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.

EFFECT OF S. 1725, WHEELER "PUBLIC UTILITY HOLDING COMPANY ACT OF 1935" UPON OIL COMPANIES AND NATURAL GAS OPERATING COMPANIES

Statement of R. W. Gallagher

To the SENATE COMMITTEE ON INTERSTATE Commerce,

Seventy-fourth Congress, first session.

(Hon. Burton K. Wheeler, chairman.)

The following statement is submitted in connection with the consideration of S. 1725:

1. OIL COMPANIES AND NATURAL GAS

All the important natural-gas fields were discovered in the search for oil, and 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.

(b) 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 acquisition of such securities or capital assets "will serve the public interest by advancing economy and efficiency in the operations of a geographically 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. 1, 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 geographically 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 SECURITIES OF NATURAL GAS UTILITY COMPANIES, AT LEAST UNTIL JANUARY 1, 1937?

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 OF 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 headings:

1. Securities:

(a) Information unobtainable.

(b) No approval or consent of State having jurisdiction over operating companies.

(c) Issued upon fictitious values and paper profits.

(d) Issued in anticipation of excessive revenues.

(e) Susbidiary operating companies are burdened with support of overcapitalized superstructure, detrimental to investors and consumers, and preventing rate reductions.

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 when 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.

VII. NATURAL GAS INVESTMENTS OF STANDARD OIL Co. (NEW JERSEY) (A) THE HOPE NATURAL GAS CO., THE EAST OHIO GAS CO., THE PEOPLES NATURAL GAS CO..

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

fields became exhausted. Many communities without any natural-gas service were also supplied and in this manner the Peoples Co. built up its system in western Pennsylvania, making available the reserves of the Hope Co. to all of these consumers.

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The building up of these three companies in Ohio, West Virginia, and Pennsyl the financial support and capital necessary to develop these properties. Standard vania was made possible by the fact that the holding company was able to furnish I got into the natural-gas business through its oil operations and continued to develop these three properties. Standard controls these companies by practically

100 percent common-stock ownership.

(B) INTERSTATE NATURAL GAS CO., INC.

In 1925 Standard organized Interstate Natural Gas Co., Inc., to build a pipe line from the Monroe field to Baton Rouge, La., to supply a refinery of Standard Oil Co. of Louisiana, which is a wholly owned subsidiary of Standard. Later, natural gas was sold at wholesale to distributing companies, to municipalities,

and to industries. Standard owns approximately 54 percent of the common stock of this company, the remainder of the common stock being owned by 713 stockholders.

It has been necessary for Standard to advance funds to Interstate for the purpose of meeting sinking-fund payments required by its bonds. These advances were made solely by Standard without calling upon any of the other stockholders