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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 Bons. 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 BONE. 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 recognized 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 Bons. 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 90count, which is an operating overhead, maintain its system as near as may be to 100-percent efficiency?

Mr. BENTON. The commissions ordinarily recognize a stated depreciation charge from which utilities may maintain their system in 100-percent operating efficiency, but which will ordinarily be more than sufficient for that. In some way or other that depreciation reserve is invested. It may be in securities, but ordinarily it is invested in plant; and it is in that way that a great many utilities have added to their systems-largely through the depreciation reserve. That is the kind of situation which I am pointing to when I say that the law should not compel the Commission to fix a rate to yield a fair return on the whole cost.

Senator BONE. Is it not a practical proposition that if the proper attitude by the State regulatory body is adopted toward these utilities, in other words, if the State regulatory body is inclined to believe that the company, by a very generous expenditure for maintenance, is able to maintain its system in such a fashion that even obsolescence plays no great part in it; that is, out of maintenance to replace portions of that system, which normally might be covered by the factor of obsolescence, with the depreciation fund, it amounts to just that much extra dividend, does it not?

Mr. BENTON. I have no question about that. On the contrary, I believe that companies often have sought to maintain their properties in good operating condition out of operating charges, and to build up depreciation reserves in addition thereto. In fact, rate investigations have disclosed that to be true. You probably have in mind that in the Illinois Bell Telephone case, decided by the Supreme Court last year, the decision turned upon that very point, that the company had been keeping up its properties in addition to an excessive depreciation reserve, and it was by virtue of the right of the commission to consider the depreciation reserve that it was enabled to secure the rate reduction which it ordered. That is exactly the right which we wish to preserve when we ask to have this language put into the bill.

Senator BONE. When a company is using maintenance funds to preserve its system against the ravages of time so that at the end of a 25-year period the system is as near perfect as may be, then that company has no right to have a depreciation fund, for it has substituted in its operating overhead the very function that the depreciation fund is supposed to perform. I have seen some things in the western part of the country that approached so close to that particular situation that it did not present a very happy picture.

Mr. BENTON. That is something which any regulatory commission ought to watch very closely.

Senator BONE. There was a case where depreciation funds were paid out to the stockholders, which was an impairment of capital.

Mr. BENTON. You are of course absolutely right, as every fair person must recognize, when you say that a company has no right to charge the public twice for one expense; and that is what it does when it takes care of its depreciation through maintenance and also builds up a depreciation reserve.

Mr. Chairman, that concludes the statement which I desired to make, unless there are some other questions.

The CHAIRMAN. We will take up all your amendments and they will be considered by the committee.

Mr. GADSDEN. Mr. Chairman, before the committee adjourns I would like to ask permission to file statements by the Columbia Gas & Electric, Electric Bond & Share, and Bernard Weadock, vice president of the Edison Institute.

The CHAIRMAN. Very well. There have been some other people who have asked for permission to file statements. Anybody who has a statement that he wishes to file, if there is nothing in the statement that is not pertinent, we will permit it to be filed. Of course we do not want a lot of things to go into the record that are not pertinent to the issues involved here. Anybody who has a statement that he wants to file will be permitted to do so by submitting it to the clerk and to the committee.

I am going to conclude the hearings right now. I probably shall not call an executive meeting before the latter part of this week or the first of next week, because I desire to give the members of the committee who have not been able to attend the hearings an opportunity to read the record and go over the matter before we take it up in executive session.

I would like to have inserted in the record at this point a letter from William T. Chantland, attorney in charge of utilities investigation, Federal Trade Commission, dated April 27, 1935, with the information accompanying it.

(Letter dated Apr. 27, 1935, with accompanying matter, referred to and submitted by the chairman, is here printed in full as follows:)

FEDERAL TRADE COMMISSION,

Washington, April 27, 1935. Hon. BURTON K. WHEELER, Chairman Committee on Interstate Commerce,

United States Senate, Washington, D. C. S. 1725, committee hearings.

DEAR ŚENATOR: At the time I testified before your committee on S. 1725 certain requests were made by you and other members of the committee for additional information which I promised to procure. I am sending the information herewith in a separate memorandum. Very truly yours,

Wm. T. CHANTLAND, Attorney in Charge of Utilities Investigation.

I. UTILITY OWNERSHIP OR INTERESTS IN NEWSPAPERS Inasmuch as our record is not carried to date it is impossible to answer your inquiry as to what the exact situation is at this date. Therefore, I had our records of the investigation examined and present the following summarized statement of the facts as disclosed by them:

Mr. Archibald Graustein, president of the International Paper & Power Co., and also of its owned International Paper Co., testified on March 20, 1931, before the Federal Trade Commission concerning its ownership of newspapers as follows:

"INTERNATIONAL PAPER & POWER CO. "The International Paper Co. owns $1,735,000 par value debentures of the Chicago Journal Co. through the Market Property, Inc. (pts. 31–32, pp. 395–400, also footnote on p. 398).

"All the stock in the Augusta Chronicle, the Spartanburg Herald-Journal and the Columbia Record are now owned by the International Paper Co. or a nominee. These newspapers are only being operated until they can be disposed of on a proper basis. "(Pts. 31-32, p. 405.)

"At one time, the International Paper Co. owned an interest in the Piedmont Press Association, Inc., the Boston Herald-Traveler, the Brooklyn Eagle, and the Ithaca News Journal. According to the testimony of Mr. Graustein, all of these newspapers have now been sold back to the former owners, and the International

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