Permian Basin Area Rate Cases

PETITIONER: Permian Basin Area Rate Cases
LOCATION: Connecticut Welfare Department

DECIDED BY: Warren Court (1967-1969)
LOWER COURT: United States Court of Appeals for the Tenth Circuit

CITATION: 390 US 747 (1968)
ARGUED: Dec 05, 1967 / Dec 06, 1967 / Dec 07, 1967
DECIDED: May 01, 1968

Facts of the case


Media for 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
Audio Transcription for Oral Argument - December 07, 1967 in Permian Basin Area Rate Cases

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

Earl Warren:

90, 95, 98, 99, 100, 101, 102, 105, 117, 181, 261, 262, 266, and 388.

Mr. Merrill.

Bruce R. Merrill:

Mr. Chief Justice Warren, Mr. Justices, if it please the Court.

I'm arguing for Continental Oil Company and Midhurst Oil Corporation.

Of the many extremely important issues raised in the Permian Basin Area Rate Cases my argument is restricted to three issues which I believe to be the very foundation of these cases.

These three issues go to the theory and method of produced regulation.

My argument accepts the legality of producer regulation on an area and a group basis provided such regulation is not arbitrary, discriminatory or capricious that producer petitioners that will follow me in argument and the producers who are respondents only, who would follow them addressed themselves to different issues.

A conscientious effort has been made to ensure that no issue will be argued by more than one producer counsel.

Earl Warren:

May I ask you if you're in Court with all of your colleagues on that preliminary statement you just made?

Bruce R. Merrill:

I believe I am Your Honor.

Earl Warren:

Yes, I just want to know if there's any contrary between --

Bruce R. Merrill:

I believe not Your Honor.

Earl Warren:


Bruce R. Merrill:

Historically, the Commission had determined rates on utility rate base, cost to service method.

Inherent in this method is a clear foreseeable relationship as to any particular service to be rendered for each utility entity and the cost of rendering that service.

A certain number of dollars will provide a service for which a certain rate must be permitted.

This is the heart of utility regulation and this system has worked very well in the utility industries.

When this Court held that the Natural Gas Act applied to the producers of natural gas, spokesman for this industry vehemently urged that this industry was no count whatever to a public utility and that a utility method of regulation could not successfully be applied in the producing industry.

The Commission staff urged rejection of this pleads.

After all, it was expert in utility regulation that knew they were they method.

This ideological battle weighs for seven years while the producers thought cost to service regulation and urged the method of regulation based upon the consideration of the economic characteristics of and the economic factors that work in the producing industry.

Producers argued first that the cost of gas cannot be determined like the cost of public utility service with little joint cause but for gas in a joint product with oil and with natural gas liquids the best that could be done was to estimate the cost of gas using some cost in formula in flowing wholly arbitrary allocation method that allocates the joint cause.

In no real sense could the cost of gas actually be determined.

The producers argued second that the Commission owed a duty to induce an adequate continuing supply of gas for the interstate consumer and that even if the cost of gas could be determined, a cost determined rate could not perform the function of a listening supply due to the lack of relationship between expenditures and results.

The forcibility, the dollars of input, the output and the rate that would provide an adequate return so characteristic in the utilities was absent in the producer industry.

Nonetheless, during these seven years, the utility rate based cost of service method was employed by the Commission while each side shamelessly computed cost to service studies designed to yield a desired cost result.

It was readily apparent that the joint cost constituted such a large percentage of the total cost that any desired cost result could be obtained and was obtained.

Finally, the Commission recognized what foolishness this was.

Concurrently with the second Phillips opinion, the Commission issued a statement of general policy in which it announced it was abandoning individual regulation in favor of regulation of an area and a group basis.

For as reasons stated in the second Phillips that in the experience of the Commission and I've hoped has shown beyond any doubt that the traditional original cost, prudent investment rate base method of regulating utilities is not a sensible or even a workable method of fixing the rates of independent producers of natural gas.