routes and joint rates with other companies (United States v. La. & P. R. Co., 234 U. S. 1; St. Louis S. W. R. Co. v. United States, 245 U. S. 136. The Louisiana case involved the so-called "tap lines" which were claimed not to be common carriers because they were built by lumber companies as private logging roads and most of the traffic was in the companies' own logs and lumber. It was pointed out that most of the railroads in the State originated as private carriers in this way. The argument, the court said, "loses sight of the principle that the extent to which a railroad is in fact used does not determine the fact whether it is or is not a common carrier. It is the right of the public to use the road's facilities and to demand service of it, rather than the extent of its business, which is the real criterion determinative of its character" (234 U. S. at 24). The court further pointed out that the roads had been organized as common carriers under State law, were so treated by the public authorities of the State, that they engaged in carrying for hire goods of others, were authorized to exercise the right of eminent domain and were treated as common carriers by the owners of connecting systems (234 U. S. at 26). The opinion is significant for its plain indication that the obligations of a business are to be determined by consideration of all the factors showing the way it is conducted and its public importance rather than by the original intention of those who enter upon it.

Under the Transportation Act the duty of two or more companies to cooperate in this way in public service is not confined to railroad companies. Express companies which use the railroads for their transportation service are equally subject to the provisions of the Act. The extent to which the duty to establish through routes may be constitutionally carried is most strikingly illustrated in a case sustaining an order of the Interstate Commerce Commission directing an express company to establish such routes with a competitor. The Act provides that a "carrier by railroad" shall not be required without its consent to embrace in a through route substantially less than the entire length of its railroad unless the inclusion of its entire line would make the through route unreasonably long as compared with an alternative route. The Supreme Court held that an express company is not a "carrier by railroad" within the meaning of this provision. It followed that the commission could order it to receive traffic for delivery by a competing company although the initial company itself offered complete service from the point of origin to the destination. The claim that the order was unconstitutional was dismissed in a sentence: "As the American has no absolute right to retain traffic which it originates, and as the provision authorizing the shipper to direct the routing is reasonable, the order does not violate any of its constitutional rights." (United States v. American Ry. Express Co., 265 U. S. 425, 437.) The imposition upon public service companies of the duty to conduct joint operations of this kind plainly constitutes a much slighter interference with property rights than that involved in many of the cases upholding grants of the power of eminent domain to private companies engaged in businesses which the legislalative body has determined to be of public importance. (Clark v. Nash, 198 U. S. 361; Strickley v. Highland Gold Mining Co., 200 U. S. 527; Offield v. N. Y., N. H., & H. R. Co., 203 U. S. 372; Union Lime Co. v. Chicago & N. W. R. Co. 232 U. S. 211.)

Because most of the present power interchanges take place between companies in the same holding company system, the objection has been urged that the imposition of a duty to perform similar services for outside companies involves the utilities in an entirely different type of enterprise from that in which they are now engaged. The argument is really a rephrasing of the claim that voluntary dedication is the test of a company's obligations. It has been shown that this argument is entirely opposed by the decisions. Munn v. Illinois, and other cases cited, supra. But on the narrow claim that services performed only for related companies may not be required on behalf of others, there is direct refutation in cases involving orders issued to railroad companies. Steam railroad companies which interchanged traffic with each other have been held chargeable with a discriminatory practice prohibited by the Interstate Commerce Act when they refused to conduct similar interchange with an electric railroad. (Chicago 1. & L. R. Co. v. United States, 270 U. S. 287. See also Pennsylvania Co. v. United States, 236 U. S. 351.) In Louisville & N. R. Co. v. United States (238 U. S. 1), the company conducted switching operations on all business for another road of which it owned 70 percent of the stock. It switched for an independent company except on products which were competitive with its business products. The Court held that its practice in refusing to the independent company the same arrangement that it made with the company it controlled was discriminatory and could be prohibited by order of the Interstate Commerce Commission. In

Chicago, R. I. & P. R. Co. v. United States (274 U. S. 29), the Court construed the Interstate Commerce Act to authorize the Interstate Commerce Commission to require the establishment of joint rail and water rates that were lower than allrail rates, it rejected the company's contention that this duty could be imposed only when both the railroad and the water carrier are under common control. The provision authorizing the Commission to require companies to extend their interstate facilities finds full support in two cases in which gas companies were compelled by a State commission to make extensions of considerable size in a territory within which they held permissive, although not compulsory, franchises (New York & Queens Gas Co. v. McCall, 245 U. S. 345; New York ex rel Woodhaven Gas Light Co. v. Pub. Ser. Comm., 269 U. S. 244), and in numerous cases upholding Commission orders requiring railroad companies to extend their facilities (Minneapolis & St. L. R. Co. v. Minn., 193 U. S. 53; Chicago & N. R. Co. v. Ochs, 249 U. S. 416; Norfolk & Western Ry. Co. v. Public Ser. Comm.. 265 U. S. 70). The most recent discussion of this power and its limitations is found in Interstate Commerce Commission v. Oregon-Washington R. & M. Co. (288 U. S. 14). There the Supreme Court held that the particular order under attack purported to require the construction of what was not merely an extension but a new line through territory which the company had not undertaken to serve. For this reason the order was held not to have been authorized by the Transportation Act. The opinion cites many cases in which State orders requiring extensions had been upheld, and impliedly asserts the constitutionality of the provision in question as the Court there interpreted it. The present bill uses language identical with that of the Transportation Act; its enactment would be a congressional adoption of the constitutional interpretation which the Supreme Court has given to this section.

With reference to the construction of new facilities there can be little question of the validity of the requirement that a certificate of convenience and necessity be secured before any new construction or alteration of existing interstate facilities may be undertaken. The Supreme Court has assumed the validity of a like provision in the Interstate Commerce Act (Railroad Comm. of California v. Southern Pacific Co., 264 U. S. 331), and has held that an attack on this requirement presents no substantial constititional question. (Gulf C. & S. F. R. Co. v. Texas & P. R. Co., 266 U. S. 588. See Texas & P. R. Co. v. Gulf C. & S. F. R. Co., 270 U. S. 266, 271.)

Insofar as the bill gives the commission complete supervision over the establishment of interstate physical connections between companies and the interchange of energy between them, it finds further support in the analogous provision of the Interstate Commerce Act under which the commission's permission must be secured before a connection can be made (Alabama & V. R. Co. v. Jackson & E. R. Co., 271 U. S. 244).

Under the due process clause as under the commerce clause the analogy of the cases under the Interstate Commerce Act is persuasive. The compulsory cooperation in the public service secured by legislation of this type constitutes no more of an interference with the property interests of interstate electric companies than with those of railroad companies. The resulting public benefit is clearly comparable in character. In each case the consuming public receives the utility product, whether transportation or electric energy, at a lower price than would otherwise be possible. It also receives more dependable and more useful services than could have been secured through the action of one company alone. And in each case the rights of the companies affected are protected in the same way-by commission determination subject to court review.

Regarding the rate-making provisions of the title, the only issue under the due process clause which need be considered concerns the provision directing the Commission to fix such rates as will yield a fair return upon the "actual, legitimate, prudent cost of the property used and useful for the service in question." The economic arguments in support of that rate-base need not be reviewed here. They have been advanced by a number of the ablest writers on the subject. (See Henderson, Railway Valuation and the Courts, 33 Harv. L. Rev. 902, 1031; Hale, the "Physical Value" Fallacy in Rate Cases, 30 Yale L. J. 710; Richberg, A Permanent Basis for Rate Regulation, 31 Yale L. J. 263; Richberg, Value By Judicial Fiat, 40 Harv. L. Rev. 567; Gooddard, the Evolution of Cost Reproduction as the Rate Base, 41 Harv. L. Rev. 564; Bonbright, the Economic Merits of Original Cost and Reproduction Cost, 41 Harv. L. Rev. 593; concurring opinion of Mr. Justice Brandeis in Southwestern Bell Telephone Co. v. Public Service Commission, 262 U. S. 276, 289.)

It is argued, however, that the decisions in Smyth v. Ames (169 U. S. 466), and cases which have followed it, preclude the adoption of this rate base. The contention is inapplicable for two reasons. In the first place, the Court has never had occasion to pass upon the validity of consistent application of the prudent investment rule when adopted as a Congressional policy. It has repeatedly said that it places great weight upon the constitutional interpretations of the coordinate branches of the National Government, and that every doubt must be resolved in favor of the validity of congressional action (United States v. Gettysburg Electric R. Co., 160 U. S. 668, 680; Burtfield v. Stranahan, 192 U. S. 470, 492). In its past decisions, it has reviewed isolated rate orders supported by no such clear affirmation of national policy as that in the present title. Secondly, the most recent decisions of the Court mark a clear departure from the rule of Smyth v. Ames and furnish assurance that rate orders fixing the reasonable rate of return upon the prudent cost of the property would not be held invalid.

This is what

the California commission did in the order which was upheld in the Los Angeles Gas & Light Corp. v. Railroad Comm. of California (289 U. S. 287). Following that case, the Court in Lindheimer v. Illinois Bell Telephone Co. (292 U. S. 151), and Dayton Power & Light Co. v. Public Utilities Comm. (292 U. S. 290), adopted a method of approach that cannot be reconciled with the earlier cases. Finding that the companies has flourished under the rates which they claimed to be confiscatory, that they had paid dividends regularly and built up reserves, the Court concluded that the rates could not be confiscatory despite findings by the trial court of the present value of the property and an inadequate return upon that value. This approach is flatly inconsistent with the traditional fair value rule (see Hale, the New Supreme Court Test of Confiscatory Rates, 10, Journal of Land and Public Utility Economics, 307). This judgment of the realities of the situation according to the test of the company's experience is precisely what the prudent investment rule requires.

OSWALD RYAN,

General Counsel Federal Power Commission.
DOZIER A. DEVANE,

APRIL 25, 1935.

Solicitor Federal Power Commission.

MEMORANDUM IN SUPPORT OF THE CONSTITUTIONALITY OF PUBLIC-UTILITY HOLDING COMPANY BILL

This memorandum is concerned with the constitutional issues presented by the bill to establish Federal control and, subject to certain exceptions, ultimate elimination of public-utility holding companies.

The factors making necessary national control of public-utility holding companies are enumerated at the outset of the bill. Public-utility holding companies and their subsidiary companies are there declared to be affected with a national public interest in that their use of the mails and instrumentalities of interstate commerce has created many abuses which cannot be corrected by the States and call for Federal legislation. This section specifies both the uses made by holding companies of interstate commerce and the mails and the abuses to which the interstate business of these companies has given rise. It concludes with a declaration of policy stating the objectives of the act: To eliminate the specified abuses, to provide for the simplification of holding-company systems, and the elimination therefrom of properties not economically and geographically related, and at the end of 5 years to abolish holding companies.

The essentially interstate character of the principal holding company transactions and practices lies in the fact that their securities are widely distributed by means of the mails and instrumentalities of interstate commerce; that they continually make use of those channels of communication in the making and performance of contracts with their subsidiary companies; and that these controlled operating companies themselves engage in interstate commerce in gas and electricity on a large and growing scale. The evils that accompany these interstate activities cannot be corrected by State legislation. The sale of holding company securities has been completely unregulated by States having jurisdiction over the subsidiary public utility companies; these securities have been issued upon the basis of fictitious asset values and in anticipation of excessive revenues and paper profits at the expense of the underlying operating companies; absence of uniform accounts conceals the unsubstantial foundation of these security issues and makes it impossible for investors to secure the information necessary for an

adequate appraisal of the financial position of the companies. These findings point to the fact that this unsound capitalization operates to the detriment not only of the widely scattered investors, but also of the consumers of the utility products of the underlying operating companies. To support their overcapitalized security structures, holding companies are compelled to squeeze the maximum possible revenue out of the operating companies. They resist voluntary rate reductions which might strengthen their subsidiaries by increasing the consumption of gas and electricity; they seek unfair insiders' profits through a great variety of intercompany transactions; they obstruct State regulation through their control of the accounting practices and financial policies of the public utility companies; and their mad scramble for operating properties has brought under common control widely distant utility facilities, creating gerrymandered systems in complete disregard of the economies of management and the integration and coordination of related properties. The growth of the superholding company has tended to concentrate control of the electric and gas utilities in the hands of a few powerful groups having an insignificant stake in their ownership. This concentration of control has tended substantially to restrict competition in supplying the construction and other needs of a great and growing industry.

The ultimate cure of the evils described in this introductory section which the bill adopts is the abolition of the holding company conducting activities in interstate commerce and by means of the mails, except where it is necessary for the operation of a geographically and economically integrated public-utility system. This prohibition is postponed, however, to permit orderly liquidation and reorganization, and so to prevent unnecessary destruction of existing security values. The bill also prescribes regulation designed to furnish protection to investors and consumers during the remaining period of holding-company existence, and as a permanent measure in the case of those companies that are permitted to continue. This is achieved through registration. It is made unlawful for a holding company to make certain uses of the mails or the instrumentalities of interstate commerce unless that company is registered with the Securities and Exchange Commission; the regulatory provisions of the bill are then directed, not at holding companies generally, but at registered holding companies and their subsidiaries. Thus compliance with these regulatory provisions is made a condition of the use of the mails and the channels of interstate commerce for the transportation or transmission of gas or electricity, the making or performance of service, sales, and construction contracts, the marketing of securities, the acquisition of securities and capital assets and the performance of any business in interstate commerce; it is also made a condition of the ownership of securities in certain other companies that conduct these specified interstate activities or otherwise engage in interstate commerce, and of the continued existence of a holding company which has during the past 10 years distributed securities in interstate commerce which are now outstanding in the hands of persons residing outside of the State in which the holding company is incorporated. The regulation imposed through this device of registration is directly related in all its details to the elimination of the evils described at the outset.

Registration itself affords the opportunity for the collection of full information regarding the holding company and its related companies. Further information must be filed before a security may be issued by a holding company, and security issues are made the subject of complete regulation, designed not merely to afford full disclosure of all relevant facts to prospective investors, but also positive protection against recurrence of the "wild-cat" financing of the past. The securities which may be issued by holding companies are limited to common stocks having a par value and first lien bonds. Every new security must be reasonably adapted to the security structure of the holding-company system, must bear proper relation to sums prudently invested in the underlying public-utility properties and must be appropriate to the operation of an integrated utility system. Fees and the terms and conditions on which a security is sold are subjected to Commission control. The business in which holding companies may engage is restricted so that the purchaser of utility holding-company securities will be an investor only in the utility industry and closely related auxiliary businesses, and will not be deceived by the utility name when purchasing an interest in a speculative venture essentially unrelated to the utility enterprise. Holdings are limited furthermore to the securities and properties of domestic utilities; those in foreign countries may not be retained in the same system. Ownership in a single system of competing gas and electric facilities which tends to monopoly and the suppression of competition whenever contrary to the policy, if not the letter, of State law is eliminated. The extension of utility systems through the acquisition of securities

and capital assets is subject to strict commission supervision and control; all acquisitions must be appropriate to the operation of an integrated utility system. and must be at a fair price bearing a reasonable relation to the prudent investment in the underlying property. Registered holding companies and their subsidiaries must keep their accounts in a manner prescribed by the commission and must file the reports which the commission shall require as necessary to afford complete information regarding all the details of holding-company operations.

These regulations of the financial operations of holding companies are supplemented by complete regulation of the transactions between companies within a holding-company system and between such companies and interests affiliated with them in such a way that their dealings are not controlled by arm's length bargaining. The service, sales, and construction contracts by which holding companies reap large profits at the expense of utility consumers are eliminated. Such services may be performed for utilities under holding-company control only if they are bought in the open market under fully competitive conditions, or if they are performed on a cooperative basis by a mutual company subject to the complete supervision of the Federal Power Commission. Other transactions between such controlled utility companies and other companies in the same holding-company system or affiliated with companies in that system must be conducted in accordance with rules and regulations designed to eliminate all hidden profits and unfair advantages resulting from the common interests of both parties to the transaction.

In all these regulatory provisions, there is the single objective of protecting both investors and consumers from the abuses of the past and their recurrence in new forms. In this there is no conflict between the investor and the consumer. The interests of both are served when utility enterprises are placed on the solid foundation of a sure return upon a sound capitalization. The bill decrees the elimination from the channels of interstate commerce of holding companies that do not take the immediate steps which will turn their business toward establishment on that solid foundation. It decrees also the more certain purification of the entire utility industry through the eventual elimination of all holding companies that do not serve a necessary purpose. To provide an orderly progress in that direction, the bill establishes the procedural machinery for the reorganization and dissolution of present companies under Commission control and trusteeship. It thus seeks to eliminate the injury to both investors and consumers that is likely to accompany the present wasteful and inefficient receivership and reorganization proceedings.

The constitutional issues which the bill presents are of two types: First, the authority of Congress rather than the State legislatures to carry out its objectives under powers expressly delegated to it by the Constitution; and second, its authority to employ the particular regulatory measures embodied in the bill without violating the restrictions imposed by the Constitution upon all Federal legislation. As to the first, the discussion will show that the bill falls within the authority granted to Congress to regulate interstate commerce and its power over the mails. As to the second, it will show that there is no violation of the due process clause of the fifth amendment, or of the implied prohibition against the delegation by Congress of its legislative power.

THE COMMERCE POWER

The business of the holding company as described in the introductory section of the bill is one which depends for its existence and for its every function upon constant and systematic use of the channels of interstate communication. The advantage generally claimed for the holding company in its facility for attracting capital on a large scale for diversified investments necessarily depends upon the marketing of securities throughout the country. Congress has already in the Securities Act and the Securities Exchange Act asserted its jurisdiction over such security distribution, whether it employs the mails, interstate communications, or securities exchanges. In the case of the holding company, this ground of jurisdiction alone is necessarily more far-reaching than the case of many other corporations, for security distribution is a more fundamental part of holdingcompany operations than it is in other businesses. The other activities of holding companies are equally interstate in character. Centralized management and control by one company of local utilities situated all over the country would be impossible without the transmission of information and instructions from one State to another. Performance of the intercompany transactions carried on in most of the holding-company systems requires similar interstate communication