Mr. MARTIN. I thought you said that you got it in Cleveland for about 33. You have stated that it is about 3812 cents to the river and 5 cents more to Cleveland, and that would run it up to over 40 cents at Cleveland.

Mr. REED. That is right; it is over 40 cents. That is gas which is purchased by the East Ohio from the Hope people. But by mixing that 70 percent-that gas with 30 percent of Ohio gas, which is about 20 cents-we have a gate rate, so to speak, at the city of Cleveland now of about 38 cents, because now we do not allow the Hope people 3812 cents at the river, through the decision of the Ohio Utilities Commission in our last rate fight, when the commission said that 37.1 was adequate and would produce a fair and reasonable return to the Hope people.

Mr. MARTIN. Then you do not get your gas for 33 cents, do you? Mr. REED. No; I am speaking of Cleveland. I think that you have reference to Detroit.

Mr. MARTIN. Pardon me; you are correct.

Mr. REED. But a rather odd situation arises in that connection and is a question which should be answered as to just why gas coming to the city of Cleveland comes there now at a gate price of between 38 and 39 cents and the gas company is now asking over 40 cents for gas coming approximately 250 miles, when gas coming through four States, 1,200 miles from Texas, is delivered at the gate of Detroit for 33 cents.

Mr. MARTIN. I got the two cities mixed up.

The CHAIRMAN. Let me see if I understand your situation. Assuming that the price at the river is just, how much do you pay in excess of what you estimate would be a justifiable cost?

Mr. REED. You mean our gate price?

The CHAIRMAN. Yes; and finally the delivered price. I understand that you start out with the assumption that the river price would be 20 cents.

Mr. REED. No; that is the production price and the purchase price from independent concerns.

The CHAIRMAN. Well, what was the conclusion you reached as to the amount you pay in excess of what you should pay based on the legitimate river price?

Mr. REED. Well, we feel this way-that the United Fuel & Gas Co., which are immediately adjacent to the fields of the Hope people in West Virginia, produce and sell gas at the river at the Ohio River-that is the line which comes up the western part of the State of Ohio-and that gas is sold at 26 cents at the river. And we feel that that is a proper guide for the price for the gas at the river and which would probably make a total gate price at the city of Cleveland of about 28 cents.

The CHAIRMAN. About how much?

Mr. REED. About 28 cents.

The CHAIRMAN. And you are paying approximately 38 cents? Mr. REED. Thirty-eight cents now, and the gas company is contending for a higher figure.

The CHAIRMAN. So that it is about 10 cents higher than you estimate it should be. Is that correct?

Mr. REED. That is correct.

The CHAIRMAN. I am simply trying to understand your figures.

Mr. REED. That is right.

Mr. MAPES. Mr. Chairman

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. What does that excess price of 10 cents at the river over what you think it ought to be mean to the consumer in Cleveland who we will say has a monthly gas bill of $8?

Mr. REED. Well, a 1 cent in the rate means in dollars and cents about $147,000, so that the reduction of 10 cents would mean about $1,500,000.

Mr. MAPES. Will you break that down a little more.

How much does that mean that the average householder would have to pay over what you think is reasonable, on the basis of an $8 a month gas bill?

Mr. REED. A reduction of 10 cents?

Mr. MAPES. If you only had to pay the Hope people 27 cents instead of 38 cents.

Mr. REED. It would be about a dollar and a half on an $8 bill, approximately.

The CHAIRMAN. Mr. Reed, what is the general basis for your estimate that there is an excess charge? Is that based on the figures of the State commission? I do not care anything about the details, but just the source of your conclusion as to the excess charge.

Mr. REED. You mean this excess of 10 cents which we contend? The CHAIRMAN. Yes.

Mr. REED. The Hope people, if we are to accept their statement literally, contend that they are doing business in a very mountainous sort of a region and that their costs are considerably higher. In spite of their contentions, they have in recent years gone farther south in a still farther mountainous country and made extensive investments, which if their statement is to be taken to be the fact has kept the price up in order for them to obtain the proper yield on their investment. Now, they have only produced about an average of 12 percent of their requirements over the period of the last 5 years. In other words, they have held back a terrific reserve of gas in their wells in West Virginia, some 3,000 wells. They claim they are justified in holding back this reserve because of the possibility of some extremely cold weather that may come on us suddenly at some time. In addition however, to holding back this reserve they buy the greater percentage of the gas which they sell from independent concerns at about 20 cents. They are capable of producing about 39,000,000 cubic feet of gas per day and they produce a very small percentage of that-less than half.

It is our contention that if they, even if they continued to buy gas from independents, if they would, in extremely cold weather, utilize the maximum part of their contract-in other words, purchase their maximum part of their contract from independent concerns and turn their own gas jets on with the supply that they have so that they would furnish, say, half their own requirements from their own wells, that their gas instead of being produced from their own wells at a figure beyond 20 cents would be produced probably for 10 or 12 cents.

The CHAIRMAN. That total difference in your estimates, between you and the company is not accounted for by the reserve alone, is it? Mr. REED. No.

The CHAIRMAN. That is the cost of carrying what you regard as excessive reserves?

Mr. REED. No; we have never been able to determine just where this price jumps from 20 to 382 cents at the river; just what is involved in that 1812 cents. We have never been able to make the proper investigation in West Virginia and even if we were inclined to do so it would take considerable money for us to do that and then we would not really have any authority.

The CHAIRMAN. So that you feel that if the authority proposed to be given to the Commission here to investigate those costs and charges existed in the Federal Government, that it would aid you in securing a just rate for your gas?

Mr. REED. That is right. Now, there are affiliated companies and with the affiliate companies of the Hope people, which is, as I say, controlled by the Standard Oil, their price is higher to their affiliate companies than it is to their nonaffiliates. Nonaffiliated gas companies in Fayette County in 1935-the average price of the gas sold was 312 cents.

Now, to affiliate companies such as the East Ohio Gas Co., it was 382 cents at the river and mind you, we have to transport that gas just as far as they transport it to get it to the East Ohio Co. at the river. The East Ohio Gas has to transport that gas the same distance to get it to Cleveland, but the price that the affiliated company, the East Ohio Co., pays, was 382 cents in 1935, and in 1931 it was 41.8 cents to the Peoples Natural Gas; also an affiliated company, 382 cents and the River Gas Co., 38 cents.

Now, then too, mind you, they have their own distribution plants in various cities in West Virginia. For instance in Clarksburg their rate to the burner tip in Clarksburg is 28.36. Now, then, they contend that in the city of Clarksburg that is about the distribution rate. In other words, a large ctiy where they have a tremendous number of users, they claim the distribution rate is around 23 to 26 cents and here they are selling gas in a small community for that price, and the costs involved are higher to distribute it to 10 people than to 100 people in the same area.

The CHAIRMAN. Does that gas which is sold at those various prices come from the same source?

Mr. REED. That came from the same source; yes. And, at Salem it is 33 cents. In one other city in West Virginia, Sistersville, they have the lowest rate, at 27.99 cents.

Now, then, with our rate of 382 cents that we have, the Hope sells to the East Ohio at the river. They are now asking for a rate somewhere around 41 cents. In other words, the gas that they now purchase under our contract is purchased by virtue of a decision handed down by the utilities commission 5 years ago. I might say to you, however, we are operating without franchises. We have not had a franchise since last July. We are operating under stop-gas legislation of the city council. Various other cities in Ohio have no franchise at the present time, but this gas at 381/2 cents at the Ohio River is transported, as I say, to Cleveland and it then becomes about 39-cent at the gate of Cleveland.

It is claimed that this contract is the flat contract at the gate, regardless of the amount of gas consumed at the city of Cleveland, and there are 61 cities along this east Ohio gas line, yet in spite of

that, the east Ohio people have a promotional or have a rate, a low bracket, to industrial consumers who use a large quantity of gas in any individual day, of 382 cents, gas which they claim they pay their sister company at the Ohio River 382 cents for and transport it to the city of Cleveland.

We realize, of course, that is an industrial rate. We favor promotional rates. And we realize that industrial rate prices to industries should be lower than the domestic consumers, but that can only be arrived at in a certain technical manner, and we think if this bill passes that the Federal Power Commission is sufficiently familiar with the engineering problem involved so that they will set up just what is a just and reasonable rate below that of the domestic consumer in a franchise. In other words, the price of gas is predicated to some extent upon a load factor. In other words, Detroit has a contract to purchase from the panhandle gas and the price that they pay of 332 cents is based on a load factor of 70 percent; 70 percent, and they arrive at the load factor, for the benefit of some of you gentlemen that may not follow me, they arrive at the load factor in this sort of a fashion: Take the heaviest day of consumption of the year, and set that figure aside. Then they take the total consumption for the other 364 days and divide it by 365, and the relationship of that figure to the heaviest peak day is the load factor, and 70 percent of the load factor is highly desirable. So that the price Detroit has obligated themselves to pay is based and predicated upon the 70-percent load factor.

Now, that means that gas is fed into that line at the intake and compressed all along the line-you have to compress it, and keep 30 percent of that line flowing and yet there is no revenue from it; but you have to keep it there because they are liable to have a cold day and pull that 100 percent out, and probably 340 days in the year they will not pull much out over the 70 percent, so that the 30 percent of that line is rolling all of the time and has no value on the value of production at the intake and can be sold at a much less figure.

While I am not so familiar with the Detroit contract, I think that after they reach a certain point, beyond their load factor of 70 percent, that that gas drops from 332 cents to less than 20 cents. And, of course, that gas can be sold to industries and it is off peak gas and has to be sold at the time when you are not really having the cold weather.

Now, there was a question asked yesterday that I would like to answer in my own way. One of you gentlemen asked the question yesterday as to whether we could be assured under the present set-up of a fair and reasonable rate in the city of Cleveland under the present circumstances and the answer to that is emphatically no, because even if we had plenty of money-which we have not got-to make investigations and parleys, and even if the Commission were favorable, still the Hope people could say in the final analysis they would not sell any gas to the East Ohio Gas Co. and the East Ohio Gas Co. would not have any gas to bring into the city of Cleveland. So we are absolutely helpless in the matter so far as being positively assured of a just and reasonable rate.

We hope that you gentlemen will seriously consider the amendments that were offered here by Mr. Scheer, the secretary of our alliance.

We feel that section 7 (c) is going to work a hardship on a number of cities.

Let me just say to you, to illustrate just how that is going to affect the city of Cleveland, we are involved now in a rate fight. We can buy gas from the Panhandle people in Texas if we want to make a contract and assure them we are going to use so much gas. They would be satisfied to be assured of the same amount of gas that we are now purchasing, but it would take us a year to get that gas, and in order for us to get that gas we would have to have a distributing plant. In order for us to have a distributing plant we would have to have the money, and in order for us to get the money we would have to issue general obligation bonds, which we do not have authority to issue because we have exceeded our limitation. We would have to get enabling legislation from the State of Ohio. That would take a long time for us to do that through the legislature.

But there is one other manner in which it might be accomplished: We can raise that money through mortgage bonds; and some of us in Cleveland have been shopping around to see just how and where we can raise the amount of money necessary to purchase that plant in the event we cannot work out a fair and equitable arrangement with the East Ohio Gas Co.

Now, then, if section 7 (c) were to be in this bill, we would not know whether we could get a contract for gas. I am quite sure we could sign that contract for a new supply of gas from Texas within a week; but if they had to come to Washington and set up and obtain a certificate of necessity and convenience, it is going to take 6 months or a year, because the Power Commission will be in no position to know whether they should issue a certificate of necessity and convenience until they inquire to find out the reasonableness of the rates, and they are going to have to make that examination and make it after this bill passes. Suppose someone comes down here to Washington next week and asks the experts of the Federal Power Commission if they can furnish gas to the city of Cleveland? Why, the Power Commission is going to be 6 months or a year before they will be able to determine it-the reasonableness of the rates that are going to be set in the city of Cleveland; so obviously I think that sort of a request would be denied at the present time.

So we just have to disband any theory of municipal ownership, I would say, for the next year with section 7 (c) in the bill.

Mr. HALLECK. Mr. Chairman

The CHAIRMAN. Mr. Halleck.

Mr. HALLECK. As I understand you, you say this would not assure you of a lower rate because ultimately the company would refuse to furnish you gas at all. Does this bill provide that they cannot terminate their service without permission from the Commission?

Mr. REED. That is right.

Mr. HALLECK. Well, then, of course, that contingency to which you refer could not happen if this bill were to become law.

Mr. REED. Well, they threatened to tear the lines up on us before, but the Ohio commission has protected us in that respect. The Ohio Supreme Court said that they could not rip the lines up.

Mr. CROSSER. If the people who supply the gas at the Ohio River should discontinue it, you could not do much? You could not do anything on the other side of the river?

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