Shaken Empire

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It ceased to be a matter of whispers last week. Everybody knew that Samuel Insull, greatest of public utility operators, was in difficulties. He left Chicago, centre of his operations, for Manhattan, there to confer with his good friend Owen D. Young and with powerful bankers. Representatives of Chicago's Continental Illinois and First National Banks thronged to Manhattan to join the discussion. Representatives of Manhattan banks went to Chicago, awaited word of what was decided in Manhattan. Soon Mr. Insull, making no statements, rushed back to Chicago.

What went on at the Manhattan meeting, held in the offices of General Electric Co., was not revealed. The problem to be untangled was how to reorganize the vast Insull structure so that neither noteholders nor bankers will step in and disrupt it. To do this will probably demand either a tremendous extension of credit, a sale of some assets, the issuance of new securities to noteholders and bankers, or a combination of these steps. While it was stated that Owen D. Young was entering the situation only as Samuel Insull's personal friend historians recalled that in the early days of the utilities. General Electric assisted them, that in 1914 General Electric and Wrestinghouse lent a large troubled holding company $10,000,000. They suspected that General Electric would be willing to use some of its $115,000,000 cash resources to aid so big a customer as Mr. Insull and to keep the credit of all utilities high.

Samuel Insull still recalls with pride that he was born, 72 years ago, in England. From boyhood he had great admiration for Thomas Alva Edison. By a quirk of fate he answered an advertisement for a secretary, found out that the man who had inserted the advertisement was Edison's London representative. Edison was struck with Mr. Insull's weekly reports, sent for him in 1881. For eleven years they worked together, Mr. Insull learning much about the technical side of the young light & power business. In 1892 Mr. Insull wrote to the capitalists controlling four-year-old Chicago Edison Co., now Commonwealth Edison, suggesting himself for the presidency. He was installed the following year and resigned his post as General Electric vice president in charge of sales. In 1896 the company needed funds. Mr. Insull was unable to get them from Chicago bankers, a fact he has twitted them with on many an occasion. He went to London and obtained a loan of $1,200,000 from London Trust Co. In later years much of the Insull financing was handled by Halsey, Stuart & Co. and some of the securities were sold abroad. While Mr. Insull is virtually a dictator of Commonwealth Edison, he has never been more than a large investor in it.

Of his early utility days, Mr. Insull likes best to recall the year 1903 when he installed in Chicago Edison's Fisk Street Station a generator of the steam turbine type much bigger than any previously used. On the day of the opening the engineer suggested that Mr. Insull leave the room.

Mr. Insull: Why?

Engineer: Well, I don't know just what is going to happen.

Mr. Insull: Well, then you'd better go out too.

Engineer: No, it's my duty to be here, and it isn't yours.

Mr. Insull: Is the thing going to blow up?

Engineer (dubiously): I don't think it is.

Mr. Insull: Well, if it blows up the whole company will blow up and I'll blow up too, so I might as well stay here.

Instead of blowing up, "the thing" made production cheaper and permitted transportation over longer distances. The big Chicago turbine was replaced by larger ones, and the original shell was taken to General Electric's Schenectady plant to be placed on the lawn as a monument.

Another great year in the Insull epic was 1910. North of Chicago were ten small towns (Antioch, Grayslake, Barrington, Crystal Lake, McHenry, Dundee, Carpentersville, Gary, Palatine, Arlington Heights) with 15,000 people, each with a local plant and electric service at night. These plants were bought and junked, the transmission systems interconnected and power sent efficiently from one central station. Public Service Co. of Northern Illinois is now regarded as the engineering germ of the great superpower systems. It was the forerunner of Mr. Insull's great Middle West Utilities System, now serving 5,321 communities.

Although Mr. Insull is considered chiefly a Middle West utilitarian, proper ties along the Atlantic seaboard now loom in his picture, contribute about one-fifth of total earnings. First of his eastern moves was to acquire Twin State Gas & Electric (Maine, New Hampshire, New York & Vermont) in 1913. In 1927 he bought National Electric Power (not to be confused with Electric Bond & Share's National Power & Light) and embarked upon a rapid expansion in New England. Frustrated by Maine's laws against the export of power, he turned to developing Maine's industries to boost consumption. Last year a subsidiary, New England Industries, Inc., reported that its invest ments in Maine's textile industry were $11,844,000, in Maine newsprint $13,848,000, in other New England industries about $3,000,000. To repeal Maine's laws against export of power Mr. Insull played a hard but losing game of politics, was faced in 1929 by the slogan: "Save Maine from Insullization" (TIME, Sept. 23, 1929).

National Electric Power Co. also acquired rich properties in New Jersey which were increased last year with the purchase, by a subsidiary, of a company previously controlled by Mr. Insull's fellow Chicagoan, Harley Lyman Clarke, through Utilities Power & Light. In 1931 Mr. Insull bought the eastern electric and water properties of Abram Edward Fitkin's Atlantic Public Utilities, Inc., giving him a foothold in every Atlantic State except Rhode Island.

When he was in Manhattan last week Samuel Insull represented a tremendous industrial Empire in bad need of cash. Insulland has 13 million inhabitants, more than one-fourth of whom are customers. It employs 50,000 men. It is a conglomeration of over 150 companies. Before the difficulties of Mr. Insull's position were apparent, the securities of the Insull group had a total market value of over three billion dollars. In 1929 their combined earning power was set at a half-billion. Chief divisions of Insulland are:

Investment Trusts In 1928 Mr. Insull, alarmed by the buying of his securities by other interests, decided to insure permanency for his policies and management. This is accomplished now by Corporation Securities Co. and Insull Utility Investments, Inc. both large investors in his group and at the top of the pyramid. Corporation Securities is controlled by three trustees, Mr. Insull, his son Samuel Insull Jr. and Harold Leonard Stuart of Halsey, Stuart & Co. The two companies have bank loans of around 80 millions scarcely covered by the present market value of their holdings. Notes of Insull Utility Investments sold at around 2 5/8% of par last week, indicating the general feeling that nothing will be done for these two companies.

Chicago Group. Commonwealth Edison, Peoples Gas Light & Coke, and Public Service Co. of Northern Illinois are considered among the finest utility properties in the world. Their combined earnings last year came to 30 millions. They have assets of around a billion dollars and while Commonwealth Edison must meet a $20,000,000 maturity on July 30 and Public Service a $15,000,000 maturity, no difficulties are expected. Less prosperous in this group is Chicago Rapid Transit Co., formed in 1924. It operates Chicago's elevated railroads, rents its tracks to the Chicago North Shore & Milwaukee (North Shore Line) and the Chicago Aurora & Elgin (both Insull Companies). Last year C. R. T. lost $1,500,000.

Middle West Utilities is the holding company for Insull properties outside the Indiana, Northern 111. and Chicago Group. More than 70% of the gross income of its subsidiaries is from power sales. Ice, gas, water, heat & transportation account for the rest. Its transmission lines total 45,187 mi., its ice plants can turn out 14,261 tons a day. The financial problems of Middle West Utilities were Mr. Insull's chief causes of worry last week. The parent company has bank loans of $21,900,000 while National Electric is $27,700,000 in debt to the banks. The parent company has a $10,000,000 note issue soon falling due which it cannot meet except with stock or new notes. Its Scranton Railway Co. has a $2,100,000 bond maturity. Next year the System as a whole has $19,368,000 worth of maturities to meet, in 1934 the figure is $16,341,000 while in 1935 there will be $12,922,000 falling due. Although Mr. Insull has denied the story that he will sell some properties, 1931's annual report of Middle West Utilities admitted the possibility. It was generally thought last week that the New England and New Jersey properties would be the most likely to go. They are not an integral part of the Middle West system, they could be articulated with existing companies whose bankers never approved of Mr. Insull's march to the sea. While Middle West Utilities reported earnings of $17,138,000 last year, the Wall Street Journal last week implied that depreciation charges were too low, that actual earnings from operations were only some $5,000,000.

Although last week found Mr. Insull 72 years old, he passed through it with his usual quietness and almost autocratic self assurance. Through his activities in business, in politics, in grand opera, Mr. Insull is one of the best known citizens of Chicago, as are also his son and his brother Martin. Last week's problems did not appear to have stripped the Insulls of Chicago's respect. Their trouble was purely financial. No ice, heat, light or traction service would be interrupted by the intricate figuring at the Manhattan meeting. Criticisms voiced last week were directed against the utility holding company as a financial device rather than against Pyramid Builder Insull himself.

"Giantism". Sharpest and most studious of criticisms were voiced in Manhattan where a Round Table Conference on Utility Regulation was being held by almost 100 commission members and regulation students. Finance Professor James Cummings Bonbright of Columbia University, Secretary of the Power Authority of the State of New York, spoke on "The Breakdown of the Public Utility Holding Company." Utilitymen read his speech with keen interest for they knew Professor Bonbright to be a cousin of the late William Prescott Bonbright and of Irving W. Bonbright, co-founders of Bonbright & Co., utility bankers.

"Up to the fatal year 1929," said Professor Bonbright, "public utility executives and financiers were able to make a strong case for their assertion that the rapid and remarkable development of the country's electrical industry was due in large measure to the domination of that industry by a group of financially strong and well-managed holding companies. The early history of the light and power enterprise, as exemplified by the growth of United Gas Improvement system and of the Electric Bond & Share system, probably bore out this claim as valid for that period.

"Within the last few years the situation has completely changed. . . . Today the greatest structural weakness of the public utility industry in America--I say structural weakness in order to make an exception of the other far more fatal weakness, the low social standards of certain leaders of public utility finance--is the superstructure of the holding company and of the so-called investment company which in turn controls that holding company. . . . The change is three-fold and may be characterized by ... irrational consolidation. overcapitalization and uncontrolled service charges."*

While Professor Bonbright conceded that a holding company is essential to consolidate small, competing plants, he averred it has been carried "to a point far beyond that of maximum economy. . . . Normal growth has given away to giantism with a result that a system such as Electric Bond & Share or the Insull System must be regarded as an economic disease." He claimed that geographical "diversification," a prime selling-point for holding company securities, is not rational. He roundly criticized holding companies for borrowing (as many have done) from the companies they control. Heartily in accord with these sentiments was Harvard's famed Professor William Zebina Ripley. advocate of U. S. and State control of utilities.

Too busy to attend the Round Table, probably far too busy even to read of it, was Mr. Insull. He and the business world realized that just as he made utility history in 1903 and again in 1910, he must now write a tremendous chapter in U. S. utility lore. Not until the final plan of reorganization is approved by each fretful banker and every anxious note-holder will Samuel Insull know whether the chapter will be one of collapse and disruption or succor and survival.

*By "service charge" Professor Bonbright meant the management or engineering fee which many holding companies extract from the operating companies.

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