Permian Basin Area Rate Cases – Oral Argument – December 07, 1967

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 06, 1967 (Part 2) in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases


Earl Warren:

99, 100, 101, 102, 105, 117, 181, 261, 262, 266, 388.

Mr. Gilliam.

Carroll L. Gilliam:

Mr. Chief Justice, may it please the Court.

In view of the event yesterday, I would like to ask the Court’s indulgence briefly on a personal note because I have received many expressions of concerns from the offices of the Court and counsel in the case.

I am assured on confident medical advice that the problem is a sinus congestion and not having availed myself of proper dining for the past two or three days, there is no impediment whatsoever to our continuing under the normal rules of the game.

I would hope as Mark Twain once stated it that the trade press would note that the news of yesterday was greatly exaggerated.

So with that note I would state I appreciate the indulgence of the Court.

Earl Warren:

Mr. Gilliam, you were arguing yesterday and has made it through (Inaudible).

Carroll L. Gilliam:

Thank you.

Earl Warren:

I think you might — (Inaudible) can be happy to service this privilege to continue (Inaudible) of your argument.

Carroll L. Gilliam:

Thank you Your Honor.

Yesterday at the point of the unfunny event in this forum, Mr. Justice Fortas had propounded a series of questions that go to the attempt to find a post revenue balance on the basis of the Commission’s decision in the case.

Mr. Justice White had propounded a series of questions dealing with the quality treatment deduction cost.

I would state that the answers to those two series of questions actually cannot be made on the face of the Commission decision or its opinion on rehearing.

The difficulty that I believe the Court is having and that all counsel are having in discussing those two questions is precisely what was found by the Court of Appeals.

In a normal rate case whether it is individual company or a group rate case, the agency makes findings as to the cost that he is going to allow in the rate and findings as to the rates it is allowing.

We then proceed if there are judicial review questions that these questions are weld if they leave out a cost or did they not.

There’s one side of the other thing, a cost allowed was generous or not generous is the rate of return high or low under the Hope test.

The problem we have in this case is precisely what was said by the Court of Appeals in order for that Court or this Court to address itself to those questions, there are certain limited gaps in the Commission’s findings in this case.

Now, to go to Mr. Justice Fortas’ problem with this revenue costs balance.

We had the 14.5 cents cost of flowing gas.

That is a cost finding by the Commission.

It is based on a number of underlying subsidiary findings as to each of the cost involved.

The Court of Appeals did not disturb that.

We are not attacking that.

To apply the Hope test however, you have to compare that figure with what is the average revenue under the prescribed rates.

Unfortunately, in this case in order to know what the prescribed rates are we need to know what is shown by this evidence of pipeline cost that would have to be used to arrive at the prescribed rates.

What the resultant rates are?

Make some multiplications by the volume sold and we would come out with an average revenue figure.

Which figure should be the one that Mr. Justice Fortas was seeking to compare with this 14.5 cent figure?

Audio Transcription for Oral Argument – December 06, 1967 (Part 2) in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases


Carroll L. Gilliam:

Now yesterday, we had talked about the 12.72 cent figure but that is the average revenue in 1960 at all of the contracts and rates then in effect that includes these 18 cent rates.

It include the whole spectrum of the 3 cent rates and everything in between and it averaged 12.72.

Now under the prescribed rates, we know a number of things.

We know first of all that all of them in that batch that were above 14.5 cents are reduced first to the 14.5 cent level.

Then on the rates for the 90% of the gas involved in this case which is not eligible for the pipeline quality rate, the prescribed rates are lower so that as we review the case and if you accept some of these estimates of how much is this pipeline quality subtraction the average revenue under the prescribed rates will be lower than the 12.72 cent figure that existed in 1960.

Abe Fortas:

That’s where I have my trouble.

Carroll L. Gilliam:

I think —

Abe Fortas:

Because the figure that was given to us was 1.

— I think it was a maximum rate — of the range of 1.7 cents deduction for this pipeline cost due to the lower quality of the gas.

And if you’d deduct that from 14.5 cents, you’re still above 12.72.

Now, my method of — my approach to this must be wrong when you wouldn’t be making this argument.

What I am asking you to do is to tell me where and how?

Carroll L. Gilliam:

You Honor that is most critical.

But just as we had to do before the Court of Appeals and as I would have to do, and as much as Solomon would have to do when he’s follows me to answer that question.

I have to go outside of this record and talk about these materials as to pipeline cost which the Commission of course has now but they are not in the record before this Court.

Byron R. White:

But Mr. Gilliam —

Carroll L. Gilliam:

I can answer the question if I — on estimate.

And I think Mr. Justice White it’s the same type of estimate that you asked me about yesterday.

If you accept a lower figure that I believe the Commission has in it’s brief now lower than 1.7, at one point in their brief here, they say that on examining the statements they have, if the range would be between one and 2 cents and in another place they say something like 1.1 to one category of gas and (Voice Overlap) —

Byron R. White:

Oh, at page 34 of your brief, it says — they say that the Permian Gas (Inaudible) that page that the turning gas (Inaudible) in a range of 0.7 to point — to 1.5 —

Carroll L. Gilliam:


Byron R. White:

And they say, and the Commission found?

Carroll L. Gilliam:

The Commission found —

Byron R. White:

What was wrong and if there’s any (Inaudible)?

Carroll L. Gilliam:

Recommend — I don’t think there is one but Mr. Solomon make the supply you want.

The Commission did make a finding that included the 1.7 figure that Mr. Justice Fortas mentioned.

It did not make specific findings on this pipeline quality material which I think maybe the source of a material before you.

The estimates that the Commission made were not based upon the pipeline cost data at all.

They were based upon what we considered totally unrelated evidence as to producer cost and the provisions in existing contracts that are addressed to this quality differential.

Well, they rejected this contract approached as Mr. Merrill covered yesterday.

Audio Transcription for Oral Argument – December 06, 1967 (Part 2) in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases


Carroll L. Gilliam:

But let me get back to Mr. Justice Fortas’ question and I think Mr. Justice White if we take — let’s take the 1.5 cent figure instead of 1.7.


Carroll L. Gilliam:


Just assume that it is 1.5.

The subtraction that you have to make in applying this designed rate here is not from the 14.5 cent cost figure.

That is a Commission finding on producer cost only of a revenue requirement.

When you design rates the subtraction is made over on the revenue side not the cost side.

You don’t subtract — let’s say this, the 14.5 cents for purposes of my argument, is the average cost.

Now, the Commission has found that it does that on cost of service methods in every case, in every regulatory agency that uses this method makes that finding that that’s the product of a cost to service, an average cost —

Abe Fortas:


But that also —

Carroll L. Gilliam:

Now —

Abe Fortas:

— includes a return.

Carroll L. Gilliam:

It includes a return and I hope to get that.

But I want to emphasize that this 1.5 cents is not subtracted from the cost that have to be compared.

It is subtracted from the rates that are prescribed.

The maximum pipeline quality gets the 14.5 cents in revenue, so you have a cost revenue balance assuming that.

But on the other 90% of the gas you have to make the subtractions which, let assume, the average 1.5.

You subtract that, you come down to what the revenue is for that 90% of the gas involved in this case.

Abe Fortas:

So what you’re saying —

Carroll L. Gilliam:

Now —

Abe Fortas:

What you’re say in this — what you’re saying Mr. Gillian depends upon going from the group average basis to the individual basis —

Carroll L. Gilliam:


Abe Fortas:

— and I guess, I’d have to agree with you that when you start engaging in that and the whole thing is a mess.

Carroll L. Gilliam:


Your Honor, we — we’re like the Court of Appeals.

We believed that with these corrections the area rate method is not a mess, it can be made a viable, workable, regulatory method.

But I’m not talking about individual company figures in any of my discussion this morning.

I’m talking about the aggregate.

This is most unlike the questions this Court had in the Chicago v. Atchison case last term.

Audio Transcription for Oral Argument – December 06, 1967 (Part 2) in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases


Carroll L. Gilliam:

I’m not talking about individual company findings.

I’m talking about the aggregate cost filed on this composite industry basis and the aggregate industry revenue.

William J. Brennan, Jr.:

And it’s the latter which you say is missing?

Carroll L. Gilliam:

It is the latter that we don’t have the necessary findings to make this clear in the Court of Appeals or here.

Abe Fortas:

How could you have findings on that?

What the Commission is doing in effect is saying that people who have this point made contacts for gas.

And more of them 14.5 just as you’ve said roughly have to and — have to or reduce a future contract to that point.

People have made contracts at lower figure and if the marketplace permits to make contracts at a higher figure than their previous contract price up to 14.5.

Well now, actually on the basis of experience as I understand this, the industry revenues may not be 14.5, they’re maybe less than that rate by considerable amount, that’s your point, isn’t it?

Carroll L. Gilliam:

It — they can be under given set of facts and the test year and it could happen in this case from 1960.

But that has very great legal significance in rate regulations.

If the combination of all of these contracts produced an average revenue that is below the average revenue requirement, it means that you can’t say that the rates, the totality of revenue is unjust and unreasonable.

Now, that doesn’t mean that the Commission is closed from looking at the spectrum and saying that this is discriminatory and so on.

But that the first step in a rate case before you start to design the rates to be placed in effect is this cost revenue balance.

Now, once you make that and if the Commission filed as it could find in any case, yes, the industry revenue is excessive.

What is the next step?

It is to design a structural rates and even in this case, there’s no single uniform rate.

The Commission has designed a structure of differing rates.

But Mr. Justice Fortas when they imposed it, it automatically sets aside the contract prices and this is imposed in lieu of that but it still as we see the majority opinion in Hope and as the Court of Appeals concluded.

It means that even under the group method the revenue — the average revenue under that spectrum of rates should at least be such that the industry has the opportunity and I emphasize opportunity because this doesn’t guarantee anything, its opportunity, to earn the average cost.

Its average revenue, average cost.

Now, on — included as Your Honor said is this 12% rate of return.

That is a piece that makes up the 14.5 cent cost.

It is significant in this case because the Commission says, “Well, even though you may not have gotten a balance, you certainly didn’t get the 14.5 cent cost, therefore you didn’t get the 14 — the 12% return but that was kind of generous, so what?”

To apply the Hope test and for a Court to review a rate case it is not reviewing a hypothetical 12% return or something else.

The Court has to know what is the return that was allowed, right?

Doesn’t make any difference.

If I stand up here and tell you that the 12% is too low and somebody else says it’s too high, if that isn’t what is allowed in this rate, what difference does it make out?

There’s no point in wasting the time of the Court.

What we should be talking about is the 12 — it is not the 12% but what was the return allowed in the rates prescribed?

Audio Transcription for Oral Argument – December 06, 1967 (Part 2) in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases


Carroll L. Gilliam:

Now, the 12 may sound high but there’s a significant reason for that and it has to do with the difference in the equity debt ratio in the producing industry with ordinary utilities.

The Court’s were accustomed to hearing 6% and times passed and that seems to be the sacrosanct magic number.

But just as a hypothetical example, in pipelines and in most utilities the equity is usually only about 15% of the total capital.

The rest of the total capital is debt but at least until times recently the companies that get is 4.5% or something along that line 4.5 to 5.

It certainly is not possible today.

But assume that in my example when they allow 6% on the total capitalization, it means that the equity gets 9 to 10% and on page 144 of the Commission’s brief they correctly state that, “in recent pipeline cases, they have allowed and this is based on evidence about the market cost money and so forth.

Rates of return that permitted pipeline equity that earn 10 to 12% on the equity.”

Now, let me shift from that to the producer situation.

The Commission made finding at the finding in the rate of return part of its opinion that an equity investment in a producing company is far riskier than this pipeline equity investment.

And I don’t think there is any party to the case and that would include the Commission staff who disagrees with that.

It is a well-known fact that it is one of the riskiest investments that anyone could make.

And this brings me right back to one of the reasons that the producers have an 85% equity, it’s this simple, you can’t finance the bulk of exploration by going to a bank and conservative institutions.

It has to be done with equity money.

And that it has to be primarily generated internally through the rates collected.

But let me get to the mathematics of this 12% return.

The Commission in its brief has these numbers that Mr. Justice White pointed out.

If you apply that both in this case the effect of it is to reduce this 12% to something on the order of 9.5 or 9 or 10 or somewhere in there.

But what that does to the producer equity in this case, if that is correct, is to reduce the allowed return to the producer equity below that or certainly no higher than that, that the Commission is allowing on the pipeline case equity and other cases.

And yet in the rate or return part of this decision there is finding at the finding that the producer equity is riskier.

Now, of course no one asked this Court or any other court to pick 12, 9, 10 or anything.

What the Court of Appeals said is that the cost of this pipeline quality thing, first of all there is the procedural error, it isn’t in the record, we can’t quantify in the Court.

It does have the effect of reducing this cost revenue balance.

It obviously has this effect on the allow of return.

We can’t fill those gaps or speculate.

It is a function of the Commission to make the additional findings.

Now, just briefly, this limited remand somebody said yesterday that it could take forever.

It is not under the Court of Appeals opinion and it would be true under any limited remand.

By this Court it would be in accordance with the Court’s opinion.

It is a practical matter would contemplate getting into this record.

These pipeline quality and cost data that they have and adjusting the findings.

Audio Transcription for Oral Argument – December 06, 1967 (Part 2) in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases


Carroll L. Gilliam:

And I think in the essence that was what the Court of Appeals was asking.

They certainly have not discarded this record.

Thank you Your Honors.

Earl Warren:

Mr. Solomon.

Richard A. Solomon:

May it please the Court.

First, let me take care of couple of minor matters.

There were some statement yesterday by Texas and New Mexico that we had excluded the evidence they submitted.

The Attorney Generals were in error there.

We did not exclude the evidence.

In fact, some of the evidence is in the joint appendix here, extracts from it.

It was admitted into the record and was considered.

We did reach the results that they wanted but there’s no exclusion problem involved.

Now, let me take up the problem which I did not take up in my initial argument which was raised by counsel for Bass yesterday and that is the argument that the Commission ignored some very substantial expenses which are born by the plant sellers, the producers who purchase on — normally on percentage contracts from producers in the field gathered, process and then sell at the tailgate of the plant and the argument made yesterday was — that it was outrageous with the Commission to fix a price for gas at the tailgate of a plant after gathering and processing which was the same as the price of fixed for gas-well gas in the field.

Now, obviously whether the Commission has properly or improperly decided every issue here, it isn’t foolish and it didn’t overlook this very major problem.

Their estimates can be made many ways but probably as much time was spent on cost of gasoline plants, so-called gasoline plants in this record as any other.

That the examiner discusses this matter in great detail in his opinion at pages 226 to 231, where he explains why despite all these costing, he thinks it make sense to price it on a value basis which after all is exactly what’s happening in this industry.

They have in fact sold at the same prices roughly as the price of the pipelines play at the well head for gas-well gas.

And at pages 328 to 341, if you want to go through a very interesting exercise, he goes into great depths on the costing.

Because both the Commission and the examiner in coming to the eventual conclusion that an exact cost involves just too many allocations to be exact.

I’ve done so only in the light of a recognition that they were not by so doing giving too little for these various expenses.

And let me briefly read you what the Commission said in response to Bass’ arguments or with similar argument very point on rehearing and I’m reading from 1116 (d) of the record.

They say, “It has been stated in the applications for rehearing of several producer respondents that the price of residue gas, derived from casinghead gas should be fixed at a higher price because the record would contain evidence which would establish this cost for the level above the 14.5 cents per Mcf based on gas well it cost”.

The record does not support this argument.

On the contrary, well a precise cost computation of residue gas cannot be made with sufficient assurance of accuracy sure was a basis for fixing prices.

The evidence demonstrates the cost of residue gas is lower than the cost of flowing gas-well gas.

It reflects in the evidence and then they go on to discuss certain evidentiary matters which had been raised and which they disagree with.

Now this is not at all the picture that you got yesterday.

I don’t want to go into this further.

We’ve discussed it pages 157 to 159 of our brief.

Briefly, let me refer to another argument made by counsel for Bass yesterday.

Audio Transcription for Oral Argument – December 06, 1967 (Part 2) in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases


Richard A. Solomon:

This was the procedural argument with respect to equality.

That equality wasn’t in this case.

Very difficult point it seems to us because we can’t quite see how you could have an area case where you don’t consider quality.

What — in general let me refer you here if I may to pages 154 to 155 of our brief and particularly to the statement why the producers when they try to tie a rule making proceeding on quality to the Permian Basin decision, what they said was not that it was in the Permian Basin case but they said was and I’m quoting from there — to my brief and this is a quote, “The producers in the Permian Basin proceeding have introduced evidence regarding quality standards in price differentials and planned to introduced additional evidence on such points when appropriate”.

Now, what the Commission did was to say that it wasn’t going to in the light of those statements try a general quality thing into this proceeding that nobody thought up until much later the quality wasn’t an issue.

Now Justice Fortas, I’m sorry to say that I agree with the counsel for Socony that it is not only useful from the standpoint of — I think the entire industry for this Court to decide the moratorium issue but that — this moratorium issue is not moot.

The technical reason for moratorium issue is not moot is because moratorium in a state, we haven’t been able when people filed increase which would have been subject to the moratorium to not let them go into effect.

But we have assumed that the Court stay on the moratorium like everything else were subject to the final action of that Court and this Court.

And the Commission has consisted with in allowing these increases to go into effect and they’re clear that they were going into effect subject to the final outcome of this case.

So, there’s considerable amount of money which means that the problem is not moot.

And for the reasons that I went in —

Byron R. White:

So it’s all in the refunds, Mr. Solomon?

Richard A. Solomon:


Byron R. White:

If your — if the Commission’s moratorium order is upheld this would result in a refund.

Richard A. Solomon:

It would result in refunds for those producers who pursuant to the stay —

Byron R. White:

Stay (Inaudible)

Richard A. Solomon:

— and filed increases —

Byron R. White:

Filed increase (Voice Overlap) —

Richard A. Solomon:

— which wouldn’t have been (Voice Overlap).

That’s what —

Byron R. White:


Richard A. Solomon:

That exactly.

I’ll give you something back.

There was one argument here which we don’t.

I won’t go any great length.

That is the argument about the last “clean rate” problem.

I wouldn’t even attempt to describe it.

It was mentioned in some of the briefs.

It was mentioned by counsel for Mobil yesterday.

I don’t — they want to decide it in May but the fact is on this one, the Commission expressly refrained from deciding it.

Audio Transcription for Oral Argument – December 06, 1967 (Part 2) in Permian Basin Area Rate Cases
Audio Transcription for Oral Argument – December 05, 1967 in Permian Basin Area Rate Cases


Richard A. Solomon:

It has not been decided by the Commission.

At the time of the Commission’s decision it wasn’t clear whether it was a real problem or not and we said we’d handle it when we got it.

So, this is not something which is the part of the Commission decision.

Now, briefly on the problem that Mr. Gilliam was speaking this morning, speaking to this morning.

I want to make perfectly clear Justice White that there is a finding.

The finding is that 1115 (d) of the record and what the finding is there’s a longer paragraph on the matter.

It says, with the charges — changes we have made with respect to quality standards, the average adjustments for gas-well gas will range from 0.7 to 1.5 reduced by the additional revenue for plant liquids and the effect of the BTU adjustment.

There is evidence upon that — which that is based on — it is evidenced which Mr. Gilliam doesn’t think is good evidence.

This evidence we think is clearly good enough evidence as well as the exporter.

And the evidentiary references, I will not labor the Court with but they are cited in our brief in the Footnote 15 at pages 142 to 143 of our brief.

Finally, like my client put back on the track what I think Mr. Gilliam’s argument comes down to.

I don’t think once we get out of this morass of quality that this is a real problem.

There is a real problem.

What they are really saying, they phrased it, what Mr. Gilliam did this morning, in terms of letting us have the opportunity to earn this cost based standard price.

But what this really boils down to is saying, set your rates to guarantee that the — we will earn these revenues despite the fact that we have on a number of our sales previously contracted to charge less.

And that is what the problem is really all about on the so-called revenue deficiency argument and I think or as I know this is something that I hope I explain in some detail on Tuesday.

Oh, may I say one more word sir?

Earl Warren:

Yes you may, resume.

Richard A. Solomon:

As lack of material in the briefs on some of the costing matters which I haven’t had an opportunity to get to.

We are asking as I said at the very beginning that the Court affirmed the Commission on all of the case.

We hope that our brief has taken care of the matter and we certainly hope that the result of this case would be a full affirmation of the Commission decision.

So, we can proceed with the difficult task of finishing up this area rate making process.