dividends to the holding company, and were told whether or not to place tax savings from quick amortization certificates in separate reserves for deferred taxes or in surplus available for dividends. The crux of this testimony is that, in dealing with the bookkeeping adjustments associated with accounting for tax purposes, it is the holding company working through Ebasco which dictates the accounting, rather than the treasurers of the operating companies and that there is a lack of consistency in the way the accounts are handled, not only as between the different subsidiaries but also as between different years in the case of the same operating company.

The general purport of his testimony is to the effect that the handling of such accounting adjustments depends upon the regulatory situation in each State, the effort being to avoid giving grounds for rate reductions.

Both the Federal Power Commission and the Securities and Exchange Commission immediately investigated the Stietenroth charges, the FPC investigation being the more thorough of the two. The Power Commission staff limited its inquiry to the company's compliance with the Commission's uniform system of accounts and found a high degree of conformance. It found no evidence that Mississippi, or Ebasco on its behalf, maintains two sets of general corporate accounts. But, as will appear from analysis of his testimony, Stietenroth made no charge that they did. Beyond this a careful reading of the FPC report shows that it substantiates much of what the witness emphasized, i. e., the fact that the accounting favored holding company, rather than rate-payer, interests.

The Securities and Exchange Commission hardly met the requirements of effective regulation in the public interest. The Commission Chairman, supported by members of its staff, testified that, following Stietenroth's charges in his initial statement to the press and his telegram to the SEC withdrawing his signature from certain basic filings of Middle South Utilities in connection with a forthcoming security issue, the Commission had practically accepted the company's own contention that there was nothing in the charges. The Commission brushed off the charges and approved the issuance of the securities after a mere 15- to 20-minute long-distance talk with Stietenroth which got him out of bed at about 7 a. m.

In this connection it should be noted that, under questioning by committee counsel as to the cursory nature of the SEC investigation of the charges, Chairman Demmler responded:

Of course, we have attended and examined the transcripts of the hearings where Mr. Stietenroth has had ample opportunity to amplify his charges (RDY, p. 401).

But this obvious effort to shore up their position appeared somewhat less than convincing when it was pointed out by a member of the committee that the SEC approval of the issuance of the holding company prospectus was given 5 days before the Stietenroth hearings. commenced. We will have more to say about this after examining Stietenroth's testimony in somewhat greater detail.

Stietenroth was aware early in his testimony that his contention that there were two sets of books would be challenged. In fact, the attorney for the holding company submitted to the committee letters from Haskins & Sells, holding company accountants, denying that

there were two sets of books. As they put it, Ebasco did have books but only for tax purposes (RDY, p. 231).

In response to questions based on this claim by holding company accountants, Stietenroth testified as to the nature of the taxbooks kept by Ebasco. He said that in 1927 the Mississippi company books were written up by about $10 million but that the Bureau of Internal Revenue retained the same old property base for tax purposes derived from the predecessor companies. He said that all the information "is now and always has been in the hands of Electric Bond & Share, or Ebasco Services, Inc. * * *" (RDY, p. 233).

Stietenroth testified further that prior to the time their tax returns were consolidated with other subsidiaries of Middle South Utilities, he signed the company's tax returns along with the president and the chairman of the board, but that they were filed without the property schedule which was supplied by the holding company after the return had been forwarded to the examiner in New York. Since the consolidation with Middle South, however, the officers of the company have not signed the tax returns, but only the consent to be consolidated for tax purposes (RDY, pp. 233-234). He continued:

Now, therefore, we were running along with two sets of books. Our books in Jackson and up here in New York, that is on a different basis. Now, it is perfectly true that I have to furnish information, current information, and as a matter of fact Ebasco has a questionnaire that they send me and they say, "now give me this additional information in addition to your annual report.' And our annual report is three-quarters of an inch thick, and the papers that we send must be 2 inches thick, and then they take this information that we send them each year and they integrate it into their records that they already have, and it is a continuing thing (RDY, p. 235).

Stietenroth stated that "they could not possibly prepare our income tax returns without keeping a set of books" (RDY, p. 226). Addressing himself directly to Haskins & Sells' denial that there are two sets of books, he testified:

I have said that if Messrs. Haskins and Sells says such a statement as that, after my full testimony that you have just had, they are splitting hairs and what they are practically saying is that it has to be in a certain form to be called a set of books. I can say, also, that Messrs. Haskins and Sells knows better (RDY, p. 237).

Wall Street dictates accounting adjustments

But it is in Stietenroth's testimony concerning the way in which the treasurers of the operating companies were called in to the Ebasco offices in New York City to receive directions as to how to adjust their corporate books to reflect holding company purposes with regard to funds accumulated for tax purposes that we learn how accounting can serve the interest of higher dividends, rather than of lower electric

rates.

He testified first as to the decisions of the holding company with regard to accounting for Federal income-tax savings, as a result of obtaining certificates of necessity in connection with the construction of new facilities. Such certificates entitle the company to amortize the investment, or a portion of the investment, in such new facilities over a 5-year period for purposes of computing their income-tax liabilities. Tax savings of 7 to 8 million dollars were under consideration.

Stietenroth testified that he and his company's principal officials contended that the savings represented deferred taxes which they

would have to pay later and that they certainly were not profits. Then he was called in to New York City, along with the treasurers of the other operating subsidiaries, to meet in "the throne room" with: Forbeck, tax consultant of Ebasco; Cecil, also of Ebasco; and Canady, vice president, and Sanders, treasurer of Middle South Utilities. The Louisiana Power & Light Co. treasurer took the same position as the Mississippi company. In the end, according to the witness, the matter was referred to President Dixon of Middle South Utilities, who decided that in the case of the Mississippi and Arkansas companies the savings should go into surplus, but in the case of the Louisiana company it should go into a reserve for deferred taxes apparently because the State regulatory commission in Louisiana would take it away from the Louisiana company as excess profits (RDY, pp. 241-243).

Putting the money in the surplus account, Stietenroth testified, made it available for dividends to the common-stock holder, Middle South Utilities (RDY, p. 242).

Stietenroth testified further that Cy Youngdahl, of Haskins & Sells, who audit all the Mississippi company books, participated in the discussion and that he asked Youngdahl on the side:

Aren't we getting a little bit flexible here? *** you mean to say to me that you can certify my accounts whether net income is $500,000 more or less? He quoted Youngdahl as replying:

Well, I wish you would not put it in just those words, but I will suitably footnote these things so as to make it clear to the reader exactly what you are doing (RDY, p. 243).

In view of the fact that small investors and little ratepayers have little understanding of the intricacies of corporate books of account, this raises serious question as to the adequacy of the present auditing by accounting firms closely related to the financial powers behind such utility companies. Further investigation of the entire industry is required to determine what should be done to meet such situations.

Subsequently, Stietenroth testified, Middle South Utilities' Secretary-Treasurer Sanders called him and said that they had decided to go back to the accounting for this item that Mississippi had recommended (RDY, p. 244). He said:

O. K., now Mr. Sanders had a change of mind. Now we are going back and do that which all of us *** had been contending for in the first place.

He continued:

So the point that I particularly want to make*** while I agree absolutely with what was done, I had no part in reaching the decision.

He considered this an example of Wall Street dictation (RDY, p. 245). Stietenroth's account of the second instance of the treasurers of the operating subsidiaries being called in to receive directions as to accounting for funds accrued for tax purposes, in such a way as to swell the funds available for dividends to the holding company, concerns the regular overaccrual of amounts required for Federal income taxes. According to the witness, the meeting called by holding company treasurer Sanders was for consideration of the question of "removal from the accrued taxes of any balance which did not represent true liabilities.' He said that neither he nor any other person could object

if we approached the matter in a proper manner, because any balance in accrued taxes that does not represent true liabilities does represent hidden profits or hidden surplus. [Italics added.] (RDY, p. 270.)

He testified further that there were some "$5 million in these accrued tax accounts over and above the liabilities of the several companies" which, he said, had cost ratepayers about $10 million, because the tax would have been 50 percent and the $5 million was left after taxes (RDY, p. 271). He then described the prolonged discussion of how much of this should be shifted to surpluses, in which the treasurers of some of the other operating subsidiaries stated they were depending on the holding company treasurer to play square with them on the matter of handling the tax reserve because they did not have the figures to work with (ibid.).

He testified that the meeting included Forbeck, of Ebasco; Youngdahl, of Haskins & Sells; Flowers, of Reid & Priest; and representatives of the four operating subsidiaries; that the general idea was to transfer the hidden profits represented by overaccrual of taxes into surplus: and that there was no issue over the accruals for the years 1949-50 because the statutory time for questioning the payments for those years had run out. He testified further that, out of the $1,400,000 in Mississippi Power & Light's tax reserves, he raised no objection to shifting about $385,000 to surplus; that he had in fact already removed $213,000 of that amount and had intended to remove the balance up to the $385,000 figure by December 31, 1954; but that he had objected to removing the remainder of the $1,028,000 on which the holding company was insisting (RDY, pp. 276-280). The amount in excess of $385,000 represented assumed overaccruals for the later years for which the taxes had not yet been reviewed by the Bureau of Internal Revenue.

Stietenroth testified that previously they had never touched their tax reserves before the Bureau had reviewed and settled the case and it was closed. He said that the matter of consistency in accounting was involved. He added that the certification of consistency is just as important in an auditor's report as the certificate of accuracy and that he kept pressing Youngdahl of Haskins & Sells as to whether he could go along with this maneuver as consistent (RDY, pp. 277–278).

He testified to another accounting inconsistency in the proposed treatment of these tax reserves as between two of the Middle South subsidiaries. According to the witness, the Mississippi subsidiary and the New Orleans subsidiary each had about $1,400,000 in tax reserves, but the New Orleans company was told to take out the $400,000 and leave the million-just the opposite of the instructions to the Mississippi company.

He explained his understanding of the difference in treatment as related to the difference in regulation between New Orleans and Mississippi. The testimony shows that there is no regulation in Mississippi. According to Stietenroth, in New Orleans the utility's return is strictly limited to 9 percent and, if the million dollars were "dropped down into their surplus account" then the city of New Orleans would have the power to recapture it for civic purposes (RDY, p. 289). Tax overaccruals increase dividends

Stietenroth testified that he finally accepted the full adjustment under orders from the holding company. He said that he did not even talk the matter over with R. B. Wilson, president of the company,

because "long dealings in this matter spelled to me that I did not have to talk with him. Whatever was ordered must be" (RDY, p. 275). He continued:

A couple of days later I did talk to Mr. Wilson and I told him what we had done. Words something like this came over the telephone: "*** what are they trying to do to us?" I said: "Baxter, I did my best. I argued by the hour." He said: "I know there is no use to fuss with you about it." Then his next statement was, without me bringing it up: "You know what will happen to that million dollars." I said: "Baxter, I certainly do” (ibid.).

The witness explained to the committee what both had in their minds as follows:

If you want me to say what we both had in our minds, it would be *** short order before Middle South would have that million dollars in the form of common stock drawing 9 percent dividends per annum on it, and we knew it; the same as has been done with 3 million other dollars in past years (ibid.).

He testified, subsequently, that on two occasions they had issued to Middle South Utilities common stock which was in a sense a stock dividend. He said:

The amount on one occasion was $1 million on another occasion $2 million *** what I meant to say is that money would be transferred out of our surplus account into the capital account and then we would begin to pay 9 percent on that (RDY, p. 279).

Stietenroth's testimony makes it clear that accounting decisions made at Ebasco offices in New York resulted regularly in considerable amounts, which the operating companies had set up on their corporate books for tax purposes, finding their way back into surplus profits available for dividends to the holding company. In other words, in the annual reports watched by regulatory officials, these amounts had appeared as legitimate expenses charged to ratepayers.

În simple terms, at the end of each year the operating company set up as a tax expense more than it needed to pay taxes, the amount going into a reserve for tax purposes. The company's net profit, as reported to the State commission, was thus made to appear lower than it really was. Then 3 to 5 years later, in the holding company office in New York City, a decision was made as to how much excess-tax funds had been accumulated and the excess was transferred to the company's surplus profit account, with the officers of the company notified to that effect.

Here again we find that one of the evils of the holding company era, exposed by the Federal Trade Commission, has not been corrected although the Public Utility Act of 1935 has been on the books for nearly two decades. In its summary of such evils the Commission's 1935 report says:

Some holding company groups retained for themselves millions of dollars collected from certain of their operating companies for Federal income taxes (882, pt. 72-A, ibid.).

The name of Electric Power & Light Co. has been changed to Middle South Utilities, Inc. But, according to the evidence before this committee, the practices and evils associated with the old holding company are still being carried out through the offices of Ebasco Services, Inc., wholly owned subsidiary of the former top holding company, Electric Bond & Share Co.