RULES, REGULATIONS AND ORDERS.

Exemptions which may be created by rule under Section 9 (c) (3) relate to such acquisitions of securities as the Commission may prescribe as appropriate in the ordinary course of business and as not detrimental to the public interest, and the test of the validity of an exemptive rule pursuant to said section is not whether a particular acquisition should be appropriately exempt, but whether it is a member of a class of appropriately exempt acquisitions.

Where the Commission has prescribed, by rule, a particular class of transactions as appropriately exempt, and where there is no suggestion that the prescription of the class as appropriate was an abuse of discretion, held, that each individual transaction need not be reexamined in the light of the statutory standard in order to determine the validity of the exemptive rule as applied to that individual transaction.

Where Commission has promulgated a rule pursuant to the Public Utility Holding Company Act of 1935, exempting all transactions with certain characteristics, held, that, proper and orderly procedure forbids an administrative tribunal, to deny, by an order, the availability of that exemption to specific transactions when such transactions have all of the characteristics required by the rules.

PAYMENT OF FEES TO ASSOCIATES AND AFFILIATES IN CONNECTION WITH AN ACQUISITION OR SALE OF SECURITIES.

Certain underwriters having made application pursuant to Rule U-12F-2 promulgated under Section 12 (f) of the Act, for a determination of their status under such rule, as underwriters for a proposed issue of first mortgage bonds and such application having been consolidated for hearing with the declaration regarding the proposed issuance, the record with respect to the declaration having been completed, but the record with respect to the underwriters' application not having been completed, the Commission ordered, that pending final determination of the issues raised by said Rule U-12F-2 application, no underwriting fees, commission or any other compensation deriving from the issuance and sale of the securities shall be paid directly or indirectly to the underwriters.

Rule U-12F-2 seeks to achieve the statutory objectives by the one means of severely limiting the fee of an affiliated underwriter: Such an underwriter may not receive any fee beyond that arising from a 5% participation in the total offering (and computed at the rate applicable to the other participating underwriters) unless there has been competitive bidding or such bidding was not practicable, it being assumed that such a limitation would destroy the incentives of such affiliates to play an important role in negotiating for and arranging the terms and conditions of the financing thereby leaving that role to underwriters who would bargain at arm's length with the issuer.

APPEARANCES:

D. Bruce Mansfield, Leonard E. Ackermann, Lawrence S. Lesser, and Sanford L. Schamus, of the Public Utilities Division of the Commission.

Justice R. Whiting, for Consumers Power Company and The Commonwealth & Southern Corporation.

George A. Brownell and Frederick A. O. Schwarz, of Davis, Polk, Wardwell, Gardiner, and Reid, for Morgan Stanley & Co., Incorporated.

Hayden N. Smith and G. Herbert Semler, of Winthrop, Stimson, Putnam and Roberts, for Bonbright & Company, Incorporated.

Hon. Robert J. Bulkley and William R. Daley, for Otis & Company and Halsey Stuart & Co., Inc.1

Harold H. Armstrong, for Watling Lerchen & Co., Wm. C. Roney & Co., McDonald, Moore, & Hayes, Inc., American Industries Corporation, E. E. MacCrone, and Bradbury-Ames and Company.1

FINDINGS AND OPINION OF THE COMMISSION

Consumers Power Company, a subsidiary of The Commonwealth & Southern Corporation, a registered holding company, has, pursuant to the provisions of Section 7 of the Public Utility Holding Company Act of 1935, filed a declaration regarding the issue and sale of $28,594,000 principal amount of first mortgage bonds, 34% series of 1939 due 1969; and 125,000 shares of no par value common stock. The Commonwealth & Southern Corporation has filed an application pursuant to Section 10 of the Act for approval of the acquisition by it of the 125,000 shares of common stock which Consumers Power Company proposes to issue, at a price of $28.25 per share.

Morgan Stanley & Co., Incorporated, and Bonbright & Company, Incorporated, have filed an application pursuant to Rule U-12F-2, promulgated under the Act, for a determination of their status under that rule, as participating underwriters for the proposed first mortgage bonds. The application, as supplemented by motion, requested the Commission to consider the issues under Sections 7 and 10 divorced from the proceeding under Rule U-12F-2 on condition that no underwriting fee be paid to Morgan Stanley & Co., Incorporated, or to Bonbright & Company, Incorporated, pending determination of the issues raised by the application under Rule U-12F-2. The application of Morgan Stanley & Co., Incorporated, and Bonbright & Company, Incorporated, was consolidated with the declaration of Consumers Power Company and the application of The Commonwealth & Southern Corporation. After appropriate notice a public hearing was held on the aforementioned matters. The record, insofar as it relates to the declaration of Consumers Power Company and the application of The Commonwealth & Southern Corporation, is complete, except as noted below. The proceeding with respect to the application of Morgan Stanley & Co., Incorporated, and Bonbright & Company, Incorporated, has not been completed. Having

1 Otis & Company, Halsey Stuart & Co., Inc., Watling Lerchen & Co., Wm. C. Roney & Co., McDonald, Moore & Hayes, Inc., American Industries Corporation, E. E. MacCrone, and Bradbury-Ames and Company filed petitions to intervene pursuant to Rule XVII of the rules of practice. The petitions were granted so far as they sought the right to be heard on the issues in the consolidated proceeding, including the right to produce testimony and to crossexamine witnesses but were otherwise denied.

examined the record, and heard oral argument, the Commission now makes the following findings:

Consumers Power Company, incorporated under the laws of Maine, does business entirely within the State of Michigan. It engages in the generation and purchase of electricity and in its distribution and sale in 1,133 communities and townships as well as in certain rural areas; in the production of manufactured gas and its distribution and sale in 126 communities and townships; and in the purchase of natural gas and its distribution and sale in 105 communities and townships. The population of the territory served is estimated to exceed 2,000,000. The company also supplies steam heat in five communities and water in four communities. As an incident of its electric and gas business, it also engages in the sale of appliances. Consumers Power Company proposes to apply the proceeds from the sale of $10,000,000 principal amount of bonds to reimburse its treasury, in part, for certain expenditures for net property additions. The proceeds from the remaining $18,594,000 principal amount of bonds will be used together with other treasury funds to retire on or before May 1, 1940, $18,594,000 principal amount of the company's first mortgage bonds, 334% series of 1935 due 1965, at 10412 plus accrued interest to May 1, 1940. It is proposed to use the net proceeds, amounting to $3,524,187.50, from the sale of the 125,000 shares of common stock to The Commonwealth & Southern Corporation, also to reimburse its treasury for expenditures.

3

The bonds are to be sold to a group of 33 underwriters, headed by Morgan Stanley & Co., Incorporated, and Bonbright & Company, Incorporated, at a price of 1032 and accrued interest, which represents a cost of money to the company of 3.07%. It is stated that the bonds will be offered to the public at a price of 1051/2, resulting in a spread of 2 points. This is equivalent to a yield of 2.97% per year to maturity. On the basis of a proposed offering of $28,594,000, this represents underwriting discounts or commissions of $571,880. For their services as syndicate managers, Morgan Stanley and Bonbright are to receive 3% of a point. The estimated net proceeds to be received by

During the 12 months ended September 30, 1939, the gross operating revenues of Consumers Power Company were derived from the following sources:

This figure is sometimes stated hereinafter in round numbers, viz, $3,500,000.

the company for the sale of the bonds, after estimated expenses in addition to the underwriting discounts or commissions of $113,448, amount to $29,481,342.

On the basis of a proposed offering of $18,594,000 with the same price and spread indicated above, the sale to the public will aggregate $19,616,670, and the underwriting discounts or commissions will amount to $371,880. Accordingly, without deducting estimated expenses over and above the underwriting discounts or commissions, the company will receive $19,244,790.

CAPITALIZATION

The capitalization (including surplus) of declarant as of September 30, 1939, per books, and pro forma after giving effect to the proposed financing, is as follows:

• The acquired surplus and $1,168,284.29 of earned surplus are restricted as to the payment of cash dividends by the mortgage securing the first mortgage bonds. As to dividends on common stock only, the certificate of organization, as amended, provides that earned surplus, to the extent of $7.50 per share of preferred stock, shall not be available for common stock dividends. As of September 30, 1939, $5,547,840 of earned surplus was, by virtue of this provision of the certificate of organization, unavailable for the payment of common stock dividends.

The utility plant account of declarant as of September 30, 1939, is stated at $248,552,141.5 The reserve for depreciation as of September 30, 1939, is stated at $24,598,666 which is equal to 9.9 percent of the gross property account. The ratios of the presently outstanding long-term debt are 49.76 percent of gross property per books and 55.23 percent of depreciated property ($223,953,475) while on a pro forma basis the long-term debt will be 53.78 percent of gross property and 59.70 percent of depreciated property."

EARNINGS

The earning power of the declarant per books for the 12 months ended September 30, 1939, and pro forma to give effect to the sale of bonds and stocks and the retirement of $18,594,000 bonds 334% series of 1935 is indicated by the following table:

• After deducting interest charged to construction in the amount of $253,600. After deducting amortization of preferred stock premium, discount, commission, and expense in the amount of $783,339.

By Chairman FRANK:

The Commission, by orders, will make the following disposition of the application, declaration, and motions in this case:

(a) The Commission will accept the offer made by the two principal underwriters, Morgan Stanley & Co. and Bonbright and Co.,

On December 21, 1938, this Commission permitted a declaration to become effective with respect to $10,168,000 principal amount of declarant's first mortgage bonds and 43,636 shares of common stock. At that time the property and plant account and the depreciation policy of declarant were discussed in detail. See In the matter of Consumers Power Company, 4 S. E. C. 228 (1938).

This sum includes intangibles and $1,456,154.71 representing the unamortized portion of the expenditures on customer's equipment incident to changing electric service from 30 to 60 cycles.

This figure takes no account of the possibility that the new money obtained from the sale of $10,000,000 of bonds and $3,500,000 of stock may be used for additions to the property account. See note C to table on property coverage at p. 468, infra, for percentages computed on the assumption that all of the new money will be used for additions made to the property account, subsequent to September 30, 1939.

"No consideration is given herein to increased earnings which may result from extensions or additions which may be made as a result of the new financing.