introduced Senate Resolution 108 calling for an investigation of the poduction, transmission, sale, and distribution of natural gas by a subcommittee of the Senate Committee on Interstate Commerce.

In this state of the record there are no facts showing the necessity for enacting any regulatory legislation affecting the natural-gas industry and natural gas should be eliminated from the bill.

Respectfully submitted.

APRIL 27, 1935.

R. W. GALLAGHER

(Representing Standard Oil Co. (New Jersey).

ARKANSAS NATURAL GAS CORPORATION

I am a vice president and director of the Arkansas Natural Gas Corporation, an operating and holding company, owning and controlling a group of properties in Louisiana, Texas, and Arkansas, and other States in the South and Southwest. I am appearing before this honorable committee as a representative of the employees and the owners of the securities of this company and of the companies which it controls. It was our purpose, in asking the committee for this opportunity to appear, to show how and why the Arkansas Natural Gas Corporation was formed, to show the beneficial results that it has accomplished since its formation, and to give you specific reasons for the opposition of its employees and security holders to the passage of the Public Utility Holding Co. bill.

The Arkansas Natural Gas Corporation was organized on April 1, 1928, by the merger of the properties formerly owned by the Arkansas Natural Gas Co., the Natural Gas & Fuel Corporation, and the Industrial Gas Co., and, immediately after this merger, by the purchase of the natural gas properties of the Southwestern Gas & Electric Co., the Bethany Oil & Gas Co., and the natural gas producing properties and natural gas leases of the Empire Gas & Fuel Co. in Arkansas. The Arkansas Natural Gas Co. owned producing natural gas property in northern Louisiana, Texas, and Arkansas, and owned and operated compressor stations and transmission pipe lines. It owned and operated approximately 20 natural gas-distributing plants in Louisiana and Arkansas, and sold natural gas at the town borders of the companies distributing in Little Rock and Hot Springs, Ark., which were nonaffiliated_corporations. It owned also natural gasoline absorption plants in Texas and Louisiana and oil properties in other States.

The Natural Gas & Fuel Corporation owned natural gas distributing systems serving the city of El Dorado, Ark., and other communities in that vicinity, and natural gas producing properties adjacent thereto; also, oil-producing properties in Arkansas and Louisiana and natural gasoline absorption plants in Arkansas. The Industrial Gas Co., of Marshall, Tex., owned producing natural gas properties in eastern Texas and pipe line transportation facilities from that field to markets in Marshall, Tex., and adjacent territory

The Southwestern Gas & Electric Co. and the Bethany Oil & Gas Co. owned natural gas distribution plants in Shreveport, La., and in Texarkana, Ark.-Tex., and in a number of towns and communities located between these two cities, and had natural gas production and a pipe-line system that partially served these cities and towns

The Empire Gas & Fuel Co. owned a large number of producing and prospective natural gas leases within an area approximately 100 miles northwest of Little Rock, Ark., and sufficiently close to the markets of the Arkansas Natural Gas Co. to make it economically available. The location of this property was most advantageous to the Arkansas Natural Gas Co., as it not only made it possible for a very considerable additional population to secure natural gas service, but also enabled the company to give the natural gas service in Little Rock & much needed reinforcement

The natural gas producing and transporting facilities of all of these companies were inadequate to supply the demand of their customers.

The service was never entirely dependable. These deficiencies, together with the lack of natural gas reserves, greatly endangered the continuity of the service and the integrity of the capital invested in these properties. Approximately 65,000 customers, domestic, industrial, and commercial, were dependent upon these producing and transporting facilities for service. The customers served by these properties were entitled to satisfactory service, many homes having been built for the exclusive use of natural gas, and naturally they were entitled to fair

protection on their investment. These companies were obligated also to protect their security holders for the expenditures already made in the construction of distributing plants, transmission pipe lines, and compressor stations. It was imperative, if the customer and investor were to be protected, that an additional natural gas supply, as well as natural gas reserves, be provided immediately. The only available partial supply and reserves were 100 miles or more from the then present facilities of these companies.

None of these companies had sufficient working capital, and were unable to finance the necessary prospecting, drilling, and construction to provide the necessary facilities and reserves to meet the demands.

After considerable preliminary investigation and negotiation, the stockholders of the Arkansas Natural Gas Co. and the stockholders of the Natural Gas & Fuel Corporation, the stockholders of the Industrial Gas Co. of Marshall, Tex., and the Empire Gas & Fuel Co., entered into an agreement embodying a plan for the merger of the properties of the first three companies into a single corporation, and the purchase of the Empire Gas & Fuel Co. natural gas wells and leases.

In the merger contract the Cities Service Co. undertook to and did purchase for the Arkansas Natural Gas Corporation, the natural gas properties of the Southwestern Gas & Electric Co. and the Bethany Oil & Gas Co. In order to finance the purchase of these properties and pay off the existing debts of the Arkansas Natural Gas Co., Natural Gas & Fuel Corporation, and Industrial Gas Co., and furnish working capital for the new corporation, an issue of first mortgage 6-percent bonds was purchased by the Cities Service Co. at a price of 90 percent of the face value, from which sale $11,700,000 in cash was realized. Immediately after the merger of these properties a comprehensive program was inaugurated which resulted in the construction of 21 major natural gas pipe lines and compressor station projects, the construction of 31 distributing systems, the purchase of the Little Rock Gas & Fuel Co., and the construction of a number of other minor natural gas service projects, including the acquisition and development of a large number of producting and propsective natural gas leases. In order to further strengthen the facilities of the new corporation, the properties of the Industrial Gas Corporation of Arkansas were purchased. The Industrial Gas Co. has a large transmission pipe line extending from Camden and El Dorado, Ark., to the huge Monroe, La., natural gas field, and also substantial distribution properties.

The oil properties which at that time were comparatively small were likewise improved and expanded. The Arkansas Fuel Oil Co., one of the subsidiaries of the Arkansas Natural Gas Corporation, was responsible for the discovery of what is known as the Lathrop area in the huge east Texas oil field, with the result that these oil properties are now very valuable and are proving a very sustaining factor to this corporation.

Since the merger in April 1928, the holding company, the Arkansas Natural Gas Corporation, has expended approximately $44,000,000 in acquisition of properties and in construction projects in expanding the operations of the companies and in the improvement of service to its customers. Approximately $14,000,000 was expended in the construction of natural-gas pipe lines and compressor stations, $2,500,000 in the construction of natural-gas distributing property, and $2,500,000 in drilling natural-gas wells. Approximately $10,000,000 has been spent in the development of oil properties and $2,000,000 in the purchase of oil and natural-gas leases. Approximately $11,000 has been spent in the acquisition, by purchase, of oil and natural-gas properties.

In addition to these expansions, improvements, and expenditures, the holding company, the Arkansas Natural Gas Corporation, has advanced large sums of money during the past 4 years for operating expenses to its subsidiary naturalgas companies, which on account of the economic conditions during the depression were unable to make sufficient earnings to carry themselves.

The Arkansas Natural Gas Corporation is an opersting, as well as a holding company, and it owns and operates directly a number of the properties herein described. It is this ownership and control that justifies and obligates the financing and management of these properties. If the holding company were forced to cease operations and distribute the securities which it holds in the subsidiary companies to the holding company stockholders, it would result in such a diversity of ownership that there would be no single entity with sufficient responsibility to finance the future operations of these properties. This holding company, through its comprehensive and diversified system, its resources and experience, was willing to furnish the necessary funds to carry its companies through periods of adverse conditions, protect its investors, the service to its customers, and the jobs of more than 5,500 employees.

The Arkansas Natural Gas Corporation is in the same situation with respect to the parent company, as the subsidiary companies of the Arkansas Natural Gas Corporation group are to it. The parent company, by virtue of its ownership of the majority of the stock of the Arkansas Natural Gas Corporation, extends to it, for a very reasonable consideration, financial, engineering, legal, and managerial services which would be impossible for the Arkansas Natural Gas Corporation group to provide for itself at a comparable cost. The approximate $44,000,000 expended by the Arkansas Natural Gas Corporation in constructing and expanding the group properties and in providing improved service through modernization of existing facilities was obtained through the parent company organization. That company purchased the bonds of the Arkansas Natural Gas Corporation at the time of the merger. This money was used in buying a large and valuable property and in paying off the debts of the merged companies and in furnishing working capital to the new organization. That company sold to the public 3,522,521 shares of common class A stock of the Arkansas Natural Gas Corporation at a gross realization of $27,090,085 and a net realization to the Arkansas Natural Gas Corporation of $25,538,458.69. The cost of raising this amount through the sale of common stock compared very favorably with the cost of raising funds through the sale of first-mortgage bonds, being approximately 5.7 percent of the gross sale. This money, which was all spent in buying and developing natural gas leases, royalty and rentals to farmers, drilling wells, constructing pipe lines, compressor stations, gasoline absorption plants, and otherwise extending and protecting the natural gas service, promoting the development of the communities and territory could not have been secured by the Arkansas Natural Gas Corporation or by any of its subsidiary companies through their own efforts or from any other source. It is obvious that it would have been impossible, without the assistance of the parent company, for any of the small units which existed before the merger, or even for the Arkansas Natural Gas Corporation, unassisted after the merger, to have accomplished this expansion which not only gave the consumer better service and greater protection for his investment, but also protected and made more valuable the company securities. This assistance also provided increased employment and comfort to a large number of people, and added materially to the wealth of the territory in which the Arkansas Natural Gas Corporation is operating.

The operating economies that have been effected through the merger of these properties and the extension of their operation have been enormous. Prior to the consolidation, during the year 1927, the operations of the companies, which are now a part of this group, resulted in revenue from natural gas sales of approximately $5,500,000. During the year 1934, despite the reduced demand caused by economic conditions, the revenue from natural gas sales of this group exceeded $7,000,000. In 1927, the volume of natural gas sales was approximately 29 billion cubic feet. In 1934, this volume of sales increased to 42 billion cubic feet. The average sales rate per thousand cubic feet in 1927 was 18%1⁄2 cents and in 1934 it was 16 cents. This reduction to the customer occurred even though the cost of natural gas in the field increased materially during the period.

It will be noted that the sales volume in 1934 was 42 percent greater than in 1927, while the average rate per thousand cubic feet was 10.8 percent less, and likewise the operating expense was substantially reduced on a volume sales basis. Without question, it is necessary to concentrate operations of this nature into a large comprehensive, and diversified unit in order to effect sufficient saving in expense of operation to render satisfactory service to the public on an economical basis.

The consolidation of these companies has resulted in:

(1) A completely unified property with the necessary facilities such as adequate production, a pipe-line transmission, compressor station, and distribution system, so designed and arranged as to render a reliable and dependable service to all consumers in any of its many communities at all times, and of such strength and character as to have a decided influence in the building up and development of the territory in which it is operating.

(2) Extensions to a number of additional communities that otherwise would not have natural-gas service.

(3) A supply of natural gas and natural gas reserves that protects the consumer and the security holder.

(4) Building up of an aggressive and alert organization whose ambition is to give the consumer perfect service and at the same time be faithful to the interest of the security holders. This is a most important item. It requires years to build

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up an efficient, coordinating organization, and it must always be remembered that the consumer and security holders finally must depend upon the men and women of the organization for service and protection.

(5) The permanent employment of an additional large number of people, as well as the employment of an additional large number temporarily from time to time.

(6) The improvements of the properties merged and purchased. The extension of the service to additional communities necessitated leasing lands, drilling wells, constructing hundreds of miles of pipe lines, constructing large compressor stations, constructing gasoline absorption plants, together with hundreds of other items going into the improvement, expansion, and operations. It has distributed rental and royalty payments into the hands of hundreds of farmers, and given employment to thousands of mill workers, mechanics, railroad people and laborers. The requirements of a business and organization of this character demand a more stable and uniform employment than any other kind of business. Statistics prove that this industry in the past and at present has the very highest rating in comparison to other industries in stability and consistency with respect to employment as well as to the rates of pay.

There never has been a single thing in the merging, modernization, expansion, and operation of these properties that reflects a particle of discredit to the holding companies which participated in and made all these things possible. The holding company has not profited in any manner whatsoever except from whatever benefits have accrued to these subsidiaries and to whatever extent these properties have been made more valuable for their security holders, and to whatever extent the added comfort and wealth of these communities has resulted in increased business for the company.

A FEW COMMENTS AND CRITICISMS ON S. 1725, KNOWN AS THE "PUBLIC UTILITY HOLDING COMPANY ACT OF 1935", AS THAT BILL APPLIES TO THE ARKANSAS NATURAL GAS CORPORATION-TITLE I, SECTION 2

(a) (5): "Their activities extending over many States are not susceptible to effective control by any State and make difficult, if not impossible, effective State regulation of public-utility companies."

Incorrect. State and local authorities have full control.

(b) (3): "Such securities are issued without the approval or consent of the States having jurisdiction over subsidiary public-utility companies.'

Incorrect. States have control over security sales. In addition, the Securities and Exchange Commission has full control over all issues.

(b) (4) (5) (6): "Such securities are often issued upon the basis of fictitious asset values and of paper profits from intercompany transactions and do not accurately reflect the sums invested in underlying public-utility properties; such securities are often issued in anticipation of excessive revenues from subsidiaries which if realized would burden consumers, and the reduction of which, in the course of State regulation of subsidiary public-utility companies, would cause loss to investors who have been led to believe that such revenues are a legitimate part of the issuer's income; such securities, when improvidently issued, subject subsidiary public-utility companies to the burdens of supporting an overcapitalized superstructure to the detriment of investors and consumers and tend to prevent voluntary rate reductions, which over a period of time might promote a greater and more economic use of gas and electric energy and thereby strengthen subsidiary public-utility companies.'

Incorrect. Rates are based on property values, used and useful in furnishing service, and not capital issues.

(b) (7): "Subsidiary public-utility companies are often subjected to excessive charges for services, construction work, equipment, and materials to the detriment of investors and consumers."

Incorrect. None of the investigations made have disclosed excessive charges for services.

(b) (8): "Subsidiary public-utility companies often enter into transactions with affiliates in which the absence of arm's length bargaining operates to the detriment of investors and consumers."

Incorrect. No investigation or inquiry substantiates this assertion.

(b) (9): "Control of subsidiary public-utility companies throughout the United States has often been used to secure to holding companies, their affiliates, and subsidiary construction companies, a substantial part of all construction work for public-utility companies in restraint of free and independent competition in that field;"

Incorrect. The policy of securing the best equipment and construction through fair competition has been universally followed.

(b) (10): "Service, management, construction, and other contracts involve the allocation of charges among subsidiary public-utility companies in different States and present problems of regulation which cannot be dealt with effectively by the States without the assistance of the Federal Government;"

Incorrect. In no instances have the State authorities failed to inquire into all items entering into any question that might affect the rate base, and it is generally recognized that the State authorities and courts are able to prevent unreasonable or improper charges in the event efforts should be made in this direction.

(b) (11): "Control of subsidiary public-utility companies materially affects the accounting practices and rate, dividend, and other policies of such companies, thereby in many instances complicating and obstructing State regulation of such subsidiary companies;"

Incorrect. Governmental and public accounting, auditing, and the requirement of public authorities, etc., have brought about a sufficiently general and uniform method of accounting. Additional requirements would only create more confusion.

(b) (12): "The growth and extension of holding companies in many cases bear no relation to the economies of management and operation or to the integration and coordination of related properties, but have been influenced by a desire for economic power and security profits, and have tended toward the concentration and monopolization in a few holding-company systems of control of gas and electric-utility companies to the detriment of investors, consumers, and the general public;"

Incorrect. The holding company's investments and activities have been so diversified and comprehensive with respect to the areas served (and not isolated and limited), it has been possible for the holding company to carry its operations into many communities to improve the service, and to extend service to many additional communities that otherwise would not have service. This has resulted in not only larger, more stable, and better service, at much more reasonable rates, but it has also resulted in adding billions of dollars of the taxables in the United States.

(b)-(13): "The abuses above enumerated are so commonly associated with the activities of public-utility holding companies and have been so persistent and so 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."

Incorrect. The abuses enumerated are entirely imaginary in the minds of persons seeking political capital. It is admitted that abuses have occurred in isolated cases, but there are no abuses that cannot be corrected by State and local authorities. There are no instances of impotency on the part of the State and local authorities.

EFFECT OF PUBLIC UTILITY HOLDING BILL IF ENACTED INTO LAW

A number of the municipalities and communities in our properties are not being operated at a profit, and under the present business and economic conditions cannot possibly be made self-sustaining, but on the contrary, a substantial loss is suffered. The holding company has made up the operating deficits and carried the loss hoping for and expecting better times.

These losses have been kept to a minimum but if the assistance and protection of the holding company is taken away, these units must inevitably go into bankruptcy. The service will be greatly impaired and the security holders will suffer irreparable loss. In addition, the present maintenance and upkeep of the property involved will have to be materially reduced thereby causing serious hazards to persons and property.

The present unified property was built up and made possible by investors who believed a consolidated and comprehensive property a much better investment than a small isolated one. Furthermore, the investor desired a marketable security. The dissolution of the present consolidated property will destroy practically all of the present security holders' investment for the reason that the securities of the new and smaller units will not be able to find purchasers, as these securities will not be attractive to new investors. Therefore, the present security holder will lose practically all of his investment.

The demobilization of the operating forces of the present company will bring serious and irreparable loss to many employees. The present centralized operations would have to be broken up. Many of the employees are paying for homes