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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 affeoted 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 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 proponents 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 electrie 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 fex 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 (h) 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. Ther can be no general competition between eleotricity 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 to justify the subjecting of the natural-gas industry to the provisions of this bill. On the contrary, the proponents of the bill have stated during the course of the hearings on this bill that they are now investigating the industry as a basis for proposing legislation. As has been made clear, the provisions of title I are not properly applicable to this industry. There has never been any implication that the industry is not giving adequate service and taking care of obligations to consumers. Title I however, if imposed would render it impossible for the industry to continue this record of performance.

The bill will have the effect upon the natural-gas industry of destroying the holding companies; stifling normal and natural expansion of the operating companies, which is necessary if the greatest number of people are to enjoy this natural resource; usurping the management of the operating companies and destroying their ability to function and give adequate service; depriving the local regulatory authorities of control over the business that is essentially local in character; dissipating the value of investments in natural-gas securities; and retarding recovery by making it practically impossible to secure capital funds for expansion.

April 27, 1935.




Seventy-fourth Congress, first session. (Hon. Burton K. Wheeler, chairman.) The following statement is submitted in connection with the consideration of S. 1725:

I. OIL COMPANIES AND NATURAL Gas All the important natural-gas fields were discovered in the search for oil, ad oil companies have been faced with the necessity of recouping their investment by disposing of this natural gas. In this way many oil companies have gotten into the natural-gas business either directly or through subsidiary companies. Oil and gas frequently are found in the same fields, and so in the future the search for oil reserves may develop additional gas fields. Any legislation affecting natural gas, therefore, necessarily concerns the oil industry. Many oil companies become "holding companies" under the definition in the bill. First, the oil refineries of their subsidiary oil companies sell surplus oil gas, and second, subsidiary companies sell natural gas for fuel to industries and in some instances to public-utility consumers. An oil holding company either would have to register as a “public-utility holding company", or dispose of all its interest in the gas business, even though that be wholly incidental to its oil operations. II. How an Oil COMPANY HAVING AN INTEREST IN NATURAL Gas OPERATING

COMPANIES WILL BE AFFECTED IF IT REGISTERS AS A HOLDING COMPANY (a) Registration would bring under the Securities and Exchange Commission all of the oil and other activities of an oil company as well as all of its natural gas interests.

(6) No securities respecting the oil business could be issued because of section 7 (d) which, among other things, requires all securities that are issued by a registered holding company to be "necessary or appropriate to the operation of a geographically and economically integrated public-utility system.”

(c) No purchases of securities or capital assets respecting the oil business could be made because of section 10 (e) which prohibits the Commission from approving an acquisition of securities or capital assets, except those of a business in which it is lawful for a registered holding company to engage in or have an interest in under the provisions of section 8, and unless there has been obtained from the Federal Power Commission a certificate that the secuisition of such securities or capital assets "will serie the public interest isy advancing economy and efficiency in the operations of a geograpl.ically and economically integrated public utility system."

(d) All loans made by an oil company to any of its subsidiaries engaged in the oil business, all dividends which it may pay to its stockholders and all retirements of its securities must be in accordance with the rules of the Securities and Exchange Commission under section 12.


(e) All contracts or other transactions which an oil company or any of its subsidiary oil companies would have with each other must be subject to the rules and regulations of the Commission, with full requirements of reports showing cost, disclosure of interest and other items. Likewise, no subsidiary oil company could make a contract with another nonaffiliated company for the performance of any service except in accordance with the provisions of section 13.

(f) Full reports concerning all of its oil business would have to be filed and all of its accounts and records would have to be kept in accordance with the rules and regulations prescribed by the Securities and Exchange Commission. III. MAY AN OIL COMPANY CONTINUE TO Own SECURITIES IN NATURAL-Gas

UTILITY COMPANIES? By January 1, 1937 (by Commission consent this may be extended to Jan. I, 1939), an oil company will have to dispose of all of its stocks in natural-gas utility companies. Section 8 limits the businesses in which a registered holding company can have an interest to gas and electric, to other businesses which a public-utility company is authorized to carry on by a State law and other incidental business, A company having an interest in subsidiaries engaged in the oil business would be prohibited from having an interest in natural-gas utility companies.

The analysis of title I states that the permission given to carry on other businesses than gas and electric are designed “as not to cause interference with State policy which allows or fosters the carrying on of water works, traction systems, bus systems, etc., by electric and gas utilities."

Notwithstanding the fact that there is a closer affiliation between the oil and gas businesses than there is between water works and bus systems and electric and gas utilities, a holding company may continue to hold an interest in a bus line and a natural-gas business, but is prohibited from owning an interest in an oil company and a natural-gas company. The State laws do not prohibit the combination of oil and gas just as they do not prohibit the combination of transportation facilities and gas.

Registered holding companies that are exclusively engaged in the public utility business may continue to own stocks of subsidiary companies at least until January 1, 1940, and under section 11, subsection (b), paragraph 4 may continue as a holding company if necessary to maintain the operation of a geograpbically and economically integrated public utility system serving an economic district extending into two or more contiguous States.

The company I represent does own securities of separate companies which are geographically and economically integrated and which serve an economic district extending into two or more States, yet it would not be permitted to retain the securities of these natural gas utility companies, although a public-utility holding company owning stocks only in the utility business would not be so affected. IV. WOULD IT BE PRACTICABLE FOR AN OIL COMPANY TO REGISTER AND HOLD


It is not the purpose and intent of this bill to regulate the oil business. It clearly is the intent that the public utility business shall be separated from all other businesses, notwithstanding any natural affiliation that exists in fact. This policy is carried out in the provisions of the statute which make it actually impracticable and impossible for an oil company to register and comply with the law. The restrictions upon all of its oil business are so hampering and so drastic that an oil company would be forced to dispose of its securities of natural-gas utility companies before October 1, 1935.

V. THE ABUSES ENUMERATED IN SECTION 2 or THE BILL In subsection (b) of section 2 of title I are set forth the various abuses which it is claimed require the elimination of the holding company. These may be grouped under the following general leadings: 1. Securities:

(a) Information unobtainable.
(b) No approval or consent of State having jurisdiction over operating

(c) Issued upon fictitious values and paper profits.
(d) Issued in anticipation of excessive revenues.
(e) Sushidiary operating companies are burdened with support of over-

capitalized superstructure, detrimental to investors and consumers, and preventing rate reductions.

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2. Service, construction, and sales contracts place excessive charges on operating subsidiaries. These cannot be regulated effectively by the States without Federal assistance.

3. Absence of arms-length bargaining between affiliates is detrimental to consumers and investors.

4. Construction work secured for holding companies and affiliates, eliminating independent competition.

5. Accounting practices, rate and dividend policies are controlled by holding companies, thereby obstructing State regulation.

6. Holding companies, in many instances, bear no relation to economies of management and operation, or to integration and coordination of related properties.

7. The foregoing abuses are so persistent and widespread that they necessitate legislation to control and eliminate the holding company as an artificial corporate device inherently injurious to investors, consumers, and the general public. VI. THESE ABUSES HAVE NOT BEEN ENGAGED IN BY STANDARD Oil Co. (NEW

JERSEY) Standard Oil Co. (New Jersey) does not own any securities of electric utilities. It is under this bill because it has an interest in natural-gas utility companies.'

The securities issued by Standard since its founding are based upon all of its business. There have been no securities issued with special reference to its security holdings in natural-gas companies. The natural-gas business in which it has an interest is a relatively small part of its entire business. It cannot be charged with any of the abuses relating to securities.

At no time has it ever had any management, service, construction, or sales contracts with any of the natural-gas companies in which it holds an interest.

None of the reasons recited for the enactment of this legislation apply, so far as I know, to oil companies, certainly not to the company I represent. Why therefore, should oil companies be required to dispose of their natural-gas utility securities immediately wh holding companies which have complicated corporate and financial structures may be permitted to retain all of their securities until January 1, 1940?. By that date the legislation may be modified so as to permit certain companies to continue to exist. But that would be too late for the oil companies. They already would have been compelled to dispose of their stock in natural-gas utility companies. The question, therefore, arises, Why it is necessary so to penalize the oil companies? That it is not necessary is shown by the following statement respecting the natural-gas companies in which the company I represent holds an interest.



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In 1890 an oil company subsidiary of Standard began to prospect for oil in the Appalachian field in West Virginia. In so doing natural-gas wells were drilled in. The oil company continued to find gas in its oil operations and developed a considerable area of gas leases and a number of producing wells from which no revenue at all was being derived. For 8 years no use was made of this gas except for fuel in the field. In 1898, to find an outlet for this gas, the Hope Natural Gas Co. was organized and to it was conveyed all of the gas acreage and gas wells which the oil subsidiaries of Standard owned in West Virginia. The East Ohio Gas Co. also was organized in 1898 and constructed a gas transmission line from the Ohio River to Akron, Ohio. Extensions subsequently were made to Cleveland, Youngstown, Canton, and other Ohio towns,

The Peoples Natural Gas Co. was organized in 1885, but it was not until 1903 that its stock was acquired by Standard, thus maintaining service to consumers with gas which was found in its explorations for oil. At this time the company's supply of gas had failed substantially to keep up with the demands of its market. It became necessary to acquire new gas acreage and production outside of Pennsylvania. The owners either were unable to or did not desire to make this investment and the sale to Standard was made.

After the acquisition of this stock various natural-gas distribution properties were acquired by the Peoples Co. and in each instance the acquisition was brought about by the failure of sources of supply of these various separate companies. In many instances the small companies had been financed locally and local capital no longer was able to acquire the necessary gas reserves when the immediate local

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