Mr. STAFFORD. I am not absolutely sure I understand what you are speaking of. But any rate that they file for the pipeline is the rate that any independents would pay if they use it. They will get their fair share of the pipeline ability to carry.

Mr. KAHN. Mr. Turner, it is altogether premature, I believe. We have nothing like that. I doubt very much the companies themselves have their rate schedules as yet. They have not started laying the pipe yet.

Mr. STAFFORD. Mine is a general statement. Once they do-you have to arrive at the value first.

Mr. TURNER. Let me say it in plain terms. Do you know how they are going to run their pipeline? Do you know the degree to which independents will be able to use that pipeline? Do you know of any restrictions placed upon the pipeline? Do you now have any studies or information to show what is going to happen with respect to that pipeline at the beginning, the end, and in the middle?

Mr. STAFFORD. They will be able to use it in the appropriate ratio. Any independent that is in the area and can deliver the oil will be given the ratio of the barrels as compared to the larger ones that are already using it, the owners of the pipeline. They must make that available to the independent.

Mr. TURNER. This is a hearing on information. So all I am asking is where would I be able to find that information for any pipeline? Mr. STAFFORD. This is true of any pipeline. Any independent has the right. They have to do that.

Mr. BREWER. The common carrier must hold itself out.

Mr. STAFFORD. There have been absolutely no complaints coming to my attention at least in the past, for as long as I have been with the Commission. Well, we may have a case now. I don't know if it is based on that alone. No, it is not on discrimination.

We have been over that ground quite a bit in the last year or two here. There just are no indications that any independent is being denied the right to use the major pipelines.

Mr. TURNER. With respect to the debt of the pipeline as well as the railroad will form R as well as form P show the holders of the longand short-term debt?

Mr. GRADY. No, it will not.

Mr. TURNER. Don't you feel that you have the authority to put that in there or to ask for that?

Mr. GRADY. Yes. I believe we have the authority, Mr. Turner. Again, I guess it depends on what your objectives are, after you collect the information. That is, how the information can be used. As I said before in my judgment the nature of pipeline companies is such that if the objective was to disclose control and ownership, I think you are in the wrong area. I think you should be at the oil company level and not at the pipeline company. It would be, in my judgment, at least akin to finding out who controls General Motors if they happen to own a trucking company that ships their cars to the dealers. It would be a similar relationship in my mind.

If you focused on the motor carrier that happened to ship the cars for General Motors and attempted to find out the ownership of debt and entity, if they had such an entity, I would think that you would be in the wrong area.

Mr. TURNER. Let me go to another matter which relates to the railroads.

Mr. Chairman, Norton Simon testified that he resigned from the

board of Burlington Northern after 22 years because, among other things, of the failure of the corporation to make adequate disclosure in connection with a large securities offer. He alleged the company failed to disclose the extent to which maintenance was being deferred, loss of revenue due to long-term commitments, and so forth.

He further testified that he did not see the management circular on this prospective bond offer until 2 days after it had been distributed to Wall Street bankers and that as a result of his challenges at a board meeting, he caused it to be revised.

Norton Simon said that he called Chairman Stafford and said that he was disturbed that a circular was going out that did not adequately disclose the facts about Burlington Northern. The chairman said I will turn it over to my staff, but I have got the message they ought to do something about it.

I presume you knew this question was coming, Mr. Chairman: The logical question is what action did you or your staff take at that time that Norton Simon indicated his concern that he had with respect to Burlington Northern disclosure?

Mr. STAFFORD. I recall his calling, of course. I am not so sure I recall some of the comments that may have later been alleged to be made. My feeling is that he was extremely upset with the president of Burlington Northern. His major request to me was that I want to be heard on this. I want to be sure to have television and radio available. I suggested-first, I did not know at that moment whether we had an application filed for a bond issue. But I suggested that his attorneys could advise him how properly to handle this.

Mr. TURNER. Do you have any further comment that you want to make?

Mr. MCCORMICK. Yes.

Mr. TURNER. Before you do that, I would like to refer to some of the things he was complaining about to Chairman Stafford and then you can respond to them.

One was the substantial loss of revenue due to long-term commitments on coal and timber contracts.

Mr. STAFFORD. He did not talk to me about that.

Mr. TURNER. The undervaluation of land, compensating balances referred on loans from commercial banks.

Mr. STAFFORD. He did not talk to me about that. He was more concerned about the president of the railroad, chairman of the board. I am sorry. Chairman of the board.

Mr. TURNER. But you didn't do anything at that time?

Mr. STAFFORD. Of course, later I believe we made an effort to talk to him and he was unavailable, wouldn't talk.

Mr. McCORMICK. The Commission does not have jurisdiction over the issuance of securities over section 20 (a) and accordingly they did approve the $60 million bond issue for Burlington Northern.

The Bureau of Accounts and the Section of Financial Analysis did analyze the prospectus as we always do.

We generally in our analysis follow the accounting circulars and procedures put out by the SEC. We are in the process of compiling our own regulations in a pending proceeding ex parte No. 279. However, we are very familiar with the SEC requirements. At that time the SEC was not looking at compensating balances. Subsequently and effective January 1, 1974, the SEC made effective their accounting release No. 148 which does prescribe very stringent rules regarding

compensating balances. We are now following accounting release No. 148 and looking at the compensating balances.

Mr. TURNER. You said the ICC or your shop looked at it and approved it. Here are some of the things that Norton Simon felt should be made known to those who were going to pick up these bonds or whatever securities they were.

He had in his possession, we have it in the record here, a memorandum from the president of the Burlington Northern dated September 20, 1973. I am sure you have seen it. It said that the company estimated that its normal replacement of tracks should be 354 miles a year, but that replacement would have to be left at low levels of 200 miles and it noted that there had been 20 derailments costing $3,510,000, and that the company could not afford this deficiency in the relaying of the track because of the anticipated increased traffic.

At that time there was this deferred maintenance program going on which was causing certain concern on the part of the director of the railroad. He wanted something of that nature mentioned in the circular.

The second thing that bothered him was that BN, being the second largest coal owner in the country had contracted for 40 percent of its coal-that is what he told us-40 percent of the coal to the Montana Power Co. at a rate which was 35 percent below its average coal price. In other words, as referred to by our chairman, a sweetheart contract that was giving a very favorable disposition toward the Montana Power Co.

According to Simon, this should have been made public that there was a substantial loss of earnings on this special coal contract. The president of Montana Power has subsequently left the board of Burlington Northern and I don't know whether he was on the board at the time this contract was made, but I believe he was.

I ask you, sir; did you look into that? Am I right or am I wrong? Mr. MCCORMICK. I read Mr. Simon's testimony also. That is what he said. Let me say first that Mr. Toffel who I believe is Mr. Simon's lawyer met with Mr. Grady and myself at the time of the filing of the $60 million bond issue. We advised him that if he wanted to become a part of this proceeding that he could. This was one of the avenues he had to be heard. Mr. Toffel just previous to Mr. Simon resigning from the board said, "No, we don't want to get involved. It is a kind of a touchy thing because we are still sitting on the board.".

He did not make these things that you have just mentioned known to us nor did the application which I have with me reveal this type of thing. Of course, when you consider these offering circulars, prospectuses, and the applications, neither we nor the SEC would have any way of knowing there was any kind of a contract. I am not even sure it was a fact.

Mr. TURNER. When was the last time you audited the Burlington Northern?

Mr. MCCORMICK. Very recently. In other words, there is an audit going on right now.

Mr. STAFFORD. Could I get Mr. Olson up here to speak to the coal problem?

Mr. OLSON. I don't think it has anything to do with coal contract relationship.

Mr. TURNER. Chairman Stafford, I don't want to get into the facts.

All I want to find out is that that here are some pieces of information that seem to me should have been loked at. I want to know whether you have in your files

Mr. McCORMICK. We do, sir, but every time an application is filed we don't send the auditors in to check it out. From previous audits, there was no indication that this information that Mr. Simon made available was a fact.

Mr. TURNER. Did you go up there and seek it?

Mr. McCORMICK. Pardon?

Mr. TURNER. Did you go up there and seek a copy of the contract on coal?

Mr. MCCORMICK. No, sir. The auditors are in there now looking at it. When an application is filed and contains no indication of any such contract, it is just not a practical thing to investigate. You can't send the auditors in every time a railroad files an application to issue securities. This isn't done. The SEC doesn't do it either. If Mr. Simon had told us this beforehand or became a party to the proceeding, we certainly would have looked into it. But the prospectus I thought was well prepared. It appeared to show full disclosure.

Let me speak for a minute as to the deferred maintenance. The deferred maintenance, of course, is a very nebulous thing. Every railroad, I suppose, has a certain amount of deferred maintenance. Certainly the eastern railroads have a tremendous amount of deferred maintenance. We have some means of checking the deferred maintenance by the rail that is replaced every year, which is reflected in their annual reports and the crossties replaced.

In fact, in 1973 the Burlington Northern replaced 265 miles of track with new rail and another 207 miles of track with used rail. This was more than they performed in 1972. The maintenance expenses were up about 712 percent which is probably due to an inflationary increase in maintenance costs.

We had no indication from any of our records that there was any substantial deferred maintenance going on in Burlington Northern or do I have such information now unless our auditors come up with it and as I say they are still on the property.

Mr. BREWER. I might supplement that if I could by saying that in this particular instance I personally have traveled most of the Burlington Northern on an inspection trip, and it would be my opinion that the trackage of Burlington Northern is a good or better condition than most of the trackage in the country today. I don't know as a fact whether they are deferring maintenance or not, but I think we also ought to probably consider the fact that the coal business or the real estate part of the railroad has been spun off into a subsidiary, if I am correct. This then, whether or not we have jurisdiction to go on down into that is something that I want to look into.

Mr. TURNER. There is one other issue and I am not going to belabor it. That is the timber contracts. I hope your auditors will be looking at those long-term contracts bringing in approximately, according to Simon, $700,000 a year where Burlington Northern's own people estimated they should bring in $14 million a year.

Mr. MCCORMICK. They are aware of that. As a matter of fact, I sent the auditors a copy of the testimony so that they would be sure to look it over.

Mr. KAHN. May we return for just a moment to the coal situation? It is my recollection as I read Mr. Simon's testimony in that he was

talking about the rates that were available for the transportation of the coal; is that correct?

Mr. TURNER. I think it would be the sale of the coal to the company as I recall it. But my thought was that they owned the coal, that Bur lington Northern owned the coal, and it had a contract, a long-term coal contract, with the power company.

Mr. KAHN. My recollection of Mr. Simon's testimony, Mr. Turner, was that he was referring to the transportation charges, that he was alleging that the transportation to the utility was at a favorable rate. I think this gave rise to the characterization of a sweetheart deal. Mr. Olson was prepared to respond to that, Mr. Turner, pointing out, first, the transportation was intrastate and not accordingly within the jurisdiction of the Interstate Commerce Commission. But be that as it may, as it was costed out, the rate was approximately 15 percent above directly ascertainable costs which compared very favorably with an average of 18 percent above variable cost for this kind of traffic.

Mr. TURNER. You can supply for the record any additional material on that particular point.

[The information referred to had not been supplied when this publication went to press, and will be printed in Part 3 of these hearings.] Mr. TURNER. Back to our pipeline, as to pipeline rates, are there general rules from the Interstate Commerce Commission limiting the level of rate?

Mr. STAFFORD. Yes. I believe it is 7 percent that they can take out. Mr. BREWER. It is a consent decree that we have.

Mr. TURNER. When were these rules made?

Mr. KAHN. Mr. Turner, you are familiar with the consent decree, and the limitation under the consent decree is in terms of the dividend payments that can be made by the pipeline subsidiary to its parent company.

Mr. TURNER. But the rules were made before the Big Inch line, weren't they?

Mr. KAHN. The consent decree was before that.

Mr. TURNER. In 1948. Having established that, have there been any studies by the ICC as to whether the pipelines are abiding by these rules on rate of return? This is information. I just wondered whether or not you have any running studies as to whether each of the pipeline companies are abiding by this rate of return.

Mr. GRADY. Each year, of course, the pipeline companies that are subject to that consent decree must file a statement of excess earnings, if any, actually with the Department of Justice. I think that you have ability of control through those filings.

Mr. TURNER. That is the overall rate of return.

Mr. GRADY. I think the overall rate of return, Mr. Turner, is established by actually looking at the cash flowing out of the pipeline entity and to its parent. In other words, you get into the valuation of the property and then the return based on that and then the amount of cash flow that can pass up to its parent and it is limited by 7 percent.

Mr. TURNER. Have any studies been made by the Interstate Commerce Commission with respect to segments in the overall line? In other words, point-to-point segments as to rate of return by point-topoint segments?

Mr. GRADY. The answer, I guess, is "No."

Mr. STAFFORD. I think they are entitled to―are you inferring that perhaps to meet competition they may have lower rates in some areas