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I will submit to you, and ask to have it made a part of the record, a brief upon the rights of the States prepared by E. A. Myers of Zanesville, Ohio, an attorney of high standing, who is chairman of the committee on Federal affairs of the Ohio Chamber of Commerce. But in conclusion, I want personally to read you an extract from letter No. XLVI of the Federalist written by James Madison seeking to allay the fears of the people, saying in part
I am sorry that Senator Wheeler is not here, because he comes from a very small State in point of population, and I think he should be jealous of the rights of the State; I should think he would be very jealous of them.
Senator Donahey. Proceed. He can read your statement in the record.
Mr. CHANDLER (reading):
The Federal and State Governments are in fact but different agents and trustees of the people, constituted with different powers, and designed for different purposes.
But ambitious encroachments of the Federal Government, on the authority of the State governments, would not excite the opposition of a single State, or of a few States only. They would be signals of general alarm. Every govern. ment would espouse the common cause. A correspondence would be opened. Plans of resistance would be concerted. One spirit would animate and conduct the whole. The same combinations, in short, would result from an apprehension of the Federal, as was produced by the dread of a foreign yoke; and unless the projected innovations should be voluntarily renounced, the same appeal to trial by force would be made in one case as was made in the other. But what degree of madness could ever drive the Federal Government to such an extremity.
And there is going to be a meeting in the Mayflower Hotel on Monday, when the chambers of commerce will act on this matter of Federal encroachment (reading further]:
That the people and the States should, for a sufficient period of time, elect an uninterrupted succession of men all ready to betray both;
that the Governments and the peoples of the States should silently and patiently behold the gathering storm, and continue to supply the materials, until it should be prepared to burst upon their own heads, must appear to every one more like the incoherent dreams of a delirious jealousy, or the misjudged exaggerations of a counterfeit zeal, than like the sober apprehensions of genuine patriotism. Let us not insult the free and gallant citizens of America
with the supposition that they can ever reduce themselves to the necessity of making the experiment by a blind and tame submission to the long train of insidious measures which must precede and produce it. That seemed to him to be preposterous, 150 years ago.
I could name other measures in Congress today which are also insidious.
These fears which James Madison found to be so fantastic a century and a half ago are rapidly becoming prophetic. The Members of the lower House of Congress represent the people and are supposed to be chosen in proportion to population. They do not always redistrict according to population, but they make a stab at it. The Members of the Senate represent the States and are chosen by the States. They should be the jealous guardians of the rights of the States. The State of Ohio asks the Honorable Senators who constitute this committee and their colleagues in the upper House to think soberly before they superimpose these regional districts upon the States of this Union and further invade the rights of the Commonwealths they are sworn to protect.
Senator DONAHEY. Thank you, Mr. Chandler.
(The brief referred to and submitted by the witness is here printed in full at the end of the proceedings.)
Senator DonaHEY. The committee will take a recess until 2 o'clock this afternoon, when we will meet in the committee room in the Capitol.
(Whereupon, at 12:40 p. m., a recess was taken until 2 p. m.)
The committee reconvened at 2 p. m. in its hearing room in the Capitol on the expiration of the recess.
The CHAIRMAN. The committee will resume. Governor Reed, some other Senators will be in later.
STATEMENT OF CLYDE M. REED, PARSONS, KANS.; APPEARING
ON BEHALF OF TWO ORGANIZATIONS OF PUBLIC SECURITY INVESTORS, ONE IN PARSONS, KANS., AND THE OTHER A STATE-WIDE ORGANIZATION
Mr. REED. Mr. Chairman, my name is Clyde M. Reed. I live at Parsons, Kans. From 1920 to 1924 I was a member and chairman of the Kansas Public Service Commission. My appearance here is in behalf of public-utility investors of Kansas, including my home town of Parsons.
The circumstances under which I appear, briefly, are these: When the proposed legislation began to attract attention a number of Parsons citizens came to me because of my previous contact with this question and asked me for an expression of opinion. I inquired into the bill, read it over, and afterward a committee came back to talk with me about it. I asked the committee if they had complied with the request of public-utility companies to write letters to their Senators and Members of the House opposing the legislation. They all said they had.
My advice to them was that that was not an intelligent way to get at this question; that here was a question that ought to be given consideration by the Congress, and that it would be a much better way for them, there being about 1,000 investors in these various securities in my town of Parsons, which is a town of about 15,000 peopple, and it being estimated that there are about 50,000 holders of these securities in Kansas, to have a committee or someone represent them at the hearings before the committees of Congress.
The estimated value of the total securities held in Kansas by these 50,000 people is around $25,000,000. That is an estimate only because there is no way that I know of, outside of the records of the publicutility companies, their own books, that would show that information.
As a result a small organization was formed in my home town of Parsons, entirely independent of any public-utility interest, the officers of that organization being substantial citizens of the town who held securities. Following the organization of that local citizens' committee a similar organization was founed in the State. I was asked to discuss the question with the officers of the State organization, and did so. They asked me if I would appear here for them and discuss this proposed legislation from their standpoint, and I told them yes. I am here without compensation, although they are paying my expenses, or at least I hope they are.
And these two organizations, the local one at Parsons and the State-wide organization, made the arrangement through the Kansas Senators for my appearance here, and through the entire House delegation from Kansas for my appearance before the House committee. I made that a condition of my coming here as their representative, that the committee arrange with the Kansas delegation in Congress, both Democrats and Republicans, and they made the arrangement, and that resulted in my appearance.
This object of public-utility holding-company regulation is an old subject with me. In October of 1925 I made a speech to the annual convention of the Kansas League of Municipalities, which was holding its meeting in Ottawa, Kans. That speech is reprinted in its entirety in the annual publication of the Kansas League of Municipalities; and, incidentally, I might say that Kansas has the largest and the most active league of that character of any of the States. I want to read to you two paragraphs from what I said 10 years ago almost:
All the States, including Kansas, have some laws about the issuance of securities by public-utility companies. Kansas has lagged behind other States in those laws, but still the law of Kansas permits the State to do this: It may regulate the issuance of securities of any company actually operating a utility in Kansas, but our New York friends have found a way by which that may be avoided. The result is that control of these utilities is in the hands of great holding companies, 10 or a dozen of them, and these holding companies issue securities pyramided upon the securities issued by the local plants. That is where this $1,345,000,000 worth of stock come in
I had used that figure as showing the amount of these public-utility securities that had been sold between January 1, 1922, and August 31, 1925. Now, continuing the quotation from my speech:
And I say to you with all the earnestness at my command that this exploitation of the public utility properties of the United States, including Kansas, can have but one end, and that is in disaster. It is only the history of the railroads in their worst years of bad financing repeated.
The State authorities of Kansas have not the slightest control over the issuance of securities, nor the character of the securities, issued by the great holding companies, because the great holding companies are not recognized as operating the utilities in the State. In the larger towns, and possibly in the small ones, everyone of you is familiar with the offers that have been made and are being made of preferred stock, 3 lot of which is based upon earning power alone. I am not saying that all public utility securities offered for sale are bad, because that would not be true, as some of them are sound.
Now, that, Mr. Chairman, was my expression some 10 years ago. About the same time Prof. William Z. Ripley, of Harvard, began to talk and write on the subject in the East. I know Professor Ripley casually, and about 1925 or 1926 we had some correspondence on the subject. We held substantially the same view. As the chairman of this committee doubtless knows, Professor Ripley gathered his writings and statements into a book, Main Street and Wall Street. I regard his book as one of the outstanding books on the question of concentration of control, not only of public utility capitalization but of commercial capitalization as well, a tendency that I have looked upon with a lot of alarm.
In 1926, I think it was, I happened to be visiting in Glacier Park, visiting a friend of mine from Kansas who had a summer house next door to Senator Walsh, your former colleague from Montana, Mr. Chairman. Senator Walsh and myself discussed this matter at some considerable length for, oh, the most of 2 days. Out of that discussion came the Walsh resolution for an investigation of these holding companies. Senator Walsh I think had it in mind, and I think my only contribution to it was the fact that I discussed the subject with him and that I had been chairman of the Kansas commission and had had a good deal of experience in public-utility regulation.
Anyway, at his request I came to Washington three times to help him gather data in the preparation of that resolution. And he hung up in the Senate when he talked some charts showing the intercorporate relationships; and I think perhaps those were the first charts made for that purpose, and they happened to have been made in my office at Kansas City for the use of Senator Walsh for that presentation.
I mention these things, Mr. Chairman, only in a preliminary way because I am one of the early proponents of regulation of publicutility holding companies. And I am still a proponent of regulation of such companies. At no time in my statement will I undertake to minimize the abuses that have been committed, principally falling under the issuance of securities without any regulation and sometimes without much relation to any element of value behind them; to managerial or intercompany contracts, which in many instances again have resulted in very grave abuses.
There has been a tremendous concentration of control over these public utilities, in comparatively few hands.
I think if we could have foreseen what would happen and the Congress of the United States could have embarked upon this legislation, or this character of legislation, some 10 years ago, the country would have been better off and the public utility companies themselves would have been better off.
What I have said about the issuance of stock in too large a quantity does not necessarily apply to all of them. I have not analyzed the set-up of the operations of the individual companies since I did that work in the case of a few companies for Senator Walsh. Since that time I have made no effort to analyze an individual company. I would not want to say that the abuses in the matter of managerial contracts applied to all companies, but undoubtedly both in the matter of the issuance of stock and in the abuses of intercompany contracts, and managerial relations, some companies are gravely responsible.
In my opinion this legislation is 10 years too late for the good of the country, and I think for the good of the public utility industry itself.
Now, Mr. Chairman, I do disagree with some things that are written into this bill. I want to discuss them in the light of my background and in the light of my experience and in the light of a very earnest desire that if it be humanly possible this session of Congress shall not adjourn without passing some workable legislation that will eliminate the abuses in the public utility holding system, and will fill in the gap that exists between State control over certain public utility service and the inability of the State to control because of utility service that is beyond them.
Those of us who are familiar with this situation make quite a clear distinction between financial transactions of holding companies, which are one thing, and public-utility service per se, which is another thing. They are related because of their corporate connection. Nevertheless, so far as public-utility service per se is concerned the State regulation has been a matter of a good many years' history, not entirely successful I should say, just moderately so.
I had some experience of my own, covering a period of 4 years, and I would say that we were very far from obtaining perfection in regulating even local public-utility service. And certainly the holding companies were beyond the power of any State to regulate them, and only the Congress through enacting national legislation can regulate them.
Now, there are two instances of public-utility service per se that ought to be regulated and which the States cannot do. Those two instances are: The interstate transmission and the sale at wholesale of power and, also, I might say of natural gas. I am awfully sorry that Senator Couzens is not here. This morning his questions indicated that he had an interest in the natural-gas question, and it so happens that because of its situation and location Kansas has had probably more experience with natural-gas regulation, or at least attempted regulation, than any other State.
If you will go over the records of the Supreme Court and examine the citations of cases affecting natural gas litigation and regulation, you will find that a majority, not all, of those cases came from Kansas.
It so happens that we were the first State in the West to produce natural gas. Afterwards the discovery and use of natural gas extended beyond Kansas, into Oklahoma first, then into Texas, and later into some other States. But being the first State in which gas was discovered and used for various purposes, domestic cooking, for making steam in industrial plants, and various uses, Kansas has had a lot of experience. I was chairman of the Kansas commission when we made the first test of the power of a State to regulate an interstate gas pipe line rate in the absence of Federal regulation.
The United States court had a pipe line in receivership and established what was known as a city gate rate. This city gate rate is a comparatively modern device in natural gas. Originally the pipeline company brought the gas up to the town border and turned it over to a distributing company, and then they divided what was collected, the distributing company retaining one-third and the pipeline company taking two-thirds as its share.
The infirmity of that plan was that there was no check upon leakage in the distributing system. They did not furnish the gas. It was the pipe-line company that did that, and they had no interest in spending money to keep the leakage down.
The Federal court, recognizing that situation, in conjunction with our Commission and the Kansas Commission, of which I was at that time chairman, was the first commission in the United States to make an order against distributing companies limiting the amount of natural gas leakage that would be permitted to be included in the consumer's rate.
The distributing companies appealed from us to the Federal court, and the Federal court sustained us and said it was a reasonable stand ard and ought to be observed.
About the same time there was established a different system, whereby the distributing company would have to pay the pipe-line company a stated sum at the town border. That was 35 cents at first. And here is where the first case testing that matter came up,