Mr. GIBSON. That is what you put in these figures for the purpose of arriving at a valuation, $500,000?

Mr. BRAND. Yes, sir.

Mr. GIBSON. Under this unification agreement, at what price does that go into the merger?

Mr. ROBERTS. Under the unification agreement, it goes in for the assumption of $550,000 in outstanding obligations and a payment of $596,000 in cash, plus interest from February 10 to the date of the transfer; that to be paid to Mr. Harley P. Wilson.

He transferred, in consideration of that amount, approximately 97 per cent of the stock of the bus company. He does not transfer the physical properties of the bus company, but in the unification agreement, as modified by the commission, the commission reserves the right to require the dissolution of the bus company. It does not dissolve it or require that it be dissolved at this time, but it reserves the right for the future to require the dissolution of the bus company.

As the agreement stands at present, it will consist of the new company owning and operating the present property of the Capital Traction Co. and the Washington Railway & Electric Co., and controlling, through stock, the operations of the bus company.

It will not be a complete merger of the companies unless the dissolution of the bus company is ordered.

Mr. GIBSON. You say that for a property that is valued at $500,000 by the Public Utilities Commission, it goes into the merger for $596,000, or 97 per cent of the stock, and the assumption of the obligations of the company amounting to more than $500,000, or practically $1,000,000?

Mr. ROBERTS. It goes into the merger at that cost; yes.

Mr. GIBSON. Is that correct, Colonel Brand? We want to get this down as it is.

Mr. BRAND. I was trying to check your figures. The Washington Rapid Transit Co. goes into the merger, included in the value, the rate base, but, as to the question of what it goes into the merger for, the agreement specifies that 21,237 shares, I believe is the number, are to be purchased from Harley P. Wilson for $596,000. The agreement says that a part of the consideration shall be the assumption of the liabilities, current and otherwise, of the Washington Rapid Transit Co., which include as of January 1, 1928, $550,000 of unfunded debt; that is, notes for busses.

The wording of that is this, according to my understanding of what the agreement is, a little bit erroneous, because it is the understanding that the Washington Rapid Transit Co. is to pay that debt itself, but that the unified company guarantees it.

The meaning of the words "assumes the debts" is that they are protecting the indorsers on the notes.

Mr. GIBSON. They are assuming that debt of $500,000.

Mr. BRAND. They are guaranteeing it.

Mr. GIBSON. They are guaranteeing it?

Mr. BRAND. Yes, sir. They expect that the Washington Rapid Transit Co. will pay it.

Mr. GIBSON. It goes into the merger with the payment of $596,000 to Mr. Wilson.

Mr. BRAND. That is the payment for the stock.

Mr. GIBSON. Ninety-seven per cent of the stock.

Mr. BRAND. We do not consider that the cost of the stock has anything to do with the value.

Mr. GIBSON. And guarantees the rest of the indebtedness.

Mr. BRAND. Yes, sir; that is only a contingent liability on the part of the new company.

Mr. GIBSON. How does this Washington Rapid Transit Co. pay off its debt-from future earnings?

Mr. BRAND. It has paid off some of that $550,000 already.

Mr. GIBSON. Out of its earnings?

Mr. BRAND. Since the 1st of January, yes, sir; out of its receipts. I would not say out of its earnings.

Mr. ROBERTS. It is operating at a loss.

Mr. GIBSON. Does the testimony taken before the commission show at what price the North American Co. purchased the stock of the different companies?

Mr. ROBERTS. Mr. Clayton tried to inquire into the transaction between the North American Co. and the bus company and was refused permission to do so by the commission.

Mr. GIBSON. Its representative has appeared somewhere.

Mr. ROBERTS. He appeared and spoke of the history, the biography, and virtues of the directors of the North American Co., but at no time mentioned the proportionate shareholdings of the Washington Railway & Electric Co., nor did he state the amount of the holdings in each of the two companies, the Capital Traction and the Washington Railway & Electric Co., although he said previously that he was going to do so.

Mr. GIBSON. It has appeared somewhere at some time that the company paid something around $5,000,000 or $6,000,000 for stockholdings.

Mr. ROBERTS. Not to my knowledge in the hearing, not on the record of that hearing, as I see it.

Mr. GIBSON. And that it bought its stock at 60 and 100 and 120 two years ago.

Mr. ROBERTS. Not to my knowledge. I do not know that.

Mr. GIBSON. That it is now worth 500 plus, or $30,000,000, or something like that, which would represent a profit of $25,000,000.

Mr. ROBERTS. I do not know that.

Mr. GIBSON. The North American Co. is one of the big public utilities groups of the country?

Mr. ROBERTS. Yes, sir.

Mr. GIBSON. And originally it had for its directors some of the directors of the Electric Bond & Share Co. of New York or some subsidiary of the General Electric Co.?

Mr. ROBERTS. The hearings on Senate Resolution No. 83, published January 16 to 26, 1928, contain a discussion of the holding companies and of their connections. I can not state from my own knowledge that they had an interlocking directorate with the Electric Bond & Share Co. at the time of their formation, but that is my information. Mr. GIBSON. That is set forth in more or less detail in Senate Document No. 213, page 249.

Mr. ROBERTS. I believe so; yes, sir.

Mr. GIBSON. I will not take the time at present to go into that; but the control of these companies reaches back to the North American Co. directly?

Mr. ROBERTS. The control of these local companies, of the Washington Railway & Electric Co. and the Potomac Electric Power Co. reaches back directly to the North American Co. Some of the stock may be held through minor holding corporations. That I can not say, because Mr. Wilson did not give a detailed account of the stock holdings of the North American Co. in local cases.

The reason we wanted the holdings-we could not get them—is that the La Follette antimerger act of 1913 as modified by the amendment of 1925, as is published in the Public Utilities Commission law

Mr. GIBSON. What are the provisions of the so-called La Follette Act in respect to the control of the utilities in the District of Columbia; that is, stock control?

Mr. HAMMER. You mean the La Follette amendment?

Mr. GIBSON. Yes; the La Follette amendment.

Mr. ROBERTS. The amendment permits stock control by street railways. May I read that first part of it?

Mr. GIBSON. What is the original provision in respect to stock control of the street railways of the District of Columbia?

Mr. ROBERTS (reading):

That it shall be unlawful for any foreign public utility corporation, or for any foreign or local holding corporation, or for any local street railroad corporation, gas corporation, electric corporation, telephone corporation, telegraph corporation, or any other local public utility corporation, directly or indirectly, to own, control, or hold or vote stock or bonds of any public utility corporation organized under any general incorporation law or special act of the United States or authorized under any law of the United States to do business in the District of Columbia, except as heretofore or hereafter expressly authorized by Congress; and it shall be unlawful for any public utility corporation organized or authorized as aforesaid to sell or transfer any portion of its stock or bonds to any other public utility corporation or holding corporation whatever, unless heretofore or hereafter expressly authorized by Congress so to do. Mr. GIBSON. Now, you referred to an amendment to that. Mr. ROBERTS. There is an amendment.

Mr. GIBSON. Let us have the amendment in the record.
Mr. ROBERTS. The amendment reads as follows:

That any or all of the street railway companies operating in the District of Columbia, be, and they are hereby, authorized and empowered to merge or consolidate, either by purchase or lease by one company of the properties, and/ or stocks or securities of any of the others, or by the formation of a new corporation to acquire the properties, and/or stocks or securities, and to succeed to the powers and obligations of each or any of said companies under such terms and conditions as may be agreed upon by a vote of a majority in amount of the stock of the respective corporations and as may be approved by the Public Utilities Commission of the District of Columbia: Provided, that no merger of such companies shall be finally consummated until the same is approved by a joint resolution of Congress. Such new corporation shall be incorporated under the provisions of Subchapter IV, Chapter XVIII, of the Code of Law of the District of Columbia as far as applicable, with issues of stock at a stated par value, and/or of no par value as may be approved by the Public Utilities Commission.

SEC. 2. The inhibitions and restrictions contained in section 11 of the act of March 4, 1913, commonly known as the antimerger law (Public, No. 435, 37th Stat. L. 1006), be, and the same are hereby, removed so far, and only so far, as they affect the acquisition by any corporation of the stocks or bonds of any of the corporations referred to in the foregoing section.

SEC. 3. Congress reserves the right to alter, amend, or repeal this act or any provision thereof.

Mr. GIBSON. So it leaves the original inhibition still in force?

Mr. ROBERTS. It leaves the original inhibition still in force as regards the control directly or indirectly by a foreign holding corporation of a power company, excluding only the street-railway companies in the first provision.

Mr. GIBSON. Does this merger proposal still leave the power company in the control of a foreign corporation?

Mr. ROBERTS. Indirectly, it does. The Washington Railway & Electric Co. will have the immediate control, of course. It is retained as a holding company, and then the North American Co. will control the Washington Railway & Electric Co., thus having an indirect control of the Potomac Electric Power Co., contrary to the provisions of the law.

Mr. HAMMER. You mean the former law?

Mr. COMBS. No; the present law.

Mr. ROBERTS. No; the present law. It is in existence at the present time. Unless you change it by the resolution here I believe it still I will be the law.

Mr. GIBSON. Unless this resolution changes the original La Follette Act and the amendment you have cited.

Mr. ROBERTS. I do not think so in respect to the-I had better not say; you know better than I do.

Mr. REID. You do not doubt that the only exemption made under this is to take the street-car companies out of it, not the power company, or any other company? You do not pretend that, do you? Mr. ROBERTS. May I ask what you mean by "this"?

Mr. REID. You have been telling Colonel Gibson about an antimerger law.

Mr. ROBERTS. Yes.

Mr. REID. And how it sounded good to your ears; and then you say that another act was passed modifying that law. That modification does not affect the so-called La Follette Antimerger Act regarding power companies or any other companies. It exempts only the street-car companies?

Mr. ROBERTS. That is my understanding of it. It does exempt the street-car companies very effectively.

Mr. REID. But it does not affect the others.

Mr. ROBERTS. That is my interpretation of it.

Mr. REID. I thought that you thought that we were trying to repeal

the merger part of it.

Mr. GIBSON. I was just asking about this joint resolution.

Mr. REID. That is what I meant by "this."

Mr. GIBSON. Colonel Brand, what were the net earnings of the Potomac Electric Power Co. last year?

Mr. BRAND. Do you want the net operating revenues or the net earnings?

Mr. GIBSON. The net of last year, wherever they put it. What did they make?

Mr. BRAND. It was $2,930,000 before paying any dividends on the stock.

Mr. ROBERTS. That was after interest on the funded indebtedness.

Mr. REID. Do you claim that that is too much?

Mr. ROBERTS. I have made no claim in respect to the Potomac Electric Power Co., sir.

Mr. GIBSON. You said something about the method of bookkeeping. Has the Interstate Commerce Commission made any recommendations as to how some of the items should be set up?

Mr. ROBERTS. Congress has specifically taken the control of the street-car companies from the Interstate Commerce Commission; they did that at the time of the creation of the original Public Utilities Commission.

It does provide, however, in paragraph 11 of the law creating the Public Utilities Commission of the District of Columbia, as approved March 4, 1913:

That the commission shall prescribe the forms of all books, accounts, papers, and records required to be kept, and every public utility is required to keep and render books, accounts, papers, and records accurately and faithfully in the manner and form prescribed by the commission, and to comply with all directions of the commission relating to such books, accounts, papers, and records. In so far as practicable for the purposes of this section, the form prescribed shall be the form accepted by the Interstate Commerce Commission.

Where not in obvious conflict with the physical facts here, that shall be in force and effect.

Mr. GIBSON. Does the present method have a tendency to increase the item covering operating expenses?

Mr. ROBERTS. May I answer that in my own way?

Mr. GIBSON. Yes.

Mr. ROBERTS. The testimony at the hearing showed that the Capital Traction Co. was accounting for its renewals, its track renewals under what is known as the retired and replaced method, by which the old investment was completely retired and the new investment was added on; whereas Mr. Ham's testimony showed that the Washington Railway & Electric Co. was accounting for its track replacements under the betterment method in which the whole cost of making the track change is charged to operating expenses, the cost of the new property at the current prices is charged to operating expenses, and only the cost of the additional physical property is charged to capital account.

That means, for example, that if they had in 100-pound rail and they put in 120-pound rail they would charge 20 pounds of rail to be added to investment, but the 100 pounds of rail, replacing a former 100-pound rail, would be charged to operating expenses.

That very materially increases the operating expenses of the company, and since the company has no interest in what its book investment is under reproduction method of valuation, the tendency would be to charge to operating expenses as much as possible. I think it does have that effect.

Mr. GIBSON. Going back to the original question, has the Interstate Commerce Commission recommended any other method so as to keep the item of operating expenses within reasonable bounds, as viewed by the Interstate Commerce Commission?

Mr. ROBERTS. The recommendation and prescription for the steam railroads and for the electric railroads under their jurisdiction is a very different method of accounting.

Mr. GIBSON. Is that applicable to these railroads?