companies, and banking associations that are authorized by law to underwrite or participate in the marketing of securities of public utility are prohibited from serving on the boards of public utilities.

On October 22, 1935, the FPC asked the Comptroller of the Currency to advise it what banks, trust companies, or banking associations were authorized by law to underwrite or market securities, and 2 days later, on October 24, 1935, the Comptroller of the Currency wrote back that no banks, trust companies, or banking associations in the United States are authorized by law to underwrite or market securities of utilities.

Therefore, for 40 years, the Federal Power Commission has permitted all utility-commercial bank interlocks.

The SEC on the other hand, whose prohibition was contained in title I of the same act, rejected the interpretation of its provision that only interlocks between underwriters or securities marketers were forbidden. However, beginning in 1936 and existing through 1966, the SEC has on 10 occasions, amended its rules to provide exemptions from the prohibition. Under the present SEC rule 70, the exemptions fall into the three main categories:

(1) A full time employee of a utility may serve as a director of a bank. Thus, the Chairman of the Board of New England Electric, Robert Krause, who also serves on the board of the First National Bank of Boston, is exempt under the full time employee rule.

(2) Board members of small banks with capital and surplus not in excess of $2.5 million are exempted from the prohibition. This is a relatively insignificant exemption which affects only 38 of the 240 holding companies interlocking directorates.

(3) Directors of banks having offices within the service areas of the utility or its subsidiaries are exempt. This is the most significant exemption, accounting for 162 of the 240 exemptions granted by the SEC.

Have the FPC and the SEC, in their interpretations of the prohibitions against bank-utility interlocks contained in the Public Utility Act of 1935, violated the mandate of the Congress?

An examination of the legislative history of the act prepared by the SEC's Division of Corporate Regulation,' which I submit for the record, and a concurrent study by the Library of Congress, American Law Division, both reach the conclusion that the legislative history of the act is vague and ambiguous. While the debate over public utility abuses focused largely on the excesses of investment bankers, it is also clear that, at least the title I, prohibition addressed itself to commercial, as well as investment bankers.

In my opinion, an effort should be begun to revise the FPC's and SEC's policies to restrict bank-utility interlocks, rather than broaden them as has been the case historically. This committee has done pioneering work in revealing the extent of corporate concentration in this country. We ought now to begin to move in the direction of broadening and diversifying economic control of major corporations. It is my intention to request the FPC and the SEC to hold public hearings on the interlock question and with an eye toward tightening up the restrictions and eliminating some of the exemptions. I would

1 See p. 161.

37-733 - 74 pt, 3 11

welcome any support which this committee might wish to give to this effort.

However, I realize that the agencies may be unwilling to reverse a course they have taken over the last 40 years.

Therefore, I will also prepare legislation prohibiting any bank and utility sharing a common director from transacting business together, and would appreciate any help, advice, or support which this committee or its members might wish to offer.

I strongly believe there is a need for prompt action on this subject. As the stock of utilities has continued to decline in value, utilities have been forced to rely far more on short and long-term debt financing the kind provided by commercial banks.

In order to assure that these loans are negotiated on an "arm's length" basis, it is important that utilities and the banks lending them money should not share common directors.

The United States is presently in an era of great economic uncertainty. Confidence in our major economic institutions is low. If we are to restore confidence in our system's ability to fairly allocate resources and maintain our standard of living, we must disseminate economic power to a broader cross section of the economic community than is now the case.

Far too much of our economic power is in the hands of a relatively small group of individuals serving on the boards of banks, utilities, insurance companies, oil companies, and other major industries. And I reject the notion, alluded to by Mr. Hill, that only a small handful of people possess the necessary qualifications to serve on utility boards. Hopefully, the rather narrow contribution I have made today on the subject of bank-utility interlocks will serve a useful purpose in bringing to light one aspect of the overall problem of economic concentration and the disclosure of that concentration.

Senator METCALF. It seems to me incredible-this exemption that you mentioned for directors of banks having offices within the service area of the utility. That is a direct invitation for a conflict of interest.

It would seem to me a violation of the statute. I don't know whether an attempt to change rulemaking power is the only attempt we should make or not. I certainly want to cooperate with you, as you suggest, in any way we can in getting a recognition of this statute.

Chairman Nassikas comes from New England.

Mr. HARRINGTON. New Hampshire.

Senator METCALF. He certainly knows his territory. I was surprised that he didn't have any qualified people up there. You didn't say that. Mr. Hill said that.

Mr. HARRINGTON. It was a report attributed to the Chairman of the Board of the First National Bank.

Senator METCALF. So we have the chairman from that area and we have some of the most renowned schools of America up in that area and yet we can't find any qualified person according to Mr. Hill.

But anyway, what else can we do besides just trying to get the regulatory commission to change its rules? Could we go to court?

Mr. HARRINGTON. I would like to look at the prospect of litigation. I would also like to look at the process by which State regulatory agencies, if they are so motivated, might act themselves in this area at least to the degree that they have any effective control.

I suspect that that leverage if they wanted to use it is very substantial.

Senator METCALF. Our attempt to change the rules of these regulatory agencies-especially in recent years when they have been captured by the various utilities or trade associations that they are supposed to regulate our experience has been that we proceed very slowly. Maybe some other way is better.

Anyway, I want to assure you of my cooperation. I know Senator Brock, and our minority counsel here, are just as interested in getting a dispersion of economic control as the chairman of this committee.

So the reason I interrupted you is because, sure we want to help change the rules, but maybe we can move faster in some other direction, too. Let's get together and work on it.

Mr. HARRINGTON. I welcome it. As one who operates more comfortably from the outside, it is a welcome to do what perhaps can be done more quickly by this branch than in the House.

Senator METCALF. I am informed you are on your way. Will you be back?

Mr. HARRINGTON. I am at your disposal. I would like to come back if I could.

Mr. METCALF. We will suspend at this time and try to work you in as soon as you are back. I understand there is a car to take you over. Mr. HARRINGTON. Thank you for letting me interrupt. Senator METCALF. Thank you very much.

[Information referred to and supplied for the record by Mr. Harrington follows]:

Mr. JOHN NASSIKAS,

Chairman, Federal Power Commission,
Washington, D.C.

JULY 3, 1974.

DEAR MR. NASSIKAS: I am growing increasingly concerned over the large number of interlocking directorates between public utility companies and banking institutions. The New England Electric System, which serves the bulk of my constituents, is interlocked with a large number of banks and investment funds including the First National Bank of Boston, the Union Warren Savings Bank, the Merrimack County Savings Bank, the People-Mechanic Savings Bank, State Mutual Investors, First National Boston Corporation, State Street Investment Corporation, the Fiduciary Trust Company, the Federal Street Fund, and the Provident Institution for Savings.

Boston Edison, the second largest utility in Massachusetts, is interlocked with the Provident Institution for Savings in Boston, the Boston Five Cent Savings Bank, the National Shawmut Bank of Boston, the Milton Savings Bank, the First National Bank of Boston, the Union Warren Savings Bank, the State Street Bank and Trust Company, the Boston Safe Deposit and Trust Company, and the Norfolk County Trust Company.

The Congress, recognizing the danger to the public interest inherent in interlocking directorates, prohibited interlocks in Section 825d of the Federal Power Act. However, it also gave the HBC authority to make exemptions to the ban when the interlock does not adversely affect the public interest.

In my opinion, the Commission, in drafting regulations which permit sweeping exemptions to the prohibition, has exceeded its Congressional mandate only to permit exemptions which are consistent with the public interest. Clearly, if the Congress felt that the great majority of interlocks were consistent with the public interest, it would not have found it necessary to include a ban on them in the Federal Power Act.

The dangers inherent in interlocks between banks and public utilities is equally, if not more serious, today then they were in the 1930's. Regulatory practices adopted by the Federal Power Commission and most state public utility commissions permit utilities to base their ratio of return on the cost of their capital. In

other words, the higher the interest rate, the higher the profit rate. By permitting banks and utilities to be controlled by the same directors, the result will naturally tend toward higher interest rates, and consequently, higher utility profit margins and bills.

For example, on December 28, 1972, the Massachusetts Electric Company, which, as a wholly owned subsidiary of the New England Electric System in under FPC jurisdiction, negotiated a $4.5 million loan with the First National Bank of Boston at an interest rate of 6 percent. The Chairman of the New England Electric also sat on the Board of the First. On the same day, Mass Electric negotiated a $5 million loan from A. G. Becker, in New York, at 54 percent interest.

There may be perfectly sound legal and financial explanations for the differential in interest rates. I have neither the training nor the experience to evaluate the situation in a professional fashion.

But I do know that figures like this arouse my suspicions. And given the enormous number of individuals fully qualified to serve on the boards of directors of utility companies, I can see no valid reason for permitting bank directors to serve on utility boards, especially in light of the clear Congressional prohibition.

It is my intention to pursue this issue in the immediate future. I would appreciate it if you could provide me with the following:

(1) The number and percentage of directors of public utility holding companies regulated by the FPC who are presently directors of banks, trust companies, investment banking houses, or banking associations or firms, or any corporation, a majority of whose stock is owned by a banking institution (pursuant to 18 C.F.R. 45.1).

(2) The number of requests for exemptions under Section 45.1 received by the FPC during each of the last 10 years, and the number of requests approved each year.

(3) Copies of all public comments, and FPC staff memoranda and papers regarding promulgation of the original Section 45.1 and each of the amendments to it.

(4) A written statement of the Commission's policy concerning what interlocking directorates are in the public interest, and why, and what interlocks are adverse to the public interest, and why, together with an explanation of the administrative procedure utilized to act on requests for exemptions. I would appreciate your response at your earliest convenience. Thank you for your cooperation. Yours sincerely,

MICHAEL J. HARRINGTON.

FEDERAL POWER COMMISSION,

Washington, D.C., July 30, 1974.

Hon. MICHAEL J. HARRINGTON,
House of Representatives,

Washington, D.C.

DEAR CONGRESSMAN HARRINGTON: In your letter to me of July 3, 1974, you expressed your growing concern over the large number of interlocking directorates between public utility companies and banking institutions. In addition, you requested from me the following information:

(1) The number and percentage of directors of public utility holding companies regulated by the FPC who are presently directors of banks, trust companies, investment banking houses, or banking associations of firms, or any corporation, a majority of whose stock is owned by a banking institution (pursuant to 18 C.F.R. 45.1).

(2) The number of requests for exemptions under Section 45.1 received by the FPC during each of the last 10 years, and the number of requests approved each

year.

(3) Copies of all public comments, and FPC Staff memoranda and papers regarding promulgation of the original Section 45.1 and each of the amendments to it.

(4) A written statement of the Commission's policy concerning what interlocking directorates are in the public interest, and why, and what interlocks are adverse to the public interest, and why, together with an explanation of the administrative procedure utilized to act on requests for exemptions.

Due to the complexities of your request for information, I am responding to your letter in part at this time and at a later date, I shall transmit the additional information which you have requested.

The Federal Power Commission's authority to approve certain types of interlocking directorates is limited to jurisdiction under the Federal Power Act. Section 305(b) of the Federal Power Act gives the Federal Power Commission the responsibility of determining the merits of an application for an individual to become an officer or director of more than one public utility, or to hold the position of officer or director of a public utility and the position of officer or director of any bank, trust company, banking association, or firm that is authorized by law to underwrite or participate in the marketing of securities of a public utility, or officer or director of any company supplying electric equipment to such public utility.

Section 305(b) of the Federal Power Act therefore limits this Commission's authority to only those situations where an individual is an officer or director of more than one public utility or an officer or director of one public utility and an institution authorized by law to underwrite or participate in the marketing of securities of a public utility; or, an officer or director of a public utility and a company supplying electrical equipment to such public utility.

Your letter indicates a concern over interlocks between public utility companies and banking institutions. While the second category of Section 305(b) of the Federal Power Act may seem to authorize this Commission to review and approve or disapprove such interlocks, such in fact is not the case.

An applicant to hold an interlocking directorate subject to the jurisdiction of Section 505(b) need only file with the Commission if he is an officer or director of a public utility and a bank, trust company, banking association, or firm that is authorized by law to underwrite or participate in the marketing of securities of a public utility.

The banks to which you refer are not banks authorized under the law to participate in the underwriting of securities.

On October 22, 1935, this Commission requested the Comptroller of the Currency to advise it as to what banks, trust companies or banking associations in the United States were authorized by law to underwrite or participate in the marketing of securities of a public utility. By letter dated October 24, 1935, the Comptroller of the Currency informed the Federal Power Commission that under the Banking Act of 1933, as amended by the Banking Act of 1935, national banks had no authority to underwrite or participate in the marketing of securities. The last paragraph of the Comptroller's letter states:

"Therefore, you are advised that it is my opinion that there are no banks, trust companies er banking associations in the United States which are authorized by law to underwrite or participate in the marketing of securities of a public utility." While this Commission does not specifically approve or disapprove interlocks between commercial banks and public utilities, in certain instances we are aware of interlocking positions being held. In the event an individual is required under Section 305(b) and Part 45 of the Commission's Regulations thereunder, to file an application to hold an interlocking position over which we have authority, we require that he report all other interlocking positions whether or not this Commission would have authority to approve or disapprove the holding of such interlocks. In response to your request that we set forth the administrative procedure utilized to act upon requests to hold interlocking positions, and the standards which are applied to determine public or private interests, I have attached a separate summary describing the manner in which applications are reviewed for purposes of implementing the public and private interest standard.

To the extent I have not responded to the requests set forth in your July 3, 1974, letter, I have directed the Staff of the Federal Power Commission to compile statistical data we have available regarding applications under Section 305(b). I will transmit those compilations as soon as they are available.

Sincerely,

JOHN N. NASSIKAS,

Chairman.

Enclosure: Memorandum dated July 29, 1974, from General Counsel to Chairman

To: The Chairman.
From: General Counsel.

MEMORANDUM

JULY 29, 1974.

Subject: Interlocking Directorates-Implementation of Public and Private Interest Standards.

This is in response to a request from Congressman Michael J. Harrington for an explanation of Staff procedures in reviewing applications for authority to hold interlocking positions under Section 305 of the Federal Power Act.