Before L. HAND, Chief Judge, and SWAN and CHASE, Circuit Judges.
This is an appeal from an order of the District Court, following its opinion of February 10, 1950, which directs enforcement of an amended plan filed under section 11(e) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k(e), for the reorganization and consolidation of Long Island Lighting Company and its subsidiaries, Queens Borough Gas and Electric Company and Nassau & Suffolk Lighting Company. These are utility companies incorporated under the New York Transportation Corporations Law. They distribute electricity and gas in the counties of Nassau and Suffolk and the Borough of Queens.We shall refer to them as Long Island, Queens and Nassau. The plan as amended was approved by the Securities and Exchange Commission by its order of November 16, 1949.*fn1 The Commission forthwith applied to the District Court for an order of enforcement. After hearings at which all parties in interest were represented, the court found the plan fair and equitable and granted the requested order D.C., 89 F.Supp. 513. A committee for common stockholders of Long Island and several individual holders of such stock have appealed.
In brief the plan provides for the consolidation of Long Island, Queens and Nassau and for the issuance by the consolidated corporation of common no par stock which will be distributed in the following proportions: To Long Island preferred stockholders 76.98 per cent., to Queens preferred stockholders 11.51 per cent., to Nassau preferred stockholders 5.80 per cent., and to Long Island common stockholders 5.71 per cent. The outstanding debts of the constituent companies will remain unaffected. In making allocations of stock of the consolidated corporation the Commission estimated that its prospective total net income will be $3,500,000 per year, without giving effect to any savings from consolidation which the proponents of the plan estimate at $250,000 yearly after provision for federal income taxes. The substance of the appellants' objection to the plan is that Long Island common stockholders should receive a larger percentage and Long Island preferred stockholders a smaller percentage of the consolidated corporation's capital stock. Their specific attacks upon the actions of the Commission and the District Court will be discussed seriatim.
1. Jurisdiction of the Commission.
It is urged that the Commission has no jurisdiction over Long Island and its subsidiaries because their operations are wholly intrastate, and that application of the Act to them is violative of the constitutional provision reserving to the states powers not granted. A sufficient answer is that interstate distribution of Long Island's securities brings it and its subsidiaries within the coverage of the federal Act. The point is mentioned merely to show that it has not been overlooked. It is adequately dealt with in Judge Kennedy's opinion, with which the Court of Appeals of the District of Columbia has recently expressed agreement. Halsted v. Securities and Exchange Commission, 182 F.2d 660. Our own view as to the triviality of the constitutional argument appears in Public Service Com'n of New York v. Securities and Exchange Com'n, 2 Cir., 166 F.2d 784, 788.
2. Refusal to permit the Committee to solicit funds.
It is contended that the Commission's refusal to allow the Committee to solicit from common stockholders five cents per share for expenses in opposing the plan so hindered their defense as to vitiate the hearings before the Commission. An appeal from the order of refusal was taken to the Court of Appeals of the District of Columbia where it has just been affirmed. Halsted et al. v. Securities and Exchange Com'n, supra. That decision is conclusive upon us as to the Commission's power to make the order. It does not, however, determine whether the effect of the order was such as to invalidate the hearings on the section 11(e) proceedings. As to this Judge Kennedy found nothing in the record to show that the Committee's representation of the common stock "was stifled, or was in any way weakened by the Commission's action." The Committee's claim of prejudice is chiefly based on the contention that lack of funds deprived it of an opportunity to submit evidence of reproduction costs. But reproduction cost is irrelevant except as it may indirectly bear on earning capacity.*fn2 So far as we are aware it has never been held under the Public Utility Holding Company Act that reproduction cost studies are essential; and the Commission says that in the only two cases where they were offered, they were rejected, and rejection of the evidence was not even urged as error although both plans were contested in the courts.*fn3 The claim of prejudice from the Commission's refusal to permit solicitation of funds is not substantiated.
3. Change of Circumstances.
The earnings data in the record before the Commission do not go beyond March 31, 1949. The appellants argue that the record is already stale and that developments subsequent to the Commission's approval of the plan on November 17, 1949 require the proceedings to be resubmitted for further evidence. Thus, the actual consolidated net income for the year 1949 was $77,279 more than the $3,500,000 estimate of prospective yearly net income. But if the year ending February 28, 1950 be taken, the actual net income would be $51,146 less than the estimate. Such differences are negligible. Any estimate of prospective earnings is a forecast which cannot possess mathematical certainty. If every slight discrepancy between estimate and actuality requires that the hearings be reopened, the case would never end, for necessarily there is a time lag after the closing of the administrative record and before the plan can be administratively approved and judicially enforced. We do not say that unanticipated developments may never be sufficient to require reopening, but certainly slight errors in the forecast of future earnings do not justify it.
The appellants also urge error in the Commission's refusal to grant petitions for reopening filed with it after the issuance of its findings and opinion. The Committee's petition was denied because it presented no matters of substance not already considered. Appellant Gordon's petition was denied without statement of reasons. He had purchased his stock after the administrative record was closed, and filed his petition while the enforcement proceedings were pending in the District Court. We see no abuse of discretion in the denial of either petition.
4. Growth factors in the Long Island system.
Closely allied to the claim of changed circumstances, just discussed, are several contentions relating to growth factors in the future which the Commission is said to have understated or ignored, in making its estimate of future income.
First, it is said that the Commission did not take account of the system's large plan for future construction. This appears to be accurate. The Commission's estimate does not go beyond construction in progress or that for which working capital was available as of March 31, 1949. Appellants claim that this exclusion is erroneous because the expansion in physical plant will necessarily increase the rate base and therefore the system's future earnings. Conceding that the system may be allowed to earn a larger return in an expanded plant, it does not follow that increased future earnings would inure entirely, or at all, to the holders of present common stock. Their equity will be increased only if the cost of financing the construction program is low - a speculative prediction, at best. Even if new capital is available at low rates it is doubtful, as Judge Kennedy pointed out, whether the system's debt burden should be increased. Thus, if future financing takes the form of stock flotation, as seems probable, there is no great likelihood that the present common's equity will be increased. If, on the other hand, the system's debt ...