THE EFFECT OF THE PASSAGE OF THE WHEELER-RAYBURN BILL ON OPERATION AND REGULATION OF UTILITIES

(A presentation on behalf of Electric Bond & Share Co. to the Committee on Interstate Commerce of the Senate in public hearings on S. 1725.)

PURPOSE OF THIS PAPER

The purpose of this paper is to summarize statements of local counsel * for various operating companies associated with Electric Bond & Share Co. and to supplement the same by statements of counsel for the company to the extent necessary in order to afford a composite presentation of views of counsel with respect to S. 1725.

Decisions and statutes cited and identified by small reference numerals throughout the following text will be found in the appendix.

PRESENT COMPREHENSIVE REGULATION OF OPERATING UTILITIES

Operating utilities throughout the country are subjected to regulation by States and municipalities in varying degrees covering substantially all of their operations and activities including rates, service, security issues, extensions into new territories, discrimination, accounts, reports, mergers, sales, leases, purchases, or consolidations of properties, contracts, franchises, holding and affiliated company relationships, service and management contracts, merchandising, rebates, and other matters.

Regulatory powers of the States extend to practically every aspect of utility affairs. Actual regulation varies according to the extent to which the States and municipalities have deemed it necessary or advisable to regulate the operating companies and their relations with holding companies. This regulation may be extended whenever local authorities, with their familiarity with local matters, determine that the need exists.

The States and municipalities should be jealous of local control of their utilities for the reason that the exercise of the powers of regulation by the local authorities has been most effective. Their intimate contact with the local companies enables them to act quickly, avoiding the unwieldy procedure which is necessarily incident to regulation from distant points. The companies respond promptly to local authority, being constantly aware of the dangers arising out of bad public relations which may result in denial of new franchises, burdensome taxation, and erection of competing plants. Accordingly, there is rapid response to complaints of any character and the people are satisfied since the situation best serves their interests. Under the present comprehensive regulation by States and municipalities the power of management has not been usurped but has been allowed to remain with the companies' officials.

CONFLICT WITH LOCAL REGULATION

An examination of the bill discloses that it would provide regulation of operating utilities to an extent never heretofore undertaken by any branch of this Government-National, State, or municipal-and that local regulation will be duplicated or superseded. The consumers of a company would be prevented, to a large extent, from regulating the business of the company through their authorized representatives in the State and local governments. Confusion in the industry must result from such duplication.

FEDERAL COMMISSION WILL SUPERSEDE LOCAL AUTHORITIES

If the bill is enacted, the right of the State and municipal governments to regulate the local operating utilities will be superseded to the extent that the Federal Government has authority to regulate with respect to the same matters. It is clear, under the decisions of the United States Supreme Court, that once the bill becomes law, the power of the States to regulate the same matters is gone regardless of whether the Federal Power Commission exercises the authority

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conferred upon it or not. Once Congress manifests a purpose to enter a field of regulation, its occupation is exclusive, and local regulatory powers disappear. State or local action could not be sustained on the ground that it is merely complementary to and in aid of the Federal legislation. The Interstate Commerce Act has been held many times to have completely superseded the authority of the States with regard to such matters.3 Jurisdiction over extensions, abandonments, securities, and other important matters, would be vested in the Federal Power Commission and could no longer be exercised by the State commissions. When viewed in the light of the decisions of the courts, the suggestion that the Federal Power Commission will only use the powers conferred upon it to supplement the powers of the various State commissions, takes on an entirely different meaning.

Where the Federal power exists, it dominates to the exclusion of State and local powers and the bill will come as an abrupt shock to the citizens of the various communities who have long guarded their home-rule rights. Thus, a bureau of individuals, unfamiliar with local situations and far removed from the people who are most affected, will supersede the local utility controlling body or bodies familiar with the history of the company, its organization and needs. The possibility of prompt relief and action will disappear, and the long delay and disadvantage that must result from remote control of local matters cannot be avoided.

It appears that little is left to management, and that therefore the authority to control the future development of any particular local territory, insofar as it depended upon its power resources, would be transferred to Washington. The States have protested vigorously against the surrender of their powers to the Federal Government. The powers of local self-government are fundamental with the various localities and are too firmly imbedded to be lightly set aised or relinquished. In many respects the State commissions would have no function other than to furnish a rubber stamp for the Federal Power Commission and. should disagreement occur, the operating utilities would be in a condition of serious uncertainty until the disagreement was dispelled. If the bill becomes law, the practical necessity for the existence of public-service commissions and other similar regulatory bodies will, to a great extent, disappear, and it could only be anticipated that local regulation would fall before the more highly organized and powerful regulation which would emanate from Washington.

The experience of the railroads will furnish an example of what may be expected. In that field Federal regulation has almost completely superseded State regulation. The electric utilities are entirely different from railroads and the question of whether or not Nation-wide railroad regulation is desirable has no bearing upon the electric industry.

1 Directly in point on this general question is the decision of the United States Supreme Court in 1912 in Northern Pacific Railway Co. v. State of Washington (222 U. S. 370). In 1907 Congress passed an Hours of Service Act for interstate carriers, but provided that it should not become effective until 1 year later. Shortly after the passage of the Federal act, the State of Washington passed a similar act and a penalty was assessed under the State act against the Northern Pacific before the effective date of the Federal act. The State court upheld the penalty on the ground that while Congress had passed an Hours of Service Act, it was not in fact enforcing it at the time the State attempted to enforce its act and, therefore, there was no conflict between the exercise of the State and Federal powers. In overruling this contention and holding that the penalty could not stand, Mr. Chief Justice White said (p. 378): "It is elementary that the right of a State to apply its police powers for the purpose of regu lating interstate commerce, in a case like this, exists only from the silence of Congress on the subject, and ceases when Congress acts on the subject or manifests its purpose to call into play its exclusive power. This being the conceded premise on which alone the State law could have been made applicable, it rezulta that as the enactment by Congress of the law in question was an assertion of its power, by the fact alone of much manifestation that subject was at once removed from the sphere of the operation of the authority of the State." (Emphasis ours.)

This clear holding by the Supreme Court has been consistently adhered to be it and this case has been often since cited with approval.

The Federal statute involved in the Northern Pacific case again came before the court in the case of Erie Railroad Co. v. New York (1914) (223 U. S. 671), where the railroad had been convicted of violation of the New York hours of service law. The argument was made that the State legislation was supplementary to the Federal legislation and was therefore not in conflict with it, the theory being that so long as the State law did not provide for longer hours of service than did the Federal law, no conflict could exist. The State court decision was reversed and, in the course of the opinion, Mr. Justice McKenna said (p. 681):

"Where there is conflict the State legislation must give way. Indeed, when Congress acts in such a way to manifest its purpose to exercise its constitutional authority the regulating power of the state ceases to exist and in specific answer to the argument above mentioned, he stated (p. 683):

"We realize the strength of these observations, but they put out of view, we think, the ground of decision of the cases, and, indeed, the necessary condition of the supremacy of the congressional power. It is not that there may be division of the field of regulation, but an exclusive occupation of it when Congress manifests a purpose to enter it."

2 Southern Railway Co. v. Reid (1912) (222 U. S. 424, 441). Gilvary v. Cuyahoga Valley Railway Co. (1934) (292 U. S. 57).

Railroad Commission of the State of California v. Southern Pacific Co. et al. (1924) (264 UT. S. 331), and cases there cited. Houston, East & West Texas R. Co. v. U. S. (1914) (234 U. S. 342, 350).

Legislation of this character would foster the destruction or at least restriction of the jurisdiction of the States with respect to property over which they now have jurisdiction and would encourage further centralization of power in commissions far removed from the localities affected. The local authorities may decline to retire from the field of regulation, thereby adding to the confusion.

FEDERAL BUREAUCRATIC ENCROACHMENT UPON LOCAL MATTERS

No attempt has been made to discuss the many constitutional questions that might be raised in connection with the bill, but it is thought that this bill attempts to extend Federal jurisdiction far beyond the limits established by the Constitution, and existing decisions of the Supreme Court, as well as recent decisions of the lower courts, tend to confirm this view.

COMMON CARRIER FEATURES MAY AMOUNT TO CONFISCATION

Sections 202 (a) and 203 (b)* authorize the Federal Power Commission to compel a utility to furnish energy to, purchase energy from, and permit the use of its plant and property by, others, including competing utility systems and Government projects. Apparently the utility furnishing energy would not have the right reserved to it to devote its property to its own consumers first. This appears to be a short-cut to taking the property of a utility without condemnation and not for public use (in the sense that the term "public use" is applied in condemnation proceedings) and without just compensation.

NATIONALIZATION OF INDUSTRY

Under the bill, the Commission would have power to regulate and control the development of a utility by requiring additions, extensions, interconnections, use of facilities by others and the sale or purchase of current (sec. 203 (b)). Having in mind that the "others" may be governmental agencies, it is obvious that the expenditure of the utility's money for the benefit of competitive Government projects may be required. Coupled with general authority to dominate the industry, this regulatory power might well be exercised in the development of any Government nationalization plan. There is the additional possibility that one company might be obliged to make investments primarily for the benefit of another.

The provisions of the bill which contemplate regional districts for the control of the production and transmission of electric energy, interconnection of facilities and determination of the uses to be made of the facilities in districts, are far reaching and threaten the rights and interests of the utilities (secs. 203 (a) (b)). These provisions disclose the underlying potential dangers of the bill, namely, governmental management as the first step, and, as the next, ownership and operation of the entire electric utility business of the country as a governmental agency.

In view of the Commission's authority to force reorganization of existing companies, and the avowed purpose of the bill to accomplish readjustment on territorial lines (secs. 11 (b), 2 (c), and 30), portions of an existing system could be taken from one company and made a part of another system, even before the Government assumes complete ownership.

When this bill, depriving the local authorities of regulatory powers, is considered in connection with the Public Works Administration bills, conferring upon municipalities power to purchase, construct, and operate municipally owned public utilities, it is obvious that the powers afforded by the bill might be utilized to bring about nationalization of the existing public-utility industry and utter destruction of private interests therein. The exercise of the powers to be conferred by the bill upon the Federal Power Commission cannot in any sense be considered reasonably necessary for effective control of either holding or operating companies.

It is perhaps worthy of comment that the application of the bill, and possible nationalization of the industry, could result eventually in the complete elimination of the public-utility industry as a field of tax revenue. Over a long period, the Government of the United States has been striving to sustain and encourage industrial and business enterprise. While other industries have required Federal aid, the public utilities, by their own ingenuity and on account of the foresight of the men who organized them, generally speaking, have maintained, up

The references in this paper to section numbers of the bill are to section numbers intitle I of the bill (Public Utility Holding Company Act of 1935) and in title II of the Federal Power Act, as set forth in S. 1725.

to now, an undiminished standard of service for consumers, have complied with Federal regulations of all kinds and character, and have met the fixed return upon their capital investment. In the fact of that record and achievement, this bill would pave the way for the Government to seize the utilities' management, abolish their owners, nationalize the industry, and thus penalize by confiscation the one industry which has survived the depression.

A consideration of the bill gives rise to many serious questions regarding the Government's future course. Could not the Federal Government by interconnecting the proposed hydro plants at various sites with other projects which are receiving its substantial support, and by regulation and control, subordinate all other neighboring power developments to that system, and thereby supplant with hydroelectric power, the power now produced by private companies with coal, gas, and other fuels to be found in the local territories? By so doing, would not the people in the local territories be supplying the market for governmental power at the expense of such local people? In keeping with the trend of the times and to avoid embarrassing conflicts, would it not be logical for the Federal Power Commission to undertake to adopt a system of geographic and economic planning in which it would attempt to allocate the industries of the country between sections and communities? Is there to be no such thing in the future as competition between localities as well as industries and corporations? Are we to have a system set up whereby an arbiter in Washington shall plan and direct the development of the country without reference to the natural advantages offered by any particular section, or without reference to the thrift, industry, and social aspirations of its people? Should the destiny of the local territories be placed in the hands of a new and untried agency?

SECURITY HOLDERS AFFECTED

The reorganization of companies which must take place, dictated in the interests of any Government nationalization plan, would undoubtedly result in forced reorganizations, under conditions which cannot fail to be disastrous to security holders and detrimental to consumers. It will be impossible to dismember companies and regionalize the industry without serious loss to those who have made investments in reliance upon existing laws and methods of regulation. How the security holders who owned the dismembered system are to be compensated and protected is indeed a problem which will be difficult of solution. In the absence of some very good reason, holders of securities should not be forced to sustain the loss which will inevitably follow the regulation and activity proposed by this bill.

CONFLICTING METHODS OF ARRIVING AT VALUATIONS FOR RATE PURPOSES

The local authorities, in the exercise of their regulatory powers with respect to rates, are governed by the rulings of the United States Supreme Court, which allow a return upon the fair value of used and useful property, taking into consideration all the usual elements which are too well known to merit discussion herein. The bill contemplates that the rates fixed by the Federal Power Commission shall produce a return upon "the actual legitimate prudent cost" of the property involved (sec. 211 (c)). This is contrary to the law as laid down by the Supreme Court of the United States. It is, of course, impossible to determine what interpretation may be given to the words "legitimate" and "prudent" and whether "hindsight" or "foresight" will be the test. The adoption of this new method of arriving at valuations for rate purposes cannot result in anything except confusion followed by extensive and prolonged litigation with accompanying financial stagnation and with the private development of the industry at s standstill in the interim.

The valuations of properties made by local authorities may conflict with valuations made by the Federal Power Commission. Rates fixed and approved by local authorities as reasonable may be found unreasonable by the Federal Power Commission and hopeless confusion will result. The bill provides that rate reductions may be made retroactive 2 years from date of complaint (sec. 213 (a)). Thus ruinous refunds might be ordered even though (1) the rates had been approved by the local authorities, (2) the funds collected by the utility had been used for legitimate purposes, and (3) no monies to meet the refunds were available.

In view of the clause to the effect that "Nothing in this title shall impair or diminish the powers of any State commission" (sec. 217), the local State commission, deeming that such clause is not a delusion, would be justified in regulating

rates, as heretofore, upon the basis established by the courts. It may then be claimed that Congress has conferred rate-making authority upon the Federal Power Commission and that such Commission, having entered the field, has exclusive authority. In that situation the reservation of the authority quoted above would prove to be a mere delusion.

Millions of dollars have been invested upon faith in the present method of regulating rates. This radical change with its uncertainties should not be forced arbitrarily upon the industry and investors.

HOLDING COMPANY PROVISIONS AFFECT OPERATING COMPANIES

The holding company provisions of the bill, although probably drafted primarily to reach holding companies in the usual accepted meaning of the term, will drastically affect many operating companies. Operating companies often find it necessary or convenient for a portion of their business to be conducted by a subsidiary company. Because of the control of a subsidiary electric or gas company, the operating company would be a holding company under the technical definition of title I, and, as such, would be subject to drastic regulation (sec. 3 (a) (7), and secs. 4 to 18 inclusive). It would be required to register as a holding company and reorganize under the supervision of the Securities and Exchange Commission (secs. 4, 5 and 11 (a) (b) (c)). The discretionary power of the Commission to grant exemption in special cases is narrowly restricted (secs. 4 (c) and 11 (b) (4)). Some of the companies would be forced to dispose of portions of their properties or securities which might be closely tied in and financed with their other properties (sec. 8). Such reorganizations might be dictated in the interests of any Government-nationalization plan. Thus, the local operating company, merely because of a convenient arrangement for the operation and financing of its properties, might be subject to the harsh provisions of the holdingcompany portion of the hill. The operating companies are penalized because of their affiliation with other companies (secs. 3 (a) (11), 12 (g) (h), 13 (b)). many instances, operating companies, because of legal obstacles to mergers or for other legal reasons, are maintained as subsidiaries of other operating companies. Many of such subsidiary companies have only skeleton staffs aided by the personnel of their parent operating company. Companies which otherwise probably could not exist are thus able to function. Under the bill such a parent operating company is technically a holding company and is technically furnishing supervision or management services to its subsidiaries. This furnishes an illustration of how the bill would be seriously disadvantageous from the standpoint of purely operating companies. Many contracts under which operating companies are receiving supervision or management services, no matter how valuable they may be, would have to be terminated (secs. 13 (a) (b) (d)). Within a short period of years operating companies would also be deprived of the holdingcompany financial support upon which they have been depending for many years and which has assisted them in keeping pace with the rapid growth in their territories.

RELATIONS WITH HOLDING AND MANAGEMENT COMPANIES NOW REGULATED

In

Contrary to popular belief, the holding companies and affiliated interests in the public utility field are very generally regulated. Early in 1935 no less than 25 States had statutes dealing directly with various phases of the relationship between "holding companies," ," "affiliated interests" and local "operating utilities." 5

These statutes cover a wide and varied field, some being comprehensive and detailed while others are short and general in their terms. Contracts covering

Alabama, General Acts, 1932, Act No. 232; Arkansas, S. B. 294 (Apr. 2, 1935); Illinois, Smith-Hurd Revised Statutes, 1933, chap. 111 2/3, sec. 8a; Indiana, Acts of Indiana, General Assembly, 1933, chap. 189; Kansas, Revised Statutes, Kansas, 1923, 1933 supp., secs. 66-1213, 74-602a, 74-602b, 74-602c; Louisiana, Dart's Louisiana General Statutes, 1932, title LV, chap. 5, sec. 8005; Maine, Laws of Maine, 1933, chap. 213; Maryland, Ann. Code 1924, art. 23, sec. 394; Massachusetts, General Laws of Massachusetts, Tercentenary Edition, 1932, vol. II, chap. 164, secs. 85, 94A, 94B; Missouri, Pub. Serv. Com. L., sec. 71 (2) (L. 1917, p. 437); New Hampshire, New Hampshire Laws, 1933, chap. 182; New Jersey, Compiled Statutes, New Jersey, supp. 1911-1924, sec. 167-21; New York, Cahill's Consolidated Laws of New York, 1930, chap. 49, secs. 110, 111, supp. 1933, sec. 106, supp. 1934, sec. 110; North Carolina, Code of North Carolina, 1931, chap. 21, sec. 1037 (e), supp. 1933, sec. 1112 (17); Oregon, Oregon Laws, 1933, chap. 441, Ibid., chap. 342, Laws, Second Special Session, 1933, chap. 98; Pennsylvania, Laws of Pennsylvania, 1933, No. 333; South Carolina, Acts of South Carolina, 1932, No. 871; Utah, Revised Statutes of Utah, 1933, sec. 76-4-28; Vermont, Public Laws of Vermont, 1933, chap. 250, sec. 6087; Virginia, Virginia Code of 1930, 1934 supp., secs. 3774b-3774i, inclusive; Washington, Laws of Washington, 1933, chap. 152; West Virginia, H. B. No. 473 (Mar. 12, 1935); Wisconsin, Wisconsin Statutes, 1931, secs. 196.02, 196.52, Laws of Wisconsin, 1931-1932-1933, chap. 440, Cf.; Ohio, Page's Annotated Ohio General Code, 1932, title III, div. II, chap. 1, sec. 614-9; Wyoming, Revised Statutes of Wyoming, 1931, 94-137.