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ments as to service or as to extensions which it might not be prepared to make.

On page 107 of the bill, section 204, there is now the provision that:

No public utility shall undertake the construction or extension of any facilities subject to the jurisdiction of the Commission, or acquire or operate any such facilities, or extension thereof, or engage in production or transmission by means of any such new or additional facilities or receive energy from any new sourcewithout procuring a certificate of convenience and necessity from the Federal Commission. The purpose, I take it, is to prevent the expenditure of money by needless duplication of facilities. It seems to us that a limitation as to the right to extend its "lines" will accomplish the purpose aimed at, and that it probably will not be the purpose of Congress to require that every company which does any interstate business, and thereby comes under the regulation of the Federal Commission as to the interstate business it does, must come to the Commission at Washington for every improvement or enlargement of its generating capacity or other facilities.

The CHAIRMAN. I do not think you need argue that point to us.

Mr. BENTON. The next suggested amendment is as to abandonments. We recognize that no company engaged in this business ought to abandon anything which will interfere with its interstate service, but otherwise there ought not to be a limitation.

With respect to section 205, on page 108, and subsequent sections, I will let the amendments rest upon their face and upon the basis of what I have said.

The CHAIRMAN. We are going to take all your amendments and study them, and when we come to consider them in executive session we will have your amendments before us and take them up.

Senator Bons. Mr. Benton, I do not want to cause you to digress, but I would like to ask you this one question. I do not want to interrupt you any more. You were referring a moment ago to the classification of accounts that has been adopted generally by State regulatory bodies. Can you inform us how generally a standard form of classification of accounts for electric utilities has been adopted in the country? That is to say, how many States have adopted the same type of accounting?

Mr. BENTON. I cannot at the moment. If I may have leave to do so, I will include a statement on that, but I will tell you now that a very substantial number of the State commissions have adopted : classification of accounts which is generally referred to as the classification approved by the National Association.

Senator BONE. One other question. How far, in that system of accounting that is now being required more generally, do you compel a breakdown and segregation of figures showing the allocation of taxes to Federal and State governments, and the political subdivisions of the States? In other words, do these accounting systems require these companies to clearly indicate just how much tax they pay, and how it is paid, as to the State and its political subdivisions?

Mr. BENTON. I regret to say that I do not know. I am not an accountant. That is a thing that at the moment I am unable to give you any information on. I am inclined to think that they do not, but I do not wish to state that positively.

On page 117, section 211 of the bill as printed, there is a provision that the Commission shall have power to ascertain, for the purposes of


this title, the actual, legitimate prudent cost of the property of every public utility and every fact which, in its judgment, has any bearing on the determination of such, cost.” We think it is desirable that the Commission should have that power, but we suggest that it ought to go to the point of ascertaining every fact which, in the judgment of the Commission, has any bearing on just and reasonable rates. There, as elsewhere, we have asked to have the authority directed to the rates which are subject to the jurisdiction of the Commission.

Paragraph (c) of that section now reads (reading):

In determining just and reasonable rates, the Commission shall fix such rate as will allow a fair return upon the actual legitimate prudent cost of the property used and useful for the service in question.

We have asked to have added to that the following:

Provided, however, That no rate which is unreasonable in amount, having in view the character and value of the service covered thereby and the cost of rendering the same when rendered or to be rendered shall be prescribed or permitted.

I think you will see that it is essential that some provision of that sort, or some variation from the language here, be made, for this reason. This, as it stands, is probably designed to direct the making of a rate which shall exactly yield a fair return on the original cost. It is either that or it is a minimum rate making section, saying that the rates fixed shall provide at least as much as a fair return on the original cost. You must remember, however, that you are beginning the regulation through a Federal commission of the rates on utilities which have been in operation for a long time. Their properties are substantially depreciated. Generally speaking, the depreciation has been recovered as parts of their rates, and has been invested in other property. If you include a legislative direction that the rates must be sufficient to yield a fair return on the original cost of all those properties, you will load upon the public the burden of paying a rate upon the depreciation reserve which the public created. That never was the intent of the persons who wrote the bill, but I think it is the inescapable result of the bill. It has been, as Í think, suggested that the matter would be taken care of because the Commission, under this bill, was going to provide for depreciation and provide for having the depreciation invested, and the return on the depreciation reserve covered in as income. It would work out that way all right if you began with a company when the company's properties were all new; but it does not work out when you begin with companies after their properties have been largely depreciated, and they have invested the depreciation reserve in other properties, or used it up-distributed it in dividends.

Senator BONE. Would you not think the suggestion was somewhat modified by the expression “used and useful” for the service in

“ question?

Mr. BENTON. Any rates should be confined to a fair return upon property used and useful. I agree with that.

Senator BONE. If the investments are not reflected in property that was presently used and useful?

Mr. BENTON. You have property used and useful, the original cost of which was 100 percent, and it has depreciated to 70 percent.

Senator BONE. You referred, as I understood, to property that was no longer used in electrical service.

Mr. BENTON. I did not intend that my remarks should be interpreted that way. I meant that the property is now used in service, but has depreciated, say, 25 percent. While that depreciation has been going on, the company has been receiving a full fair return, including depreciation. The companies presumably have set up a depreciation reserve, but they have not in their depreciation any bonds or any cash; they have got it in some more property which is a part of the plant in use; and if you have in the law a command that the rate must yield a fair return upon the original cost of all that property, you assess too great a burden upon the public. You would also assess too great a burden upon the public in the case of a company which had built a plant to serve 100,000 people in a town where, like Goldfield, something has happened to cause the community largely to die. The plant is there, and is still serving some portion of the original population but there is not business to pay a fair return on the original cost.

Senator BONE. How far afield may we go if we undertake to predicate rates on the character and value of the service rendered to a community? Does not that open up a field that has never been explored?

Mr. BENTON. I think it is necessarily explored whenever you fix just and reasonable rates.

Senator Bons. I am talking about basing rates on a theory of that kind. You can take the average rate case and find every theory that was ever heard or advanced aggressively and persuasively. I am talking about the theory of basing rates on the value of the service. Are you not opening a veritable Pandora's box?

Mr. BENTON. I do not think so. The Supreme Court has recog. nized that from the beginning as a proper element to be considered, from the Covington Turnpike case, with which you are undoubtedly familiar, down to the present time. It has held that the man who receives service is entitled to pay no more than the service is fairly worth

Senator BONE. Are you able, as a commissioner, to reconcile all the different decisions?

Mr. BENTON. No; I am not. Senator BONE. Do you think anybody in the country could reconcile them?

Mr. Benton. No; I do not think so. But I am saying that in my humble judgment it would be a mistake upon the part of Congress to tie the hands of any commission so that it cannot exercise a fair judgment as to what are just and reasonable rates.

Senator Bone. What do you think of the doctrine announced here legislatively which would amount to an abandonment of the reproduction cost doctrine which has been so ardently expounded by the utility representatives before courts and commissions in recent years?

Mr. Benton. Personally I do not believe that you can close your eyes to a consideration of the physical property that is being used at the time the rate is received, and at the time the service is rendered. I never have believed that the reproduction cost ought to be considered as the dominating element. I have thought that the rule as laid down by the United States Supreme Court in the much abused case of Smythe v. Ames is the only practical rule that has yet been devised, because that rule permits you to consider what the operating company has put into the property, what property is has, and what that property would cost today, what it costs to operate, and the amount of business it does, and then leaves it to the regulating body to determine what is just and reasonable. While it may be said, and is true, that that is no rule at all, yet it is also true that nobody has ever been able to devise a rule which would always in different cost, measure just and reasonable rates.

Senator BONE. The whole rule is just a jumble of ideas, is it not? Do you think the average men who is a layman, but who has an understanding mind, could read all these cases and know what courts and regulatory bodies mean by the language they use?

Mr. BENTON. Nobody could read all of the rate cases and believe that they could have represented the mind of any one man, because you have a great number of cases, based upon greatly varying facts, with opinions written by men of differing purposes and views. You attempt to reconcile cases which cannot be reconciled, as you have so well said.

Senator Bone. Take the McArdle case in Indianapolis: Could you tell us right now exactly on what theory that valuation was arrived at?

Mr. BENTON. I could not tell you now, and I never could tell you.

Senator BONE. But the people in Indianapolis from now on, clear into eternity, will have to pay rates on a theory which nobody understands.

Mr. BENTON. The Indiana commission has been proceeding with another rate case involving that utility. I do not know just what the stage of it is; but the Indiana commission does not intend to rest under the rates which were prescribed in that case.

Senator BONE. When a company, presumably in good faith, issues its securities and sells them for cash to the public, and the public having bought those securities on the strength of that decision, if the commission should determine that it made a terrible blunder and should strike out 8 or 10 million dollars of the value, which rests on what I think is a lot of fantastic notions, what would the company do?

Mr. Benton. If it were struck out, they would pay so far as they were able to pay.

Senator BONE. The whole business hangs, like Mahomet's coffin,

in space.

Mr. BENTON. May I read you a few sentences from the opinion of the Supreme Court, which I have not heretofore put into this record, which I think will bear upon this really very important matter which you are discussing. The citations I refer to are these. In Smythe

: V. Ames the Court said (reading]:

What the company is entitled to ask is a fair return upon the value of that which it employs for the public. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth.

The principle has been restated in Corpus Juris, volume 10, page 418, as follows (reading]:

The public is entitled to demand that no more shall be exacted from it than the services rendered are reasonably worth; and this right takes precedence even over the right of a company to a fair return on the investment when the two rights cannot stand together. In consequence, the value of the service to the public is an important factor in determining the reasonableness of the rates charged therefor. In the Covington Turnpike case, 164 U. S., 578,579, the Court said (reading):

It is alleged here that the rates prescribed are unreasonable and unjust to the company and its stockholders; but that involves an inquiry as to what is reasonable and just for the public. If the establishment of new lines of transportation should cause a diminution of the number of those who need to use the turnpike road, and, consequently, a diminution of the tolls collected, that is not in itself a sufficient reason why the corporation operating the road should be allowed to maintain rates that would be unjust to those who must or do use the property.

Mr. Chairman, I have no disposition to argue this. The bodies for whom I speak believe that your attention ought to be directed to this matter, so that you may rephrase in some manner that part of the bill, so that the commission which you create will not be deprived of any discretion in the matter of the rates which it prescribes. Of course these wholesale interstate rates are going to affect the local consumer rates which are subject to the jurisdiction of these State commissions, and that is why they are interested in the matter.

The CHAIRMAN. I am inclined to agree with Senator Bone, that you can read all the Supreme Court decisions and when you get through you do not know very much more about it than you did before.

Mr. BENTON. Mr. Chairman, I have not attempted for a moment to reconcile them. I think it was unfortunate that in Smythe v. Ames the Court referred to the rate base as value. I think that has confused commissions and courts from that day to this. But I think the Supreme Court is getting away from that word in its ordinary meaning.

The CHAIRMAN. It probably helped us lawyers.
Mr. BENTON. It has helped the legal profession beyond all doubt.

I will skip over various amendments and come to one on page 124, to section 302. As to that section we ask to have language included which will not disable the State commission from determining what is a fair depreciation rate when it has before it a utility for the regulation of its rates.

Senator Bone. What page is that on in your memorandum?
Mr. BENTON. On page 13 of my memorandum.

If the Commission should prescribe uniform depreciation rates for electric utilities throughout the country, it would be inevitable that in some cases those rates would be more than the actual depreciation experienced. If the rates of such a utility should come on for regulation before a State commission, the utility ought not to be permitted to hide behind the order of the Federal Commission and say the Federal commission fixed our depreciation at 4 percent and you cannot say it is 3 percent.

We are not desirous that the Federal commission shall be in any way limited in its power, but we desire to have the State commissions left free to exercise their judgment in the administration of their laws in performing the rather difficult burden which is placed upon them of securing just and reasonable rates for the public which finally consumes the current.

Senator Bone. How far does the average commission go in keeping a check on the maintenance expenditures of the average utility company? That is to say, how much latitude do you give the average power utility in maintenance accounts so that it may from that ge

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