have been created by Congress. I may add that its offices and activities are supported by the State commissions exclusively.

When gas distributed is produced in the State where distributed, a State commission can provide complete regulation. But as Mr. McDonald told you, however, a situation has developed within the past two decades in which, to a very large extent, this is not true, because gas is distributed in States where it is not produced.

Thirty-seven States which now use natural gas to a greater or less extent obtain most of that gas, with the exception of six or eight States, ouside of their own borders. In the majority of instances distributing companies buy from other companies; and these companies when they bring the gas from other States are not subject to State regulation. There is no jurisdiction whatever in the State commission, or any State authority, over the price that the distributing company pays to the pipe-line company or to the importing company. It is this situation which has led the State commissions, through their association, to adopt the following resolution.

(The resolution above referred to is as follows:)

RESOLUTION FAVORING THE ENACTMENT OF FEDERAL LEGISLATION PROVIDING FOR TRANSMISSION AND SALE OF GAS IN INTERSTATE COMMERCE

Whereas the business of transmission and sale of gas in interstate commerce at wholesale for resale, under decisions of the Supreme Court of the United States, is not subject to regulation by the States and, in the absence of Federal legislation providing therefor, is left wholly unregulated; and

Whereas jurisdiction to regulate such business should be vested in some tribunal, so that gas supplied to distributing companies in interstate commerce may be obtained at just and reasonable prices; therefore be it

Resolved, That this association favors the enactment by Congress of legislation vesting jurisdiction in some one of the existing Federal regulatory commissions to regulate the service of supplying gas, whether artificial or natural, produced in one State and sold at wholesale to a distributing company in another State, including rates applicable to such services; and

Resolved further, That Congress be asked to limit the jurisdiction granted strictly to gas transmitted and sold at wholesale for resale, and that such legislation be so drawn as in no way to limit or impair the power of the States to regulate intrastate and local service, and the rates applicable thereto, and

Resolved further, That the Committee on Legislation be directed to present this resolution to the chairmen of the appropriate committees of the two Houses of Congress, and to support the passage of such legislation.

There is, I believe, no question as to the legal situation; and it would not be useful for me to take the time of the committee to do more than to give a summary statement of the cases, for the record, indicating very briefly the point decided in each case, so that members of the committee may refer to the cases, if they wish to.

The attorney appearing for the Federal Power Commission filed a complete brief dealing with_the_constitutionality of this bill; I will only cite a few cases, and call your attention particularly to points involved.

The committee will notice that the resolution which was read here by Mr. McDonald asks Congress to enact legislation which will govern the service of pipe-line companies across State lines, and the price at which gas shall be supplied wholesale to distributing companies, and at the same time asks that the bill be so drawn as to withhold Federal regulation from the local business. As Chairman McDonald stated, that request is based upon the fact that the United

States Supreme Court has recognized that the distribution of ga locally to consumers, either for domestic or industrial use, is a local business, and may be reached and controlled and regulated by local authorities, municipal and States, as provided by State law, so long as Congress withholds its hand from regulation. The States can now regulate gas rates to all consumers, and they will continue to regulate those rates to consumers until Congress enters that field, and crowds the States out.

Mr. MERRITT. You say until Congress enters the field?

Mr. BENTON. Yes.

Mr. MERRITT. But it cannot do that.

Mr. BENTON. Congress can enter it, as to that service which is rendered across State lines. It cannot crowd the States out of regulation of local distribution which is purely intrastate in character.

Mr. MERRITT. But the jurisdiction of the Federal Government ends at the State line, does it not?

Mr. BENTON. The Federal Government?
Mr. MERRITT. Yes.

Mr. BENTON. No. The Federal Government may regulate, if it chooses, the entire business which crosses a State line. It may not deprive a State of the right to regulate that business which is wholly within State lines. That business which a State may regulate only until Congress crowds out the State, is the local business across State lines. A gas plant, we will say, is located in a community which is built up along a State line, and furnishes service within the State and service across the line to consumers in another State. The consumers in the second State may look to their State commission to regulate consumer rates in that State, even though the gas be generated and distributed from a point outside the State. That is interstate commerce, technically speaking, and Congress may, if it considers it in the public interest to do so-if it chooses for any reason to do so provide that a commission in Washington shall regulate the consumer rates wherever service is rendered across a State line.

Our request is that the Congress, in drawing any legislation in this field, shall clearly provide in the act that it shall not apply to local utility business. This bill appears to have been drawn with the purpose of conforming to that request, just as Congress conformed to similar requests in the passage of other acts within the past 2 years.

We are somewhat fearful, however, that the bill as drawn does not accomplish the entire purpose of the draftsman of it; and before I complete I will point out the respects in which I think it ought to be amended, and shall offer proposed amendments to accomplish that purpose. That was the purpose, undoubtedly, of the man who drafted the bill; and the purpose of the provisions in section 1, which were criticized by Mr. Battle, that the regulation provided shall extend only to the business of transportation and sale of gas carried interstate in high-pressure mains and shall not apply to the transportation of gas in low-pressure mains.

We think, however, that the exclusion does not exclude all local consumer business. We believe that the Congress, in this act, should exclude the local business just as it excluded the local exchange business in the Communications Act, and just as it excluded the local

consumer business in the Federal Power Act, where it is merely a sale for consumption and not to a distributing company.

The first case to which I want to call to your attention bears on this point. It is Pennsylvania Gas Co. v. Public Service Commission of New York, reported in 252 U. S., page 23. In that case the New York commission undertook to prescribe the rate charged to consumers in New York for gas brought from Pennsylvania by the Pennsylvania company, and by it sold in New York. Presumably, the importation into New York was in high-pressure mains, and the distribution to consumers in low-pressure mains; but that aspect of the case was not considered. The court sustained the jurisdiction of the New York commission upon the ground that the business regulated was local in character, and, while within the reach of Congress as interstate commerce, was subject to State regulation until Congress should enter the field and impose Federal regulation.

The next case is that of Missouri v. Kansas Natural Gas Co., reported in 265 U. S., page 298. There the court dealt with orders of the Missouri and Kansas regulatory commissions prescribing gate rates to be charged by the pipe-line company to distributing companies in various cities and towns in the two States. The court, in the cases covered by that opinion, held that the rule laid down in the Pennsylvania case applied only to the local business of supplying consumers, and did not apply to intercompany wholesale transactions.

Discussing the Pennsylvania case, the court said:

There the gas company, a Pennsylvania corporation, transmitted gas from Pennsylvania into New York and sold it directly to the consumers. The service to the consumers, which was the thing for which the regulated charge was made, was essentially local, and the decision rests upon this feature. * * * The business of supplying, on demand, local consumers, is a local business, even though the gas be brought from another State, and drawn for distribution directly from interstate mains; and this is so whether the local distribution be made by the transporting company or by independent distributing companies. In such case the local interest is paramount, and the interference with interstate commerce, if any, indirect and of minor importance. But here the sale of gas is in wholesale quantities, not to consumers but to distributing companies for resale to consumers in numerous cities and communities in different States. The transportation, sale, and delivery constitute an unbroken chain, fundamentally interstate from beginning to end, and of such continuity as to amount to an established course of business. The paramount interest is not local but national-admitting of and requiring uniformity of regulation. Such uniformity, even though it be the uniformity of governmental nonaction, may be highly necessary to preserve equality of opportunity and treatment among the various communities and States concerned.

This rule applies even though delivery to the selling company is at the State line, so that its transportation is wholly intrastate. See People's Natural Gas Co. v. Pennsylvania Public Service Commission (270 U. S. 550).

In Public Utilities Commission v. Attleboro Steam & Electric Co. (273 U. S. 83), the Court dealt with an attempt on the part of the Rhode Island commission to regulate the price to be charged for electric energy generated in Rhode Island and sold to a Massachusetts distributing company. The cases which I have cited were reviewed by the Court, and it was held that the case fell within the rule laid down in the Kansas case rather than in the Pennsylvania It is important as an affirmation of the latter rule which we ask to have Congress recognize and preserve.

case.

East Ohio Gas Co. v. Ohio Tax Commission (283 U. S. 465) was a tax case which involved the validity of an Ohio statute which taxed the gross receipts of gas companies from sale to consumers. Under the well-established rule that interstate commerce may not be subjected to a State tax, this law was invalid if sales to consumers were interstate in character. If, on the other hand, they were intrastate, the tax was valid. The Court rules that the sales were intrastate, saying that after gas had been brought into the State under pressure, and then the pressure had been reduced for the purpose of enabling distribution to consumers, the stepping down in the pressure of the gas marked the end of interstate commerce, and that all that took place thereafter was intrastate commerce.

This case established very clearly that a State has jurisdiction to regulate the business of distributing gas after it has been imported, and the pressure has been stepped down to permit of local distribution. It, however, leaves the State authorities still subject to the rule announced in the Kansas case, and followed in the other cases which I have cited. The rule I mention applies to the purchase by one distributing company from a pipe-line company.

The only control which a State commission can exercise as to the price paid by a distributing company to a pipe-line company for gas imported from another State is through its determination of proper operating costs. In some instances the Commission may refuse to recognize a price paid as reasonable for allowance in full as on operating cost. Seemingly, however, it may do this only when the two companies are affiliated. I will read briefly from an opinion of the court touching this point.

In the Southwestern Bell Telephone Co. case (262 U. S. 276), the State commission had refused to allow in full, as an operating expense, 412 percent of gross revenues which the Southwestern had paid to the American Telephone & Telegraph Co. for certain financial and other services. The Southwestern Bell is absolutely controlled by the American Telephone & Telegraph Co. through stock ownership. The court set the Commission's order aside for reasons which it stated as follows:

Four and one-half percent is the ordinary charge paid voluntarily by local companies of the general system. There is nothing to indicate bad faith. So far as appears, plaintiff in error's board of directors has exercised a proper discretion about this matter requiring business judgment. It must never be forgotten that while the State may regulate, with a view to enforcing reasonable rates and charges, it is not the owner of the property of public-utility companies, and is not clothed with the general power of management incident to ownership. The applicable general rule is well expressed in State Public Utilities Commission ex rel. Springfield v. Springfield Gas & E. Co. (291 Ill. 209, 234, P. U. S. 19200, 640, 125 N. E. 891).

The Commission is not the financial manager of the corporation, and it is not empowered to substitute its judgment for that of the directors of the corporation; nor can it ignore items charged by the utility as operating expenses unless there is an abuse of discretion in that regard by the corporate officers.

This rule, however, has been modified by the United States Supreme Court since Mr. Hughes became Chief Justice. In the Illinois Bell Telephone Co. case (283 U. S. 133), the Court held that a State commission may refuse to be bound by payments made by an operating utility to a subsidiary or affiliate under common control.

This rule, however, was based upon the affiliation of the parties. It has been followed in two other cases, which I will cite as follows: Western Distributing Co. v. Public Service Commission of Kansas (285 U. S. 119); Dayton Power & Light Co. v. Public Utilities Commission of Ohio (292 U. S. 290, 297).

In the Dayton case, Mr. Justice Cardozo said:

The contract between the appellant and the Ohio Fuel Gas Co. called for payment at the rate of 45 cents per thousand cubic feet; the Commission found this price to be excessive to the extent of 6 cents, thereby reducing to 29 cents the allowance to be made as a proper operating expense. There is no doubt under the decisions of this Court that the commission was not concluded by the price fixed in the agreement. This results from the relation of intimate alliance between the buyer and the seller. They were not dealing with each other at arm's length, and the prices that they fixed in their intercompany transactions were of no concern to the consumer unless kept within the bounds of reason (Western Distributing Co. v. Public Service Commission, 265 U. S. 119, 76 L. ed. 655, 52 S. Ct. 283; Smith v. Illinois Bell Telephone Co., 282 U. S. 133, 75 L. ed. 255, 51 S. Ct. 65; United Fuel Gas Co. v. Railroad Commission, 278 U. S. 300, 73 L. ed. 390, 401, 49 S. Ct. 150).

In the light of these decisions, it may be said that the rule laid down by the United States Supreme Court in the Southwestern Bell case has been so far modified as to permit commissions to examine into the reasonableness of the prices paid by operating utilities for gas which they purchased from an affiliate, or for electric energy so purchased, or for any service obtained under any service contract, but as to others than affiliated companies the rule as laid down in the Southwestern Bell case still obtains, so far as any judicial decision that I know of is concerned.

Even where companies are affiliated, however, a State commission is not in a position to obtain information as to the cost of producing gas in a distant State, and as to the cost of transporting it for delivery within the State. A State commission cannot prescribe accounts to be kept by the producing company in the other State or by the pipe-line company which transports it. It cannot demand that accounts be submitted for examination. It cannot summon witnesses from outside the State.

In short, it cannot make a complete and satisfactory examination which will enable it to determine what the operating costs of the producing company are, or the cost of transporting. Indeed, if it had the power to do all these things, it could not ordinarily exercise that power satisfactorily, on account of the prohibitive costs of such an extensive investigation. Generally speaking, the State commissions are supported by rather scant appropriations. They are appropriations dealt out to them by the legislatures, measured by the necessity which the State legislatures at the time of appropriating can see; and the cost of such an investigation as would be required by a State commission to investigate the cost of producing gas in a distant State, and of transporting it and delivering it within the State of distribution, would be beyond the reach or financial ability of practically every State commission in the country, even if it had the power which it lacks.

These pipe-line companies supply gas in many States. The cost involved in such supply should be determined by Federal tribunal for the benefit of all the States involved, and the national agency ought to stand ready to prescribe just and reasonable rates for the