aspect of it and they are the keywords in the two sections are identical, substantial economies.

The evidence showed that combining the gas companies in the separate system affected economies of $329,000 a year and on that showing, the Commission conceded that they met the test.

We regard this as necessarily implying a finding or at least a recognition that for these eight gas companies in this situation savings of $329,000 a year constitute substantial economies.

Similarly, the evidence showed that combining that system with the electric system resulted in further savings of a $1,098,600 a year and on that showing, the Commission held that savings of a $1,098,600 are not substantial economies.

The findings and opinion offered no explanation of this rather serious inconsistency as we view it nor even recognized that it was that.

The petition for certiorari tried to brush it aside by a casual reference to these eight gas companies which concededly are a single system.

At the time of the brief, we’ve petitioned — of ours was sent it, our brief in opposition, we pointed out that there was no agreement between the parties as alleged and so in coming in with their later brief they shift their grounds somewhat and in order to avoid the dilemma they come in with what to me is a very surprising suggestion.

I read from page 9 of their brief, the Commission did not in fact adjudicate the issue whether there were substantial economies as used in 2 (a) (29) (B) which defines integrated gas system but merely accepted it’s staff’s concession.

And further on page 22, the Commission without making any findings thereon decided the case on that assumption.

This concession however, “made primarily for the purpose of simplifying the decision on the Section 11 issue cannot fairly be treated as an informed determination by the Commission.”

In other words, they started it and the Commission is not responsible for it for obvious reasons that it is not an acceptable answer.

In the first place, the status of these eight gas companies under 2 (a) (29) was a vital issue in this case.

It was specified in the Commission’s order of notice in exactly the same way as the corresponding issue with respect to the elected companies we specified.

Under the Administrative Procedure Act, we maintained that it was the duty of the Commission not only to adjudicate it but to state its subsidiary findings and its reasons.

It did exactly that in the case of the electric companies reciting that although there was no opposition, they had examined their voluminous record and then came out with an 11-page findings and opinion followed by an order.

As I’ve mentioned a moment ago in the gas phase of the case under Clauses B and C, the Commission made the finding rather than merely a concession.

At the hearings before the hearing examiner, counsel for the staff insisted that this issue had to be settled first before it could go on to the other.

So that all along the line in the administrative portion, this was regarded as one of the issues before the Commission that had to be set.

Now, —

Abe Fortas:

Mr. Quarles —

John R. Quarles:

Yes, sir.

Abe Fortas:

Perhaps I had — I don’t quite cover this, 2 (a) (29) has a separate definition of an integrated utilities, electric utility system, separate definition of an integrated gas utility system, is that right?

John R. Quarles:

Yes, sir.

Abe Fortas:

The words on which you are relying appear only with respect to the definition of the integrated gas utility system?

John R. Quarles:

Yes, sir.

Abe Fortas:

They do not appear in the definition of the integrated electric utility system.

John R. Quarles:

And I think that is quite pertinent here, sir because when you are dealing with gas companies, there is no particular advantage in the interconnection.

Abe Fortas:

Yes, sir.

John R. Quarles:

Therefore, there is no bonus, if you will, for interconnection.

Abe Fortas:

Yes, I understand that.

In 2 (a) — in (b) of — 2 (a) (29), the — what Congress is talking about is substantial economies that may be affected by being operated as a single coordinated system, is that right?

John R. Quarles:

Yes, sir.

Abe Fortas:

Now, it is theoretically conceivable anyway that there might be a determination that substantial economies would be affected as a result of allowing the gas utility system to be operated as an entity.

But that — it might not necessarily — it does not necessarily follow perhaps that same type that the economies would — that a finding as to such economies would also apply to 11 (b) (1) (A) because there you’re talking not about an integrated — single integrated gas utility system.

Talking about the economies which are urged to follow from the operation of that gas utility system by holding company which is — also owns an integrated electric utility system.

So my — and my question rather is to test the validity of a proposition that the 2 (a) (29) use of that phrase has the same implication as it’s used in 11 (b) (1) (A).

John R. Quarles:

In both cases, the statute has posed that as one of the requirements for combining separate utilities.

(Inaudible)

John R. Quarles:

Yes.

I would call your attention to the fact that in the corresponding definition of an integrated electric system, the requirement is different.

You do not require substantial economies because certain advantages flow from interconnection itself.

If — ability to pull your power to ensure a better service and other direct advantages so that in the case of the electric companies all that need be shown is that they maybe operated on the normal conditions, economically.

Abe Fortas:

Economically?

John R. Quarles:

Yes.

Whereas to combine gas companies where you do not have that advantage or to combine two electric systems which are not capable of interconnection, in other words, if you are taking a second electric company as your additional system then it is necessary to go further and show substantial economies.

Our position is —

Abe Fortas:

I understand that but what bothers me is the relevance of the gas utilities standard to the 11 (b) (1) (A) inquiry and as I understand this voluminous as argument.

It is that the 11 (b) (1) (A) inquiry is substantially broader than the inquiry under (2) (a) (29) (B).

John R. Quarles:

That is his contention and it is based on his basic philosophies if the Act reflects a public policy against combination of gas and electric utilities and against the combination of more than one integrated system and I will hope to come to that a little later in the argument.

But at the moment, I would like to focus particularly on this matter of the meaning of the critical phrase in the two sections and our contention that the phrase must be construed consistently in the two sections.

Not only is the context the same, not only are you looking at the question of what is gained by joint operation.

That framework of the two sections is similar and the words of (2) (a) (29) are in effect incorporated by reference in 11 (b) (1).

Actually, the definition is only used one of the place in the Act, so this is a principle used of that definition.

So that if you construed those two words differently in the two places you in effect are giving the identical words different meanings used in the same sentence, in effect, because by using the definition in 11 (b) (1) you are picking up the definition and it’s terms from (2) (a) (29).

The Commission has referred, as Mr. Loomis mentioned, to the fact that the petitioner has referred to the fact that the Commission periodically has pointed to the parallelism between the two sets of requirements and said there should be a construed consistency.

Now, coming back to this matter of the concession rather than dealing with it as the court below pointed out the Commission couldn’t in good conscious concede unless it was a fact.

John R. Quarles:

If it was making this as a concession it is a departure from it’s well-established practice of not adopting the opinion of counsel back as early as the North American case where there was an effort made to get the Commission to go along with an agreement reached between counsel for the staff and counsel for the commit — for the companies.

The Commission said, “The concurrence of counsel does not change our statutory duties.

We may make the affirmative findings necessary to permit retention only if the record shows that such retention satisfies the criteria of Section 11 (b) (1).”

Now, as a — and final resort is the petitioner now does take the position as Mr. Justice Fortas’ referred to of saying that this is alright because it’s permissible to apply different meanings to this — to usage in the two context and that brings us into the problem of whether or not that is a permissible thing in trying to give effect to an assumed policy of the Act.

Byron R. White:

Well, Mr. Quarles, can I ask you please.

John R. Quarles:

Yes.

Byron R. White:

I take it you’re you’re saying that whenever there are substantial enough economies among several gas companies so you could pick them as a single integrated system under 2 (a) (29).

That automatically means that there is a substantial economies which prevents it being operated — being separated from the gas company?

John R. Quarles:

I’m saying that if —

Byron R. White:

Then when would you ever have a — when would you ever have a single integrated gas companies that should —

John R. Quarles:

That could —

Byron R. White:

— ever —

John R. Quarles:

— could be held as into this note?

Byron R. White:

— ever be separated — ever be separated (Inaudible)

John R. Quarles:

That could — that could ever be held as an additional one that wouldn’t have to be separated and that is one of the difficulties with this anomalous situation.

Is that if the gas companies do have to meet the same standard and do meet that standard, you could never prove that they were incapable of standing alone.

That’s one of our difficulties with this interpretation.

If you have the same standard, it’s a different result.

Now, this aspect of the case —

Abe Fortas:

Is this perhaps — perhaps Mr. Quarles, my Brother White stated this point which is troubling me as an analytical matter that I have no idea, that is, if 2 (a) (29) is to be carried over to 11 (b) (1) (A) then I — its sort of a — it would automatically follow in very case, wouldn’t it?

That a holding company which has an electric utility system can retain the integrated gas utility system that — and it follows this automatically as saying, if you add one and one and one, you get three?

John R. Quarles:

No, Your Honor, (Voice Overlap) —

Abe Fortas:

I think that’s the point.

That is if the — do you say you have an integrated gas utility system then under 2 (a) (29) you’re saying that there are substantial economies that they carried that over to 11 (b) (1) (A) then it would follow.

If I correctly understand your argument that in every case where there is — where a holding company owns an integrated electric system it can also retain the integrated gas system.

John R. Quarles:

Just the opposite sir, because if the gas companies meet the test of being capable of independent operation then they cannot be retained.

Byron R. White:

But don’t you have to though — but don’t you have to be pretty clumsy not to be able to save some money by operating two systems together?

John R. Quarles:

The savings must be substantial on the overall —

Byron R. White:

Well, you have to be pretty clumsy not to make some substantial savings.

You just add personnel or billing or meters or something I suppose?

John R. Quarles:

I would expect that you would usually be able to make some savings.

Byron R. White:

And (Voice Overlap) —

John R. Quarles:

The savings that was —

Byron R. White:

And therefore, no separation?

John R. Quarles:

No, sir.

Because in the first place, the savings that we’re talking about by operating the gas companies together with each other may not be the same as the savings that would be realized by operating those gas companies as a unit together with the electric companies.

Byron R. White:

I understand that but I would say — my point is wouldn’t there almost automatically be savings in operating gas companies with electric companies just in terms of — you’re not going to lose any money doing (Inaudible)

John R. Quarles:

There are many ways in which savings can be realized.

Byron R. White:

In almost any kind we have — you’re operating two integ — two integrated systems together, gas and electric.

John R. Quarles:

And if those savings —

Byron R. White:

If there’s — at least if you’re serving the same customer.

John R. Quarles:

There is a good opportunity there for savings.

There is nothing in the philosophy or theory of the Act that finds that objectionable so long as the other requirements are met.

Byron R. White:

I understand —

John R. Quarles:

So —

Byron R. White:

— but I’m just saying that since that is so — since it would be so repetitively true that you would be making savings by operating gas and electric companies together that it would be the rare case when you — whatever have a valid separation order under your theory.

John R. Quarles:

I think it is open to question in each individual case whether on the total showing.

Byron R. White:

Of whether its —

John R. Quarles:

They are subs —

Byron R. White:

— substantial enough.

John R. Quarles:

Yes.

Whether they are substantial enough, I — agreeing with Mr. Loomis that it is an issue that has to be examined carefully and that it isn’t just savings in operating expenses but you have to take into account other offsetting items and come up with the net result and if the net result is a substantial amount of savings in relation to the size of the business in giving due weight to contrary factors then retention is permissible and we find nothing in the history or the wording of the Act that would indicate that that is an undesirable result.

Byron R. White:

Yes, but if it — what — it reduces the Act, the saying is that, well, normally we separate them but normally we don’t because of — if the normal result of operating an integrated grass company — gas company along with an integrated electric company is to make substantial saving.

Why — normally you’re not going to separate them under your —

John R. Quarles:

I think that perhaps the normal situation and certainly the situation against which the Act was primarily directed, wasn’t that tight little situation where you have an electric and gas operation in the same territory and capable of substantial savings since we have in ours.

It was concerned with these enormous organizations spread across the country and the other two tests, the geographic test and the size test were clearly the ones that were uppermost in the minds of Congress and the public generally at the time of the enactment of this law.

Byron R. White:

Do you agree (Inaudible) where the gas — I mean, the gas system(Inaudible)

John R. Quarles:

I would hope that would be the result.

Yes, sir.

Because I can see in that situation tremendous advantages as was testified by the chairman of the Department of Public Utilities having supervision over these gas companies in our case.

Byron R. White:

And here, substantial (Inaudible)

John R. Quarles:

Oh, yes, 75% of the territory and 78% of the customers of the gas companies overlapped the electric.

And that rather distinguishes this case and does permit very substantial savings.

Reference is made to the record on the facts and we needn’t get in to that.

But this figure of the 1,089,000 was after various deductions and was the minimum figure that we saw in it as —

Byron R. White:

(Inaudible)

John R. Quarles:

We found that the principle economies actually realized were in operating savings, meter reading, service offices and things of that kind, and in procuring insurance that would cover the entire operation, certain things of that kind.

If there were not the overlap certainly in the normal case, you wouldn’t have anything like a substantial savings as you do in the situation such as ours.

Now, we maintain that in the posture of this case, it was essential that the Commission determined the status of the gas companies that it make affirmative findings with respect to him and that it give its subsidiary findings and its reasons.

And we suggest that on this basis alone aside from the other which I will hope to come to it immediately after recess.

Earl Warren:

We’ll recess now Mr. Quarles.

John R. Quarles:

Mr. Chief Justice —

Earl Warren:

Mr. Quarles, you may continue your argument.

John R. Quarles:

Well, coming now to the question of the interpretation of Section 11 (b) (1) (A) independently of (2) (a) (29), may I emphasize that the interpretation of the word substantial economies which the Court is asked to affirm is, a loss must be such as to render the additional system incapable of sound and economical operation independent of the principle system.

Our position is that that is an artificial interpretation that is not warranted that the Clause A is a clear statement.

The words are plain, everyday, non-technical words.

The intended meaning is obvious and there is no occasion for going outside those words.

This Court speaking through Mr. Chief Justice Warren in the recent Richard’s cases, we must of course start with the assumption that the legislative purposes expressed by the ordinary meaning of the words used.

We’re going to operate within the framework of the words chosen by Congress and not to question the wisdom of the latter in the process of construction.

The Commission’s test, we submit, is not within the framework of the words chosen by Congress.

It is in effect a substitution in order to reach the result that the Commission urges.

It is necessary to replace substantial economies with indispensable economies or necessary economies.

So the test of substantial economies requires a comparison of the situation after separation with the situation before separation to determine the magnitude of the savings whether or not they are substantial or whatever substantiality is tested.

The test suggested by the petitioner requires no comparison.

It’s an absolute test.

If the separate additional system can operate or if it cannot be shown affirmatively that it is unable to operate economically and efficiently.

Then it must be divested and the magnitude of the loss of economies and the seriousness of the impact on investors and consumers is irrelevant.

It’s our position that no extraneous factors, however persuasive should be allowed to reach that kind of result.

The words of Mr. Justice Frankfurter in Addison v. Holly seem particularly appropriate.

He says, “The idea is not so complicated nor its English speech so poor that words were not easily available to express the idea.

John R. Quarles:

After all, legislation when not expressed in technical terms is addressed to the common run of men and is to be understood according to the sense of the thing as the ordinary man has a right to rely on ordinary words addressed to him.

Construction is not legislation and must avoid that retrospective expansion of meaning which properly deserves the stigma or judicial legislation.”

Certainly, in this situation English speech is not so foreign words and not easily available to express the idea of that the petitioner is suggesting as the test here.

All that would be necessary would be to change the long and involved phrase in which clause knowledge expressed and have — of course they read, a each of such additional systems cannot be operated soundly and economically as an independent system.

It’s hard to believe that if that had been the intent of the expert draftsman of the Act they would have used words which ordinarily have an entirely different meaning.

In fact, I think it’s inconceivable that intending one test under 11 (b) (1) they would have used words expressing an entirely different test in the definition which at the time they were incorporating by a reference into 11 (b) (1).

Now, the petitioners undertake to justify this substitution by reference to the history and design of Section 11 (b) (1) to the great difference that this Court should pay to the Commission’s determination and to derive a noble idea that the test should be designed to accomplish the desired result rather than determining what the test is and then applying it.

And all of these they say is by way of implementing a policy, an overriding policy that is so strong that it warrants whatever distortion of the words maybe necessary to give it full effect.

And yet, a careful analysis of the Act itself and of the legislative history gives no support for any such philosophies that has been expressed.

First place of course is to look at the Act itself and I think that anyone will agree that an unprejudiced reading of the Act would not suggest any such philosophy.

Section 1 enumerates the specific evils against which the Act is directed and announces the policy to overcome those evils by simplification under Section 11 (b) (2) primarily and by eliminating those properties that are inimical or cause difficulty impairing out the policy.

There’s no suggestion of a policy against combinations that meet the test and there is no suggestion that the test shouldn’t be read fairly in accordance with the simple words in which it’s expressed.

It’s also interesting to note that under either of the original bills, House or Senate, needs would’ve been permitted to retain its gas companies.Under the Senate bill because under that definition you could have in a single integrated system both gas and electric; under the House bill because there you could have any number of additional systems if they were found by the Commission to be consistent with the public interest.

The only support that is claimed for this philosophy from the wording of the Act itself is two phrases from Section 1 taken out of context and we think completely misconstrued.

On page 17 of petitioner’s brief, we find this statement, retention was permissible if it resulted in, “The integration and coordination of related operating properties” in citing 1 (b) (4).”

Under a management single-mindedly devoted to the development of those related properties and “free and independent competition” citing Section 1 (b) (2).

Now, actually Section 1 (b) (4) suggest two alternatives, economy of management and operation or the integration and coordination of related operating policies, economy of management and operation, the part that refers to our type of situation and with which we clearly comply was omitted.

The court below took this rather seriously.

Similarly, if we read Section 1 (b) (2) in it’s entirety this quoted phrase “free and independent competition” applies only to purchases by public utilities of services, materials and so on to assure them of the minimum prices and doesn’t by any search of the imagination relate to competition between utilities as suggested by the petition, both in oral and in their brief.

The same we think misleading reference to this partial quotation that appears elsewhere in the brief.

There is an argument in the brief it hasn’t been adverted to in oral, to the effect that the mere fact that the specification of the properties in a proviso warrants a strict reading against retention.

That I think ignores the historical development of this Clause.

As was pointed out, the original bills provided for a single system as that was found unsatisfactory and unacceptable to the House and the total exclusion was whittled away just as a matter of convenient drafting mechanics.

The use of a proviso was the obvious thing and certainly no particular significance to — should attach to that.

Certainly, it doesn’t warrant reading it other than in accordance with its language.

Likewise, if we refer to the legislative history, you find nothing that will really support this concept of separating gas and electricity.

When Mr. Roosevelt asked for remedial legislation in this field, a single bill drafted by the National Power Policy Committee, it was filed in both Houses and that as I indicated, provided for a single geographically and economically integrated system.

The primary concern as I mentioned this forenoon was for the size and power, and geographic spread rather than for whether it was gas or electric.

The indication was that this was something of — primarily of concern to the individual states and should be left to state policy.

An argument was made this morning that the change in Section 8 had a bearing on this.

John R. Quarles:

Actually, Section 8 so far as it pertains to this problem all the way through relates solely to those combinations which in substance violates state policy and Section 8 in it’s earlier form and it’s present form is designed merely to prevent the use of the holding company structure as a means to get around a state prohibition.

The two bills in Congress took divergent courses.

In the Senate, under the leadership of Senator Wheeler, a very strict interpretation was favored and limitation strictly to a single assessment.

In the House more liberal attitude developed, the two came to an absolute stalemate and as the session was nearing an end in order to effect a — to get any legislation through, the Senate agreed to this compromise.

Mr. Loomis referred to the fact that Senator Wheeler was the author of the bill.

Well, he certainly had a part in the drafting of the bill but it is clear from the reading of his own speeches and the comments of others that he wanted a strict bill and that this kind of a concession was not to his liking.

His own statement as a matter of fact on its face I think shows that it shouldn’t be give the — given the interpretation that is now proposed for it.

He refers to a system so small that it couldn’t survive and that this is the economic test under Clause A, size is the (Inaudible) with under Clause B and C.

But with no greater support from the legislative history than this, the petitioner goes on to the conclusion.

In short, the loss of substantial economies contemplated by Congress was such a loss as would render the additional system incapable of sound and economical operation independent of the principle system.

Now, we contend that even if the language were capable of the interpretation that is proposed for it and we insisted it’s not that there isn’t sufficient evidence in the history or the wording to warrant that distortion.

We submit that the compromise that was affected was a real compromise so sincerely that it was properly expressed by the words of the proviso and that the people that voted for that compromise had a right to start those words to be given their normal interpretation rather than an artificial one that is most repugnant.

The report of the managers to the House that cited in the petitioner’s brief supporting them is support for their position only if real economic need which was used in that report is equivalent to real economic necessity.

And this I think points out the real difference between us, the real issue before this Court at the present time.

Is it a matter of serious important loss of economy or is it a matter so serious, so important that continued economic operation becomes impossible.

Now, we talked about Senator Wheeler’s part in this, he was prejudiced.

There’s no question about that.

The words that he used do not indicate a proper approach to have this test under A was to B.

In other words, it’s our suggestion that he’s comments really have no relevance to this issue.

Let we come to the question of administrative interpretation and the petitioner claims that great deference is due to the Commission’s long-standing interpretation.

First of all, that assumes that it is a reasonable interpretation of the word and that it has been consistently applied through the years.

If this were a fact, we would certainly agree that this Court should give it careful consideration even then it’s a question how much we should attached to it because this isn’t the kind of a question on which administrative experience or expertise is particularly needed or useful as compared with the judgment of the Court, but fundamentally the basic assumption is an unsound assumption.

The Commission’s decisions and even the Court’s decisions dealing with them or rather confusing and frustrating.

It’s hard to classify them or to evaluate them because of this very loose use of words that has characterized the whole history of this thing in the Commission.

On the — the variety of the words is such that in any particular case it’s difficult to be sure on just what the Commission is basing its decision.

In our brief on pages 44 and 45, we have listed eight versions of the test.

I apologize, sir, there is a mistake in the brief at that point, items three and five duplicate.

Hugo L. Black:

What page of the brief?

John R. Quarles:

That is on page 45 of our brief.

There are however, correcting that error, there are eight different versions of the test that has been stated in this case and with that it’s not surprising that the court below had to spend considerable time in determining what the decision was before getting to the point of whether or not it was right.

Hugo L. Black:

Page what?

Potter Stewart:

Did you say a duplicated (Voice Overlap) —

John R. Quarles:

Three and five.

Potter Stewart:

Three and five.

John R. Quarles:

Yes.

If you just delete five, I’ll appreciate it.

Now, the petition for certiorari erroneously stated that all of the previous cases under 11 (b) (1) had applied the same test and that under that test over $2 billion of assets had been ordered divested.

Our brief and our position called attention to the error in that statement and pointed out that over half of that amount was divested in cases applying the original North American test which is that it must be serious, not that it must render economical operation impossible.

That another large block was divested under cases where the evidence wouldn’t support any test and no test was even mentioned by the Commission, and that only three cases out of the 14 had specified this test.

Those three representing less than 7.5% of the total.

Well, the petition now says that at least we admit that since the Philadelphia case, there has been no different statement.

And I think probably that’s technically accurate but I’m afraid it’s a little misleading because since Philadelphia there have been just three cases.

This in utility’s case when the evidence wouldn’t support any finding and no test was mentioned.

The GPU case in which counsel had worked out a solution to the problem and GPU did not oppose the entry of the order, Middle South in which there was opposition but the only evidence was the opinion testimony of the President not backed up by any scientific study.

So that actually since Philadelphia, nothing of significance on this point has happened at the Commission level.

But in the meantime, this problem has been considered by two Circuit Courts of Appeals.

The Fifth Circuit considered it in the case that was later reversed on jurisdictional grounds only.

The First Circuit in this and those six judges unanimously rejected this test.

Another very puzzling aspect of this thing to me is that in all of these recent cases, the Commission has carefully computed the ratio of the prospective losses to various factors, the operating revenues, revenue deductions, gross profit, net profit in terms of percentages, and was gradually building up tables showing a comparison of those cases.

And in this case, the same thing was done and it was stated that those ratios were relevant.

And yet, if the test is the absolute test of the ability to survive economically, this test, so far as I can see these ratios have no relevance whatever and comparisons with other cases and the ratio is where would seem to be meaningless.

In other words, it seems to me that although the Commission has stated that it is applying a single test.

It has actually applied several tests and that it has confused two different categories of test, one lot bearing as to the emphasis or the amount of substantiality, of a comparative test.

The other one represented by the Philadelphia case and by this case an absolute test of survival economically.

The words that are used through this various cases are not synonymous.

The test are not the same and in attempting to phrase it in this various ways which Mr. Loomis referred to is merely difference in phrasing.

I think that it does not conceal the fact that fundamentally these are different tests.

My time is not going to permit me to deal with the question of their suggestion of using this test because it permits a meaningful consideration of the competition feature.

I would just say that we have three difficulties with that test.

In the first place, as I mentioned before, it hardly seems appropriate to choose a test on the basis of — it’s enabling you reach the result that you want to reach.

John R. Quarles:

Normally, you determine what the test is going to be and then let the chips forward, I mean, in applying that test.

The second thing is that, it assumes that competition itself is bad.

That is a very, very large assumption that is unwarranted by the history of this Act.

It is a thing that should be left to the states to determine on the basis of local conditions.

In some places competition is good.

In some it is not good.

In the third place, they have not shown how that guess is any easier for application than the test of substantial economies.

Our position can be summarized quite briefly.

It says, and first, “The Commission’s handling of the issue under 2 (a) (29) (B) was so inadequate under the Administrative Procedure Act and was so inconsistent with the requirements of the Holding Company Act inconsistent with it’s order of notice in this case with the Commission’s own established practice.

If there was to be a change in that established practice, we should have known about it at the time and with it’s handling of other issues in the same case both the electric (Inaudible) company situation under 2 (a) (29) (B) and Clauses B and C under 11 (b) (1).

In the second place, the Holding Company Act is a clear and ambiguous.

It sets forth a comprehensive self-consistent, workable regulatory scheme.

There’s no reason for distorting its normal meaning and trying to impose on it an artificial construction.

The test that is urged by the petitioner is not within any normal or reasonable interpretation of the language of this Act.

Third, the assumption of this overriding federal policy against common control of gas and electric utilities which apparently dominates the thinking of the Commission throughout and on which the petitioner’s case so largely rest is not warranted by anything in the statute or its legislative history.

And fourth, the test stated by the Commission in its previous decisions and in the present case represent a variety of interpretations.

Any apparent uniformity among them depends on treating synonymous words that have really normally very different meanings.

There is no single test which has been consistently applied and can be regarded as the Commission’s tests to which this Court should give serious deference.

And for this several reasons, we ask this Court to affirm the decision of the First Circuit.

Earl Warren:

Mr. Loomis.

Philip A. Loomis, Jr.:

Thank you, Your Honor.

In the first place, Mr. Quarles actually describes the way in which he thinks these things should be approached in a manner that is not too different as he agrees with the way we described it.

He suggests that the Commission should consider as it has done offsetting items in the total picture as well as merely savings and expenses.

And that the economies involved must be serious and important in order to justify retention.

The real economic need justify the committee.

The Commission, he points out that the Commission in fact does this.

The ratios are computed and that an effort is made to measure the significance of the losses of economy in the total operation of the enterprise.

And Mr. Quarles does not — he says hardly a word in defense of the alternative test announced by the Court of Appeals in this case.

In fact, I don’t find any mention of that test which seems to be expressed solely in terms of is there a loss of expenses with someone would regard as significant as a business matter comports it all or permits it all the type of analysis which Mr. Quarles says should be pursued.

In addition, our test is not as he suggests that simply that — it is impossible to operate the system independently.

Philip A. Loomis, Jr.:

It is expressed in terms in the petition in this case or that it cannot be — that it cannot be operated soundly and economically on an independent basis which is quite a different thing.

Sound, economic, desirable, useful, socially useful operation, yet independently is I think one of the objectives that was sought to be achieved by Section 11.

It’s not a matter of necessity or bankruptcy or anything like that.

I want to avoid any indication that it was.

Byron R. White:

But Mr. Loomis, you announced your version of the test here, do you — is that the test the Commission fairly applied?

Philip A. Loomis, Jr.:

Well, I believe it is.

It sound — I think the wording —

Byron R. White:

Do you think these various versions of the test referred to (Inaudible)

Philip A. Loomis, Jr.:

Well, I’m not sure —

Byron R. White:

— at page 45 of this brief.

Those aren’t just imaginary?

Philip A. Loomis, Jr.:

Knowing that in various cases and in the opinion in this case, there were various formulations but they all seem to come down to two main thrust that the — that in order to permit retention the system cannot be operated soundly in — on an independent basis soundly and economically or it cannot be operated —

Byron R. White:

Well, there’s one of the —

Philip A. Loomis, Jr.:

— on an independent basis without serious impairment which I think means much the same thing.

Potter Stewart:

Aren’t you saying pretty much that it cannot be operated, if it cannot, cannot means cannot be operated soundly and economically, I suppose in a capitalistic system with private ownership, it means it cannot be operated independently, doesn’t it?

They’re very long?

Philip A. Loomis, Jr.:

It that — if that is the case — if it — cannot be operated independently then it is retained by the holding companies —

Potter Stewart:

Yes.

And that you say is your (Voice Overlap) —

Philip A. Loomis, Jr.:

It cannot be operated — I don’t say —

Potter Stewart:

And now you’re backing away from that test and that —

Philip A. Loomis, Jr.:

Yes, I’m get — I’m backing away from this extent Mr. Justice Stewart.

We don’t simply say, it cannot be operated independently, period.

We say it cannot be operated independently on a sound and economical phases as a (Voice Overlap) —

Potter Stewart:

Well, then if (Voice Overlap) —

Philip A. Loomis, Jr.:

— court (Voice Overlap) since been applied.

Potter Stewart:

— as long as you have private ownership.

Doesn’t that mean that it cannot be operated very long, period?

Philip A. Loomis, Jr.:

No, I don’t think so.

Byron R. White:

Do you mean companies that are unsound just go right on.

Potter Stewart:

Yes, and —

Philip A. Loomis, Jr.:

Well, companies that are —

Potter Stewart:

— non-economic.

Philip A. Loomis, Jr.:

Companies that are unsound and uneconomic probably don’t but we’re not talking about that.

We’re talking about a company which is sound economic.

It doesn’t have to be separated unless it is sound and economic to operate it independently.

Byron R. White:

Well, there’s a — there’s — which one of these tests says a lost is substantial unless it would render impossible economical, and efficient operation.

Now, you reject that test?

Philip A. Loomis, Jr.:

Well, it’s a similar version of the same thing, economical and efficient, sound and economic, they’re the same (Voice Overlap) —

Byron R. White:

(Inaudible) cannot and impossible are the same, those are synonyms.

Philip A. Loomis, Jr.:

I think they are very much the same, yes, sir.

Byron R. White:

Well, why shouldn’t the Commission tell us what’s the test thereof?

Philip A. Loomis, Jr.:

Well, I am never —

Byron R. White:

I mean, in your opinion where they’re deciding the case?

Philip A. Loomis, Jr.:

The test that they — they put it finally in this way, they hol — we hold that the Clause must be strictly construed that a registrant seeking to retain an additional system as the burden of showing that is by clear and convincing evidence that such additional system cannot be operated under separate ownership without the loss of economies so important as to cause a serious impairment, which is one of the —

Byron R. White:

Isn’t that (Voice Overlap) —

Philip A. Loomis, Jr.:

— it’s the serious — the same serious impairment test that was announced in the Engineer’s case in 1942 by the —

Byron R. White:

Is this the test you’re — that you proposed for us to — that you want to prove here?

Philip A. Loomis, Jr.:

Either that —

Byron R. White:

Or is it the one you stated a while ago?

Philip A. Loomis, Jr.:

Well, I — at other times, the Commission and in its opinion is had did.

Hugo L. Black:

Well, what’s wrong with that?

Why do you —

Philip A. Loomis, Jr.:

I don’t think there’s anything wrong with it.

Abe Fortas:

What page is that Mr. Loomis?

Philip A. Loomis, Jr.:

It — on the record, it’s on page 1262 and 1263.

Byron R. White:

What volume is that on?

Philip A. Loomis, Jr.:

That is Volume 2 of the record.

Hugo L. Black:

12 what?

Philip A. Loomis, Jr.:

12.

Philip A. Loomis, Jr.:

And there’s a further discussion of the test on 1261.

Hugo L. Black:

Are you suggesting anything that if you could — do you think could be better than that in connection with such a wide authority and discretion as it (Inaudible) Commission in this case?

Philip A. Loomis, Jr.:

I think this is perfectly satisfactory test, Mr. Justice Black.

Potter Stewart:

Well, which one?

Philip A. Loomis, Jr.:

The one that on (Inaudible)

They’re going settle, aren’t they?

Hugo L. Black:

I would ask you about the one the Commission (Voice Overlap) —

Philip A. Loomis, Jr.:

Yes, the one in the Commission’s opinion, 1260 —

(Inaudible)

Byron R. White:

Which one in the opinion brief?

Just taking out (Inaudible)

Philip A. Loomis, Jr.:

The one of 1262 or 1263 was the one that I —

Potter Stewart:

Is that the same one on those two pages?

Philip A. Loomis, Jr.:

It’s — it carries over on bottom of one page to the top of the next.

William O. Douglas:

Is that in this case?

Philip A. Loomis, Jr.:

No, that — yes, that is in this case.

That’s the Commission’s opinion in this case.

William O. Douglas:

And that’s substantially whether what they said in the Engineer’s?

Philip A. Loomis, Jr.:

It’s almost identical.

They — he were — used the words serious impairment.

I don’t think the words economies so important is the cause of a serious impairment used in Engineer’s, Engineer had simply said loss of the economy —

Earl Warren:

Well, it’s a difficult to hear you, it’s a little different (Voice Overlap) —

Philip A. Loomis, Jr.:

What is it?

Earl Warren:

— talk to hear you, I was —

Philip A. Loomis, Jr.:

Yes, excuse me.

Earl Warren:

Speak up a little louder.

Philip A. Loomis, Jr.:

It was the same I believe Mr. Justice Douglas.

They referred to serious impairment of the system in Engineer’s as well in 1942,

William O. Douglas:

Well, if they were making an 8% return in the integrated company, the holding company system then would make a 1% return separate — that would be a serious requirement?

Philip A. Loomis, Jr.:

I should think — it might be unless the offsetting advantages of competition made it unlikely that the impairment would be that serious.

Philip A. Loomis, Jr.:

Now — finally in regard to the construction of the Act and the words that the argument that Mr. Quarles announced with reference to the words.

This Court in the Joiner case which is also involving one of our statutes stated that it would construe the details of an Act in conformity with it’s dominating general purpose will read the text in the light of context and we’ll interpret the text insofar as the meaning of the words fairly permits so as to carry out in particular cases the generally expressed legislative policy.

I think that the same should be done here.

I think that — further the — as Mr. Justice Fortas pointed out the context in 11 (b) (1), in which the word substantial economies is used is somewhat different than it is in 2 (a) (29) and that in turn — because the 11 (b) (1) refers to a situation where the systems cannot — again that word is used be operated as an independent system without the loss of substantial economies and then it goes on to say which can be secured by the retention of control which the latter phrase, I think means, primarily that retention isn’t justified if the economies would not be retained even if not be secured, even if the holding company control was retained.

So the fundamental test is it cannot be operated as an independent system without the loss of substantial economies.

Finally, I wanted to correct one possible misinterpretation.

I was asked if the Commission has ever permitted the retention of gas and electric properties together.

It has its several types of situations but I was unable to discover during the recess a situation where it had done so in Section 11 (b) case and there may not be yet.

Thank you.