Federal Power Commission v. Tennessee Gas Transmission Company

PETITIONER:Federal Power Commission
RESPONDENT:Tennessee Gas Transmission Company
LOCATION: United States Court of Appeals for the Fifth Circuit

DOCKET NO.: 48
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 371 US 145 (1962)
ARGUED: Oct 17, 1962
DECIDED: Dec 03, 1962

ADVOCATES:
Brooks E. Smith – For the Respondent Manufacturers Light and Heat Company
Charles S. Rhyne – for the petitioner in case No. 50
Harry S. Littman – For the respondent Tennessee Gas Transmission Company
Ralph S. Spritzer – for the petitioner in case No. 48

Facts of the case

In 1959, Tennessee Gas Transmission Company filed a 7% proposed rate increase across all six of its zones with the Federal Power Commission. The rate increase was based on the expected cost of service and rate of return. The Commission imposed a five-month suspension period while hearings were conducted to determine whether the rate increase was reasonable. At the end of five months, the new rates would be applied, but they were subject to refund if the hearings found a reasonable rate lower than 7%. On August 9, 1960, the Commission found that only a 6 1/8% increase was reasonable and that Tennessee Gas must provide refunds. 

Tennessee Gas challenged the ruling by arguing that requiring a refund prior to a final determination of cost made the company unable to recoup its 6 1/8%. Because Tennessee Gas spreads its rates differently across the different zones, there are certain zones in which the refund would be greater than the value of the new rate. The United States Court of Appeals for the Fifth Circuit found in favor of Tennessee Gas.

Question

Can the Federal Power Commission order a rates reduction and refund without determining how such a reduction would affect costs in different service zones?

Ralph S. Spritzer:

This case is here on certiorari to the Fifth Circuit involves an order of the Federal Power Commission entered in a Section 4 rate proceeding under the Natural Gas Act.

It raises the question and I shall state it very broadly at the outset in seek to refine it later, whether the Commission is authorized to dispose of a portion of a rate case in order to relieve consumers immediately of some of the burdens of excessive charges.

In advance of its disposition of the entire proceeding, the rate proponent here, the respondent, Tennessee Gas Transmission Company, is an interstate pipeline extending from Texas and Louisiana, its southern extremities to the New England states at the northern, doing business in some 16 states.

As an interstate company, as Your Honors know, it is obligated to file its tariffs with the Federal Power Commission.

Commission regulations further require that any filing for increased rates and this is an increase rate proceeding shall be accompanied by a full supporting statement as to the costs of service which are relied upon as justification for the company’s proposed rates or charges.

It’s to set forth for example the cost of its purchase to gas, the cost of labor, supplies, its estimate as to the taxes it will pay, estimated depreciation allowance and its claim for fair return on its net invested capital.

Now, upon the filing of the tariffs then the supporting statements, the Commission is empowered in its discretion to suspend the rates and to enter upon a hearing as to their lawfulness.

This suspension is limited to five months duration.

Thereafter, the company may make the increases effective even though the hearing has not yet been completed.

In that event, however, the company has an obligation under the statute to refund any portion of the increase ultimately found not justified, as well as to adjust its rates prospectively to whatever level may be prescribe by the Commission.

One further aspect of this statutory scheme, there is emphasis in our view.

If I may refer the Court to pages 48 and 49 of our brief where Section 4 (e) is set forth.

Earl Warren:

What page is that?

Ralph S. Spritzer:

I’m looking now at the middle of page 49, Your Honor.

The last four or five lines of the section provides at any hearing involving a rate or charge sought to be increased.

The burden of proof to show that the increased rate or charge is just unreasonable shall be upon the natural gas company and the Commission shall give to the hearing and decision of such questions preference over other questions pending before it and decide the same as steadily as possible.

Now, this last as not always so easily accomplished.

Tennessee actually filed the increases, which are involved in this proceeding in October of 1959.

When those increased rates were filed, they were already pending before the Commission two prior sets of increases; one, which had been filed the earlier in 1959, the other filed back in 1957.

Both of which were themselves that that stage in the toils of the administrative process.

I suppose you might visualize the situation in terms of a stairway consisting of three steps.

The floor from which these steps ascend might be said to represent the rates as they existed in 1957 when the Commission had last approved a set of Tennessee rates.

The first step upward represents the increases for which the company filed in 1957 that same year.

The second step, the increases for which the company filed in May of 1959.

The third step, and that refer — and that’s the proceeding that is before the Court immediately at this time.

The increases which is I indicated earlier were filed in October of 1959.

The difference incidentally in the yield produced by the rates at the floor level and the yield which will be produced at the level of step 3, computed in terms of relatively current gas sales amounts to that $75 million a year.

Earl Warren:

Mr. Spritzer, may I ask what happened to those first two steps?

Ralph S. Spritzer:

They are still in administrative proceedings, Your Honor, and I’m going to refer during the argument to the chronology of these various cases because they do bear some relationship.

We have asked that — that they’ll be distributed to the Court a chronology sheet which I think may make that easier to follow.

Ralph S. Spritzer:

As this thumbnail sketch of the three pending rate dockets does suggest, one of the facts of life with which the regulatory commission has had to deal.

And I think in recent days, they’re making various strenuous efforts to find ways and means to deal with it, is that the capacity of the natural gas company to file new sets of rates may tend to outstrip the capacity of the agency to dispose of these large and complex cases.

And I think that brings us closer to the core of this case for the procedural device which the Commission has employed here is one which it is utilizing in this and in other pipeline rate cases in an effort to provide more promptly to consumers a measure of relief from the burdens of rates which are found to be excessive.

Now, the rates of the pipeline company are aggregates.

By that, I mean, that numerous elements enter into the cost of service.

As I mentioned a little earlier in speaking of the supporting statements, which a pipeline is required to submit with its filing, there are various components, how much is the pipeline paying the producer for the gas, which it purchases and it sends on the customer companies?

What is the estimate of its annual payroll?

What will it need for taxes and depreciation and for fair return on investment?

Now, some of these items may well be uncontroverted in a particular case, others will be challenged by various parties to the proceeding.

Characteristically, some of these issues are great complexity and require many weeks or even months of testimony, a protracted battle of the utility experts.

Others will admit of more expeditious treatment.Suppose that the Commission concludes in a particular case that it may take two or more years to dispose of one these large rate cases in its entirety.

But that one or two controverted issues, issues, which perhaps involved a substantial portion of the cost which are seriously disputed are susceptible of separate and much earlier disposition, can the Commission decide the one or two issues accepting for purposes of its interim decision, the remaining claims of the company assuming their correctness for the time being.

In other words, if it finds that the certain elements which it have examined, certain elements of the company’s claim have been overstated, can it, to that extent order refunds for the past and more important late reductions for the future?

Now, as I understand our opponent’s brief here, Tennessee is not urging a categorical no to that question.

Rather, it seems to say that perhaps sometimes the Commission might do this but not in this case.

Well, what precisely did the Commission do in this case?

The increases which Tennessee proposed in October 1959, were predicated in large part upon a claim that it was entitled to a 7% overall rate of return on its net invested capital.

This was in contrast to the 6% rate which the Commission had allowed Tennessee in its last completed rate case.

Now, the hearings in this case began in February of 1960.

The course so that it shown by this chronology sheet in the right-hand column.

Tennessee at that hearing presented its direct evidence, its witnesses within cross-examined exclusively on the issue of rate of return.

Thereafter, the Federal Power Commission staff and those of the interveners who wished to do so, presented their testimony on that same issue of rate of return and their experts were cross-examined.

Finally, Tennessee presented its rebuttal on rate of return.

When all of the evidence tendered on this issue was in the record, staff — Commission staff counsel moved, this was in May of 1960, that the proceedings be divided into two faces.

One, determination of a proper rate of return for this company, two, determination of the remaining cost of service issues in the case.

He further proposed that the examiner’s decision be omitted and that the Commission proceed to decide this issue directly.

The Commission adopted this procedure over Tennessee’s objections.

And after hearing oral argument on the issue of rate of return, wrote an opinion in August of 1960 in which it found that 6 1/8% would be a just and reasonable return for the company.

By its order, which is the order here under review, the Commission did three things.

One, it disallowed the rates computed by Tennessee on the basis of the excessive 7% rate of return.

Ralph S. Spritzer:

Two, it directed Tennessee to file substitute rates, such rates to be effective as of the time the disallowed rates had originally gone into effect which would yield 6 1/8%.

Three, it ordered Tennessee to refund to its customers the amounts which had already been collected in excess of the prescribed interim rates.

In its opinion, the Commission pointed out that by permitting Tennessee to file substitute rates based on a proper rate of return.

But otherwise, based in every particular on the company’s own claims as to what it was entitled to, Tennessee would be placed in exactly the same position that it would’ve been in if it had originally filed increased rates predicated upon a proper allowance for this rate of return factor.

William J. Brennan, Jr.:

The effect of this was the seller agent, both have ordered refund to this —

Ralph S. Spritzer:

Yes.

But more importantly, I think, it would relieve the consumers of the continuing burden of paying the higher rates which the Commission at this point had found to that extent unjustified.

Arthur J. Goldberg:

Mr. Spritzer, may I ask you, do you have the allocation that the commission used (Inaudible)

Ralph S. Spritzer:

Yes.

The company under the Gas Act has the initial responsibility of proposing rates, and that means rates for all customers wherever situated regardless of their class of service.

Arthur J. Goldberg:

How about the imposed rates in the first case imposed by Tennessee in the net allocation between those rate cases?

Ralph S. Spritzer:

Yes.

Actually, the allocation I would say Your Honor, is an element which enters in to the rate when the company files it.

It must consider the situation of all of the customers who were being served.

Now, before the Fifth Circuit, Tennessee challenged both the Commission’s determination that the 6 1/8% was a proper rate of return and the Commission’s authority to give immediate effect to that determination.

On the first question, the Court of Appeals unanimously sustained the Commission.

Tennessee did not petition from that determination and that issue is not before the Court.

It is now being definitively determined that 6 1/8% is the just and reasonable rate of return.

On the second issue, namely whether the Commission could require an immediate reduction by virtue of its determination of this portion of the case.

The Court ruled against the Government with Chief Judge Tatel dissenting.

In connection with the Court of Appeals’ ruling, perhaps I should also note that Tennessee sought a stay before the case was heard in that court and that stay was denied.

Moreover, after the case was decided, the Court of Appeals stayed its mandate.

The consequence is that the Commission’s order has been continuously in effect and is now in effect.

Earl Warren:

Have they bothered to pay the said amount?

Ralph S. Spritzer:

Tennessee refunded the amount which had been collected in excess of the interim rates prior to the date of the interim rate order, some $7 million, it has done so.

And since the date of the interim order, Tennessee has been charging the interim rates which means that it is — it has been collecting since that date approximately $11 million a year less than it would have collected under the disallowed rates.

Hugo L. Black:

Did you say $11 million?

Ralph S. Spritzer:

$11 million a year less, yes Your Honor.

Arthur J. Goldberg:

(Inaudible)

Ralph S. Spritzer:

Tennessee claims that it should be permitted to go back and to charge the disallowed rates and if the Commission’s order should be set aside.

Ralph S. Spritzer:

It claims further that the way in which the Commission has proceeded exposes it to certain risks and I’m going to attempt to develop that point shortly.

Arthur J. Goldberg:

(Inaudible)

Ralph S. Spritzer:

That’s right.

Arthur J. Goldberg:

(Inaudible)

Ralph S. Spritzer:

Tennessee claims that there is an important relationship between the amount it is allowed to collect and the ultimate disposition that the allocation issue and that the effect of reducing its collections at this point, may prejudice it later when the allocation issue is decided.

Now, that’s — I have to go through some stages to develop that point.

Arthur J. Goldberg:

(Inaudible)

Ralph S. Spritzer:

That is so.

Arthur J. Goldberg:

(Inaudible)

Ralph S. Spritzer:

Well, Tennessee is of the view that if the Commission’s order should be set aside that it could go back and collect what it has refunded.

Arthur J. Goldberg:

From the consumer?

Ralph S. Spritzer:

From the consumer companies, yes.

William J. Brennan, Jr.:

Mr. Spritzer, may I ask, presently, the old rate before the increase is something in between?

Ralph S. Spritzer:

The present rate is something in between.

It is represented by the rates filed by Tennessee when it made its third successive increase less that portion which was cut out when the Commission said, you were wrong in computing your — the amounts to which you were entitled on the basis of this seven rather than of 6 1/8% of rate of return.

William J. Brennan, Jr.:

Well, so that am I understanding hypothetically if the first place (Voice Overlap) —

Ralph S. Spritzer:

Was what sir?

William J. Brennan, Jr.:

If the basic rate was 10 cents —

Ralph S. Spritzer:

Yes.

William J. Brennan, Jr.:

— and it went to 12 cents and still undetermined firstly in this proceeding, then the 14 and still undetermined second rate increase then went to 16 on the third —

Ralph S. Spritzer:

Right.

William J. Brennan, Jr.:

— what’s the reduction from the 16 to the present rate, between 14 (Voice Overlap) —

Ralph S. Spritzer:

Since the last?

Yes.

It’s between 14 and 16, and since about half of the last increase was predicated upon a claim to a higher rate of return, putting it in terms of your example, the reduction would have been to 15 cents.

All of the other issues in the case having been reserved in the party’s rights to possible additional reductions being held in advance pending determination of those issues.

Byron R. White:

Mr. Spritzer, just so I’m clear about it, is it within the Commission’s discretion would allow the increase rate is going to effect to condition it upon a requirement that a refund takes place?

Ralph S. Spritzer:

Yes sir.

Byron R. White:

They can either amount to go into effect one way or —

Ralph S. Spritzer:

No, the statute requires when the Commission has suspended the rate that the company undertake to make refund at any amount unless they found excesses.

Byron R. White:

You mean, pending within the suspension runs out and the rates want to go into effect, the Commission may or it must require them to undertake —

Ralph S. Spritzer:

If the statute contemplates an undertaking, and that was required here and there is a bond, definitely will make refund of any amount ultimately found to be constitutional.

Hugo L. Black:

How would they refute those amounts, you say they — if you hear to them the practical issue then they want to refute these refunds, is that correct?

Ralph S. Spritzer:

Well, if the Commission’s order were set aside then the now, disallowed rates would be reinstated.

Hugo L. Black:

Can they go against the distributing company?

Ralph S. Spritzer:

Yes, the distributing companies are the persons from whom they collect under their tax.

Hugo L. Black:

From distributing companies against the consumer?

Ralph S. Spritzer:

They pass it on to the consumer, yes.

Hugo L. Black:

But they are never paying consumers though.

Ralph S. Spritzer:

No, you might not.

But the consumer company under Tennessee’s theory would be obligated assuming that the disallowed rates were illegally set aside, those disallowed rates would be reinstated and those would be the lawful rates with the past period, and Tennessee presumably, would seek to go back and to collect the difference which it lost in the interim.

William J. Brennan, Jr.:

Was this possible Mr. Spritzer that the increases in the first or second or both might be disallowed, in those event —

Ralph S. Spritzer:

Both —

William J. Brennan, Jr.:

— that would be the refund obligation on the part of Tennessee and not anything coming back to them with the (Inaudible)

Ralph S. Spritzer:

Oh, yes.

It’s quite possible that substantial portions of the three increases which are not yet been passed upon in their totality and can’t be disallowed.

Now, on the —

Potter Stewart:

Mr. Spritzer, excuse me.

Ralph S. Spritzer:

Yes sir.

Potter Stewart:

You lost me somewhere in your development of facts, the Court of Appeals for the Fifth Circuit with Chief Judge Tatel dissenting, held that whether that the 6 1/8% rate of return was correct.

But that the Commission didn’t have the power to put that portion of its determination into effect immediately as it did.

And now, have you told us that despite that decision of the Court of Appeals that is what happened?

Ralph S. Spritzer:

That is right because the Court of Appeals states its mandate.

Potter Stewart:

For that reason, I see.

Ralph S. Spritzer:

Now, our — the Commission’s legal position on the merits of this interim order procedure I think may be very briefly stated.

Arthur J. Goldberg:

Mr. Spritzer before that, may I ask you —

Ralph S. Spritzer:

Certainly.

Arthur J. Goldberg:

(Inaudible) is that correct?

Ralph S. Spritzer:

Yes, the Commission has decided that the allocation principles that has not yet translated them into newly prescribed rates.

Arthur J. Goldberg:

Now, with that I would assume that that came (Inaudible) solved in Commission’s decision.

Ralph S. Spritzer:

Oh, yes.

The Commission’s holding oral argument next month on the remaining aspects of the case at which point presumably it will apply the allocation principles which it has declared correct to the rates and make specific rates for the future.

William O. Douglas:

And the remaining —

Arthur J. Goldberg:

(Inaudible)

Ralph S. Spritzer:

Until —

Arthur J. Goldberg:

(Inaudible)

Ralph S. Spritzer:

Well, it’s — since we don’t know how many months it will be before this case is finally disposed of at the administrative level, it’s certainly clear that the case is not moot.

I agree with the suggestion that may be implicit in Your Honor’s question that as time passes, the issue become less and less important for the particular case.

But were — in terms of the Commission’s general power to use this method, this is a very important case because a plowed has been passed upon its availability by the decision below.

Do you mean general (Inaudible) interim order?

Ralph S. Spritzer:

Well, the Court of Appeals’ opinion at least in some its aspects —

(Inaudible)

Ralph S. Spritzer:

— suggest that —

(Inaudible)

Ralph S. Spritzer:

— suggest that when — the Commission might not be able to use this method at all.

But your opponent really don’t contest that general right, they simply say that under the circumstances of this case.

Ralph S. Spritzer:

They are defending the Court of Appeals’ decision primarily on the basis of what might be described as the narrower of the two holdings in the case, that’s quite right.

They are arguing primarily that there was an abuse of discretion in using the procedure in this case, though some of their arguments and some of the Court’s argument appeared to us to have a broader thrust than that.

William O. Douglas:

Again, what are the remaining issues in the litigation?

Ralph S. Spritzer:

The remaining issues relate to other costs of service, which Tennessee has claimed, taxes and depreciation among others.

William O. Douglas:

And allocation issue.

Ralph S. Spritzer:

Well, the allocation issue has now — the Commission has come out with an opinion.

William O. Douglas:

That’s in the Third Circuit?

Ralph S. Spritzer:

Yes, that’s being reviewed in the Third Circuit.

The Commission has come out with its opinion on the allocation issue.

Hugo L. Black:

(Voice Overlap)

Ralph S. Spritzer:

Pardon me?

Hugo L. Black:

(Inaudible)

Ralph S. Spritzer:

Actually, the review that has been sought there by one of the customer companies rather than by Tennessee.

Now, as to the power of the Commission to use this method, our basic position is that Tennessee has the burden of justifying each of the component claims which makes up the total that it seeks to refute by its rates.

Ralph S. Spritzer:

As to the claim that it’s entitled to a 7% rate of return, it failed to do so after it had a full hearing.

And we say, having had its hearing on that issue, there is no reason why it should continue to collect any more than it would’ve collected, had it file its rates on the basis of a proper rate of return factor in the first instance.

We believe that the Commission under Sections 4 and 5 of its Act has plenary rate powers.

And if for purposes of proscribing rates, the Commission can therefore assume arguendo the correctness of the other claims which are made by the company.

We also point out that Section 16 of the Act, which is the necessary and proper article of this statute, authorizes the entry of any order necessary or appropriate to carry out the purposes of the statute.

This Court has often said that a fundamental purpose of the effect is to afford prompt protection to consumers.

And since the mechanism of possible refunds that a later date is both delayed and imperfect and that’s the point which the council for the city of Pittsburgh is going to develop at greater length later.

We think the Commission was well within its authority in terminating Tennessee’s effort to continue collections on the basis of a claim which had already been found unjustified.

We find support in a number of cases for the use of this interim order type procedure.

One case in this Court, the Natural Gas Pipeline Company case, in the 315 U.S., held that a company which had predicated its entire direct — which had presented excuse me, its entire direct testimony in support of its rates, could not complain that it had not yet been able to cross examine Commission witnesses on aspects of the case, which for purposes of the interim order, the Commission had decided on the basis of the company’s presentation.

Several other Courts of Appeals have similarly allowed use of an interim order procedure to decide a portion of a rate case.

The Third Circuit’s Panhandle decision is close to this one and that it also involve rates predicated upon a claim to an increase rate of return.

In that case, Judge Hastie spoke for the Third Circuit and I’d like to refer for a moment to one or two sentences of his opinion.

True, he said in recognition of the time involved in these often long drawn out rate proceedings, the Commission quite properly permits the basic showing of the justification, which existed at the time of filing to be supplemented by evidence of occurrences since filing.

But this is far from saying that a party who tries and fails to make a prima facie showing to support severable elements of his claim is entitled to a postponement of adjudication thereon in anticipation of possible new justification which some future event may supply before the overall case can be completed.

Arthur J. Goldberg:

(Inaudible)

Ralph S. Spritzer:

No, we don’t know what the practical effect of the allocation will be until the Commission has finally passed upon the remaining aspects of the case.

Arthur J. Goldberg:

You mean the service.

Ralph S. Spritzer:

I’m sorry, I didn’t not understand Your Honor’s question.

Arthur J. Goldberg:

The cost of service issue?

Ralph S. Spritzer:

That’s right, until the Commission decides the remaining issues, we don’t know what the consequences may be to Tennessee.

Arthur J. Goldberg:

Only the cost (Inaudible)

Ralph S. Spritzer:

No.

We know that the principles of allocation in which the Commission has decided may have some impact on Tennessee but we cannot possibly put aside the cost of service issues or determine what the impact will be until those remaining issues are decided.

Arthur J. Goldberg:

(Inaudible)

Ralph S. Spritzer:

Yes.

They may have collected sufficient amounts entirely apart from the impact of this interim order so that they earn the position to earn the full 6 1/8% during the interim period.

Arthur J. Goldberg:

(Inaudible)

Ralph S. Spritzer:

They have to — if they are going to earn their 6 1/8% rate of return, they’re going to have to earn it from the customers who were involved in this case, yes.

Now, perhaps I should turn without further delay to Tennessee’s contention that the availability of the interim order procedure that it is not available in cases where there is an allocation issue remaining to be decided.

Ralph S. Spritzer:

Now, essentially what Tennessee is saying, is that the Commission’s determination that Tennessee’s cost of service is less than Tennessee estimated it to be, will only lead to proportional reductions to all customers of Tennessee, will only lead to that if one assumes that the rate relationships, the rates in various zones are going to remain intact.

Tennessee says further, that if it should turn out that the rate structure was all wrong in the Commission’s view, that the rate structure was invalid or discriminatory, then it might be, it might be that though Tennessee in all was entitled to collect only something less than what it sought.

That nonetheless, its rates to particular customers might not be too high.

Perhaps I can make this clearer by attempting an illustration.

Let’s suppose that the Tennessee has three zones rather than six for simplicity’s sake.

And that the basic rate was 60 cents in MCF in Zone 1, 80 cents in Zone 2 and a dollar in Zone 3, that these are the rates for which Tennessee filed in order to produce let us a hundred million dollar of gross revenues a year.

Let’s suppose further that as in this case, the Commission examined one element of the cost of service in advance of the others and said, you’re wrong, you’re not entitled to a $100 million a year, you’re seeking that on a basis of an inflated claim as to what rate of return your stockholder should have.

We find that you’re only entitled to $90 million a year.

Let us suppose further that at that point, the Commission said, since your total cost of service we found was exaggerated by 10%, we will order a 10% reduction across the board from 60, 80 and a dollar to 54, 72 and 90 cents.

I’m also assuming in this illustration for the sake of simplicity that they’re selling equal volumes in each zones, so you effectuate the reduction by a flat across the board cut in the rates.

Now, says Tennessee if there’s an allocation issue in the case, it might turn out that some of the premises upon which we fixed rates, 60, 80 and a dollar were all wrong.

It might turn out though we’re entitled only to $90 million overall that instead of cutting the rates equally 10% in each zone, the Commission will ultimately say that they ought to be cut 15% in Zones 2 and 3 but they should’ve remain the same on Zone 1.

In other words, it should’ve remained at 60 cents in Zone 1.

Now says, Tennessee further, if the consequence of the Commission’s order in its impact on Zone 1 is to reduce the rates for that interim period from 60 cents to 54 cents and it should ultimately be determined that the final stage of the proceeding that we’re entitled to 60 cents in that zone, we will have no way of going back in collecting that 6 cents difference.

Our answer to that is that it is the burden of the company which proposes all of the rates, the rates in each zone.

It’s the burden of the company to have a nondiscriminatory rate structure.

And if that risk cannot be shifted to the consumer, the company is chargeable and the words of Section 4 (b) of the statute, if it grants any undue preference to any person or maintains any unreasonable difference as between localities or as between classes of service.

We point out further that the risk of which Tennessee complains is precisely the same risk as it would’ve had if it had filed on the basis of a proper rate of return, 6 1/8% in the first instance.

Arthur J. Goldberg:

Wouldn’t the statute want to say that during the first instance (Inaudible) that they have a burden of proof to the jury?

Ralph S. Spritzer:

They also have the duty under the statute to file just and reasonable rates and rates which do not discriminate as between any localities or among any classes of service, Your Honor.

And our —

Hugo L. Black:

(Inaudible)

Ralph S. Spritzer:

I’m sorry, I didn’t —

Hugo L. Black:

(Inaudible)

Ralph S. Spritzer:

They did not, that’s correct, Your Honor.

Hugo L. Black:

Why can’t they save that allocation now as it been in the first instance (Inaudible)

Suppose they did (Inaudible)

Ralph S. Spritzer:

Well, the principles are determined but the alloca — those principles have not yet been applied to Tennessee’s rates because of the failure to determine all of the other cost of service factors.

Hugo L. Black:

Though it can’t (Inaudible) be lower or higher at any given zone.

Ralph S. Spritzer:

There’s an indication whether — yes, as to what the adjustments may have to be.

Hugo L. Black:

The indication of what the adjustment have to be (Inaudible)

Ralph S. Spritzer:

Yes, there is a —

Hugo L. Black:

How couldn’t they have filed that and except one and two whether they were granted or whether they were denied and that would be determined by looking at the figures.

Ralph S. Spritzer:

Well, there are still indeterminate elements which would have to go into that equation.

In other words, it’s theoretically possible that Tennessee would lose something that it would collect for the interim period something less than the permissible rate in one of the zones.

But whether that would occur in fact, depends upon whether any of the other claims of Tennessee are inflated.

In the illustration I gave before, where I thought of this possibility of collecting 54 cents and then finding the 60 cents should’ve been collected all along.

But whether the company has collected enough so that it had a cushion against this possibility, depends upon whether the company’s claims on the other issues not yet decided are found to be wanting in some respects.

Arthur J. Goldberg:

But if the cost of service issues are decided and that it appears on this record then it would be after the allocation where the rate issue have been decided and you found that there ought to be an issue of refund would that go then unfortunately in accordance to the allocation decision?

Ralph S. Spritzer:

If the Commission follows the examiner’s decision, which has now been rendered on the other issues, Tennessee would come out whole.

Because the examiner has found that Tennessee had inflated claims on other portions of its cost of service, the consequence of that is that the adjustments which are being made in the rate structure.

The change of the rate differentials will still not result in Tennessee’s failing to collect for the interim period, those amounts, which it would be entitled under the Commission’s final order to collect.

Now when I said, the Commission’s final order, I’m assuming for the moment the Commission agrees with the examiner whether it will or will not, we don’t know.

(Inaudible)

Ralph S. Spritzer:

That is right.

And we have to argue our case and we do, on the assumption that Tennessee might not collect 6 1/8% for this interim period and we do that on the basis that the risk of having defensible rate relationships is on the company, that the consumers cannot be required to pay on the basis of inflated claims to furnish a cushion or a safeguard as against the dangerous that some of the company’s rate relationships for which it is responsible may be found discriminatory.

We say that if the Court would’ve do that, they would be doing nothing less than putting a premium on the presentation of inflated claims.

And in the face of statute, we say, which make that the inescapable duty of the utility to file just, reasonable and nondiscriminatory charges.

William J. Brennan, Jr.:

How long — could I ask you one question?

How long would it probably be before the Commission translates these allocation principles into figures?

Ralph S. Spritzer:

The Commission is hearing oral argument on the remaining aspects of the case before Your Honors in November and I would assume that the remaining aspects of this rate proceeding and probably the other two rate proceedings which had now been consolidated would be decided within the next six months.

Tom C. Clark:

Am I right in thinking that what the Government is really concerned about here is the principle that’s involved in this case rather than this particular situation itself?

Ralph S. Spritzer:

Well, that is our main concern because this is a tool —

Tom C. Clark:

If you read the Court of Appeals’ opinion narrowly so is not to exclude, not to exclude intermediate orders generally or in a zone allocation question and the cost allocation situation like this, limited to this particular case would be very much concern then?

Ralph S. Spritzer:

Yes.

Because if the thrust of the opinion is that you cannot use this interim procedure where there is an issue of cost allocation pending, then the procedure has very little utility.

Because as matters now stand, there is scarcely a pipeline rate case before the Commission in which there is not a bitter dispute as to the allocation of charges as between different classes of customers.

Tom C. Clark:

Yes.

Ralph S. Spritzer:

So, you think it would have — if it means that we can’t use in any case where there’s an allocation issue pending would have a broad thrust.

Now, if you treated more narrowly than that, and this isn’t the point I was able to get to in the brief, there is also suggestion that it was an abuse of discretion in this case to the use the procedure, because the Commission had already taken evidence on the allocation issue.

Ralph S. Spritzer:

Now that’s a narrower holding, and our answer of course to the Court of Appeals’ view as to that, is that the Commission properly found that though the evidence had been taken as to cost allocation that it couldn’t decide that issue as promptly as this.

The Commission found that there was a record there of many thousands of pages.

There were 90 interveners interested in the cost allocation questions.

The Commission said, we don’t think we can decide that issue without the benefit of an examiner’s decision.

It took the examiner a year to write its opinion in that case, it’s a 130-page opinion, it took the Commission two oral arguments thereafter to decide that issue.

And so, it wasn’t until 18 months after this interim order went into effect that the allocation principles were actually decided.

Tom C. Clark:

Supposing the — can I ask one more question?

Supposing the allocation proceedings at the time of the issuance of this interim order had been in the same posture as they are now, would you issue the interim order?

Ralph S. Spritzer:

No, I think certainly —

Tom C. Clark:

Now, suppose —

Ralph S. Spritzer:

— desirable when you have several issues, whatever they may be, at the same stage to decide them concurrently.

The Commission isn’t anxious to fragmentize these cases but they are so huge and some of the issues are so long in the deciding that if you can cut out certain pieces you can perform a service immediately.

Now, the real problem is that whether we can deal with this thing realistically in terms of the present posture of things at the time the case is ordered as to whether we have to look back as it was at the time, that’s really what it comes down to.

William J. Brennan, Jr.:

(Voice Overlap) business within six months from any view of the bearing of that fact on this litigation?

Ralph S. Spritzer:

Well, yes.

I think the — there would still be the question or might be the question, what were the lawful rates for the interim period.

So that could have an impact upon Tennessee as to what they collects and retains for that interim period.

If the Commission’s reduction wasn’t lawful when it was made and if the final disposition of the case should be such that Tennessee did not collect from certain customers in certain zones, all that it was entitled — would be entitled to under the final order.

Then the question whether the interim order was valid has a direct economic consequence.

William J. Brennan, Jr.:

So that there would be no question of mootness because the Commission had decided that people are used to.

Ralph S. Spritzer:

I think the question isn’t liable.

Earl Warren:

Mr. Spritzer, may I ask one question?

Do you happen to know approximately how many of these proceedings have been initiated before the Commission since the Philips case and how many of them have been finally determined so that their order of the Commission is now effective?

Ralph S. Spritzer:

Well, I must — I think to give a meaningful answer to that Your Honor, make a division between the pipeline rate cases and the producer rate case.

Earl Warren:

Yes.

Ralph S. Spritzer:

Now, the Commission has made considerable progress in its pipeline rate cases.

It has secured settlements of many of those cases in the last year or two.

It has disposed of more than in the last year or two when it had for a considerable period previously.

And I think the state of its backlog in pipeline rate cases is far better today than it has been in many, many years.

The producer cases present a quite different problem because the Commission in that field has decided that it is going to adopt a quite new regulatory approach and it has initiated two major proceedings so-called area rate cases.

Ralph S. Spritzer:

The aim is to decide what our reasonable or permissible rates for producers on the basis of what might be described is a kind of OPA feeling price for an area to take a whole geographic basin of the country, certain parts of Texas, when they decide what a fair price is for gas from that area.

It is pursuing that approach in the case of producers in lieu of the traditional case-by-case company-by-company approach, which has seemed to the Commission to present such unmanageable difficulties in relation to producers.

But in terms of pipelines, the Commission is now unhappy to say much more current than it has been a long time.

Earl Warren:

Mr. Spritzer, we take so much of your time, we took five minutes, I think extra, we’ll give you five minutes more on your rebuttal and you may have for your side five minutes also gentlemen.

Charles S. Rhyne:

Mr. Chief Justice —

Earl Warren:

Mr. Rhyne.

Charles S. Rhyne:

— may it please the Court.

The City of Pittsburgh is appearing here as a gas consumer as a representative of its 600,000 for instance most consumer — gas consumers, to speak in support of the use of the interim order procedure in this case.

Because we feel that it is vital to the interest of consumers, it’s vital to prevent a frustration of the major purpose, the Natural Gas Act which this Court has said time and time again, is to prevent natural gas companies from exploiting consumers.

In the light of one or two of the questions, which have a little broader thrust within this case, may I say to you Mr. Chief Justice that in August 1962 according to the brief filed on behalf of the Commonwealth Pennsylvania, there were $900 million that had been paid subject to refund in this pipeline cases.

According to the petition for writ of certiorari filed here for the Solicitor General, the amount of this money is piling up at the — at $375 million a year.

Also —

William O. Douglas:

All pipelines?

Charles S. Rhyne:

All pipelines.

And on — this is on page 19 of the petition for writ of certiorari and right there, they referred to what happened in 1961.

They pointed out that they settled 31 and I used the word “decided” or settled, or concluded 31 pipeline cases.

And that in doing so, they reduced the amount requested by 37% and that in reducing it back 37%, 56% of this amount of reduction was in the rate of return, the very thing that it is here.

Now, I would call the Court’s attention to the fact that according to the Commission’s 1961 Report, 30 and I emphasize, 30 of these 31 were settled only one was actually decided.

Now, why is that in Court in here?

Because under the — in the context of this case, Tennessee asked for $75 million, $11 million was disallowed in the rate of return.

The examiner has allowed an additional — or disallowed an additional $26 million.

$37 million or 50% has been disallowed.

So, the situation that exist down at the Federal Power Commission, the reason why the Commission has moved into use this interim power at long last is, this is a rather shocking way to evade rate regulation under the Natural Gas Act.

These pipeline companies filed one rate increase — this is Tennessee did here, one on — right on top of another and so this backlog, this regulatory log grows larger and larger and there’s tremendous pressure to settle — to settle and when you settle, it’s the consumer that loses.

These pipeline companies are very glad to come in and say, well, we’ll take 10% or 25% off and of course that always means millions of dollars.

And so then they push those of us who represent consumer.

Well, let’s settle.

Let’s settle.

There’s tremendous pressure on the Commission staff to settle and they always get more.

So this allowance of 37% in 1961 is a great boom for the pipeline companies.

Charles S. Rhyne:

This business is conference procedure, the settlement procedure I know that the Commission is doing a terrific job.

I’m not criticizing at all but I am saying that right here the Commission has put its finger on one of the greatest escape route and that you have no effective regulation of natural gas company today under the Natural Gas Act because of this very thing, this pyramiding of one rate increase right on top of another.

And I think that the Court should take all of those facts into consideration in deciding this case.

Not only do I agree with what Mr. Spritzer had said but I think that this pressurized settlement of cases before the Federal Power Commission is one of the most vital things that this Court must consider in facing up to what the Commission is trying to do about this pated.

And I say, it’s closer to 50% than 37% rate increase.

Then the Commission can’t stop these pipelines from doing it.

They have an absolute power to file one year after year almost day after day.

So, we urge that this interim power which the Commission has at long last started to use is absolutely vital to prevent the frustration or the major purpose of the Natural Gas Act and to stop this greedy train escape route, this windfall to the pipeline companies.

Now, I was to discuss whether refunds were an adequate remedy for consumers and we say they’re not for several reasons.

Number one, under today’s mobile society, people move around all the time.

And when one of these rate cases has completed four or five, six, seven years after it started, you’d have a hard time finding the ultimate consumer who paid the illegal rates and get the money back in his pocket because it comes out of the ultimate consumer’s pocket not out of the pipeline or other distribution company’s pocket.

Secondly, in connection with the rate increase and this is particularly important for small business, as well as large business, when a rate increase goes into effect, they must increase the price of their product immediately in order to recover what they paid out of their pocket right then.

And that puts him in a terrible competitive position with respect to those who use other kinds of fuel.

Now, they can’t change over to some other kind of view because the cost of putting in new burning equipment is too great.

So, when they come along to the end of this thing five, six, seven, eight years afterwards and there’s a refund, it doesn’t pay him for these business losses.

There is an immediate effect on the consumer and they get back the rate increase is plus 7% interest after deduction of a lot of expenses.

So they never get all of their money back.

And now, with respect —

Mr. Rhyne —

Charles S. Rhyne:

Yes, Mr. Justice.

— what happens to the fact of the matter if you can’t find the consumer, what happens to the refund, did the company keep it or –?

Charles S. Rhyne:

Mr. Justice Harlan, there’s probably more confusion on that and almost in any other question that exists in this whole field, the distribution companies claimed it and it’s suppose to be decided under state law as to who gets it.

And in ultimate thrust, I guess if you can’t find him — the money really should escape to the state eventually but I don’t think that you follow down that long road.

I might say that one of the complexities which demonstrates the inadequacy of the refund thing are the decisions of this very Court in the Muscatine case and then in the Natural Gas case where you handed down four opinions in trying to decide how you get the money back to consumers.

Hugo L. Black:

Have you gathered up or can you gather up the history of what has happened in these refund cases before and since Muscatine, with reference to which part of it went to the companies and how much was lost to the consumer’s who paid?

Charles S. Rhyne:

I can’t enumerate, Mr. Justice Black.

I’d like to ask Federal Power Commissions do it rather than us because we have a very few lawyers in my office and this is a tremendous job.

Hugo L. Black:

Well, —

Charles S. Rhyne:

And I think that it’s an answer that —

Hugo L. Black:

(Voice Overlap) have done it.

Charles S. Rhyne:

I would like to see —

Hugo L. Black:

But I think we’ve had a several times that so far as I know, it is never going to anybody except the companies when the people were — disappeared and they didn’t pay.

Charles S. Rhyne:

Well, the state commissions have stepped in —

Hugo L. Black:

Maybe it had.

Charles S. Rhyne:

— and I think that it’s an open question as far as I know Mr. Justice Black but I will never get the answer.

William J. Brennan, Jr.:

(Inaudible) that any state attempted any mischief in any part of this though?

Charles S. Rhyne:

Not that I know.

Now, I must hurry along because I have very little time.

I’d like to say to the Court too that the Congress recognized that refunds are not an adequate remedy for the consumer because they provided for suspension of rates of five months suspension.

And I don’t know whether they thought that the Commission could decide this case within five months but if they had thought that refunds were adequate, they wouldn’t provide a suspension.

They would let the rates go into effect immediately.

So, we say most respectfully that if the Court was wrong below in saying that refunds are an adequate remedy for the consumer in concerning itself only with trying to protect the pipelines.

Now, the second point that I was to discuss relates to Columbia Pipeline’s position here.

It’s very difficult for me to understand their position because they are pipeline customer, they are stakeholder, they’re not a consumer.

They agreed that these — well in the first place, they passed on each of these three rate increases directly to their consumers.

They agreed in the settlement of ten of their cases last year that any money received from this would go right along to the consumers.

They say in their briefs something about them being representative consumers and I say to you that’s about like calling yogi bear if I may say so up to that for the giants.

He wouldn’t try very hard and I can’t imagine this pipeline company which is one of the tremendous giants of the industry with 42,000 miles of pipeline, it’s a billion dollar corporation, more of billion and a half corporation coming in here and speaking for the consumers.

They seem to be trying to say that somebody up in Boston out to pay this illegal 7% rate so that they can get their hands on it on a refund.

They’re trying to say that Tennessee can’t pay back to them of what money they pay in illegally but it’s not their money in the first place.

And in the second place, Tennessee has entered into an obligation, it’s on page 508 of the record, to pay ack all of these illegal amounts and Tennessee is a giant too, they have billion and a half dollar corporation.

They are present in this record over on pages 419 and the following talks about how rich and prosperous they are.

They have plenty of money to pay it back.

So, Columbia can’t possibly be hurt anyway that you approach this.

Now, they say maybe this, maybe this, maybe Columbia will have some money coming back, maybe Tennessee will have some money coming back.

But with this $26 billion bulge or padding or pad, as Chief Justice Tatel call it, I can’t see any question but what Columbia or anybody else who might have any money coming back is going to get that money.

And they assumed that the Commission is guarantying Tennessee of 6 1/8% return, they’re not doing that.

They haven’t guaranteed anybody that but I say it’s rather shocking that they having conceded that the 6 1/8% is just unreasonable to come here to this Court and ask this Court to reinstate the 7% rate pendente lite so to speak.

And just because they say that Tennessee have may have made a mistake in their rate design.

Well, now consumers are not guarantors either and they can’t shift the risk of the natural gas business from consumer — from the stockholders to consumers.

Charles S. Rhyne:

The Act doesn’t contemplate that by any stretch of the imagination.

And so they’re here, I think throwing up some kind of a smoke screen, some kind of a shadow box to try to confuse the issues with respect to this interim order procedure.

And my time is done, so I would simply say this.

We strenuously urge that the lower court decision be reversed because we feel that what is occurring and what has occurred in this case before the Federal Power Commission, is a shocking abuse of the power of these pipeline companies to file increased rates and that the consumers must have this protection.

There must be some way to break down this escape hatch and stop the gal — this exploitation of consumers, which is going on under the present circumstances down to the Federal Power Commission.

Earl Warren:

Mr. Littman.

Horry S. Littman:

May it please the Court.

I think Mr. Spritzer is to be remanded for his excellent clear statement of the facts of this case.However, before proceeding with my — with the main body of my argument, I should like to straighten out just three or four items of fact.

Mr. Spritzer said early in his argument or stated the question early in his argument as being whether the Commission as my notes show, whether the Commission can decide a rate case and reduce rates at an interim stage without waiting until the entire case is completed in all of its aspect.

Now, we do not agree that that is the question that is presented here.

The reason we do not agree with that is born out by the record.

We certainly do not and never have taken the position that the Federal Power Commission lacks authority generally to issue interim rate orders.

Indeed, in this very case as the record shows in our memorandum, in opposition to the interim order procedure, at page 592 and that’s the bottom — the number at the bottom of the page.

We advise the Commission that we wanted to make it crystal clear that we did not oppose the interim order in this case.

If the Commission would confine its decision to the — as it one or two to the issue of rate of return, provided it would at the same time hand down its decision on the hotly contested allocation issue which it had fully heard and which had been fully briefed and which was awaiting decision at that time.

In other words, we told the Commission, we thought the Commission should be equally as diligent in expediting the decision in this case on the very important allocation issue as well as on the rate of return issue.

In fact, we —

Does that mean that your — your argument is how long would be until you got an allocation procedure.

There’s no case where the Government issued a refund.

Would you enter an order?

Horry S. Littman:

That is —

Do you have to go that far?

Horry S. Littman:

That is — well, what we say is that where there is a contested allocation issue where that issue is in contest —

Yes.

Horry S. Littman:

— it must be decided for the reasons, which I will go into detail in my argument, before the Commission can reduce rates for the reasons I will state.

Now, the Natural Gas Act, it’s impossible to order a reduction in rates until the allocation issue where it’s contested is decided.

Now, there are many cases, if Your Honor please, there are many cases where interim orders can be issued.

For instance, the case that counsel cited, the Natural Gas Pipeline Company of America case, which this Court would reach this Court.

In that case, an interim order, which was entered into, was a Section 5 (a) proceeding where the Commission was fixing rates prospectively.

Now, in a situation like that and where the company cannot be heard by a retroactive rate making device which would deprive it of its — which would deprive the company of the very dollars — of revenue that the Commission itself finds are needed in that situation of course an interim rate order may be entered and this Court so held.

Horry S. Littman:

I might also point out that in the Natural Gas Pipeline Company of America case there was no allocation issue.

An order may also be issued validly where there is no contest on allocation.

Obviously, if the parties are not fighting about the company’s method, the company’s method it suggests is agreeable to the parties in the case, there was no argument and this has happened many times.

It is not every case where allocation is disputed.

For 18 years we —

Hugo L. Black:

Would you mind finding —

Horry S. Littman:

Pardon?

Hugo L. Black:

Would you mind defining from this argument, just how far your argument is?

Horry S. Littman:

Yes.

Hugo L. Black:

What do you mean by allocation?

Horry S. Littman:

I mean by the allocation —

Hugo L. Black:

(Voice Overlap)

Horry S. Littman:

Yes.

I mean by the allocation issue —

Hugo L. Black:

Allocation?

Horry S. Littman:

Yes.

The question of how the total overall cost of service in the aggregate how that should be divided among the customers.

Hugo L. Black:

Your argument is based on that limited definition of allocation?

Horry S. Littman:

Yes, that is — that’s right.

That’s the very broad of course but it’s the best I can do at the moment.

Earl Warren:

Well, Mr. Littman, doesn’t the Commission assume for the purposes of its order that your allocation is correct?

Horry S. Littman:

Yes, it does.

The interim order based the use the allocation method, which we selected, for purposes of its interim order.

It is our contention for the reasons, which I will soon develop, that that cannot be done where there is a contest as here on that question among the customers.

And where the very — where the Commission would adopt that method for interim order purposes only and later on could adopt after deciding the issue a different method and thereby deprive the company of many millions of dollars of its rate of return.

Earl Warren:

But if the Commission assumes for the sake of its order that your allocation is correct then the only way you could suffer would be if your allocation is wrong, isn’t that correct?

Horry S. Littman:

If — yes, (Voice Overlap) the Commission should —

Earl Warren:

You could only suffer if your allocation was wrong?

Horry S. Littman:

Yes, that is that the Commission were to later adopt a different method and prescribe rates retroactively.

In other words, tell us at the end — tell us after deciding the allocation issue that the very rates that it ordered us to reduce shouldn’t have been reduced at all or should’ve been reduced in lesser amounts and then retroactively decides that that is the fact by a different method of allocation then we are —

Earl Warren:

That could only happen though if you were wrong.

Horry S. Littman:

Yes.

Earl Warren:

If you have made the original allocation wrongly as against some of the regions?

Horry S. Littman:

Yes Your Honor, and let me say that regard while we’re on that subject.

I hope to reach later at all but (Voice Overlap) but this will be a good time.

Earl Warren:

Well, if you want to reach it, don’t mind me.

Horry S. Littman:

Now, let me point out here, if Your Honor please, that as to our ability to guess what is the right method, let me hasten to point out that our company was born in 1954, I’m sorry 1945.

I have bad way of reversing figures and during the 18 years or more of our existence, the Commission had never decided what would be the proper allocation, cost allocation method for our system.

The Commission had never said any guidelines for us and it had never said any policy as to how costs should be allocated.

It decided cases on a case-by-case method.

And this case, the one immediately preceding it, was the case which the Commission selected as the first case in which to decide that issue.

At the hearing, there were some five different extremely complicated methods of allocation presented and the Commission adopted none of them.

It adopted the sixth.

Now, I say that our chances of making a correct guess as to what method of allocation the Commission would adopt in this case were practically new.

But I shall go into —

Earl Warren:

Who should bear the burden that if you’re wrong, you or the consumers?

Horry S. Littman:

We’re not asking the consumers to bear any burden at all.

We pay them back all of the money that is due to them when it comes due at 7% interest under the refund provision.

They can’t be hurt, it seems to me, but we can be terribly hurt by being deprived of the very dollars, a good portion of the very dollars which the Commission found in this case.

We need it in order to enable us to operate our property and render good service to the customers.

That — it is in that way that the customer can really get hurt that the customers and the company.

Arthur J. Goldberg:

Isn’t the risk is inevitable in this operation?

Suppose you got the 7% that you asked for and there could be subsequent decision on the allocation that would still cost you money and under your own theory of the case, isn’t that correct?

Horry S. Littman:

That is a risk that we would accept, that we do accept.

In other words, what Your Honor is talking about Judge Tatel mentioned it too is the risk where we file rates that are too lawful, that is that we knowingly and voluntarily don’t have a enough sense but we make the final.

To file rates under our own methods that are — is sufficient to recover our cost of service.

When we do that and if the Commission should’ve at the end of the case prescribe rates that are higher than those which we filed by then of course that is a risk we undertake and we’re certainly willing to accept it but that — and that is not what we’re complaining about here.

What we’re complaining about here is that the Commission adopted our method of allocation for the temporary purpose of immediately reducing rates and by so doing in view of the facts of this case because the allocation issue was so bitterly contested.

We could very well find ourselves in a position where when the Commission does decide the allocation issue later on just by reasonable shifting of the costs among the various zones.

We then may find ourselves in a position where we had made refunds to customers which the customer — which the Commission finds when it decides the allocation issue, it decides what’s the proper method, refunds that shouldn’t have been made or should’ve been made in lesser amounts than those which we made.

Horry S. Littman:

And we have to pay for that out of our own pocket.

Arthur J. Goldberg:

(Voice Overlap)

Horry S. Littman:

Yes.

Yes, Your Honor.

Arthur J. Goldberg:

So the question of (Inaudible)

Horry S. Littman:

Yes, but our risk, if Your Honor please, and I think Your Honor — your point is an excellent one.

The measure of our risk is the rate that we filed in each zone.

We’re using the 7% rate of return.

It is a higher rate and gives us the degree of protection in each of these zones which our — under our filing there would be no question in our mind no matter which of these allocation methods were used.

We were fully protected but that risk if Your Honor please must be measured by the rate that we filed.

Our burden issue Your Honor rightly pointed out is to sustain that rate.

Our risk is measured by the rate that we filed not by the rate which we would have filed had we used a 6 1/8% return.

I —

Earl Warren:

Isn’t that the statutory responsibility of the company to establish nothing but there and reasonable rates and if it does establish any rates that are greater than fair and reasonable rates that it can — it shouldn’t be in a position to complain if the Government takes for granted in its order every factor that you put into the case except the one that it has established after a hearing?

Horry S. Littman:

Well, I agree with the first part of Your Honor’s statement.

It’s the latter that I cannot agree with for these reasons.

Earl Warren:

Well, I guess that be your case, wouldn’t it?

Horry S. Littman:

Yes, if I agree with that, I wouldn’t be here, sir.

Earl Warren:

Isn’t that so?

Horry S. Littman:

I wish I could but I just can’t.

Earl Warren:

(Voice Overlap)

Horry S. Littman:

And for this reason.

I think basically, we must and I think this is where the Commission didn’t think this thing through with all due respect.

They ignored the real distinction between an item in a cost of service which is claimed by the companies such as an operating expense.

Incidentally, let me point out that over half of these rate increases involved in these three pending cases involves money increases put upon us by our own producers.

In other words, they’re producer increases.

We get nothing out of that, we simply are accounted to pay to those producers.

Now, an item of expense or an item in the cost of service can be accepted by the Commission for purposes of an interim order.

In other words, the Commission can as it did here and we don’t complain about this.

They can say, Tennessee we’re going to accept you at your word as to every item, every dollar that you were claiming in each of your items in the cost of service such as cost of gas purchase, depreciation, the rate of — except for rate of return.

Horry S. Littman:

We’ll try the rate of return issue, we’ll reduce that $11 million and thereby reduce your overall cost of service by $11 million.

So far so good, we don’t like the reduction.

We took an appeal from that reduction in the rate of return from 7% to 6 1/8%.

We lost that and so we’re not arguing or rearguing that here.

We think that is perfectly valid but when the Commission accepts of item in the cost of service for that purpose accepts that no one can be hurt.

We can’t claim anymore in dollars than we sought in hearing.

We can’t possibly claim anymore.

That item has only one way to go and that is down.

In other words, at that juncture of the procedure putting aside in the allocation issue, the Commission can properly say, “Your total overall cost of service should be reduced by at least $11 million at this point.

Later on, we may want to reduce that more after we hear the other issues.”

We have no complain about that, if there’s no allocation issue.

But the issue of allocation is a horse of an entirely different view even if it is the method that we suggest that in these circumstances.

For this reason, when the dollars of total cost of service or total revenues which the Commission finds are the total dollars that we should have and the total dollars that we’re entitle to collect in order to render service properly to our customers.

When those dollars are divided and distributed to the six rate zones on our system, the — that must be done in a proper manner otherwise if the Commission uses one method even though it’d be ours, for interim order purposes, and later on, switches around after hearing and uses a different method.

Then as this case show, we could be harmed millions of dollars and be deprived thereby of millions of dollars of our cost of service.

Let me illustrate it, if I may, Your Honors would open please to page 594 of the record and I’m again referring to the bottom page, you’ll see a tabulation.

I’m not going to unduly complicate this.

Now, this is a tabulation which appears in the motion that we — or the memorandum that we filed with the Commission objecting to interim more procedure.

We were here explaining why we were objecting.

Your Honors will note that there are five columns, these — and you’ll notice the six zones which are represented by the six lines Southern, Central, Eastern, New England and so forth.

Arthur J. Goldberg:

What page are you referring?

Horry S. Littman:

At page 594 of Volume 2 of the record.

Now, each of these columns represents the costs as allocated that each of these six zones under each of — under the five methods that were submitted and the first column the one that was submitted by Columbia.

Second, one by consolidated system, the third by our New England customers, fourth by the Commission’s staff and fifth by Tennessee and you’ll notice that in the bottom in the bottom line that the cost of service used in each case was approximately the same.

There could be some slight difference but that’s immaterial.

Using the same cost of service, which in the case is the staff’s cost of service in the previous docket number G-11980, that’s the docket where the allocation issue was tried actually.

3And the Commission said, they would use whatever method they decided, they’re here.

So, I’m going to these figures that come out of that docket for illustrative purposes.

Now, here’s what I’d like to point out that while the Commission would find if it had adopted for instance the staff’s cost of service in this case of the total dollars at the bottom of each of these columns.

If the Columbia method were — of allocation were used some $23,852,000 of the total cost would be allocated to New England under Columbia’s method.

Horry S. Littman:

But under our method, Tennessee’s method, some $18,614,000 would be allocated to New England.

In other words, there would be a difference by just by reason of the shifting of cost between zones under these different methods there could be as much as a $7 million a year difference in the allocation in one zone using the same cost — the same overall cost of service.

Now, —

(Inaudible)

Horry S. Littman:

Well, as much as the — I’m sorry, I should’ve said the New England method.

The New England method it was my fault I misled you.

The New England method would’ve given — would’ve assessed $16 million, $16.8 million to the New England zone and Columbia $23.5 million, $7 million difference and of course they’re very different —

Earl Warren:

It didn’t actually happened in this case, however —

Horry S. Littman:

No, I’m going to — well, I’m just coming to that next.

If Your Honors will please turn to Appendix A of the white record which is our brief.

You will now find — well, I can only say — I can now come closer to what may happen or did happen in the instant case.

Here, in the first column, we show for each of those zones the revenues prescribed, the revenues, which we would receive under the interim rates.

Sorry?

Where are those?

Horry S. Littman:

On page 38, Appendix A of our white brief that is some of our brief, the Tennessee’s brief, respondent’s brief.

The last page in that white brief.

(Inaudible)

Horry S. Littman:

Yes sir.

In the first column, it will be noted that under the interim order, which the Commission prescribed in this proceeding, you’ll find the various revenues which we would receive from each of the zones and I direct your attention particularly to New England.

Here, we would receive or we are now receiving as a matter of fact because we’re now operating under the rates which the Commission compelled us to produce $32.9 million.

Now, that as Mr. Chief Justice has pointed out was the result of reducing a rate of return by from 7% to 6 1/8% that is total cost service by $11 million and using the suggested method of allocation, which we suggested.

Now, look at column 2, if Your Honors please, if the Commission had done what we implored them to do, namely to decide that the allocation issue which I think they could have decided that in there.

Then here’s where they would’ve come out using the identical overall cost of service reflecting the $11 million reduction overall because if you add at the total figures in both of these columns you’d come out exactly the same.

Now, using the total same cost of service, you come out — you would — the Commission would have found that the proper portion of the total cost of service allocable to New England was $34.3 million.

Now, having made reductions under the compulsion of the Commission’s order based on a $32.9 million cost of service, we could never recoup assuming that this is what would happened at the end of the case.

We don’t know what will happen at the end of the case.

We could never recoup the deficiency of $1.4 million shown in column 3.

We could never get that back because we could not file increased rates retroactively.

We’re stuck with a million and a half dollars, which is a part of the very colors of return, which the Commission found just and reasonable and which we were entitled to receive simply because the Commission refused to decide this controverted allocation issue and adopted our method for the temporary purpose as a temporary expedient of getting rate reductions to the consumers.

In fact, a windfall of a — in this case of a million and a half.

Horry S. Littman:

Now, I want to point out very, very clearly.

It tend to refer me of course to point out.

I’m not saying this is what’s going to happen at the end of this case.

I don’t know what’s going to happen frankly.

It may come out much worse than this if for instance Columbia’s appeal in the Court of Appeals is sustained.

Potter Stewart:

What is that appeal that you left?

Horry S. Littman:

There, the Commission decided the allocation issue finally last February and the Columbia people have taken an appeal to the Court of Appeals.

And that matter is now being briefed.

Now, if that —

Potter Stewart:

It’s the Court of Appeals for the Third Circuit?

Horry S. Littman:

No, for the District of Columbia, I have this number.

Potter Stewart:

What’s this I the Court of Appeals for the Third Circuit on June —

Horry S. Littman:

That — there is no — the Third Circuit, that was an error.

It’s Court of Appeals for the District of Columbia, that’s where that appeal was pending.

Now, if the —

Potter Stewart:

Do you have the Government’s chronological statement?

I don’t know if you have it.

Horry S. Littman:

Yes, I have Your Honor.

Potter Stewart:

This, — on June 4th of this year that petition for review was filed in the District of Columbia Court of Appeals?

Horry S. Littman:

Yes, that should be —

Potter Stewart:

So, the only thing wrong is C.A. 3 here?

Horry S. Littman:

That’s the only —

Potter Stewart:

Is that right?

Horry S. Littman:

— yes.

I’m sorry, I should’ve found that error myself but I didn’t.

Potter Stewart:

But it’s the — and that’s Columbia’s petition to review the allocation decision of the Commission?

Horry S. Littman:

Yes.

Yes, Your Honor and when we say Columbia, we use that as a short term — shorthand term for Manufacturers of Light and Heat.

William J. Brennan, Jr.:

Mr. Littman, is that — this allocation cost is column 2 that’s now before the Court of Appeals in the District of Columbia, is that it?

Horry S. Littman:

The method that was used, the method that the decision of the Federal Power Commission that — that the method that they adopted —

Potter Stewart:

Well, what I’m trying to get at, is this what the Commission came up with?

Horry S. Littman:

No.

No, if Your Honor please.

The Commission simply decided what method is the proper method, they didn’t.

They did translate that into dollars —

Potter Stewart:

But you did — you did is that you protected that method into dollar and this what come up?

Horry S. Littman:

Yes.

We say, in other words, what column 2 represents in our brief is, we have taken the method, which the Commission found last February after deciding the allocation issue was the proper method.

We then applied it to the total overall dollars of cost of service, which the Commission used for purposes of order.

Potter Stewart:

But it’s the method, which is now being reviewed at Columbia in instance in the Court of Appeals (Voice Overlap) —

Horry S. Littman:

Yes, Your Honor.

Byron R. White:

But you didn’t appeal?

Horry S. Littman:

We did not appeal that matter.

That is —

Byron R. White:

You really did not appeal under that.

Horry S. Littman:

That is correct.

That method it was not appeal by us, it was fairly close to ours except in the New England zone.

And I’d like to say that further in this regard that the reason basically under the law why we contend that an order of this kind is invalid.

Well, let me first finish up the previous idea.

If Columbia — if Columbia is successful on that appeal, we can be hurt a great deal more than they shown in this table.

This table of course reflects that the proposition or the hypothesis that we’re going to win all the issues other than the rate of return issue which we have already lost.

The table in the Government’s brief which appears at the last page of their brief shows what would happen if the Government of if I should say if the Federal Power Commission staff were to be if the Commission’s examiner would to be sustain in all of the items of cost of service concerning which we’re taking field.

So as just Judge Tatel below said, this thing was just too much for him to try to predict what the outcome will be and he said he wasn’t going to speculate and I just can’t speculate either.

I do know, however, that we have been by this order, by this method we have been subjected to the hazard of losing many dollars of our return.

The very rate of return that the Commission has said, we were entitled to.

Now, the reason, basically, I should’ve gone to this long time ago but the reason basically why this procedure is invalid it is because as this Court held in the Mobile case the — under the Natural Gas Act, the Commission reviews rates that are filed under Section 4.

And it can — but it can’t set them aside only upon making a finding that those rates are unlawful.

Now, what we’re saying here is that, and what Judge Wisdom said in the majority opinion below, was without first deciding the contested allocation issue, without first deciding what is the proper method to be used to distribute the overall cost to the various zones.

The Commission had no basis for deciding or determining which of the filed rates in the specific zones are unlawful the extent to which individual rate should be reduced or to whom refunds are due.

Now, we submit, that that is absolutely correct in accurate statement of the situation.

Horry S. Littman:

To be sure, the Commission found —

Byron R. White:

Was there — was there a determination here in putting in the interim rate that — that your rates were unlawful?

Horry S. Littman:

They said that but we say they couldn’t have known that.

They had no way of knowing until they decided the allocation issue whether they were or were not in fact unlawful.

Byron R. White:

You just say that some interim procedures are quite probable.

If there had been no allocation as here, you would’ve accepted the — you would have no argument about the interim rate?

Horry S. Littman:

Yes, and as I said earlier I — we advised the Commission in this very case.

We said, it’s perfectly alright for you to go ahead and enter an interim order by deciding the rate of return issue.

But for heaven’s sakes, protect us here by also deciding the allocation issue at the same time.

We did not oppose the interim order procedure.

We said this in this case if they had decided the allocation issue.

We said, look, you already heard this issue.

It’s been fully heard, it’s been fully briefed, you have it before you, you can now decide it.

And the only reason that took them 18 months as Mr. Spritzer said it did to decide the allocation issue, was because they didn’t do what we asked them to do.

Namely, omit the intermediate decision procedure as they did in the case of the rate of return issue and decide the allocation issues as well as the rate of return issue.

If they had done that, there might have been a very short delay a few months but they couldn’t have been much delay because after this case was finally argued to the Commission after the examiner took a year to hand down as a report.

And let me say, he was a very able thorough examiner but he told us that the hearing — the reason he was going to take a long time to write his report was because he had so much other work to do, he couldn’t get to this case for many months.

The delay was the Commission’s fault in not omitting the intermediate decision procedure.

We say, they should’ve been just as diligent in that regard so as to protect us as well as the — in their diligence to protect the consumer.

We think both should’ve been protected here.

Hugo L. Black:

Mr. Littman, —

Horry S. Littman:

Yes, Your Honor.

Hugo L. Black:

— does the record show what’s the total increase in rates allowed and how much bigger revenue you get by reasonable interim rate than you were getting from the rate that the previous increase?

Horry S. Littman:

Well, let me — I think I can answer your question this way, in this particular docket, 19983, our total filing and was $26,590,000, that’s overall.

The Commission reduced those overall revenues by $11 million.

Does that answer your question?

Hugo L. Black:

Into what?

Horry S. Littman:

The Commission here — the Commission’s interim order here reduced those overall revenues by $11 million meaning that were collected.

Hugo L. Black:

What I want to find out was, were the interim rates larger or smaller than the rates you had before you asked these three increases?

Horry S. Littman:

Well, the interim rates are smaller.

Hugo L. Black:

They’re smaller?

Horry S. Littman:

Yes, there was $11 million reduction overall.

Hugo L. Black:

And what you asked but —

Horry S. Littman:

Oh no,no, no.

Hugo L. Black:

— I’m talking about what you asked — I’m talking about what the company was previously collecting.

Horry S. Littman:

I’m sorry.

You mean overall?

No, it was — the interim rates were less than that which we were asking overall.

Hugo L. Black:

I understand they were less.

Then you’re asking — maybe I haven’t made it clear.

You were collecting something before you asked these increased rates.

Horry S. Littman:

Yes.

Hugo L. Black:

You were getting a certain amount of revenue, the revenues you have given here and the revenues of interim rate.

Horry S. Littman:

Yes, Your Honor.

Hugo L. Black:

What were your revenues, total revenues before you got — before you file this application for increase?

Horry S. Littman:

Well, I can’t give you a dollar figure.

I can only say there were $26 million less than the new filing that have been they were after the new filing in the last docket.

I can’t give you the total dollars.

Hugo L. Black:

You asked the $26 million increase, is that right?

Horry S. Littman:

I think, perhaps, I can give that to you.

I think I have made a note here that will help.

The revenues overall at the interim rates were approximately $266 million.

Hugo L. Black:

That’s shown on the appendix of your brief?

Horry S. Littman:

Well, if you add the picket, yes.

Hugo L. Black:

(Voice Overlap) now, what I want to know is, what it was before you asked for those increases and got the interim rate.

Horry S. Littman:

It was $26 million less than that.

Hugo L. Black:

$26 million less than the $266 million?

Horry S. Littman:

Approximately, yes.

Yes.

About 42 — $240 million approximately overall.

Arthur J. Goldberg:

(Inaudible)

Horry S. Littman:

The — where the allocation issue is contested, they could not deprive the rate until they had decided that issue because of the fact that it without so doing there had no way of knowing whether those rates were — as filed in dollars were or were not just and reasonable.

Arthur J. Goldberg:

(Inaudible)

Horry S. Littman:

No.

If you’re talking about an interim order, I’ll say no, they couldn’t.

If you’re talking about a final order, I say yes, they can.

Now, —

Arthur J. Goldberg:

(Inaudible)

Horry S. Littman:

An interim order, no.

They can’t use one method in an interim order and another method in another order for this reason.

If they do that then that leads to the proposition that it is inexorable.

The Commission will find for purposes of — will find what it issues its interim order that the rates that we filed in a particular zone are not just and reasonable.

And when it uses a different method, they later find that the rate would be filed in that particular zone are in fact just and reasonable.

Now, there can’t be two inconsistent findings that a rate is just and reasonable and not just and reasonable, during the same period of time, any more than two objects can occupy the same space at the same time.

So, being unable even if they had thought our method but I realize that there — there is a catchy —

What you’re saying in effect is that whole — this — what you’re referring to here is acceptance is really not an acceptance of your proposition, it’s also a conditional acceptance of your proposition.

Horry S. Littman:

That’s right.

Arthur J. Goldberg:

That’s what it comes down to.

Horry S. Littman:

That is correct.

We note — I want to also make it clear, we think our method was right.

We suggested it to the Commission.

We would’ve been perfectly happy to have the Commission adopt it but not for just one purpose and not for another but for all purposes.

If the Commission adopts our method at the end of the case, that is perfectly alright, we have no complain.

And let me also point out if Your Honors please with regard to allocation.

A company is primarily interested of course in recovering its total cost of service.

That’s what it is interested in, the rules require that company to submit a method of allocation as a part of its filing.

I like to call that a suggested method because the company can’t gain and make a lot of suggesting one method or another method.

It doesn’t stand to gain a thing because when it submits that method, the rates that are produced by that method, the rates that are produced by applying that method as a total overall cost of service must equal precisely the total overall revenues which those rates will yield at the test year.

So we do this, the Commission requires us to do it, we’re perfectly happy to do it.

But we don’t believe that the risk that is imposed upon us by submitting a suggested method, wherein a case such is this where the Commission has never decided the allocation, one method of allocation should be used suggests — submits to us a risk similar to that of a game of Russian roulette.

Horry S. Littman:

Where the Commission will simply take our method from one purpose, only later on to use it for another purpose, and thereby, deprive us of something on the order of — I don’t know how much but it may very well be many millions of dollars of return.

Let me say in the very, very few minutes remaining for me because I do want to leave our friends in Columbia some time.

I do want to make a quick reference to the three cases that have been referred to by Mr. Spritzer and let me say those are the only three cases in the whole history of the Natural Gas Act up to the time that we made our filing where a Commission — the Commission had ever entered an interim order.

There are only three cases, those are the three up to that time.

And as to those three cases, they’re discussed in our brief.

I know something about the Panhandle case from which the quotation was read because I try it before the Commission and argued it in the Court of Appeals.

I know that no such issue was there presented as in here, as was here presented.

There, the Commission dismissed four issues one of them being a rate design or so-called you might call it cost allocation issue.

The Court — the Commission dismissed that issue because it said, look here just 75 days before you made this new increase rate filing, we had decided, we just decided that issue.

We’re not going to go into it again.

So, we’re going to dismiss that issue along with three other issues that had just been decided in a case — to the opinion that the Court — the Commission issued just 75 days earlier.

So that was the end of the allocation issue.

When we went to Court, the Court said, the Commission was well within its rights to do that.

And so, there was no contested allocation.

The Court just simply said there was no contest of allocation issue in that case and the precise question that is presented here was not raised there.

In the Northern case, the Commission in the Northern case as the staff brief admits the precise contention or issues there were not the same as they are here because in that case as in the Panhandle case, the Commission had dismissed the allocation issue because it had been decided and passed on an earlier case.

In the Natural Gas Pipeline case of America, as I stated earlier, there was no allocation issue because they didn’t have any zones on their system.

They had one rate over the whole system and moreover they were not — they were fixing rates under Section 5 (a) where the rates were fixed prospectively only.

Now, just one word then on abuse of discretion, briefly stated here the Commission, and this is the gist of our argument that there was a gross abuse of discretion.

Putting apart the requirements of the Act if the Commission had any discretion to exercise in this case, it abused that discretion because here it had a choice of two alternatives.

One, was to decide the allocation issue on the evidence that it then have before it.

It might have been a very short delay occasion.

By reason of that, I think it took the Commission only four or five — four months or five months to decide that issue after the third argument at the second time.

I might point out the reason for that being if there was a change in the first note the Commission due to the change in administration.

That was one of the causes for its delay.

All of which could’ve been avoided if they had omitted the intermediate decision procedure that we requested.

Earl Warren:

What change of administration?

Horry S. Littman:

But they could’ve avoid it not to change the administration and no one suggested that but they could’ve avoid if the delay had they decided it a year, 18 months earlier.

Now, the Commission had the choice of waiting of few months deciding this case, deciding what method was the proper method to be used thereby not harmed the company, not subject as to the hazard of losing a very a portion of very rate of return which they said we ought to have at the same time, protecting the consumers.

Consumers were fully protected by the refunds, which incidentally were required to pay 7% interest on while we are allowed to 6 1/8% rate of return.

Horry S. Littman:

They were faced with that alternative as against the alternative which they did adopt which places us in jeopardy of losing a large part of the rate of return to which we’re entitled simply because they wanted to save the few months from getting the — getting refunds to the customers.

Now, we say that as between those two choices, the Commission abused its discretion when it adopted the former, when it adopted the latter revenue form.

Thank you.

Earl Warren:

Mr. Littman, who in your opinion owns this money that is not distributed to consumers?

There’s a very large percentage of our country is on the moot every year and that these things continue over a period of years, of necessity, a very large part of the refunds, I would, think could not be made.

Now, who comes in ownership with those — do you claim them?

Horry S. Littman:

I wish —

Earl Warren:

Do you claim them?

Horry S. Littman:

Oh, no.

No.

I know this much, I have researched this question but if the brief once validly due to the consumers —

Earl Warren:

I beg pardon.

Horry S. Littman:

— if consumer — if refunds are validly due to consumers and the consumers have moved away, we never get the money back.

The money either goes to the distributors or goes to the state.

I have never researched that subject.

I know it’s a state problem and I’m sorry I’m not prepared to say what the law is.

I would imagine it would be different in various jurisdictions.

But I do know this that in this case the refunds — part of the refunds that we made are lawfully — may lawfully be found after the Commission decides the allocation issue to be due to us.

And we urge the Court of Appeals to give us a stay of the Commission’s order so as to avoid the difficulty that may come if this order is reversed.

But the Court did not give us the stay with Judge Wisdom dissenting.

He said, the Commission should’ve put the cart before the horse and he would’ve given us a stay but the other two judges didn’t.

He —

Hugo L. Black:

Any idea of that stay?

Did you apply for a stay here?

Horry S. Littman:

We did not apply for a stay here but we did this, I think the reason the — I might — well I don’t know whether that’s the reason.

But I do know the Commission represented to the Court in our position when it opposed to stay that we could get our money back from our customers, our distributors if we should prevail eventually in this case on this issue.

And I might say that we advice the company when it made the refunds to take the precaution of apprising our customers that we would take that position.

So they would be able to protect themselves and perhaps not pass these refunds on without knowing just what the —

Hugo L. Black:

(Inaudible) if the state order was denied (Inaudible)

Horry S. Littman:

We — we made the — we had to make and we did make the refunds after the stay order was denied.

Horry S. Littman:

And I might say just to clear up one slight imperfection in Mr. Spritzer’s statement.

He perhaps left a possible implication that we — well, I don’t say he said, we didn’t have to file these interim rates.

He said the Commission permitted us to file the interim rates.

It’s true the order, the interim order did use the word “permit” in one paragraph but in the very next paragraph it said, “but if you don’t, we’re going to take a whole increase away from you.”

So I think that is a clear case of compulsion when we did then file the rates under compulsion.

Earl Warren:

Mr. Smith.

Brooks E. Smith:

Mr. Chief Justice, Mr. Associate Justices.

At the outset, I think I should identify to the Court the position of the Columbia Gas System Company in this proceeding.

As Mr. Spritzer argued, I don’t believe Mr. Spritzer mentioned the Columbia Gas System Company although if you read the Fifth Circuit’s opinion below why the Columbia position and the arguments of Columbia featured — quite well featured in the decision of both of Mr. Justice — Judge Wisdom and the dissenting judge the Chief Judge Tatel.

When Mr. Rhyne, representing the City of Pittsburgh got up, he confined his mention of the Columbia companies as impugning their motives for being here at all.

Even though if the Columbia companies, who have taken the burden in this cost allocation fight for many, many years wins, it will mean that the people of Pittsburgh and the people of Pennsylvania will be — will receive more refunds than they will under any other of the cost allocation methods presented in the — before the Commission.

And it would be presented if the Columbia companies prevail before the Court of Appeals for the District of Columbia Circuit and then go back to the Commission and get their reliefs of the true and correct method of cost allocation applied to the rates.

Now, —

Earl Warren:

Who should the refunds be made to, the distributor or to the customers?

Brooks E. Smith:

The — in all of the Columbia company cases that we have before the state Commission to see we are regulated by our seven state commissions as well as the Federal Power Commission.

The state commissions have — will take jurisdiction and see to it that the refunds are passed through to the consumer and the — if in cases there might be several consumers who have left one jurisdiction going to another.

I believe the ordinary rule is that there will be a credit made to that residence for the next occupant of that particular house.

But it’s not perfect but the chances of any great number of consumers being prejudiced because of our present mobile society is not substantial.

Earl Warren:

Why?

Because they don’t move or because they give it back to the dwelling — to the owner of the premises?

Brooks E. Smith:

Well, because Mr. Chief Justice, I don’t believe that anyone has ever ran a statistic on how many people do move from their homes.

I just believe that the number would be few proportionately, that the great majority, these consumers lived in their homes for many years and if the — I’m sure the commissions will pass through the refunds to those consumers

Earl Warren:

I happen to know that over — over the last 25 years in my own state we have 1000 new comers every day who come from other parts of the country.

Now, they use gas too and — are you going to make the distribution to those people?

Brooks E. Smith:

Well, if they happen to occupy — they happen to occupy the residence that was occupied by a consumer who was overcharged why they will get credit and they pass through.

However, the — when you get these refunds back to the individual consumer, the amount of money to each consumer is very, very small.

I think, in this case, they gave a figure of 15 cents per month.

It’s —

Earl Warren:

All of which might tend to the conclusion that reimbursement is not the very adequate remedy.

Brooks E. Smith:

Oh no, the — whatever is due, the state commissions takes charge and in our case is particularly they see to it that some adjustment is made.

Brooks E. Smith:

They all have different ways to adjust them by escalation clauses up and down and by crediting the bills of the future to make up for the overcharges in the past.

They have all different types of methods but the Court — if the Court pleases, the state commissions do take charge of their responsibility.

I don’t say that it’s absolutely perfect, but they do a very good job.

Now, Columbia’s interest in this proceeding are not identical with Tennessee although we are both correspondents, we do not have the same interest except that we do both believe that the Fifth Circuit’s order should be sustained.

The Court might wonder why and what benefit it would be to the Columbia companies to have the Fifth Circuit’s order sustained, and there’s a twofold way that that is an economic benefit to the Columbia companies.

That is, they will be sure that for the past periods that they will not be made to subsidize other consumers, other zones, if the Columbia companies after having their day in court and having the Commission decide these matters.

And the Court review them and find them — the Commission’s method improper and then the — our position prevail that we will not be made to make up to Tennessee the 6 1/8% return that the Commission said that they should have.

As far as the second point for the future, if the Columbia companies’ method of cost allocation prevails, finally that would mean that the consumers that are served by the Columbia companies will only pay their just due and will not be paying in the future the cost should’ve been paid to Tennessee in the rates charged to other zones.

Now, Mr. —

Potter Stewart:

Did I understand Mr. Rhyne to say that you were just a conduit or a stakeholder, or did he say that?

Brooks E. Smith:

He did say that and that I think ties it up with Mr. Chief Justice’s viewpoint to put who gets the refund.

We are a stakeholder and we do pass it through, but if Your Honor please, it’s to the best business interest of the Columbia companies.

Moreover, the Columbia companies have a duty to the public to see to it that the rates are as low as they possibly can be.

They have a competitive position.

Mr. Rhyne said that there is a competitive fuel problem.

It’s to our business interest and it’s in our duty to the public to keep those rates as low as possible.

Potter Stewart:

You’re —

Brooks E. Smith:

There’s more to it than just being a conduit for refund.

Potter Stewart:

Your companies or distributing companies?

Brooks E. Smith:

Both, they distribute and they sell at wholesale.

Potter Stewart:

And you’re regulated I suppose by now only by state but by cities in some case.

Brooks E. Smith:

That’s correct, if Your Honor please.

Potter Stewart:

And when your cost go up you can’t always really pass them along, can you?

Brooks E. Smith:

That’s right.

Hugo L. Black:

When did Columbia first raise the question about the unfairness of this allocation?

Brooks E. Smith:

That’s what I was going to next develop Mr. Justice.

In 1955, the Commission formally recognized that this issue existed in the last brief case that was settled and finally determined.

That was the so-called Docket G-5259.

The issue was raised in that proceeding but the Commission transferred that issue over to a specific docket, docket number G-11980 and it was in 1955 that the Commission itself formally recognized that the issue prevail — existed.

And there was in that same case that Tennessee tried to get made a motion for interim rates and the Commission denied that motion because it said it was improper and that matter was presented to the court below and commented upon in the decision below.

Brooks E. Smith:

In 1957, the Commission acted to put this cost allocation in this Docket Number G-11980 and it was to permeate, it was to run through all of the other rate cases that followed that were then existing and have since been filed, there are three of them.

Now, as I say, Columbia is not merely being litigious and it’s not a mere question of a fight on different mathematical methods of cost allocation.

There’s more to it than that.

A little bit of history has to be presented to the Court to see why Columbia companies feel so strongly about this.

At the outset of Tennessee’s corporate existence, they sold most of their gas in West Virginia which was then carried on into Ohio and Kentucky and Pennsylvania.

And about 1950, the complexion started to change.

Tennessee begun to expand to new market.

They went up to New York and New England also up into Canada and during that period of 1950 through 1958 when this expansion was going on to other markets, they did not expand a very greatly if at all to sell more gas to Columbia.

But even though the expansion and the cost multiplied during that period, Tennessee filed a series of rates ever since 1947.

And those rates fell disproportionately upon Columbia.

Now, there’s another factor in this history and that is apparently the new — the expansion in the New England didn’t pay out the way they thought it would during this buildup or development period.

And so we have the case where Tennessee was not making such a good sales picture in the northeast and so to make their overall return, we felt that the facts show, that the rates seems to be falling disproportionately on us.

That’s what gave us the impetuous to get in and try to see what was causing this and we fear that we were being made to subsidize the expansion into other markets.

We didn’t feel that should be done.

It’s not that we don’t want New England to have as low of rate as they possibly can but we think that if the expansion was improvident that it should be Tennessee that would have to absorb the difference and not Columbia companies and the other companies that serve in middle of Appalachian area.

Now, —

Earl Warren:

I would think that would make your interest more identical with say the City of Pittsburgh than it would with the pipeline company.

Brooks E. Smith:

That’s true and that’s why it puzzles me to see the City of Pittsburgh taking an opposite view.

Earl Warren:

But have you been on their side of the case?

Brooks E. Smith:

Pardon me?

Earl Warren:

Have you been on their side in this proceeding?

Brooks E. Smith:

Well, it’s not in this proceeding.

They should be on our side because we have taken the burden of going forward and trying to get a fair complete determination of the cost allocation issue.

Now, most of my time was taken up, so I have to hurry along but — and hit some legal points that were covered by Mr. Spritzer.

Mr. Spritzer seemed to argue that the burden of proof was solely upon the Natural Gas Company that was filing the higher rate, Tennessee.

Well, now Section 4 (e) does state that but this is a little different.

It’s not that the burden of proof doesn’t lie with Tennessee but that doesn’t mean that the sole right to present evidence is Tennessee.

It’s not that the Tennessee method of cost allocation raised this issue for the first time.

The Commission took the issue, recognized the issue and put it in this docket number G-11980, and raised that issue knowing that the Columbia companies have been complaining for years that they were being made to subsidize the undercharged zone of Tennessee.

Arthur J. Goldberg:

Doesn’t your argument (Inaudible)

Brooks E. Smith:

Well, if Your Honor please, the question of whether New England is undercharged or not must depend upon how the cost are allocated to the zones.

Arthur J. Goldberg:

On the allocation?

Brooks E. Smith:

On the allocation.

Arthur J. Goldberg:

For the reduction of rates (Inaudible)

Brooks E. Smith:

That’s right.

We are for the reduction in rates in our area Zones 2, 3 and 4 but we want the customers in Zones 5 and 6 to pay their fair share because otherwise if they don’t pay their fair share it’s either Tennessee or some other customers in other zones that pay.

The difference is they — when you — the Commission decides the cost, there’s a certain — there might be a certain reduction in total overall cost.

Now, that doesn’t mean that those costs should be distributed proportionately.

Some zones might not be entitled to recover any.

Arthur J. Goldberg:

(Inaudible) order, issued order and reduce these rates with this order.

Brooks E. Smith:

We — the order the reduced the rate only covered two items, the rate of return which we took no part, we did not object to the Commission’s determination that 6 1/8% return was a just and reasonable rate of return.

So we did not oppose the Commission’s order in that respect.

We did oppose the only other item in the Commission’s order in which they said now, take this reduced cost of service and use the contested method of cost allocation that Tennessee used and was still being tried in another administrative proceeding and now you reduce your rates accordingly.

Arthur J. Goldberg:

That you’re litigating, are you not?

Brooks E. Smith:

That — that we’re litigating.

Arthur J. Goldberg:

The cost allocation.

Brooks E. Smith:

That’s right but it permeates the underlying case whatever happens in that cost allocation case it’s still not final must be applied to the underlying case.

And that’s where the rub comes.

Someone is going to get hurt.

Hugo L. Black:

May I ask you, you said, what was the law in Ohio about where this money went?

Do you know about the other states?

Brooks E. Smith:

Well, I do know that, for example, in Pennsylvania, the refunds that were made to Columbia from Tennessee in the past are now being given credit on the future bills to the retail customers of Pennsylvania.

Hugo L. Black:

Why does the Manufacturer of Light and Heat Company to do business?

Brooks E. Smith:

They do business in the States of Pennsylvania and West Virginia.

Hugo L. Black:

That’s your client?

Brooks E. Smith:

Yes, Your Honor.

Hugo L. Black:

Then the Ohio (Voice Overlap) —

Brooks E. Smith:

Ohio fuel.

Hugo L. Black:

— are they subsidiaries of the Manufacturer?

Brooks E. Smith:

No, they are subsidiaries of the Columbia Gas System in Columbia.

Hugo L. Black:

Columbia Gas System?

Brooks E. Smith:

Yes sir.

Hugo L. Black:

Are any of these other companies in the Northeast and so forth subsidiaries of Columbia?

Brooks E. Smith:

No, just the Columbia companies comprise the seven state, Mid-Atlantic area, Kentucky, West Virginia, Virginia, Ohio, Pennsylvania, parts of New York and parts of the District of Columbia by whole through wholesale.

They sell for wholesale to (Voice Overlap) —

Hugo L. Black:

And Kentucky Gas is a quite a different company?

Brooks E. Smith:

Quite a different company.

Byron R. White:

(Inaudible)

Brooks E. Smith:

Well, Mr. Justice White whether Tennessee has the money or not is something I can’t answer.

But I do know that if we — if the Columbia companies prevail on our appeal in the cost allocation fight that are still before the lower court then the cost will be remanded to the Commission.

Now, at that point, the Commission will face with this problem.

It will have told Tennessee that if it is entitled to 6 1/8% return, now it will for the future.

I’m not going to get into the difficulties for the past which we’ve discussed on a refund but for the future, it seems to me that then when the Commission determines the allowable cost of service, the aggregate.

And having told Tennessee that it’s going to permit them to earn 6 1/8% return, they’re going to do everything they can on remand to work up a cost allocation that would permit Tennessee to get the 6 1/8% and take it out our eyes.

That’s just the point.

I see my time is —

Earl Warren:

(Voice Overlap) the law prohibits them from doing that, does it not?

Brooks E. Smith:

The law theoretically prohibits them from doing that but the Section 4 (b), the section that specifically prohibits the Natural Gas Company from giving an undue rate preference to other customers, in other zones, specifically, that’s not self executing.

The customer companies of Natural Gas Company have to get in there and fight.

They have to recognize the issue and do all they can to have their position prevail before the Commission the lower tribunal.

Earl Warren:

Isn’t the Commission prohibited from allowing retroactive rates?

Brooks E. Smith:

Well, the Commission —

Earl Warren:

This would amount to, would it not?

That they jack your rates up in order to take care of the expense of Tennessee, they would be giving Tennessee dating back their rates to your detriment, would they not?

Brooks E. Smith:

Well, —

Earl Warren:

Isn’t that prohibited by statute?

Brooks E. Smith:

Yes, that’s true, Your Honor.

But I’m afraid the Commission has compromised itself by first deciding the —

Earl Warren:

You mean they have a conflict on interest there?

Brooks E. Smith:

The Commission will have compromised itself because it will have determined finally that 6 1/8% should be allowed in Tennessee and there it will be searching ways.

Brooks E. Smith:

In other words, we won’t come before that tribunal in a mutual position along with all the other parties.

We will have to be fighting against this issue that was decided out of line.

The whole point of the error I think of the Commission is that it short circuited the whole administrative process and damaged us in the process.

Thank you.

Byron R. White:

May I ask you one more question.

It may be implicit to go to the (Inaudible)

Brooks E. Smith:

No.

It is not, if Your Honor please.

If the cost allocation —

Byron R. White:

(Inaudible)

Brooks E. Smith:

No.

I want to explain that there is another way that they could’ve acted.

They could’ve granted an interim rate reduction order in this very case if they would’ve taken the Columbia method of cost allocation.

And the cost allocation method, that is the other extreme applied it to the reduced cost of service and then they would’ve got a bracket, a maximum and a minimum for each zone.

And then they could have ordered reduced rates within that bracket.

Byron R. White:

Was this proposed?

Brooks E. Smith:

No, this was not proposed.

But —

Byron R. White:

(Inaudible)

Brooks E. Smith:

This is perfectly valid because just September 14 to this year, the Columbia companies entered into a settlement, which did just that.

The Columbia had a cost allocation fight on its hand with its customers, different entirely than this.

Byron R. White:

(Inaudible)

Brooks E. Smith:

There are many ways that they can do that.

The principle, the cardinal principle Mr. Justice White is that they don’t act so as to prejudice litigants.

There’s always in the position of the litigants.

There’s a —

Byron R. White:

Even though in Tennessee?

Brooks E. Smith:

Yes, in Tennessee.

Thank you.