A Test for Teacher's Pet

SEC's favorite new rule--compulsory competitive bidding for utility securities --flunked its first test last week. But it was not the rule's fault. Next day it got another test, passed with flying colors.

New York State Electric & Gas Co.

wanted to sell $35,393,000 of 3 1/8% first-mortgage bonds, 120,000 shares of 5% preferred. Three underwriting groups and an insurance company entered competitive bids. When they were opened, the company sadly rejected all four because none offered anything for the preferred stock.

Chief reason for this misfortune was a head-on collision between an SEC ruling and a New York State law. SEC, presumably to assure the highest price on each type of security, had ruled against "basket bids," insisted that bonds and stocks must be bid for concurrently but separately. New York State law says that a utility cannot sell capital stock for less than par. And the company's 5% rate on the new preferred was so low in relation to similar issues now on the market (Consolidated Edison's 5% preferred was selling just below par) that no underwriter dared offer $100 a share, unless he could hedge against loss by a better deal on the bonds.

To save its face, get the securities to market fast. SEC modified its cherished rule. New York State Electric was permitted to sell the bonds immediately to the highest bidder, Equitable Life Assurance Society (for 104,015) and to ask again this week for bids on the preferred, which the company had by then sweetened up with a 57% dividend rate.

If not a clear defeat, the test was no triumph for competitive bidding. One company had swallowed the whole bond issue--the very thing that SEC had hoped such bidding might obviate. Dealers and investors outside New York, who have for years complained that they weren't getting a fair slice of the best issues from the big Eastern syndicates, this time got not even a sliver.

Before anyone had time to make much capital of this point, another test case proved the opposite. The Philadelphia Co. offered $48,000,000 of 4 1/2% bonds, $12,000,000 of serial notes. The bonds were won competitively by a Kuhn, Loeb and Smith, Barney group for 100.3375, the notes by Mellon Securities and First Boston Corp. for 100.07. Next day the underwriters reported unusually high takings by small dealers, as well as by the public.

Thus at week's end, the score on competitive bidding was still not final. Wall Street already looked forward to a new test--Standard Gas & Electric's sale of its 590,527 shares of San Diego Gas & Electric common stock, due next week. The San Diego issue will also test another SEC-Wall Street controversy: whether investors will go into public-utility common stocks.

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