holding companies. Any company in any line of business is a "holding company" within the definition of section 3, paragraph (7), if it exercises control over a company which sells natural, manufactured, or byproduct gas even though such company is not in the public-utility business. Any person whom the Commission finds to be exerting a "material influence" over the management or policies of a public utility may be held to be a "holding company."

Because the definition of a "gas utility" in paragraph (4) is so broad, many steel companies, coke manufacturing companies, chemical companies, carbon black companies, and oil companies will become holding companies and have all their business subjected to the provisions of this bill. Although their subsidiaries may not be engaged in the public-utility business, nevertheless they would be required by section 8 to dispose of all their interests in manufactured, natural, and byproduct gas.

By means of the definition of a "subsidiary company" in paragraph (8) and of an "affiliate" in paragraph (11), there is brought under the jurisdiction of the Securities and Exchange Commission and Federal Power Commission all naturalgas operating companies even though only remotely connected with a "holding company" as defined.

There is brought under the control of the Federal Power Commission all persons and companies having no other connection with a public-utility company than to sell materials and perform services. Section 13 (d) does this by subjecting all dealings with a public-utility operating company to the jurisdiction of the Federal Power Commission. If a coal company sells coal, if an engineering firm makes a contract to render services, if an accounting firm undertakes to make an audit, unless done in accordance with the rules of the Federal Power Commission, the persons involved are subject to a fine of $10,000 and may be imprisoned for 5 years. There is notably one group of public-utility operations that is not subject to the law in the slightest respect. The bill exempts the United States, the States, all municipalities and all governmental agencies or authorities, which would be left free to compete with existing natural-gas companies.

EFFECT OF THE BILL ON MANAGEMENT

The abuses which it is claimed exist in the holding-company field are not charged against the operating companies. Notwithstanding this fact the bill effectively extends Federal control to practically every natural-gas operating company in the United States, merely because such operating companies are subsidiaries of holding companies. No benefits whatsoever can come from such control and it can only result in an impaired ability to properly serve the consumers.

The constitutional power under which Congress can enact this legislation is the power to regulate commerce among the States. The power of the States over public utilities likewise is that of regulation. This has been held by the Supreme Court of the United States many times to be a limited power, not including control of management.

Many natural-gas operating companies have found it necessary to organize subsidiary companies because of the requirements of State laws and for other business reasons. Such companies have all their operations brought under this bill, which goes the full distance and deprives the owner of the property, whether a holding or operating company, of anything to say about the following essential matters regarding his operations:

1. In what territory the company shall operate.

Section 11 makes it the duty of the Commission to determine the extent to which the subsidiaries of a holding company can be confined to those that are essentially related in operation and substantially contiguous in location, and to require the elimination of such properties as the Commission thinks are not necessary to a geographically and economically integrated public-utility system. See discussion following.

2. Whether the same company may engage in the related businesses of natural gas and carbon black, or of natural gas and oil and natural gasoline.

Section 8 (a) limits the business in which a holding company may be interested to gas and electricity, and businesses deemed by the Commission to be incidental thereto. See discussion following.

3. Whether such company may engage in both the electric and natural-gas business.

A company engaged directly or indirectly in the electric utility business cannot have an interest in interstate natural-gas pipe lines or in natural-gas producing properties. Section 8 (b). See discussion following.

4. Whether a company may acquire securities or physical assets of another company, or sell or dispose of any of its facilities.

Sections 9 and 10 and parts of section 12 apply to operating subsidiaries as well as to holding companies.

One restriction is to the effect that an operating company may acquire securities or capital assets only for the conduct of that type of business in which it is lawful for the holding company to have an interest. This might prevent an operating company from acquiring the assets of its own subsidiaries or advancing funds to them unless the company and its subsidiaries were engaged solely in one branch of the business.

Another restriction would prevent the acquisition of any security or capital assets unless Federal Power Commission gives a certificate that the acquisition will be in the interest of a geographically and economically integrated system. 5. The kind and amount of securities a company may issue, the purpose of the issue and the disposition of the proceeds, and the making of guarantees and assumption of liabilities.

Sections 6 and 7 apply to subsidiary operating companies. Only three classes of securities may be issued: (1) Par value common stock, (2) first-lien bonds, (3) receivers' or trustees' certificates. Securities and Exchange Commission has discretionary power to authorize other types of securities (a) for refunding operations, and (b) for a company whose business is done exclusively within the State in which it is organized, provided the State commission gives affirmative approval. The prohibition of financing by means of preferred stocks shuts a company out of that important section of the investment market. Furthermore, the difficulties of common stock financing may result in a tendency toward an undesirably high proportion of bond financing. In general, a combination of bonds, preferred and common stocks, would represent sounder and lower cost financing than a combination of bonds and common stock only.

Short-term notes and loans (maturing within not more than 6 months) do not require the Securities and Exchange Commission approval (sec. 6) provided the aggregate amount of short-term debt outstanding does not exceed 5 percent of capitalization. Short-term notes or loans in excess of this 5 percent limit are apparently prohibited, with no discretionary power on the part of the Securities and Exchange Commission to waive the prohibition. Even a holding company could not loan on short-term notes to a solvent subsidiary if this 5-percent limit were exceeded.

6. Whether any holding or operating company can pay dividends on any security or acquire, retire or redeem any security, solicit any proxy or negotiate or take any step in the performance of any transaction with an affiliate, except as may be allowed by the Commission.

Detailed prohibitions respecting these matters are contained in section 12 and operating subsidiaries are affected as well as holding companies.

7. Establishment of systems of accounts and prescribing the account in which particular items shall be entered, and the filing of such reports and minutes of directors' and stockholders' meetings as prescribed by the Commission, which reports must be certified by public accountants.

Sections 14, 15, and 20 require all of these things, as well as numerous other items.

8. Existing long-term contracts and other transactions essential to the continued operation of the natural-gas business, which do not conform to the provisions of this bill or to any rule, regulation, or order that might be promulgated by the Commission under the bill.

Such contracts are made subject to full control under section 26.

9. The making of service, sales, or construction contracts with wholly unaffiliated companies under private negotiations and nondisclosure of terms.

Section 13 (d), in placing all of the business done by an operating company with & nonaffiliated interest under these restrictions, deprives a company of the advantages gained in private negotiations for materials and services. Engineering and accounting service cannot properly be the subject of competitive bidding, there being involved the element of individual skill and knowledge. This would seriously handicap all operations.

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THE THEORY OF A GEOGRAPHICALLY AND ECONOMICALLY INTEGRATED PUBLICUTILITY SYSTEM

In the recital of abuses in section 2 of title I of the bill, no. (12) is as follows: "The growth and extension of holding companies in many cases bear no relation to the economies of management and operation or to the integration and coordination of related properties, but have been influenced by a desire for economic power and security profits and have tended toward the concentration and monopolization in a few holding-company systems of control of gas and electric-utility companies to the detriment of investors, consumers, and the general public." Section 30 specifically provides for investigation and determination, in furtherance of a wider and more economical use of natural gas, of the type and size of geographically and economically integrated natural-gas operating systems, to best promote and harmonize the interest of the public, the investor, and the

consumer.

True purpose of bill revealed. This same theory is carried out in section 11, wherein the Commission is directed to make a study of holding-company systems in order that the "properties thereof may be confined to those essentially related in operation and substantially contiguous in location." The requirement that every holding company must dispose of securities or assets unless the retention thereof is necessary or appropriate to the operations of a geographically and economically integrated public-utility system discloses that the true intent of this bill is a nationalization of the utility industry and a parceling out of the various units in such manner as the Federal Power Commission deems wise.

Alleged abuse nonexisient in gas industry.—The statements made, both in the bill and in the analysis thereof to the effect that the assembling of a number of operating properties, all of which are not contiguous and coordinated, has been detrimental to investors, consumers, and the general public, are obviously inaccurate. Because of the fact that gas must be taken where it exists in the earth and the markets must be served where the centers of population are situated, the mere statement thereof refutes the proposition that natural gas properties of a holding company should be confined to such operating companies as are related in operation and substantially contiguous in location. The natural gas pipe line extending from the Panhandle of Texas to Minneapolis and St. Paul passes through many States which are served by other gas companies, but the entire operation from source to market is a single operation. No one could deny that this line is an "economically integrated" system but no one would suggest that it is a "geographically integrated" system within the meaning of the bill. The same thought is applicable to the many other lines which extend through the same territory in transporting gas from the Panhandle field, each of which is a necessary part of the system. These lines, however, cannot meet all the requirements of the bill as drawn for although they are unquestionably "economically integrated" they are not and cannot be "geographically integrated" and the bill requires that every system must be both.

This theory not applicable to natural gas.—As new gas fields have been discovered, those companies already experienced in the natural gas business have sought to develop them and extend natural gas service to communities not already served. By using their financial, technical, and management facilities and experience, holding companies have developed such new sources of supply to the benefit of the people owning the land under which the gas is found, the States in which it is located, and the consumers who get a cheaper fuel. If a natural gas operating or holding company which had been established in the Appalachian territory, where the first development took place, had been denied the right of making investments in or engaging in operations in additional natural gas fields as they were discovered, there would certainly not have been the expansion of the natural gas industry which has taken place since 1920.

Those who knew how to carry on this business were naturally the ones best qualified to develop it in new fields. To attempt now to separate the ownership of natural-gas properties in widely separated parts of the country, would be just as sensible as to provide that no oil company could engage in the exploration and development of oil fields or the building of refineries, except in areas which are economically and geographically integrated. The necessity of obtaining the product where it exists and selling that product where the people who can buy it are located is essentially the same in both the oil and gas business.

The natural gas industry should be permitted to develop logically and naturally and should not have superimposed upon it an artificial theory administered by s commission without experience in the natural gas business,

THE PROHIBITION AGAINST COMBINING THE NATURAL GAS BUSINESS WITH THE OIL, CARBON BLACK, or Natural GASOLINE BUSINESSES

Under section 8 (a) of title I, every registered holding company and subsidiary thereof is limited to the businesses of gas and electricity, to such other business as a public utility company might be authorized by a State commission to carry on, and such other business which the Securities and Exchange Commission might find to be reasonably incidental to the foregoing. By this section a combination of the oil and gas businesses is prohibited. The natural affiliation between these businesses has been pointed out on pages 12 and 13 of this brief.

The pipe lines which extend from the Panhandle field to various markets in the West and the Middle West have enabled a good many of these oil operators to recover some of the investment which they made in acquiring acreage and drilling wells and prospecting for oil. In some instances these companies have an interest in the pipe line, and the prohibition against a company having an interest in the oil business along with the natural-gas business would require the divorcement of this joint investment.

Where casinghead gas is produced the gas production is inseparable from the oil production. If section 8 (a) is enacted then a company producing such oil and casinghead gas could not transport and sell this gas in interstate commerce, but would be required either to sell it in the field or let it waste into the air. In some States, permitting gas to escape into the air is prohibited by law. In such case, unless the oil operator could sell the gas in the field, the production of oil would be necessarily curtailed, thereby increasing the hazard and speculation of exploration for oil.

Many gas companies in seeking additional gas reserves have discovered oil when drilling wells for gas. In such case the company should have the right to dispose of this oil just as any oil company would.

Carbon black and gas are related.-Another business adversely affected is the manufacture of carbon black. Natural gas is used in manufacturing carbon black. The companies so engaged have for a great many years purchased gas acreage and prospected for gas, especially in the early days, when such gas fields were located at such distances from any domestic or industrial market that its transportation and distribution were impracticable. The gas was utilized in carbon black plants constructed in the filed. The principal carbon black companies own wells and producing acreage in the main gas-producing fields, and when it became economically possible to transport gas from such fields to domestic and industrial markets those carbon black companies were in a position to participate in that transportation and sale. Some of these companies transport and sell gas for ultimate public consumption and others have participated in pipe-line projects and so have been able to market their gas in that manner. Section 8 (a) makes this joint operation unlawful. A carbon black company could not produce or transport and sell gas nor could it own stock in any gas utility company. Such a company could only use its gas for manufacturing

carbon black.

Natural gasoline.-A third business directly connected with the production, transmission, and sale of natural gas is that of manufacturing natural gasoline. Such a business is purely incidental to the production and transportation of natural gas and so might be permitted by order of the Securities and Exchange Commission under paragraph (3) of section 8 (a). Such a business, however, should be clearly permitted without the necessity of going to the Commission for authority because it is a very essential part of the operation of a natural gas pipe line. It is necessary to remove all condensable liquids from the gas before transporting it over long distances and in so doing natural gasoline is sometimes produced. It is then marketed. If a natural gas company were not permitted to engage in the selling of this natural gasoline, the conditioning of the natural gas would still be necessary to make it of commercial quality and transportable. This valuable byproduct would have to be thrown away and the cost of the gas would be increased to the consumer to the extent of the cost of conditioning the gas.

Natural gas is so closely allied with the production of oil, the manufacture of carbon black and the production of natural gasoline that no separation can practically and economically be made. Companies engaged in any of these businesses and which come within the definition of a holding company under title I, shoud not be required to dispose of their interests in either the oil, carbon black or natural gasoline businesses in order to continue in existence. Likewise a company which is engaged principally in the natural-gas business should not be

prohibited from carrying on the oil business. By making such a prohibition the fundamentals of the production, transportation, and distribution of natural gas are entirely disregarded.

GAS PIPE LINES AND INTRASTATE NATURAL GAS PRODUCTION FROM ELECTRIC UTILITIES

Section 8 (b) makes it unlawful for any registered holding company which, or subsidiary of which, has an interest in an electric utility company to own or have any interest in any natural-gas production or the interstate transportation of natural gas. This section does not prevent the distribution of natural gas by a company which also distributes electricity, nor by a natural-gas distributing company which is in a holding company system which has electric utility properties. Unless the State law prevents the joint distribution of gas and electricity there is no prohibition against it in this bill. Therefore it would seem that local competition in distribution is not detrimental.

Alleged basis for separation. In the analysis of title I prepared by the propo nents of the bill, section 8 (b) is referred to as follows:

"Subsection (b) is concerned with the unfair subordination of the production and transportation of natural gas to the production and distribution of electric energy, and vice versa. It prohibits, in the same holding-company system electric utilities and facilities for the transportation of natural gas in interstate commerce or for the production of natural gas. The provision is aimed to break up the threatening monopolization of the transmission of natural gas by a few powerful groups who at the same time control the distribution of competing electric energy."

* * *

In view of the fact that competition in the local distribution of natural gas and electricity is not to be eliminated, the proponents assume that certain benefits exist where natural gas is produced and transported to the city border by a company having no connection with electricity, even though the gas is distributed locally by the same company that distributes electricity.

The inclusion of this subsection (b) in the bill further implies that the joint ownership of production, transmission, and distribution facilities by a natural gas company in the same holding company system as an electric utility has been detrimental to consumers. The fact is that there are distinct benefits to the

consumer.

The enforced separation of the production and transmission facilities from the distribution facilities will destroy the benefits that exist where production, transmission, and distribution are under one ownership, and will create burdens that do not exist under such ownership.

Benefits of common ownership to public.-Where there is an integrated system consisting of production, transmission, and distribution facilities the consumer pays a retail price for natural gas based upon the cost of utilizing those combined facilities for his service. Where there is a separation of such facilities and a sale to a distributing company at the town border, the wholesale rate at such town border being fixed by nonaffiliated interests necessarily must result in a higher retail price to the consumer, because of the increased cost of separate organizations. Natural gas has been introduced in many small communities by reason of the fact that an electric utility operating organization already was available. In many instances the amount of business would not justify a separate natural gas operating force.

Competition fallacy. The premise of competition which seems to be the underlying theory of this section is not sound. Electricity primarily is used for light and power. Its cost even under extremely low rates is higher for cooking and hotwater heating than is natural gas. These two sources of energy have their fields in which one is better than the other. Gas primarily is for cooking, hot-water heating and house heating. There can be no general competition between electricity and natural gas in their respective fields.

The separation compelled by this section of the bill goes far beyond the theory of dissolution of holding companies and, in fact, compels the dissolution and breaking down of operating companies without any consideration of the benefits that have accrued through the building up of an integrated system which has been described in a previous part of this brief.

CONCLUSION

It is submitted that no showing has been made natural-gas industry to the provisions of this bill. ents of the bill have stated during the course of the

to justify the subjecting of the On the contrary, the proponhearings on this bill that they