Favorable opinion on joining Iranian oil consortium probably dictated from above he relieved of responsibility.

In our case needs to understand the facts. No use to have Defense write letters to him. Would require a directive from the White House or Nat. Security Council to override him.

Only time the A. G. mentioned our case-November-asked if negotiations were going on-wanted them pursued actively.

Foote had talked with Vic Cooley who gave him three reasons why W. E. costs were lower than any possible competitor-no selling expense etc.

It should have nothing to fear from allowing others to bid for some of the business. Kramer said W. E. could cut prices and take a loss on lines where there was competition. F. not much impressed..

Barnes has a high opinion of telephone company and accepts what we tell him as truthful.

Foote illustrated his thought by reference to experience in getting other mfrs. into production on aircraft engines.

APPENDIX XII-A. T. & T.

November 30, 1755

The Honorable

The Attorney General

Washington 25, D. C.

Dear Mr. Attorney General:

Further reference is made to your letter of November 8, 1955, concerning the pending antitrust suit against Western Nectric Company, Inc. and the American Telephone and Telegraph Company, in which the complaint asks that Western be divorced from the Ball System. In your letter, you cite the position taken by the defendants in discussions with the Department that divestiture would result in a less efficient and ecomand cal arrangement for the provision of telephone equipment used by the Bell System and would increase the cost of such equipment and tend to increase the cost of telephone service to the public. You advise that in this camection the defendants have stated that the reasonableness of Western's prices and profits are subject to mination by the regulatory bodies in the exercise of their rateaking fmctions, and the burden of proving such reasonableness is upon the Bell System companies; that the regulatory agencies, as part of their rate-making powers, may make disallowances to the extent that Western's prices may be found to be unreasonable; that Western's prices and profits are under continuous regulatory 'study; and that divestment of Western from the Bell System would deprive the regulatory agencies of their adsting control of the prices and profits of Western. You request the Commission's views as to whether, if the defendants are correct in these statements, divestiture of Western would have a signif. icant effect upon the exercise of their functions by the regulatory agencies.

The operations of Western, including its prices and profits, are, of course, not subject to direct control by any regulatory au- · thority. Nevertheless, telephone regulatory authorities have the pover which is inherent in their rate-making fumotions, to safeguard the public against possible abuses in the prices established for Western's sales to its affiliated telephone operating companies. Because of the absence of "arms-length dealing" between Western and the Bell System telephone companies, the latter companies, then called upon to do so, have the burden of demonstrating that their payments to Western are reasonable. To the extent that such payments are determined to be excessive, the regulatory agency in fixing reasonable telephone rates, may make appropriate disallowances in the amounts claimed by the telephone companies as allowable investment and expenses.

In addition to the powers inherent in the rate-fixing process to safeguard against abuse in the prices charged by Western to affili. sted companies, regulatory agencies also have varying types of statutory povers designed to provide additional safeguards. For example, certain state commissions have authority to pass upon the propriety of contracts entered into by telephone companies with affiliated manufacturing and servicing companies and to disapprove any such contracts, the terms and conditions of which are foud to be in conflict with the public interest. This comission is empowered to require Westera, in its capacity as an affiliate of telephone companies subject to our jurisdiction, to file prescribed reports with respect to its operations and to furaish full and complete information with respect to any matters affecting the performance of the Comission's regulatory responsibilities. Also, under our authority over the accounting performed by telephone companies subject to our jurisdiction, the Cazzissim my take appropriate measures to require a Bell System telephone company to eliminate from its accounts my amounts recorded therein which represent excessive payments by the company to Western.

In view of the foregoing, it would appear that adequate powers reside in the regulatory authorities to deal with the matter of Western's prices and profits, insofar as they may affect the investment and expenses of affilisted operating telephone companies. This Commission, in cooperation with the National Association of Railroad and Utilities Commissioners, Jaistly undertook, in 1947, a preliminary study of Western's profits and accomting procedures in order to provide helpful information to state and Federal regulatory agencies in judging the reasonableness of Western's prices and to determine the need for a more comprehensive investition of Western's costs, accounting procedures and prices. This study, which was the subject of an extensive report in 1948, reviewed selected phases of Western's operations. Supplemental summary reports on Western's operating results have been prepared azmally since that time. We believe that these studies have been instrumental, at least in part, in bringing about substantial reductions by Western in its prices charged to the telephone companies of the Bell System.

In the event that Western vere divested by AMT, the reason-. ableness of the payments made by the Bell System telephone companies for equipment and services would, is large measure, be removed as issue in the rate-making process. In other words, to the extent that such equipment and services would be obtained from a competitive market and negotiated for entirely at "arm's length", there would be no issue as to the propriety of inter-company profits included in the prices paid therefor. Such payments would not be denied the presumption of reasonableness as they are under existing arrangements. Of