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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 standard 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, or this is how it came up: One morning the general counsel for the Kansas Natural Pipe Line Co. came into my office and said to me: “Now, we are losing money on that 35-cent rate. We are going to start billing these distributing companies at the rate of 40 cents per thousand, beginning this month." ' I said: “You haven't asked us about it or filed any application for permission to do that?" He said: “Well, we are not going to file an application. It is our position that this is interstate commerce and you have nothing to do with it." It was a perfectly good-natured conversation, and nobody was mad about it, but that was just his statement. I said: “Well, we will see you in court."
The result was that we did go to court, on the theory that there being no Federal regulation, we might impose a rate upon the pipeline company for the delivery of gas at the town border. stance, the pipe-line company and the distributing company were under separate ownerships.
Our own Supreme Court held that we were right. The Supreme Court of the United States held that we were wrong. Now, ever since that time Kansas has been trying to regulate interstate pipe-line rates without success. The present effort is aided by two cases which the Supreme Court of the United States decided and in which it held this: That where a contract was not made between parties that dealt at arm's length the State might examine into the reasonableness of the rates prescribed in that contract. That was first decided in the Illinois Bell, case where the Supreme Court of the United States held that that old percentage deduction that the American Telephone & Telegraph Co. took from its subsidiaries—and, incidentally, I had had a fight with the Bell Telephone Co. about that also—that the value of the service had to be proven.
And then later, in a gas case from Kansas, the Western Distributing Co., that matter came up again, and again the Supreme Court held, as it did in the Illinois Bell case, that here was a contract made between a pipe-line company and a distributing company, both of which were owned by a holding company, thereby creating a common interest, and that the contract not being made at arm's length it was entirely proper for the State to inquire into the reasonableness of the terms of the contract and whether or not the distributing company was paying a reasonable rate.
But I do want to urge upon the committee that that is limited regulation at best, and even then it only applies where the pipe-line company and the distributing company are oned by the same inter
Where you have a different set of interests, as to the pipe-line company and the distributing company, the State has no power whatever, and that is one of the gaps in interstate public-utility regulation that very clearly ought to be filled in,
Now, what I have said about gas applies also to electric-power transmission lines, although I do not think with the same degree. The same principle is involved but there is more interstate traffic, I think, in natural gas than there is in electric power. And then, too, the characteristics of the industries and the two operations are somewhat different.
You can build an electric power plant of any size you want to, wherever you want it. You could not do that with water power, of course, but take the ordinary commercial energy plant and you can build a plant of any size you want, wherever you want it. You cannot do that with natural gas. You have to go where the natural gas is, and then bring it where it is not, to where there is a market for it.
And it so happens that there are more natural-gas pipe lines in and through Kansas, I think, than any other State. I think Ohio has perhaps more natural-gas customers than Kansas has, but it is because it has a greater population. With the exception of the line from the Texas Panhandle field to Denver, all of these pipe lines cross Kansas. There was a natural-gas pipe line built from Amarillo to Kansas City for the purpose of supplying both Kansas City, Mo., and Kansas City, Kans; and then there was a natural-gas pipe line built across Kansas to Chicago, and one built across Kansas to the Twin Cities, and one built across Kansas to Springfield, Ill., I think it is. I heard a part of the testimony of the natural gas people here this morning, and doubtless they have described that situation fully.
Before I leave that point I do want to make one statement to you about these natural-gas pipe lines, and do want to impress upon the committee this. The laws of Kansas constitute all pipe lines, whether oil or gas, over 15 miles in length as common carriers, but we never undertake to give that practical application in Kansas. It could possibly be done with oil, and in fact it is sometimes done with oil. All the oil companies, the big producing oil companies in the MidContinent field, own their pipe lines, and they will all buy your oil, and a few of them will transmit your oil for you. But oil is different
You can store oil after you bring it above ground until you get ready to ship it, whether by railroad or pipe line. Then if you are going to ship it by pipe line you can identify it by putting in a water cushion, I mean between the consignment ahead of yours and the one they are handling for you.
You cannot do that with gas. All gas pipe lines of which I have any knowledge were built as a part of a public utility service. In the natural gas public utility service you start, of course, with production and then must seek a market. I have lived in these natural-gas fields so long that I am quite familiar with that situation, that natural gas seeks a market. Before you spend a lot of money on a pipe line you have to know that you have an adequate supply, because of the market you create, and when you create a market-let us take Kansas City, for example, or Denver, either one will do, but I am more familiar with Kansas City: We have probably 600,000 people in the two cities, Kansas City, Kans., and Kansas City, Mo. And then we have probably 600,000 more people dependent upon that natural-gas pipe line company for their supply. About twothirds of the inhabitants of those cities and my State of Kansas use natural gas for cooking, and a great many of them for heat.
Now, when you have, say, 1,200,000 people dependent upon continuous service, a continuous flow of gas that must not be interrupted, that always has to be adequate, it is just a physical impossibility to make a common carrier out of a line of that kind.
It is conceivable to me that you might build a gas pipe line for common-carrier purposes that would carry the gas of anybody who offered it, and that would deliver the gas of anybody to whoever would take it, but no gas pipe line of that kind ever has been built so far as I know. I do know of a few pipe lines that have been