CONGRESSIONAL RESEARCH SERVICE, To: The Honorable Lee Metcalf. Attention Vic Reinemer. From: Economics Division. Subject: Data supporting Federal intervention into intrastate regulatory body proceedings. I. SUMMARY Data have been collected herein delineating the magnitude of regulated industries' annual business. It was possible to make estimates of revenues jurisdictional to Federal regulatory organizations in the areas of electricity, natural gas and telecommunications. Insurance is regulated exclusively at the state level. Segmenting the inter/intra state revenues of ICC and CAB regulated firms has proved impossible. An extensive check has been made here and it appears that the required reporting of regulated firms is such that Federal jurisdictional and non-jurisdictional revenues are reported together in a non-separable manner. Not even a meaningful guess can be made on the size of revenues earned by motorcarriers, airlines, and railroads under tariffs authorized by Federal regulators. In short, the transport sectors' inter/intra state revenues continue to be irreparably aggregated, and Federal regulatory bodies seemingly have little interest in the gross revenue performance of firms under their tariffs vis-a-vis under the tariffs of various State PUC's. The table below highlights the role of Federal regulation and suggests impact on national income. TABLE 1.-SUMMARY STATISTICS DESCRIBING RELATIONSHIP BETWEEN RATE REGULATED Under the Federal Power Act, the Federal Power Commission regulates the rates of power sold in interstate commerce. This amounts to only 15 percent of total power sold. Because consumers per kwh bill includes distribution and other costs in addition to simple power cost, this 15 percent figure translates into about 7 percent of consumers' electric bills. Gross revenue from electric utilities sales to ultimate customers in 1972, the latest year for which data are available, amounted to $27.9) 2 billion and the portion thereof resulting from sales under FPC tariff was $1.95 billion. III. NATURAL GAS The FPC also regulates the price of gas sold in interstate commerce as well as the rates charged by interstate gas transmission pipelines. About 70 percent 1 of produced gas enters interstate commerce and this had a 1972 value of $2.9B.3 Interstate gas transmission companies' revenues were $7.3 billion during that year and these monies include receipts for the gas sold under FPC regulated prices above. Gross receipts of all gas utilities totaled $12.5 billion for 1972, and the assumption can be made that 58.4 percent are the portion stemming from sales under FPC tariff. 1 Statement of John N. Nassikas, Chairman FPC. Hearings Before the Subcommittee on Consumer Economics, JEC, March 28, 1974. 2 Survey of Current Business Gas Facts, table 27. Gas Facts, table 104. Ibid., table 80. 43-362-75-pt. 1- -5 IV. TELEPHONE AND TELEGRAPH There are over 60 telephone operating companies in the United States, one domestic telegraph carrier, and several relatively small international record carriers. We can, therefore, make the following tabulation. TABLE 11.-COMMUNICATION SUBJECT TO FEDERAL REGULATION Insurance is regulated at the State level exclusively. State insurance departments are, in general, primarily concerned with the financial well-being of regulated firms. It is widely felt that consumer interests are badly represented in an industry whose net premium income in 1972 totaled $46.5 billion for life and health insurance companies and $39.3 billion for property and liability insurance companies. $85.8 billion in combined revenue is the equivalent of 7.4 percent of 1972 GNP. VI. TRANSPORTATION COMMON CARRIERS Motor carriers, airlines and railroads are rate regulated by both State and Federal organizations but no separation along the lines of State and Federal tariff derived revenue can be made. In 1972 these industries derived the following gross operating revenues,' all under rates set by various regulatory bodies. Senator METCALF. I am delighted to see such a formidable group of regulatory agencies represented here. Certainly today and yesterday we have the greatest group of experts on regulation that I think have ever appeared before the Congress; they are men of considerable wisdom and innovation. So I am not here to make a speech. I am here to listen to your suggestions and your ideas. The first witness is Mr. Ray Garrett, Jr. Chairman of the Securities and Exchange Commission. We are delighted to have you here and pleased to hear about some of the reforms you are making at the Commission without additional legislation. You do have a prepared statement, Mr. Garrett, and we would like to hear from you first. 6 A. M. Best and Company, phone call. 7 Survey of Current Business. STATEMENT OF HON. RAY GARRETT, JR., CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION Mr. GARRETT. Thank you, Senator Metcalf. I have prepared a written statement. It is much too long to read on this occasion. I hope the entire statement will be incorporated in the record. Senator METCALF. Yes, I will make a ruling at this time in the interest of time. I will not make it again. All statements will be submitted in their entirety for the record, will be printed in the record as if read, and the summary of the statements will also be printed as presented and propounded in oral testimony. Mr. GARRETT. Thank you, sir. At this time, I would like to read. a few extracts from my prepared statement. Senator METCALF. Please do. Mr. GARRETT. I appreciate this opportunity to testify on behalf of the Securities and Exchange Commission before this Committee on the general subjects of the functioning, effectiveness and independence of regulatory agencies, and on the five specific bills before you today. Nearly 40 years ago, a former chairman of the Securities and Exchange Commission, and now a member of the U.S. Supreme Court, Mr. Justice Douglas, recommended to President Roosevelt that the agencies Roosevelt created should be abolished after 10 years of service. Mr. Justice Douglas apparently believed that, after 10 years, such agencies become too close to the groups they regulate, and thus no longer would be competent to serve the public interests that originally motivated their creation. Needless to say, I do not believe that such a generalization is applicable to the Securities and Exchange Commission, if it is applicable at all. But, Mr. Justice Douglas' comment and recommendation serves to underscore the fact that the Congress, members of the independent regulatory agencies, and the courts are under a continuing mandate to prevent any erosion of the quality of performance or efficiency of independent regulatory agencies. For this reason, the Securities and Exchange Commission supports the legislation before this committee that would establish a National Commission on Regulatory Reform. In addition to seeking our comments and views on the bills pending before this committee, we also received a list of 11 questions covering, in some detail, the broad subjects with which the pending legislative proposals deal. The legislative proposals and 11 questions seem to us to lend themselves to three broad categories. With the committee's permission, I propose generally to express the Commission's views on these broad topics. To the extent that we perceive any problems with the specific language of the legislation before you, these are noted in the discussion of the three broad issues set forth in my prepared statement. The issues posed both by the legislation and questions, I believe, can be broken down as follows: First, the effectiveness of the functioning of independent regulatory agencies. This topic is raised by S. 4145, S. 4167, and all or portions of each of the questions posed. Second, whether the independence of the independent regulatory agencies should be strengthened or diminished. This issue is raised by S. 704, and portions of questions Nos. 5, 7, and 9. And third, whether a separate Federal agency should be established to represent the interests of consumers of regulated services. This issue is raised by S. 770 and portions of question No. 5. The Commission is not affected by, and does not intend to offer any comments on S. 3604, a bill which, if enacted, would abolish a number of agencies and offices and which would curtail some of the functions of other agencies. The first issue posed is the effectiveness of independent regulatory agencies. Measuring agency effectiveness is not a simple task. While, as I previously have noted, we support the adoption of legislation creating a National Commission on Regulatory Reform, I hope the committee will bear in mind, and the legislative history of S. 4145 will so reflect, that it is not possible to put all independent regulatory or other agencies in a uniform mold. And the establishment of a Commission with as broad a mandate as both S. 4145 and S. 4167 would confer could result in a final report that, due to time constraints, manpower limitations, and budget shortages, might treat all agencies alike, even though different agencies perform different functions. Thus, unlike some agencies, we do not grant subsidies of the sort referred to in question No. 4. Nor are we engaged in the kind of licensing functions-those typical of agencies such as the Federal Communications Commission or the Federal Power Commissionthat appear to underlie question No. 1. We do, of course, register a number of entities, such as national securities exchanges, brokers and dealers in securities, investment companies and investment advisers; but, aside from statutory disqualifications, predicated generally upon prior wrongful conduct or lack of adequate financial protections for investors, almost any person may register with us. Much of our work is directed toward insuring that appropriate disclosures to investors are made by entities subject to our jurisdiction, and that dishonest, unfair, or otherwise improper market practices are prevented or corrected. The large bulk of our work, however, at least currently, is to operate in a quasi-legislative capacity to prescribe rules governing the efficiency and future functioning of the marketplace for securities, and the professionals who operate in it. In the performance of these functions, the collegial form of commission is, in our view, vastly superior to a single administrator. The diverse viewpoints and experiences of our five-member Commission certainly serve to insure that our decisions reflect consideration of all possible ramifications of proposed courses of action. The benefits of this process are difficult to overstate. I suppose it is essentially similar to the situation this committee and all other congressional committees must face. One-man committees might, in some instances, produce legislation far more rapidly than now occurs, but the process would seriously destroy the fine balancing and careful consideration of all viewpoints that generally are reflected in final legislative decisions of the Congress. Perhaps more importantly, the collegial commission in our case serves to insure appropriate independence. In 1971, this was the essential conclusion of the President's Advisory Council on Executive Organization, although that report suggests that such independence of the SEC from the President is unfortunate. Indeed, it should be noted that over the last 3 years this Commission has been the subject of intensive scrutiny, in separate studies, by subcommittees in both the Senate and House charged with jurisdiction over our performance and the substantive laws we administer. While some conclusions reached as a result of those studies are similar to the ones upon which the legislation pending before this committee apparently is predicated, no suggestion was made by either subcommittee to transform the SEC into a single administrator agency. Although our effectiveness, functioning, procedures, statutory mandate, and substantive jurisdiction recently have been the subject of two congressional studies by subcommittees familiar with the nature of our functions and mode of our operations, if this committee believes a further review of these matters is necessary or appropriate, we certainly can and do support appropriate legislation to that effect. We are not aware, generally, of any significant deficiencies within our regulatory processes which end to lessen competition, adversely affect the public and regulated companies, or contribute to inflation. Indeed, in one significant area-the operation of our markets-we are currently taking steps to increase the effective operation of competition. It is true, as I have noted, that the two subcommittees on the Congress that have made an intensive study of this Commission and its substantive jurisdiction, have proposed some substantial revisions of our mandate and the standards pursuant to which we comply with that mandate, in order to give greater effect to competitive policies generally and in order to streamline some of the procedures pursuant to which we may take regulatory action. While we are unaware of any adverse effects on inflation our regulatory processes may have had, there is no question that the reporting, disclosure, and other burdens imposed on various publicly held comapnies may result in greater costs of operations for those entities. Nevertheless, the Congress, starting in 1934 and continuing for the 40 years since then, has continued to reaffirm the basic conclusion that the benefits to the investing public from the disclosure and other requirements we have imposed upon these companies pursuant to the statutes we administer necessarily outweigh any costs associated with compliance with these requirements by the companies involved. We have not, however, been unmindful of the cost burden that some of our regulations may impose, and, to this effect, we have recently proposed regulations which would attempt to free smaller companies from some of the more costly and onrous reporting requirements without adversely affecting public investors, and we are continuing to explore whether other steps can be taken in this general direction. There are, to be sure, certain areas within our substantive jurisdiction which may present overlapping jurisdiction or duplication of interests by this Commission and other agencies. On the whole, where such duplication has appeared to be unnecessary, Congress has generally acted to insure that some of this duplication is eliminated or curtailed. |