Permian Basin Area Rate Cases – Oral Argument – December 06, 1967 (Part 2)

Media for Permian Basin Area Rate Cases

Audio Transcription for Oral Argument – December 06, 1967 (Part 1) in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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J. Evans Attwell:

— question stating and I quote, “The producer’s argument that the imposition of quality standards by equal due process because of lack of notice need not be resolved at this time.

We are remanding the case and now everyone has notice”.

Therefore, if this Court should reverse the Tenth Circuit, it must decide this serious procedural due process question.

We submit a considerations of fundamental fairness required that the Commission hold supplemental proceedings in which all parties will have notice of the quality standard and price reduction issue and be afforded an opportunity to present full and complete evidence on that issue.

In conclusion, let me say that it is our primary position in this case as expressed in our application for certiorari that the Tenth Circuit decision should be affirmed.

We believed that the limited remand required by that Court will give the Commission the opportunity to fill obvious procedure and evidentiary gaps in this — its first area ratings firm.

Certainly such a remand would remove the procedural due process question we have raised and as indicated by the Tenth Circuit on such remands perhaps the Commission will allow producers are gathering costs since such costs allowed in pipelines.

However, if this Court should reverse the Tenth Circuit decision, we submit that the orders of the Commission must still be remanded for the limited purpose of having the Commission determine what increment to its area well head prices should be allowed producers such as Machlup to perform extensive gathering and trading services after the gas is produced but before it is delivered to the pipeline purchasers.

Abe Fortas:

Do you claim that the great aspects because they don’t allow you exactly in the – in a special amount for that one and for pre — or confiscatory?

J. Evans Attwell:

I think it depends up on the definition of confiscation, Justice Fortas.

I think that I keep considering area ratemaking that in order –-

Abe Fortas:

I’m talking about —

J. Evans Attwell:

— for it to be legal and non-confiscatory —

Abe Fortas:

I’m talking about your clients because your client — has inquiry rates confiscatory as to your plan, is that your contention?

J. Evans Attwell:

No, it is not, Mr. Justice Fortas.

But my contention is that on an overall basis, we are looking at an area of ratemaking.

We haven’t presented any individual –- halt the service (Inaudible) such as there are individual calls, so there’s none of that in this record.

But if you look at the overall area, we submit that —

Abe Fortas:

How would you state for us in the constitution, the statutory terms, what you’re legal point is apart from (Inaudible) and due process clause?

J. Evans Attwell:

I think that — our point is simply this.

That if the Commission is going to set area rates legally, it must include in those where area rates, all actual legitimate costs incurred by producers in order to make the gas available to the consumer.

Abe Fortas:

Alright, I was (Voice Overlap) —

J. Evans Attwell:

Our position is that it has not done so in this case.

Abe Fortas:

As to before whether you are complaining about failure to include business cost and the failure to make special allowance in the rates and I thought you said the limit.

J. Evans Attwell:

Perhaps I’m — I misled you, Mr. Justice Fortas.

What I said is the Commission has determined the cost of the well gas.

Now, we’ve incurred costs beyond the well gas certain — certain producers.

Abe Fortas:

I understand that —

J. Evans Attwell:

I’m saying that a —

— a legal area rate will have to in it – as to those producers determine another cost, it — be tapped — packed on to the top of the wellhead cost.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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J. Evans Attwell:

And the Commission has not done that.

There is a gap there.

Abe Fortas:

Although you don’t complain about the overall rate, you say the overall rate is not confiscatory as to your client nor is the overall rate I assume, I don’t know, you claim that if the overall, it doesn’t give you an adequate return, I don’t understand — really I don’t understand — and your position —

J. Evans Attwell:

I’m saying as an industrial —

Abe Fortas:

— as in a constitutional statutory terms.

J. Evans Attwell:

I think Mr. Justice Fortas, you have to look at this as an industry, halves the Commission —

Abe Fortas:

I mean I don’t want too right now.

Well, I got to do (Inaudible) of your client?

J. Evans Attwell:

Well, early in the game the Commission said that they would not permit my client to put on individual evidence to show what its cost were and the — we did not — but it — there was any such evidence, there’s none in the records.

I’m strictly arguing this case assuming the validity of the area rate concept.

What did the Commission do wrong, and the implementation of area rates, that vis-à-vis.

Byron R. White:

Well, how do you know that the Commission won’t let you do it now?

They do have an escape cost of some of the covered companies.

I don’t quite know what it covers but the — but if you’re different from the — here, sufficiently different from other producers for — from area rates that it said, I would suppose that if the — you could present that kind to the Commission.

J. Evans Attwell:

Mr. Justice White, we are not claiming that we are sufficiently different from other producers.

We’re saying that there are many, not many but are considerable number of other producers in the Permian Basin just as we do that provide these services.

It’s an area concept.

We think that there has to be an allowance for an area wide basis for gathering and trading costs as to those producers that provide that.

William O. Douglas:

What does the Court of Appeal say to you?

J. Evans Attwell:

The Court of Appeal said two things, Mr. Justice Douglas.

First, they said that we were trying to get a special allowance just for ourselves just as Mr. Justice White pointed out.

That’s not right.

We have used our own circumstances as illustrative of the situation with respect to others in the industry, other producers that provide extensive gathering and trading services.

Secondly, they had said, this involves the difficult question of allocation which they were not going to delve into.

And as I try to develop before lunch, we’re not arguing about any allocation issue here.

We’re just saying that they didn’t include any cost.

Now, we agreed that there will have to be an allocation at some point in time and we agreed that the Commission is the — is a proper authority to make that at least in the first instance.

So that the — the question really is the complete omission of any allowance for gathering and trading costs.

Byron R. White:

But this was though as — the Commission has left that (Inaudible)?

J. Evans Attwell:

They did leave out Texas as a matter of fact.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Byron R. White:

Really did.

— and you make the case (Inaudible)?

J. Evans Attwell:

Well, I think they made out —

Byron R. White:

(Inaudible)

J. Evans Attwell:

I think it’s a different basis.

I think that they claim that Texas is more or less a phantom tax and that producers don’t actually incur Texas because of certain tax benefits they get.

But there is no question that here —

Byron R. White:

(Inaudible)

J. Evans Attwell:

— we spend this money.

Byron R. White:

(Inaudible)

J. Evans Attwell:

Yes there are but the differences —

Byron R. White:

There are?

J. Evans Attwell:

Because of the difference in production tax I believe, Mr. Justice White —

Byron R. White:

(Inaudible)

J. Evans Attwell:

There’s going to be two prices between those two different areas, yes sir, because the costs are different in those two areas as the Commission determines.

Byron R. White:

But the — you’re claiming that this is all the Commission has (Inaudible)?

J. Evans Attwell:

I think that’s exactly right as to those produces that do provide the gathering and trading services.

Yes sir.

Byron R. White:

They’ve come up, (Inaudible)?

J. Evans Attwell:

Some of the —

William O. Douglas:

He wants three prices instead of two?

J. Evans Attwell:

I would say we’d want an increment to each of the two other prices, Mr. Justice Douglas.

I might give you four prices but it would just be a common increment.

We’ll say 1 cent per Mcf on top of the 14.5 and 1 cent on top of the 16.5.

I wouldn’t differentiate between gathering and trading services as to old gas and new gas.

Thank you.

Earl Warren:

Mr. Wolf.

Justin R. Wolf:

Mr. Chief Justice, may it please the Court.

My name is Justin Wolf.

I appear here today in behalf of Standard Oil Company of Texas, to argue the single point that we have raised in our very short brief, the point that we have persistently raised before the Commission on rehearing and before the Court of Appeals.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Justin R. Wolf:

Assuming the propriety of familiar rate base, cost of service, methods for prescribing the rate for new gas-well gas on an industry basis in the Permian Basin area.

It is our contention if the Commission has committed a grievous, serious error in it’s computation of that cost of service and error that goes to the very heart of utility regulation and cost of service specifically.

They have allowed an earning of their allowed 12% return — rate of return on a rate base that is equal to a little more than half of what the Commission has found is the industry’s prudent investment in the production of new gas-well gas specifically.

They have allowed a 12% return on a rate base of 43.45 cents where they had found that the prudent investment rate base of the industry is 79 cents.

The error of the Commission really amounts to saying that it would be proper for any regulated industry to charge rate certificate to be permitted to be char — to charge rates which would not yield the required reasonable rate of return during the first period of a capital recovery period in this instance a hypothetical 20 years.

In anticipation of the regulated industry at the same rates will recover or earn an excessive rate of return during the last half of that capital recovery period, in this instance, the last 10 years.

We submit that this is fundamentally in conflict with the utility law that has been developed by this Court at least beginning in Bluefield in 262, in Los Angeles Gas Electric in 289 U.S., and the West Ohio case in 294 and indeed is a hypothesis rejected by the Commission itself in its South Carolina generating case and decision in 16, Federal Power Commission reports, page 52.

Moreover, the cost of the natural gas producing industry is — it has been an aggressive, dynamic one which regulates year-in, year-out, invest large new sums to find and develop new reserves to meet a constantly increasing market demands to which reference has made — inlaid before you today.

That natural gas producing industry will never, in the foreseeable future, reach a state of 50% equation of its new gas-well gas reserves.

Yet, under the Commission’s formula, the gas producing industry must reach a stage of 50% depletion before it can begin to recruit its earned — it’s under earnings through alleged accessories.

The Commission treats each 79 cent capital investment to which it refers in its opinion as if it were a single asset and as if it were the only asset of the gas producing industry.

The fact is that each year the industry has a constantly changing and a constantly expanding package of assets.

As of the test year in 1960, there were some depleted properties, some brand new ones.

Others come all.

In the foreseeable future, the totality of the package that is what the industry has, is a package of gas, new gas-well gas producing assets.

In the foreseeable future the package will never reach a stage of 50% depletion.

Both the Commission and the Courts, particularly the Fifth Circuit, have recognized that in a growing, expanding industry, you cannot, do not in the foreseeable future, reach a stage of 50% efficient or 50% depreciation.

When I say that the Commission has recognized this, I refer to the relatively recent opinion in the Alabama, Tennessee Case at 31, Federal Power Commission reports, and the Fifth Circuit’s decision affirming the Commission’s decision reporting in 359 F.2d.–

Abe Fortas:

What do you call the (Voice Overlap) —

Justin R. Wolf:

— in which certiorari was denied in 87 Supreme —

Abe Fortas:

Yes.

What do you think those —

Justin R. Wolf:

I beg your pardon sir?

Abe Fortas:

What do you think they should’ve done?

I understand the method that they used was to assume that they got 20 years in which to — recovery of (Inaudible) and the — they made a distribution of your capital cost over that period of time, and what do you think they should’ve done?

Justin R. Wolf:

The Commission?

Abe Fortas:

Yes.

Justin R. Wolf:

In view — in applying the rate base?

Abe Fortas:

What’s the alternative into what the (Voice Overlap) —

Justin R. Wolf:

The alternative — one alternative would be, if this Court feels it appropriate to direct to the Commission to pick and choose between the alternatives but since you’re not asking me —

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Abe Fortas:

No I’m not suggesting that.

Justin R. Wolf:

(Inaudible) you’re asking the part —

Abe Fortas:

I’m not suggesting —

Justin R. Wolf:

They could —

Abe Fortas:

(Inaudible)

Justin R. Wolf:

The Commission could readily have employed a cross section of packages of gas if you will, of investments found or made over a relatively recent period or more precisely struck an average of all new gas-well gas that was flowing in 1967.

Remember by definition that all new gas-well gas of all new gas-well gas is gas flowing under contracts executed after January 1, 1961.

Now, they could have taken gas discovered in 1960, gas discovered in 1961, gas discovered in 1962, etcetera to a reasonable period.

Let’s say through 1964, since they wrote their opinion in September of 1965, they could’ve taken those packages, reduced the gross investment of each by the period of depletion of each.

They could have struck an average, determined an average rate base, and apply their 12% for that.

Abe Fortas:

Is that essentially different from what they did?

Justin R. Wolf:

Yes sir.

Because what they did was to assume one package, one asset, one 79 cent investment.

You see, Mr. Justice Fortas, —

Abe Fortas:

Oh i think —

Justin R. Wolf:

— if you do it my way —

Abe Fortas:

— that they may.

They arrived at an overall figure, I don’t understand you really.

Commission arrived at an overall figure.

You’re suggesting that they should have taken, arrived at separate figures for new gas-well gas and for old gas-well gas, and for oil well gas, is that what you’re saying?

Justin R. Wolf:

No sir, no sir.

I am not.

I am saying that applying the method that they used of these 79 cents of — in — of prudent investment in finding new gas-well gas, what they did was to apply the 12% rate of return to a rate base that’s roughly half.

I am saying that’s wrong because the industry will never reach that stage of depletion, i.e.50% depletion that would permit it in the latter years of 12% times 43.45 who have excess earnings when we know that in the earlier years at 12% times 43.45, they’re going to have under earnings.

I’m saying they could’ve avoided that.

Abe Fortas:

Well you — are you saying — that you’re not saying, are you that the record does not contain substantial evidence on the point, are you?

Justin R. Wolf:

Oh, no sir.

I am not saying that the — that their 79 cents is — that (Inaudible) the record for their 43.45.

I am clearly criticizing if I may for one moment to answer the question I’m clearly criticizing, what they have done with the data that they have used in the matter of which I have described.

Thank you, Your Honors.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Earl Warren:

Mr. Armour.

James L. Armour:

Mr. Chief Justice, may it please the Court.

My name is James Armour and I’m here before the Court today on behalf of Mobil Oil Corporation and Northern Natural Gas Producing Company, petition number 388.

In the 20 minutes allotted to Mobil, an attempt will be — had been made to discuss various points, the moratorium, the ban on flexible pricing clauses, the last clean rate argument, the automatic application of Section 7, in the Section 7 the inline argument, the minimum rate argument.

The first argument, I’d like to conserve, would be that of the moratorium.

As was stated yesterday, the Commission by its order placed an absolute ban on all contractually allowable rate increases above the area maximum from the date — from the effective date of its decision which is September 1, 1965 until January 1, 1968.

That is true that this moratorium will expire (Inaudible) before the Court renders its decision.

But it has a great deal of importance not only for Permian but for the other area rate proceedings that are now in progress.

And I don’t think it needs to be emphasized to the Court that the rules, the holding in the Permian decision will set the basis for the other area rate proceedings which encompass as the Solicitor told you yesterday some 93% of the gas flowing in interstate commerce.

The Commission attempts to justify its moratorium in two basic ways —

Could I ask you (Voice Overlap) —

James L. Armour:

Mr. Justice Harlan —

— our recollection, when is the expiration date of the moratorium?

James L. Armour:

January 1, 1968.

And so it could expire, but the issue is far from moot and the overall approach of the area of concept.

The Commission attempts to justify the moratorium in two basic ways, statutory and by “reasonableness test.”

Now first, it’s statutory.

The Commission tends to use that to be thereafter observed language in Section 5 of the Act.

Now, it is Mobil’s contention that to allow — that to be thereafter observed the language to be so used completely ignores the entire rate changing structure of the Act.

Section 5 can be used only by the Commission by certain state agencies or by certain distribution companies.

A natural gas company cannot institute a Section 5 proceeding.

On the other hand, Section 4 (e) and Section 4 (d) which are the rate changing Section of the Act which are available to a natural gas company to change its existing rates cannot be invoked by the Commission.

We think there’s a complete disregard by the Commission in using that to be thereafter language of Section 5.

Now previously this Court in the Mobil case, in the Memphis case, and in the Sunray DX case held emphatically that under the Natural Gas Act contrary to other methods of regulation employed by federal agencies, the regulation and the imposition of regulation by the Commission is superimposed on private contracts.

And this Court in Mobil specifically held that when a contract allows the producer to file — not a producer but the seller of natural gas, the natural gas company, the producer wasn’t involved but it’s the same principle.

When he’s — when his contract allows a filing for an increased rate, he may file under Section 4.

Now the mere filing under Section 4 (d) does not mean that the filed rate becomes the just and reasonable rate.

Congress foresaw this problem.

And before the file rate can become the just and reasonable rate, the Commission must find itself.

That is true that after five months, the rate can be placed into effect but subject to refund if the Commission so desires.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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James L. Armour:

There are number of refunds being ordered in this case before the Court today which were put into effect under this very same power.

So in effect, we can only have a balancing of consumer and investor interest.

The producers are allowed to place their rates into effect if they are suspended after five months but subject to refunding and under bond.

Now, the Commission also attempts to use as a justification for the moratorium certain decisions by this Court which have been developed in the interim period pending development of the area method.

This started in the now famous case of CATCO where this Court said that it was up to the Commission to hold the line pending determination of just and reasonable rates.

Now, the hold of the line theory has been applied by the Commission in numerous ways.

One of the ways is by the imposition of a moratorium on either a temporary or permanent certificate.

In the Hunt case, decided with this case in nine — presided by this Court in 1964, it was held that the Commission could impose a moratorium on a temporary certificate.

Now, the moratorium is on filing under Section 4 (e).

At — in the Hunt Case, it was told until the permanent certificate was issued but now in Callery, in 1965, this Court then said that the Commission has the authority under Section 7 not under Section 4, under Section 7 of the Act imposed a moratorium pending determination of just and reasonable rates.

The whole concept that hold the line, all the doctrines developed and the hold the line theory have been approved by this Court pending determination of just and reasonable rates.

The Permian decision, the decision now before this Court is a determination of what the Commission hopes is just and reasonable rates.

This is not an interim measure.

In the Permian decision, the period of pendency has ended.

Now, the Commission also attempts to use the power given to it under Section 16 of the Act.

And very briefly I like to say that Section 16, in and out of itself, is not an independent grant of power.

It very specifically states to be used to carry out the provisions of the Act.

Turning now with the Court’s permission, the ban on flexible pricing clauses, this Court in the Texas —

Abe Fortas:

Before you do you do that, —

James L. Armour:

Mr. Justice Fortas —

Abe Fortas:

— these rates haven’t gone into effect, have they?

James L. Armour:

I beg your pardon?

Abe Fortas:

These rates have not gone into effect?

James L. Armour:

The moratorium under the Commission as I understand it has been stayed and so —

Abe Fortas:

So that apart from the moratorium or the — none of the —

James L. Armour:

They have not become the just and reasonable rates.

Abe Fortas:

That’s right.

James L. Armour:

Because the Commission —

Abe Fortas:

So that there’s more —

James L. Armour:

— has not so found.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Abe Fortas:

And the moratorium order, the effect of that’s been stayed too.

James L. Armour:

That’s exactly right.

Abe Fortas:

So and the — then the moratorium expires January 1.

James L. Armour:

That is true.

Abe Fortas:

There’s any factual or realistic point, that issue here?

James L. Armour:

Very definitely, Your Honor.

Abe Fortas:

I mean, set apart from the question of principle and theory of the — that —

James L. Armour:

Well —

Abe Fortas:

— they could live, what I mean to say is that, did anybody been heard?

James L. Armour:

Well I can’t —

Abe Fortas:

(Inaudible) anybody do that.

James L. Armour:

I can’t say — if you put the question that way, they haven’t been heard as much as they would be if the order had been staged.

But again, let me emphasize and I would like to rest it on this if I may.

Abe Fortas:

And nobody can be heard thereafter?

James L. Armour:

They can be heard very definitely.

93% of the gas going in interstate commerce is now subject to area proceeds.

If this Court approves the principle and moratorium —

Abe Fortas:

No, no, no.

No, I’m talking about this order in this proceeding.

James L. Armour:

If a — depending upon the — whether the Court decides the order by January 1, 1958.

Abe Fortas:

But if we decide it after that?

James L. Armour:

The moratorium will then expire.

Abe Fortas:

That they’ve got it.

There’s quite a few problems in this case as I understand that it would —

James L. Armour:

Certainly do, Your Honor but —

Abe Fortas:

And the question is whether we have to face up with this point too.

James L. Armour:

Well, may I say this that in Mobile field that this is an issue which perhaps the Court will address itself to — in setting the guidelines for the area rate and it will be up for the future, for the other 93%.

It’s not moot in that respect and the Solicitor made the same point to the Court yesterday and we join in that.

If I may turn now to the flexible pricing clause —

Byron R. White:

(Inaudible) the Commission has not yet set just and reasonable rates?

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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James L. Armour:

Well, I don’t want to —

Byron R. White:

In what stage will it accept just and reasonable rates.

James L. Armour:

I said, the Commission by its Permian order hopefully has said what it’s considered to be just unreasonable rates.

The Mobil has objections to that.

Byron R. White:

Well, they did purport find just and reasonable —

James L. Armour:

As I’ve stated.

Turning now to the flexible pricing clause ban, this issue has been before the Court before in the Texaco case decided in 1964 also.

This Court said that the Commission by the use of the rule making authority could ban certain flexible pricing clauses in contracts to be filed with the Commission in the future.

Now that is not the issue presently before the Court.

The issue presently before the Court is the order of the Commission in Permian banning flexible pricing clauses in contracts which will formally file with the Commission which were formally approved and with — on which formal approval of various producers committed their gas interstate.

Now it is true that under Section 5 of the Act as this Court made clear in Texaco, the Commission can change existing contracts but in a matter which is just and reasonable.

And as this Court said in Hope, the just and reasonable standard is a balancing of consumer and investor interest.

And Mobil submits it’s not a balance of consumer investor interest to completely eliminate these clauses and thereby trap the producers in a situation from which they cannot extricate themselves.

Turning now if I may with the permission of the Court, the last clean rate argument.

This is a very difficult argument to state and in the interest of conserving time, I refer the Court to the brief which Mobil has filed, pages 66 to 72 in which we have set forth a very detailed example of what we’re contending.

Basically, the contention is, that once the Commission has permanently certified a rate then while it may reduce that rate perspectively under Section 5 (a), it cannot because a Section 4 (e) increase has been filed, go behind its permanent rate.

Now this Court in the Hunt case stated that once a permanent certificate is granted, the Commission can correct that importer rate only under Section 5 of the Act.

And as long ago again as the Hope case, in CATCO and again in Callery, this Court has been very straight in saying that the Commission has no power to fix rates retroactively.

And once the rate is fixed, this maybe reduced prospectively but not retroactively.

Now, the Commission and in particular the various California producers, seem to contend that because a Section 4 (e) increase has been filed on top of a permanently certified rate, that a reduction maybe made down to the area rate in complete disregard of this permanent certification.

Again, I refer the Court to pages 66 and 72 of Mobil brief.

Another point with the permission of the Court which I would like to bring your attention is discussed in pages 72 to 77 of Mobil’s brief.

And this involves the automatic application by the Commission of the just and reasonable rate which they purport to have found — to Section 7 proceedings.

The rate is based on a 1960 test year.

And under the Commission’s order as the Mobil interprets it, if a certificate were filed today and an attempt were made under Section 7 to have that rate certified, the Commission would use the rate which it has decided on the 1960 test year.

Section 7 (e) of the Act states the certificates are to be based on the present public convenience and necessity.

And we think that that means a present showing and not a 1960 test year.

Now, the Tenth Circuit did not decide this issue.

And so Mobil’s position on this must be that if this Court affirms the Commission, then this one issue should be remanded back down to the Tenth Circuit for their initial decision.

It has never been decided by the Tenth Circuit and they reserved their decision on it.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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James L. Armour:

Of course, if the Commission is reversed, then the issue would go back to the Commission.

Turning now if I may to the minimum rate, I have dwelled at length upon the integrity of contracts and the superimposition of rate regulation on private contracting.

Now, I would like to turn to the Commission’s minimum rate are.

In its decision, the Commission set a minimum rate of 9 cents subject of course to quality deductions.

And they based this minimum rate upon this Court’s decision in the Sierra Case.

Now the Sierra Case and the Case of Mobil which I have just discussed in moratorium are both decided the same day by this Court, February the 27th, 1956.

Now, it is Mobil’s contention that the Commission was correct in including a minimum rate in the rate designed to the area method.

And it’s such a decision is just and reasonable, but Mobil contends that the 9 cent level is too low and cannot be supported by the Commission rather the minimum should be placed at a level which would allow recovery of the revenue requirements which the Commission has established for the Permian area.

Now, there can be no doubt about it that the Commission in following the mandate of this Court in Phillips 2, has set 16.5 for new gas and 14.5 for old gas as the revenue requirements for the industry collectively in the Permian area.

Now, having gone this far, it is Mobil’s contention that rate should be designed which will allow the recovery of these revenue requirements.

Now —

Abe Fortas:

What would that be?

James L. Armour:

This would be —

Abe Fortas:

Would that be —

James L. Armour:

We just said that rates —

Abe Fortas:

— 16 and 14?

James L. Armour:

We have no quarrel with the rates that are set.

It’s the rate designed as the 14 and 15 —

Abe Fortas:

What you are contending for is the minimum?

James L. Armour:

As the minimum, that would be up to the Commission, considering the fact that under contract limitations, not all rates are uniform.

This is a fact of life under the Natural Gas Act.

Considering also that as we have contended, rate filings above should be allowed, in other words the moratorium should be relaxed.

And that somewhere from the record, a minimum can be said which will allow a range of rates which will allow —

Abe Fortas:

So you’re saying it’s wrong but you don’t have — supposed they fixed it overall as you’re doing now, you’re quarrelling with the figure?

James L. Armour:

I’m quarrelling with the 9 cents, yes.

Abe Fortas:

Well, what should it be?

Is there any evidence in the record or —

James L. Armour:

I think that if there’s not, there should be, considering the contract limitations.

Abe Fortas:

Are you arguing that 9 cents is not supported by substantial evidence?

James L. Armour:

I am arguing that 9 cents is not supported by substantial evidence as it should be used.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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James L. Armour:

The Commission itself stated that the 9 cent will only provide an additional $250,000.

Now, it’s purported purpose in setting the minimum basing again upon the decision in Sierra was that the rate received by a producer and I’m quoting from the Commission’s decision at 671 (d), the rate received by a producer must not be so low as to prevent or retard further exploration and thereby decrease possible discovery of gas reserves which will be needed by consumers.

Now the Commission itself has found that the cost of new gas, the average cost of new gas is 16.5.

Now, don’t misunderstand me.

I’m not saying the minimum should be 16.5, but I think that should be some indication to the Court that a 9 cent minimum which only produces $250,000 doesn’t live up to its purpose.

Abe Fortas:

Well, there’s no indication at all to me, because I don’t see anything in the statutes that says, the purpose in — of the Commission adopted a purpose for a minimum rate would be — the Commission have to adopt any minimum in your opinion?

James L. Armour:

Under the group procedures which they have used following the mandate of Phillips 2 to set rates based on industry averages, yes it would be my position that —

Abe Fortas:

You’re — you have —

James L. Armour:

— they do have to set a minimum.

Abe Fortas:

You introduce that from Phillips 2.

James L. Armour:

I would introduce that in a rate designed which would allow recovery.

If I might now turn to quick — a quick word as to the rate of return and I only wish to say very briefly that the Commission purported to allow a 12% rate of return.

However, in their brief to this Court, page 141, we now find that the Commission says that the rate of return was only to be allowed on gas of pipeline quality.

And that in actuality, the rate is something like 10 and three-fourths on new gas, and 9% on flowing gas.

Now this comes as a better shock to those people who have studied the Commission’s decision.

In the record, page 606 (d), the Commission’s decision, it stated that the rate of return is to be allowed on the production activities.

And there’s no mention there of gas of pipeline quality or anything of that nature.

So, most of the position is that if the impact of the quality deductions are going to reduce the rate of return down to 10 and three-fourths than 9, then perhaps the Commission should again raise the stated rate of return to 14 or 13 and a half to allow the actual recovery of a 12% rate.

Thank you.

Earl Warren:

Mr. Flax.

Louis Flax:

Mr. Chief Justice, may it please the Court.

My name is Louis Flax and I represent Sun Oil Company.

Sun’s briefs are those covered with the green cover include a rather thick principle brief inside.

Mr. Solomon, in his opening yesterday, said that a — said that this case is important, of a legal framework of all other producer cases.

We say however, that it’s important for more than the legal framework of producer cases, it is important for the whole legal framework of regulatory law because what we have here is not producers as a world apart.

We have many determinations of this Court as to what is just and reasonable, as to what is confiscation and we say these determinations are applicable to an area rate even though it deals with producers.

Sun’s position is that the constitution of the Natural Gas Act require that the Federal Power Commission give consideration to the individual in fixing just and reasonable rates under the Act.

And that this consideration is to be in the form of rate that permit the individual to recover as a minimum.

It cost the service made up of its operating expenses and capital charges.

This however does not mean that separate findings need be made as to each individual in a group.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Louis Flax:

Instead, individual rights maybe reconciled with those of the group in a cost method of regulation.

By use of evidence that is typical and representative of the individuals in the group and by providing for an effective and viable savings cost.

The Federal Power Commission in its Permian opinion however, has neither recognized nor applied these principles.

And for this reason we say that its action should be reversed in its entirety.

In the time I have available, I want to make four points in support of this position.

I shall try to avoid repetition but sometimes in order to make a complete presentation might be necessary to what appears would be repetition.

First, it is fundamental that the Federal Power Commission must consider the effect the rates fixed on the individual.

The individual producers have very extensive investments and constitutionally, these investments will be confiscated by inadequate rates.

This was the holding of this Court in the Tag Brothers in the market agency cases in which they distinguished the need for confiscation in a utility type case as opposed to this market agency type case where there was no investment, it was just simply the operating expenses we’re involved.

Also the individual has a continuing obligation to sell and it is not free to terminate by reason of the aban — by reason of the abandonment section of the Act as interpreted by this Court and as applied by this — by the Federal Power Commission on a number of cases as cited in our brief contrary to the statements of Mr. Solomon to which I would say would’ve given the impression that the Commission just simply let’s people out of their contracts and out of their obligation to sell at will.

Now in addition, the Natural Gas Act is predicated on the commerce power and not the war power as was the case of group ratemaking under war pri — war time price control.

From a statutory standpoint the underlying rights of the individual are indicated by the plain words of the statute, by a contrast with this statute, with statutes that were advisably designed for group ratemaking such as the Interstate Commerce Act and the transport — and the Civil Aeronautics Act of 1938 which was virtually contemporaneously the Natural Gas Act.

In addition as has been mentioned, this Court in Bowles v. Willingham recognized that under the Act, the rates that fixed must be just and reasonable as to particular person’s incompetence.

We now come to my second point which is the consideration that must be given to the individual is that as a minimum, it must be provided rates which will afford the opportunity to recover its operating expenses and capital charges.

This assumes of course that those cost are prudent and that the resulting rates are within competitive limits.

In the instant case however, there is no evidence of imprudency.

In fact the question was put to any number of staff witnesses, the Commission staff witnesses.

Have you seen any imprudency?

And they said “No, we have not done so”.

Abe Fortas:

Do you think this ought to include the total exploration cost regardless of what they are?

Louis Flax:

I’m glad you asked that, Mr.–

Abe Fortas:

Well I’ve asked you before.

Louis Flax:

— Justice Fortas.

I know you did and I was prepared for it.

Abe Fortas:

Yes, I hope you would be.

Louis Flax:

I say this, under the Lindheimer case, one of the elements to be included in a cost to service is the operating expenses.

Now, if the exploration and development is prudent and if the product of that exploration and development is directed to the public benefit that is if it’s dedicated to interstate operations then I say that’s it’s a viable vital cost.

Abe Fortas:

I suppose — suppose a company, your client for example decided that it was going out — to try to get 20% share of the market and then in 5 years, and therefore it — I don’t know what the share market is.

But supposed your client has a half of one percent now and I don’t mean an (Inaudible), and supposed that it got a — had as its target to get 20% for 5 years and then they got up a tremendous exploration market, do you think all of that ought to be included as cost of operation?

Louis Flax:

I think that this is a determination of whether this was prudently expanded.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Abe Fortas:

(Inaudible) come on down.

Louis Flax:

Yes sir, I do.

Abe Fortas:

So why couldn’t it —

Louis Flax:

And the reason I say —

Abe Fortas:

Why couldn’t it — what terms, prudent — related to what?

Louis Flax:

Well, this is a matter of fact —

Abe Fortas:

What’s your approval?

Every cent you spent, let’s assume that every cent you spent was prudent, conservative, dominated by genius and inspired by conservatism.

If he wants to assume — if he wants to assume the legitimacy for ratemaking purposes of the objective mainly to engage in exploration which will let you get 20% of the market in five years.

Louis Flax:

Well, I think that if it’s imprudent to get 20 — to make a single thrust, to get 20% of the market in five years then I think it might be disallowed.

Abe Fortas:

Okay, I take — I see we’re not heading there.

Louis Flax:

Let me say this, Your Honor.

This Commission in Opinion 468 said, it is but — beyond disputed that continuing exploration and development of new gas reserves is necessary in the public interest.

We cite that on page 70 of our brief further, the Fifth Circuit in Forest Oil Company said that dry hole expenses are unavoidable elements of exploration and development.

Now we say that therein lies the rule as for the allowance of this.

Now let’s take this situation that Mr. Furbush brought out where you find a 138% of your reserves in one year.

Now what happen sometimes is the company might drill for three or four years before it finds something.

Then it finds a good find, it dedicates it to the public interest in that one year by signing a 20 year pipe — contract with a pipeline.

Now we say that you shouldn’t limit your company to just replacing its reserves.

We think that this is all a question of fact and that you can’t use a rule of thumb on it and that’s why you have hearings.

And that’s why you don’t do what the Federal Power Commission did in this case which is just simply ask for reports which is a raw reports stated how much did you drill this year and didn’t let anybody explained what that meant.

And this is part of the whole area the Commission has met —

Abe Fortas:

As I understand it, part of the Commission’s approach here, only tried of the part of the Commission’s approach here as if the rates have been fixed here on such generous basis that something good for everybody.

Louis Flax:

Well —

Abe Fortas:

So the class would come to everybody and now — and I say, are you taking the position that it has evidence in this threshold coupled with an offer of approval that would show that these rates are confiscatory as to the Sun Oil Company.

Louis Flax:

I say Your Honor that Sun Oil Company attempted to put in as did others.

Abe Fortas:

Well there’s —

Louis Flax:

But the Commission wouldn’t let it an individual cost of service.

And we say that these would be appropriate for a savings cost presentation.

However, let me say this —

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Abe Fortas:

Would that show that — my question here is that —

Louis Flax:

Well, excuse me —

Abe Fortas:

— would that show that it’s confiscatory?

Louis Flax:

What that would show is that on Sun’s views of it’s operating expenses and capital charges the rates provided will not permit it to recover those operating expenses and capital charges hence it would be confiscatory.

Now, let me say this as long as you brought the subject up, that we believed that in the first instance there are two criteria for this group ratemaking.

In the first instance, the Commission had to find that the evidence it used was typical and representative of the individuals in the group.

Now this is just a straight regulatory law of the Commission.

This Court has applied it.

It approved it last term in the Chicago and Northwestern case for the fixing of group divisions.

There have been other cases where the Court has recognized the identity of the individual and the group.

Now we say that’s the proper test that was kept along and represented as evidence.

The Commission didn’t do that and on that basis alone, we say it should be reversed as this Court reversed the ICC in the Orient Case, the U.S. v. Abilene, Southern at 265 U.S.

However, there is the second element that if the Commission had found properly that it had typical and representative evidence, the second element to our presentation or to the fundamentals to group ratemaking under this statute is providing a viable and effective savings cost.

And we say one of the elements of the savings cost is permitting an individual company to show that it would be confiscated by the rates that are being fixed.

And when I say confiscated, I mean confiscation on an overall basis because this Court has found that confiscation is an overall company concept.

Now from what I have stated, we say that there is no evidence that any cost were imprudent.

There is no basis for Mr. Solomon to seek to equate a producer whose cost exceed the average as being some way imprudent hence the Commission takes the view that you can just simply ignore their costs.

And Mr. Furbush yesterday said it doesn’t make any difference if they go bankrupt.

We say that the producers are not strangers to bankruptcy.

And that many producers have gone bankrupt by the normal forces of competition, their ability to find gas, their ability to sell the gas, and that’s one thing.

But when they go bankrupt because the Federal Power Commission fixed a rate which refuse to consider their individual costs and reduce their revenues and for that reason they go bankrupt, we say this is confiscation.

We say that this minimum of operating expenses from capital charges has been held by this Court.

The Commission says however it needs only balance in consumer and investor interest.

However, if you re — and may cite for that Justice Black’s concurrence in Natural Gas Pipe.

But if you read that concurrence in full context and if you read the Hope Case, the Colorado Interstate Case, the statement is that imbalancing that interest, the minimum investor interest is its operating expenses in capital charges.

My third point is the need for identity between group and individual.

In U.S. v. Borden, a 1962 decision of this Court there was involved cost justification for price differentials under the Robinson-Patman Act.

And the concurrence urged that the cost justification should be on an individual basis.

The majority however held that — bound that it could be on a group basis if there was a “self saneness” of the individuals in the group.

Now we say this principle is the same thing the ICC has applied in its division’s cases and in its group ratemaking cases where it used typical and representative evidence and provided the savings cost.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Louis Flax:

My fourth point was that the Commission had not give in effect or considered the typicality or representative a — ness of the evidence or had prov — had not provided any– an adequate savings cost.

I have to skip over the details including some good answers I had to Mr. Solomon for some of his statements yesterday because I want to get to the question of the savings cost.

As I said, in the first place we say that the Commission, the typicality of the representativeness is the first criteria.

The Commission has not found it and therefore it should be reversed on that basis.

However, as to the savings cost, the Commission’s view of a savings cost is apparently — in the one instance it says that’s unnecessary to its method of regulation.

On the other hand it refers to the savings cost throughout its brief as apparently a catchall to foster the impression that no matter the inequities of its method, sooner or later justice will be done.

The fact is however although the operation of savings cost is not to any extent explained, enough is said to show that the savings cost that the Commission proposes is nothing like the savings cost that this Court recognized as recently in its last term in the Chicago and Northwestern case.

In the first place, the Commission views the savings cost only as a matter to be heard at a distant future.

And it even resists a stay pending that determination.

On the other hand, the ICC makes the savings cost an intrical part of its determination.

In fact, the argument was made in the Chicago and Northwestern case that a company had not made their savings cost presentation during the course of the hearing and therefore they were stopped.

In further contrast, our Opinion 468 clearly states that the savings cost will not permit the individual to show that he is atypical.

Also it will not permit the individual to show that he is being confiscated.

Now Mr. Solomon referred to out of pocket expenses.

Now out of pocket expenses are not the measure of confiscation because there wouldn’t be included return, there wouldn’t be included depreciation, there wouldn’t be included overhead.

It’s just simply a question if you’re ready to go out of business, you can’t even make your out of pocket expenses.

The distinction between out of pocket expenses and confiscation has also been defined by this Court in the B & O Railroad case, 298 U.S.

So we say that the Commission has advisably said — as it stated as we pointed out that it will not use confiscation as a measure of a savings cost.

Further, it has indicated by its moratorium that it won’t consider changed facts and conditions.

And this is one of the other elements of its savings cost to permit the individual if he has changed facts and conditions to show them.

I note my time is up.

Earl Warren:

Very well.

Louis Flax:

Thank you, Your Honors.

Earl Warren:

Mr. Gilliam.

Carroll L. Gilliam:

Mr. Chief Justice, may it please the Court.

I and Mr. Stone who will follow me appear for 30 producer respondents in this case who are unique thus far before the Court.

We are the — apparently the only parties here who asked the Court to do one simple thing and that is to affirm the decision of the Court of Appeals.

We are the parties within the producing industry who are not petitioners in this case and we are here as I said as respondents only.

Mr. Stone who will follow me will discuss our view as to the refund issues and issues involving Section 4 (e) of the Act.

I will cover the issues of rate design and the reasons why the Court of Appeals limited remand ordered in this case is correct.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Carroll L. Gilliam:

We believed that the limited remand is essential to have a lawful area rate method and to have valid rates in this case.

I believe the Court will see that implicit in that statement is the fact that our group supports the Commission insofar as it has adopted the area rate method.

We are not before the Court raising special circumstance type questions.

We are therefore somewhat unique and that we cannot endorse any of the arguments that had been made before the Court so far.

We find ourselves agreeing with the Commission on some things, agreeing with even the California distributors on the adequacy of supply questions, agreeing with our fellow producers in part and not in part.

So the safest thing I can say is that I must start my argument on a clean slate.

I do have to return the attention of the Court however to the items and issues that were discussed yesterday and not today.

Very briefly I would like to remind the Court as to what the Court of Appeals did not do.

It did not reverse the Commission as to the legality of the use of group or area procedures.

We agree with that.

It did not reverse the Commission as to the dual pricing system.

It did not reverse the Commission as to methods of data collection, means of determining group clause that were determined in the case for producers and apparently the means for determining revenue requirements for the producing industry.

What the Court of Appeals has done is to accept the Commission’s cost yardstick but to tell the Commission that having selected that yardstick the Commission should use it when it designs the rates that are applicable to the group.

Now this brings us to what are the patent errors in the Commission opinion that compelled this result in the Court of Appeals.

First of all, the Court of Appeals referred to this question as to possibly the most important in the case.

It is the question that if area rates are valid under this statute what is the substantive standard as to what is a lawful and valid area rate on a group basis.

That of course is important in the Permian Basin in this case in the second round of any future Permian Basin case and it is the most critical issue here in relation to the four of the area rate cases that Mr. Solomon referred to yesterday.

If the standard being used to determine the rates on the group basis is a hodgepodge and complete confusion then those cases like all others will be endless in the time of trial.

They will be endless in judicial review because no Court of Appeals will know what it is they’re supposed to be reviewing when the case arrives there.

The Court of Appeals solved this question by turning to this Court’s prior construction of the standard in the Natural Gas Act principally in the Hope Case, the end result test.

It was the conclusion of the Court of Appeals that even though the Commission had shifted to a group method using group data, the objectives still was to come out with just and reasonable rates to be applied to the group under that statutory standard.

Now, some questions have come up about the scope of review and so forth.

We believe the Court of Appeals correctly turned to Hope to find out what is the measure of judicial review in a rate case which this is.

Using that standard, the Court turned to look at what is the end result in this case in relation to what is said in Hope.

And here is the problem.

The end result in relation to the test in Hope is an unknown today.

No one who has argued before this Court including the distinguished general counsel of the Commission can tell the Court that in what in the prescribed group rates is the return actually allowed or what clause have been covered, cushions or otherwise.

The reason is that the rates on the record before this Court are unknowns.

Now I had to go back to some of the tedious facts as to what the Commission did in order to demonstrate to the Court that that is the case.

A number of counsel have covered the steps the Commission used to collect data to composite cost.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Carroll L. Gilliam:

We are not questioning in our argument those steps.

What they did though was give the Commission the ingredients to measure cost and currents and the financial requirements for the industry.

Now, Mr. Solomon referred to the two types of cost determinations that were made.

And I would make one blanket general statement about those that I don’t think could be contested.

Every single step involved was a process of averaging.

They had questionnaires which we all answered and in fact we cooperated in this endeavor.

So let us just take as an example the overhead cost of the company.

Each producer who filled out the questionnaire supplied the cost.

On the other hand, the Commission also acquired unsifted volume data that is unsifted as to quality.

All of these things were totaled up, volumes are divided into cost and you thereby come out with an average cost.

This is part and parcel of the normal ingredients of a group type of rate regulation.

The examiner in the case, I would point this out specifically because I will get back to the new gas cost, expressly labeled his new gas cost as the average unit cost at 1960 which was the test year.

I would refer for those statements to the record, page 186 that is the joint appendix page 221 and 257.

But the product of this process of averaging was this Commission yardstick.

Now, Mr. Atwell did cover it earlier and I won’t go into that the fact that the yardstick was the cost to the wellhead only.

It did not include producer incurred cost beyond that point which are cost incurred to bring gas up to a higher quality.

But accepting the wellhead cost figures, there are two of significance.

On the new gas cost 16.5 cents and the old gas cost 14.5 cents.

The Commission then had these as the yardsticks to turn to measure against that yardstick the average revenues that the industry was then deriving at the contracts in effect under the Act.

The record showed that the test year average revenues and this is all gas regardless of age or quality.

The test year average revenue was 12.72 cents per Mcf.

This was an approximate collection of about a $110 million.

The rate structure that created that revenue consisted of prices that were originally contract that are now filed rate schedules under the Act ranging from as low as 3 cents per Mcf up to 18 cents per Mcf.

But this structure of contracts produced this average revenue figure of 12.72.

It is our view that at that point following the steps for testing and prescribing rates that this Court referred to in 1942 in the Natural Gas Pipeline case, the Commission should have then turned to test against its cost figure, the average cost figure, the revenues at existing rates.

The Commission however skipped these steps and went straight to the step of prescribing or designing a complete new structure of rates to replace these contracts in effect.

And it is —

Abe Fortas:

I’m afraid that I missed you.

I thought you said the 12.72 cents per Mcf was the average return on the basis of actual rates.

Carroll L. Gilliam:

Perhaps the average revenue, test year revenue in —

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Abe Fortas:

Applying what?

Carroll L. Gilliam:

The contract prices that were in effect, not —

Abe Fortas:

(Inaudible)

Carroll L. Gilliam:

— not the Commission prescribed rates.

Abe Fortas:

I understand that if — as of 1960 then you’re telling us, if you take the actual contract prices in effect the average return was 12.72 cents per Mcf.

Carroll L. Gilliam:

Average revenue.

Abe Fortas:

Average revenue.

Carroll L. Gilliam:

12.72 cents per Mcf.

Abe Fortas:

Well, does that compare with the 14 point whatever it was and the 16 point whatever it was?

Carroll L. Gilliam:

Well, I can simplify that by this statement.

The 16.5 cent new gas figure the Commission has prescribed under its dual price system would apply only to gas sold under contracts executed after January 1, 1961.

Abe Fortas:

I understand that (Inaudible).

Carroll L. Gilliam:

So we leave that aside because this 1960 is flowing gas.

So as we would see the case, the comparison would be the 14.5 cents figure of cost with the 12.72 cents revenue figure.

Abe Fortas:

Well, what I’m saying — what I’m asking is this, Commission found that as of 1960, the — what do you call, that average return, whatever is the —

Carroll L. Gilliam:

Average revenue.

Abe Fortas:

Average revenue was 12.72 cents per Mcf.

Carroll L. Gilliam:

That’s correct.

Abe Fortas:

And then the Commission set rates to near average revenues, is that right, of 14.5 cents and —

Carroll L. Gilliam:

No.

Mr. Justice Fortas where you’re headed right now is one of the essential problems in the case.

Abe Fortas:

Alright, that’s where I want to get straighten out.

Carroll L. Gilliam:

Alright.

The 14.5 cents is the average cost figure that came from the composite cost study.

Now we go to rate design.

Abe Fortas:

That’s the average cost —

Carroll L. Gilliam:

Average cost.

Abe Fortas:

14.5 cents and the 16.5 cents new gas in which you say is that relevant purposes of comparison.

Carroll L. Gilliam:

With the 1960 revenue.

Abe Fortas:

Right.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Abe Fortas:

Now, and the 1960 revenue was 12.72 cents which was —

Carroll L. Gilliam:

Correct.

Abe Fortas:

— almost 2 cents lower.

The revenue is 2 cents lower than the figure that the Commission found to be the average cost.

Carroll L. Gilliam:

At that time.

Abe Fortas:

At that time.

Now, am I right?

Carroll L. Gilliam:

You’re correct at that point.

Abe Fortas:

So then if you —

Carroll L. Gilliam:

Now —

Abe Fortas:

— if you take this though as fair figures the Commission need a figured cost generously or the average cost would appear on this very superficial and highly unreal basis to the average cost was almost 2 cents higher than the average revenue.

Carroll L. Gilliam:

On that basis, yes.

But I don’t —

Abe Fortas:

(Inaudible)

Carroll L. Gilliam:

— want to mislead you.

The Commission will contest my view that that is an average cost and I must go into the next steps that go into rate design under the Commission method.

As we view the case what the Commission did with that 14.5 cents average cost and I will concentrate on the argument on that was to make that the rate applicable to pipeline quality only the highest quality under the quality standards that they prescribed indicates.

The Court of Appeals make the point that only 10% of the gas involved in the Permian Basin area would be eligible for that average cost maximum rate of 14.5 cents.

Abe Fortas:

Now, excuse me.

Where does the 12% figure come in?

Was that over and above the —

Carroll L. Gilliam:

The 12% return?

Abe Fortas:

Yes.

Carroll L. Gilliam:

That is embedded in the methodology used to get —

Abe Fortas:

That’s the —

Carroll L. Gilliam:

— to the 14.5 cents.

Abe Fortas:

That’s in the 14.5?

Carroll L. Gilliam:

Correct.

The return element is in there.

I hope that later in the argument to get to the questions about the 12% returns.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Carroll L. Gilliam:

But I’m talking now only about the end product of all of the costing methods.

This is tidying up everything.

And that’s 14.5 cents.

Now, as I said under the rate design that the Commission used, that rate was used as the maximum rate, the pipeline quality only, but all of the data that the Commission had for average data.

But this is not the end of the problem.

Earlier, Mr. Justice Fortas referred to the view that there is something in here for everyone as the Commission argument.

That was a song in one — I believe some years ago, that the title of the show was a funny thing happened on the way to the forum.

And this in effect is the problem in rate design because the funny thing happened when you moved from the 14.5 to the prescribed rates.

A number of things including the 12% return fall through the crack because the next step is to apply the rate.

You have to take the Commission’s pipeline quality standard and subtract from that, not producer cost or cost which are in this record but pipeline cost.

Now, this source of subtraction to arrive at a producer rate was sprung on all parties to this case out of the blue in the Commission opinion.

I don’t believe that a single witness on rate design who appeared indicates ever conceived that to design producer rates, you would have to have recourse to something not in that record which was the cost incurred by the pipelines when they bring gas up to pipeline quality.

So when the Commission prescribed the rate system, you have to go to what is called the ordering paragraph B where the quality standard is set up.

Then in order to find out what the rates are you have to go to the pipeline, these are all added up and submitted to the Commission.

The result of that was that when the Commission entered this order on August 5, 1965, it did not know and could not have known what were the rates that prescribed?

It could not have known what costs were covered.

It could not have known what the actual return allowance would be.

Abe Fortas:

Is that a —

Carroll L. Gilliam:

And I am talking —

Abe Fortas:

— generalized figure?

That is to say those — you refer to the pipeline cost for bringing up a substandard gas.

Now is that a single figure that the Commission has arrived at or is about to arrive at?

Carroll L. Gilliam:

I believe that they have submitted in the brief, certainly, on the Court of Appeals.

In brief they submitted some figures based on materials they had at that time.

In oral argument before the Court of Appeals there were still different figures.

There are still different figures in their brief in this Court.

We have questioned them in our brief.

Apparently there’s something wrong with how we questioned them.

I would be — assume that you might hear still other figures from the Commission.

But in order to get that total what was required was that each individual producer had to go to the pipeline —

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Abe Fortas:

Through it’s pipeline —

Carroll L. Gilliam:

It’s pipeline.

There are three principal pipelines involved.

Abe Fortas:

Right.

Carroll L. Gilliam:

Then they agree on these things and it’s supposed to include a reasonable return on investment through the pipeline, not the producers.

You get those costs, subtract from the 14.5 cents and you come out with a cents per Mcf figure and that was filed with the Commission.

Byron R. White:

Now, but didn’t the Commission find the — what the range of deductions would be.

They may not know what the specific — what specific thing it was as in connection with every company or with every producer but I know that the Court of Appeals said they didn’t make any findings to what this quality adjustments would be in terms of dollars per cent.

But didn’t the Commission find that it would be something like 0.7 or up to 1.5 or something like that per Mcf?

Abe Fortas:

Your Honor, yesterday there was a reference —

Byron R. White:

Is there a finding in the record of —

Abe Fortas:

There were estimates.

The Commission made one most critical statement however, and that was that the record does not permit a finding as to the financial impact of these deductions.

William J. Brennan, Jr.:

In —

Carroll L. Gilliam:

Now, from that —

William J. Brennan, Jr.:

In specific cases but did — didn’t they the range?

Carroll L. Gilliam:

The total impact the commission was saying they could not find.

Now it is correct, now, we’ll answer your question.

I believe the Commission brief here refers to three types of estimates.

But there is no record basis for any of them.

While the Commissioners on a concurring opinion referred to contractual provisions, they cover differences in quality and he had an estimate —

William J. Brennan, Jr.:

But is there any statement in — with reference to this range of what is — of this — of adjustments in the Commission’s opinion?

Carroll L. Gilliam:

The opinion on rehearing had an estimate of I believe —

Byron R. White:

Of what?

Carroll L. Gilliam:

— it was 1 cent to 1.7 cents per Mcf.

There were —

Byron R. White:

Oh, well, anyway the Commission — we have in the Commission’s opinion its judgment of the range, of cost to bring gas up to quality.

Carroll L. Gilliam:

That was an estimate in the opinion but, Your Honor, my point was that —

Byron R. White:

These — is there any evidence in the record?

Carroll L. Gilliam:

There is no record basis whatsoever as to this pipeline cost that are in fact used to subtract.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Byron R. White:

You mean, this pipeline cost to bring gas up to the —

Carroll L. Gilliam:

Up to pipeline quality.

Byron R. White:

Pipeline quality (Inaudible) —

Carroll L. Gilliam:

So —

Byron R. White:

You — the Commission just took that statement out of the blue.

There is no evidence in the record (Voice Overlap) —

Carroll L. Gilliam:

There is no evidence in the record as to the pipeline cost.

Now what they have referred to are three different things that are not the same thing.

There were —

Byron R. White:

Well, were there some basis for it then whether it was pipeline cost, they’re not — there are some other basis (Inaudible) —

Carroll L. Gilliam:

There were producer processing costs submitted in the record for a different purpose.

But the producers’ function in processing is different and therefore the cost involved would differ.

I would add —

Abe Fortas:

But supposed that a margin of 1 point if you take the cost here as being 1.7 cents per Mcf, you’re still within the 12.72 cents per Mcf for having this revenue, is that right?

Carroll L. Gilliam:

If that was subtracted from the 14.5 —

Abe Fortas:

Correct.

Carroll L. Gilliam:

— it would be in that range.

But I would look — go back to the question of the evidence of that and the problem that it creates in the rate case.

What it means is that when the Commission got to the critical point of rate designs and therefore came out with a decision which was subject to judicial review, the product still was an unknown.

And it is critical in this sense that whether the pipeline cost were in the record or not, the effect of the rate design is to reduce the average revenue below an average cost by using the average cost figure as a maximum rate and then using deductions from that.

The total revenue then would be derived from these prescribed rates whatever they are would come out at an average level that is below the average cost.

Now —

Abe Fortas:

So what is the average cost?

That’s not the average revenue.

Carroll L. Gilliam:

The average cost as we would see it in the case would be the 14.5 cents figure of flowing gas.

Abe Fortas:

Of course the oil was — every time a rate case I’ve ever heard off is that the sliding words necessarily so because that’s what the language is and you can’t get around that.

But this 14.5-cent average cost includes the 12% return.

Carroll L. Gilliam:

That’s correct.

Abe Fortas:

And —

Carroll L. Gilliam:

Now —

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Abe Fortas:

So, cost gets to be kind of a clear thing.

But you still haven’t gotten us found below the average of actual revenue in 1960 average.

And we don’t have any evidence I supposed or do we have evidence as to what the — with history, could work it out as to what the average cost without reference to the 12% would be on 1960 on a natural basis.

Carroll L. Gilliam:

Well, that would be in the record.

Abe Fortas:

Yes.

You don’t know —

Carroll L. Gilliam:

But —

Abe Fortas:

— what that figure is, the (Inaudible)?

Carroll L. Gilliam:

I would not because in order to determine that in the case, you would have to have evidence on the pipeline cost.

Now, I think it would turn from that to the corrective steps that the remand would contemplate.

The examiner in the case recognized principles that would produce a lawful result and it starts with the proposition that the average cost in any case determined on an average rate base method.

That rate is the fit —

Earl Warren:

We’ll take a short recess.

Oliver L. Stone:

Mr. Chief Justice, may it please the Court.

In behalf of the side of producers who are here solely as respondents seeking affirmance of the judgment of the Court of Appeals I wish to discuss the issue of refunds.

In this case, the Commission consolidated a large number of Section 4 (e) increased proceedings which were pending before it.

And in its decision, the Commission recognizes that its decision here will have a dual impact upon producers, that is it fixes a rate for the future and it also uses that rate as the basis for the refunds in the past.

Now, in determining its ceiling rate and let’s speak now in terms of the flowing gas cost because that’s where the greatest impact is with respect to refunds.

The Commission fixed the maximum rate at 14.5 cents.

And it did that on the use of aggregate cost or as I would call it using the group approach.

After having used that approach to reach that unit figure, what did the Commission do when it came to the question of refunds?

It then switched over to an individual basis and ordered each company that had an increased rate above that 14.5 cents to make refunds on a contract by contract basis down to the 14.5 cents as further reduced for quality deficiencies.

In doing that and in reaching that conclusion, the Commission gave no consideration whatsoever to the revenues which were generated during this past period by virtue of the rates including the increases either to the industry as a group or as to any individual company.

Nor did the Commission in reaching its conclusion on refunds on an individual contract by contract basis decide that anyone of those increases was unduly discriminatory or preferential.

The Commission used as the sole basis for refunds the fact that the individual increase exceeded this ceiling price as further adjusted for quality.

So in essence, what the Commission did as we view it is to determine that each such increase above that ceiling rate was unlawful per se.

The Court of Appeals on rehearing differed with the Commission on that issue concluding that no refund obligation could be imposed for any portion of this past period in which there was a group revenue deficiency.

Before pointing out the principle reasons why we believe the Court of Appeals was right and the Federal Power Commission was in error, let me make as clear as I can what we are not claiming.

We are not claiming that the producers should be entitled to raise a single contract price we have.

We have never claimed that in this proceeding at any of its stages.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Oliver L. Stone:

We do claim that during this past or refund period, when the refunds generated to the group are less than the revenue requirements of the cost found for that group by the Commission it is improper to order refunds.

Now we do not say that some refunds might not be due in the future.

We do say the Commission committed serious error in not giving any consideration to the revenue side of the ledger including the rates as increased but as I said made the refunds upon the mere premise that the individual increase happened to exceed its ceiling price.

In the first place, we believe that when the Commission in an area proceeding adopts the group approach to determine the revenue requirements of the cost on a group basis consistency requires that that same group or unit be looked to on the revenue side of the ledger to see whether our rates including the increases produce too much or too little revenue.

Abe Fortas:

But suppose they did that and suppose they found an excess for the group, then what would happen?

Oliver L. Stone:

An excess of revenue?

Abe Fortas:

For the group, then what would happen?

Oliver L. Stone:

Then Your Honor as the Court of Appeals said in this case, then refunds on some equitable individual contract by contract basis could be ordered.

Abe Fortas:

How could that be done?

Oliver L. Stone:

I think it could be done rather simply.

And in fact I think if this case is remanded as we suggest, the procedure will be quite simple —

Abe Fortas:

Because of this —

Oliver L. Stone:

— because —

Abe Fortas:

But —

Oliver L. Stone:

We have here and bear in mind, we are talking now about the past period, this refund period which came to an end September 1, 1965 which was the date the Commission said its rates fixed in this cre — in this case will be effective for the future.

So under Section 5 (a) starting in September, the Commission fixed is just and reasonable rate for the future.

Now, with respect to these increases, we are concerned only with a past period as we think this Court was in second thoughts.

You asked, Your Honor, how might they do it?

I think it can be done rather simply.

And we’re dealing with flowing gas.

We know the cost for revenue requirement, 14.5 cents.

We’d know or can very easily ascertain the actual revenue to the industry on a year by year basis because producers have made those filings with the Commission.

For each year let us take the test year 1960, you have the cost figure.

You know what volumes were sold jurisdictionally.

That’s in this record.

Its 861 billion, but I won’t bother you with these numbers.

Abe Fortas:

So your revenue with — and just to make this clear, if you took that 1960 and have a 14.5 cent —

Oliver L. Stone:

Cost.

Abe Fortas:

— what you called cost revenue period —

Oliver L. Stone:

What?

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Abe Fortas:

Right?

Oliver L. Stone:

No, that’s not revenue.

It’s either cost or revenue requirement.

Let — I think falling in cost —

Abe Fortas:

A revenue requirement, that’s good.

Oliver L. Stone:

Alright.

Abe Fortas:

Revenue requirement.

And you’d compare that with a — with what?

With the —

Oliver L. Stone:

Oh, here’s what I would do?

Abe Fortas:

— 12 — wait a minute.

Let me ask you my question.

Oliver L. Stone:

Yes.

Abe Fortas:

Would you compare that with the 12.72 cents average revenue —

Oliver L. Stone:

You can do that.

Abe Fortas:

— for 1960.

Oliver L. Stone:

You can do that but the way to determine whether there was a proof excess of revenue would be take this unit revenue requirement and multiply it by the volumes of jurisdictional gas.

That will give you a total dollar figure.

Now you know the total revenue figure because that’s on file with the Commission.

As a matter of fact, I happened to have it.

For the test year if you multiply the 14.5 by the test year jurisdictional volumes, you come out just with about $124 million.

That’s revenue requirement.

Our actual revenues as shown by Exhibit 175 in this record equals — it comes to $109.5 million.

The revenue in other words for the test year is about $14.5 million less than our revenue requirements as found by the Commission.

Let me make it clear that this revenue includes the rates as increased.

So we already have on that basis for the test year, a revenue deficiency in the order of some $14.5 million —

Abe Fortas:

Now, to put it in another way, if you applied the Commission rates without reference to the allowance for equality inferiority which maybe substantial if — I don’t know.

But if you take that 14.5 cent figure as the rate of the Commission gave you, they gave you a rate that was higher than the average — than the —

Oliver L. Stone:

Your honor, —

Abe Fortas:

— of the return —

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Oliver L. Stone:

Excuse me.

Abe Fortas:

— from the (Voice Overlap) —

Oliver L. Stone:

I think you’re confusing rate and revenue.

The 14.5 cent figure is our cost.

They did not give us revenue to come up to the cost.

Abe Fortas:

I understand that —

Oliver L. Stone:

Alright.

Abe Fortas:

— but that’s also the rate, isn’t it?

Oliver L. Stone:

They fixed it as —

Abe Fortas:

As — and I would — the Commission fixed as —

Oliver L. Stone:

— the maximum rate.

Abe Fortas:

— the maximum rate.

Oliver L. Stone:

That is correct.

Abe Fortas:

As well as what you’ve referred to as revenue requirement.

It’s a maximum —

Oliver L. Stone:

That same cost.

Abe Fortas:

— rate and if you take that and compare it with your average revenue in 1960 you get your rate fixed by the Commission at 14.5 cents less whatever it should be deducted from it as compared with 12.72 cents, is that —

Oliver L. Stone:

I think you (Voice Overlap) —

Abe Fortas:

— right or wrong?

Oliver L. Stone:

Yes, you could get it that way, sure.

And it would show a revenue deficiency then on a unit basis.

But we believed that the Commission should be consistent in the area approach.

If it uses the group approach to determine the industry’s requirements, it must also look to the group to determine whether that same entity got too much or too little revenue.

Otherwise, they’ve gone —

(Inaudible)

Oliver L. Stone:

— in con — no.

In computing the refunds I would do it on an annual basis for each year and these refunds would stop at September 1965.

The Commission could start with the test year 1960.

Very simply, take its unit revenue.

If they get a 14.5 cents multiply that by the volumes.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Oliver L. Stone:

It knows the actual revenue.

Now, for each year they can do it by — on annual pay periods.

(Inaudible)

Oliver L. Stone:

Well, they could do it if they saw fit that way but I think since these reports are filed normally with the Commission on your revenues on an annual basis and the examiner would have recommended too doing it on an annual basis, I would think that might be the better approach to it, Your Honor of —

(Inaudible)

Oliver L. Stone:

No.

I think all of the producers in the Permian Basin area now are a group and to me it constitutes the regulated entity.

And I think you should look at the revenue requirements for that entity during each of these years, during the refund period.

And where there is no excess revenue, no refunds.

Now, in some of those years it could well be, Your Honors, that there will be an excess of revenue over revenue requirement.

Then how might they do it?

(Inaudible)

Oliver L. Stone:

I beg your pardon.

(Inaudible)

Oliver L. Stone:

We certainly did on our gas business in the Permian Basin, we think more than $14.5 million.

Abe Fortas:

Is that in the record?

Oliver L. Stone:

It’s obvious from the Commission’s findings, yes it is.

We can show you —

Abe Fortas:

No, you — no, no, no, —

Oliver L. Stone:

Alright.

Abe Fortas:

— you’re taking —

Oliver L. Stone:

It’s in the records Your Honor.

Abe Fortas:

You’re taking that 14.5 cent figure and working backwards on it.

I’ve combat your actual operations.

Does the record show that on the basis of your actual operations in the year 1960, the industry lost money on its gas operations as a result of Permian — in the Permian Basin operations.

Oliver L. Stone:

All I could look to, Your Honor is the cost found by the Commission.

And according to that we did lose money.

Now another reason or one of the main reasons why we believe the decision by the Court of Appeals in the position we advocate here namely the balancing of group ne — revenue requirements as against the groups revenue before refunds are due will fully accommodate and protect the interest of consumers and will likewise be fair to the interest of producers.

And why is that?

This is why we believe it to be so.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Oliver L. Stone:

This Court knows generally, the chain of command or events by which gas, gas from the producing field out to the consuming points.

Let’s take the Permian Basin and then the principal pipeline there, El Paso.

All of the producers in the Permian Basin sell to El Paso at various prices in the field.

El Paso transports this gas to the Arizona, California Stateline where — there sells to get the gas to the distributors.

The distributors in turn move it within the state for delivery and sale to the consumers.

El Paso’s price to the distributors at the California Stateline is of course regulated by the Federal Power Commission.

That regulation is upon a cost of service basis.

Into that cost of service goes what is known as El Paso’s purchased gas cost.

That purchase gas cost Your Honors, and this is important, is a lump sum or total aggregate number of dollars that El Paso has paid for this gas to the producers.

That passes on as an item of expense, not a part of the rate base on which returned as earned.

What the amount that El Paso pays for the various producers here is passed on as an expense from El Paso through the distributors to the consumers.

So what the consumers pay for this El Paso gas, vis-à-vis the producers is the aggregate that El Paso pays to the producers for the same gas.

Now, so long, so long as the aggregate prices paid by the consumers in California is less than the aggregate cost of the producers of making that gas available we find it impossible to see how it can be said that consumers are paying excessive charges or that producers are receiving excessive prices.

The Commission has said in this opinion that the area approach as it question will enable it to provide a fair relationship and this now are the Commission’s words, a —

(Inaudible)

Oliver L. Stone:

Well, I was using that as an example — the same — in — and in fact the same would apply.

El Paso and Transwestern go to the Pacific Coast.

But the rates are passed on in the same way.

That is the consumer —

(Inaudible)

Oliver L. Stone:

Who has — I understand Northern Natural, the one that goes in the Midwest, but it would be the same proposition there.

The point, Your Honor, is this.

It’s the aggregate we’re looking at to determine whether consumers pay excessive prices.

The aggregate which they pay as against the aggregate cost to all of the producers of making this gas available and that’s the basis I think of what the Court of Appeals held and that’s the gist of our position, the Commission.

Byron R. White:

(Inaudible) shouldn’t in this area approach it all.

Oliver L. Stone:

There is none in first determining whether or not refunds are due.

We agree with the Court of Appeals.

Byron R. White:

No escape clauses?

Oliver L. Stone:

I beg your pardon?

Byron R. White:

No escape clauses?

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Byron R. White:

No individualizations for —

Oliver L. Stone:

Oh, you would still have to have the same in this clause because I understand that —

Byron R. White:

Why?

Oliver L. Stone:

— to be able to —

Byron R. White:

Why?

Oliver L. Stone:

— a required or a necessary part of the area rate approach.

If you don’t —

Byron R. White:

Or for some purposes even individualized and not — but not for refunds.

Oliver L. Stone:

Well, no.

Wait a — no, no Your Honor.

I want to make this perfectly clear.

In order to determine first of all whether the revenue requirements are being met, in order to determine whether any refunds are due, this thing we believe must be evaluated on a group basis and that will fully protect consumers and we think also be fair to producers.

Now, if you make the evaluation on the group basis and it turns out that the group has an excess of revenue then as the Court of Appeal said, the Commission can then order refunds on some equitable in — contract by contract basis.

And that as I see it would be about the only practical way it could work once refunds are found to be due.

Byron R. White:

But if El Paso is collecting 14 point whatever it is plus X, they’ve been collecting an excess of the maximum rate at sometime.

The only reason that they shouldn’t get refunds is because of a — is because some other people in the — producing in the Basin have not been doing so well.

Oliver L. Stone:

Your Honor, I’m glad you asked that because I was —

Byron R. White:

— Is that right?

Oliver L. Stone:

— coming to it next.

Byron R. White:

Is that right?

Oliver L. Stone:

No, your assumption is wrong yet you — if El Paso were paying unlawful prices of course, we should have — we might have to make refunds.

But this record shows this, El Paso’s unit gas purchase cost for all these gas it bought in the Permian Basin for the test year 1960 was 15.4 cents per thousand cubic feet.

Now, my point is this.

El Paso, to whom most of these refunds would go, purchased gas in the Permian Basin for the test year had more than a cent less than the Commission determined the industry’s revenue requirements to be.

And I figured it out on the total dollar basis and for the test year, El Paso paid $84 million for this gas and it cost the producers to produce it according to the Commission’s own determination $90 million.

Byron R. White:

Well, then I —

Abe Fortas:

I take it —

Byron R. White:

They bought some gas from some producers at much lower prices from others?

Oliver L. Stone:

Oh, there’s no question, they bought it —

Byron R. White:

And some were below the — the price is somewhere above obviously —

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Oliver L. Stone:

That’s —

Byron R. White:

— there was an average (Inaudible) —

Oliver L. Stone:

That’s’ correct, Your Honor.

But you see in passing on their rates they roll them in.

It’s an aggregate figure.

And it’s — in the El Paso’s cost —

Byron R. White:

Yes, well, the commission says that — instead of a no roll in.

Oliver L. Stone:

I beg your pardon?

Byron R. White:

The Commission in effect says that determining a refund should be — you don’t add them all up together, even in the case of El Paso.

Oliver L. Stone:

Well, the Commission actually didn’t say very much about that except that they said anyone that’s above this rate we think is unlawful per se and we strike it down.

Had the Commission really evaluated El Paso’s cost for this gas as against what the Commission itself found to be the producer’s cost, I don’t see how it could sensibly have required refunds to be made by the producers.

Byron R. White:

Well, you have to.

I guess they’re regulating the producers’ prices is not the seller’s ag — buyer’s aggregate cost.

Oliver L. Stone:

No.

If I may Your Honor, the Commission said the area approached enabled it and would afford it the opportunity of striking a fair relationship, a fair relationship between and the aggregate price paid by the consumers and the aggregate cost incurred by the producers.

And we are saying that’s all we are contending for here.

Look at this thing on an aggregate or a group basis.

Abe Fortas:

I suppose —

Oliver L. Stone:

We believe —

Abe Fortas:

— this Commission would — couldn’t say that looking at it on an aggregate or a group basis in generosity of their rates as illustrated by the fact that they almost a cent higher than what El Paso paid on the average.

Oliver L. Stone:

First of all Your Honor, we disagree that there was generosity there.

Abe Fortas:

Yes, I know that —

Oliver L. Stone:

I —

Abe Fortas:

— but I say that if you compare those two figures, I understood that you are not arguing that the Commission fixed the rates of the — maximum rates that were too high.

Oliver L. Stone:

We are assuming that figure for present practices.

But no one challenged that figure.

These people who are now saying that —

Abe Fortas:

Assuming what figure?

Oliver L. Stone:

The generosity.

The distributors are not saying — they did not challenge the court below.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Oliver L. Stone:

The Commission’s finding of the revenue requirement figure of 14.5 cents.

Abe Fortas:

But did they challenge it as a maximum rate figure?

Oliver L. Stone:

As they — in the Court of Appeals they did as they’re doing here now Your Honors.

Abe Fortas:

They —

Oliver L. Stone:

They said affirm the Commission.

Abe Fortas:

And did they or did — do you — do they or do they — did — do your clients or do they not?

Oliver L. Stone:

Oh, my clients?

Abe Fortas:

Your clients don’t challenge the maximum rate figure as such.

Oliver L. Stone:

We do not, we do not.

It’s a question of design.

What we in effect — what we are saying and what Mr. Gillman was saying that it operates both in the future and in the past is —

Abe Fortas:

You’re saying if you don’t challenge the adequacy of the maximum rates fixed by the Commission, you just think they were done on a wrong basis and that they ought to be redesigned so that they would take account of individual variations.

Oliver L. Stone:

No, no.

We are accepting the Commission’s revenue requirement determinations for this purpose.

All we are saying is that the Commission did not properly design rates to afford the industry the opportunity to recover the cost as the Commission itself determined that cost to be.

Abe Fortas:

Alright.

Oliver L. Stone:

And we —

Abe Fortas:

I was coming back — not your argument on the refunds but the argument made by your co-counsel and what is your attack on the rates then?

Oliver L. Stone:

Our attack on — we are not — first of all let me make it clear.

We are not at this time attacking the Commission’s determination for all gas of 14.5 cents was alright.

We’re not attacking that now.

What we are saying is this.

You have found our revenue requirements on a cost of group basis.

It is improper to fix our maximum price.

At the average, you cannot fix the ceiling at the average.

You have not properly designed rates which will afford us the industry the opportunity of recovering our cost as you have found them to be.

Abe Fortas:

I’m having a great difficulty and I’m sure it’s my own fault but I’m still having a difficulty.

Now, either you are or you are not attacking the maximum rates as maximum rates, they’re maximum — this is a maximum rate.

Now, and it doesn’t —

Oliver L. Stone:

Oh, if Your Honor would —

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

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Abe Fortas:

— permit as it set now, it does not provide for exceptions.

Oliver L. Stone:

Right, we are (Voice Overlap) —

Abe Fortas:

Now are you attacking the maximum rate in your —

Oliver L. Stone:

We are attacking the maximum rate, yes.

Abe Fortas:

That’s what I thought you were doing.

Oliver L. Stone:

But we are not attacking this revenue requirement at the moment.

We’re saying you’ve fixed your maximum rate too low, you fix it at the average.

Abe Fortas:

Well, what you’re saying is that you’re attacking the maximum rates fixed by the Commission?

Oliver L. Stone:

Absolutely!

Abe Fortas:

And you say that there ought to be that the rate’s structure should be such that the maximum rate should be increased for certain types of operations —

Oliver L. Stone:

Well, the Commissions couldn’t —

Abe Fortas:

— of certain types of (Voice Overlap) —

Oliver L. Stone:

— increase them and someway designed the rates and I think it would be probably.

You have to increase this maximum somewhat because I don’t think we want a sort of a post to stamp rate, we don’t.

That is one rate, one single rate clear across the area for all gas.

You design a serum of ma — of a series of maximum and minimum rates and within that the opportunity will then be afforded to the industry to recover this cost —

Abe Fortas:

Well, I don’t see — I really have difficulty in seeing how you can make that argument on the one hand.

On the other hand, say that you’re not opposing the fixing of — the theory of fixing group rates.

So that’s my difficulty, I guess.

Oliver L. Stone:

We are not of — the group I’m working with — well, we — no, we think they could still do it on a group basis.

Abe Fortas:

I know but I don’t — I don’t understand any square of those which (Voice Overlap) —

Oliver L. Stone:

Maybe if I put it this way Your Honor, let’s look at it and assume what we are saying if you’re going to go to group basis then the regulated entity becomes the group instead of an individual company.

Now for this entity, you have found a certain revenue requirement figure.

And all we are saying is, “Alright, we’re not challenging that at this moment”.

But having found the revenue needs for this (Inaudible) you must then decide a series of rates which will afford this entity, the group.

(Inaudible)

Oliver L. Stone:

There we’ll —

(Inaudible)

Oliver L. Stone:

It would be that way because the contracts will operate that way.

Some of them will be limited by their contracts.

Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 07, 1967 in Permian Basin Area Rate Cases

del

Oliver L. Stone:

We’re not asking for our contract rates to be increased.

Yes, there will be varying rates within that maximum-minimum range.

But if I may on the refund question we submit that this Court’s decision in the second Philips case governs here on refunds because we think the situation here is as a legal matter in the same posture as was second Phillips.

Of course, here the regulated entity is not an individual company but a group of companies.

But in second Phillips they were dealing with a past period or a refund period.

I think I understood the general counsel for the Commission yesterday to say that here we do not have a locked in period.

Now, I don’t want to get in to a discussion to this administrative terminology but the significant point here is, the Commission issued its order under Section 5 (a) of the law and it made that effective on September 1, 1965.

And it said this is the just and reasonable rate for all gas in the Permian Basin from and after this date.

So these rate increase proceedings therefore and their rates was superseded as of that date by the Commission’s order in the Section 5 (a) proceeding.

So we are dealing here with a past or an impoundment period where the only question is that of refunds.

And in second Phillips, we believe that the Commission held and this Court affirmed that rates well off the just and reasonable if you wish, though the Commission did not use those specific words, where during the past period, the revenues to Phillips were less than these revenue requirements even though some of the individual rates exceeded Phillips’ revenue requirement of 12.16 cents in that case.

That we submit is controlling here and the briefs they refer to the Tennessee Gas case, time will not commit my going into that.

I would refer, Your Honors, to our discussion of it.

In our brief, Tennessee deals with zones, a rate that was concededly illegal whereas here that’s a question and for the reasons I have stated and those in our brief we respectfully urged that the judgment of the Court of Appeals be affirmed.

(Inaudible)

Oliver L. Stone:

I assume you want me to (Inaudible) but I just want to know what your (Inaudible).

(Inaudible)

Oliver L. Stone:

(Inaudible)