Wisconsin v. Federal Power Commission – Oral Argument – January 09, 1963 (Part 2)

Media for Wisconsin v. Federal Power Commission

Audio Transcription for Oral Argument – January 09, 1963 (Part 1) in Wisconsin v. Federal Power Commission

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Earl Warren:

Mr. Solomon.

Richard A. Solomon:

May it please the Court.

Just before the recess, we were discussing what we’re attempting to do in our area of proceedings and the question that would come up: What about the man whose cost of service is substantially higher than the price that the Commission will fix in any given area?

And I was indicating that this is a problem which the Commission will have to face up to.

I want to make it clear, Justice Black, that there’s a very wide distinction at a minimum between a cost-of-service price and a confiscation price.

Obviously, in a cost of service, there are many, many things which go into it which no Court would consider in determining what is a confiscation, for example as a rate of return.

It’s hardly confiscatory if a man selling gas doesn’t make a 9%, 10% or 11% return on his investments, and yet, a rate of return would go into a cost of service price.

But there will undoubtedly, and let me stress again because I want to make it perfectly clear, whatever the old Commission — Commission that decided the Phillips case might have thought about area pricing, and I would agree there are certain ambiguities, if you read the Commission’s decision in Phillips and a statement of policy, both of which were on the record here, certain ambiguities about the language there exactly as to what they intended by area pricing.

It could be argued that maybe they were talking about contract price, field price.

This Commission is basing its pricing on cost considerations.

But assuming that an individual producer could show that an area price which has been set is confiscatory within the narrow limitations of what is confiscatory, and it could show that this was not because of carelessness or inefficiency or what have you on his part, but because he just hadn’t been successful in this business, this mining business.

He had gone around and attempted to get gas and the only thing he’d gotten finally after 15 or 20 or 30 drilling of wells was a little trickle of gas.

I think there are grave doubts as to whether this Court would say because a man on his 15th attempt to drill for a well has gotten a little trickle of gas that he has to be allowed to sell that gas at a price which would allow him in and there to recover all the costs he’s put into that.

That isn’t the nature of this business.

Hugo L. Black:

I presume when the Commission was acting —

William J. Brennan, Jr.:

Ambiguity.

Hugo L. Black:

— however, it would be a very natural inclination for them to — if they’re going to take a whole group together by the sea that they didn’t hurt any — anyone particular a company, only six or seven so that you would tend to have as a fixed price, not a maximum price, as a just and reasonable price, the price that might give some people what they considered a reasonable profit and give the others five times as much.

Richard A. Solomon:

Well, the theory of area pricing does concede that some people who are fortunate or efficient will get more than on a cost of — individual cost-of-service prices.

If Phillips turns out to be an efficient producer, it is possible that when we get through with area pricing, the prices that Phillips gets would be somewhat higher than Company X would get — no, the prices will be the same, but they will be getting more than they would be getting on a cost-of-service basis, whereas Company X which we can assume is an inefficient producer or unlucky producer would be getting less than they would be getting on a cost-of-service basis.

Hugo L. Black:

I would also assume maybe — maybe I could be wrong, is when they start to kind of fix some kind of an average price, these contract prices that had been fixed when there was no regulation of any kind and which are pretty well fixed subject to certain procedures whereby they might be held unjust and unreasonable, maybe the average would be figured according to the average of these contract prices.

Richard A. Solomon:

The Commission, I can only reiterate, has not suggested by any of its activities in the area of proceeding that it intends to fix prices by the field prices at which gas is being sold in that area.

I cannot tell you that it will give no consideration to these field prices, what the prices at which gas is being sold in that area, but the basic intent of the Commission is to fix a price for the gas based upon the cost and economic necessities of producing and bringing gas to the market in sufficient quantities so that it will serve the needs of the consumers at the cheapest possible prices to do so.

William J. Brennan, Jr.:

Probably if an area, the price is possibly around these figures or maybe some higher or some lower, but they cluster around some particular figure.

You just suggested that this will not be conclusive upon the Commission.

But how — how the Commission is going to ignore that in the area of pricing business?

Richard A. Solomon:

The prices for example in a given field — when you say price is hovering, of course, you recognize that —

William J. Brennan, Jr.:

Well, I’m thinking of the old techniques that the Wage Stabilization Board and the OPA follow when they, for very different reasons, had to determine going prices for a given job in a given area or going prices for a particular commodity.

That’s the old cluster technique as I recall —

Richard A. Solomon:

Yes, and that is not we’re starting out to do.

William J. Brennan, Jr.:

Well, I —

Richard A. Solomon:

We’re starting out to get the —

William J. Brennan, Jr.:

— I’m not saying that.

Richard A. Solomon:

— underlying cost and to apply these underlying costs to the problem of fixing the fair price here.

William J. Brennan, Jr.:

I heard you say that but you haven’t told me how you’re going to do it?

Richard A. Solomon:

We have for example in the Permian Basin case — now, I can only talk about the staff presentation because other people have different ideas.

We’ve put in to the Permian Basin case what the staff has determined on the basis of extensive questionnaires and information that’s received.

What is a cost for exploration and development?

This, I indicated, is a national cost.

I don’t know what this figure is.

Let’s say it is 3 cents.

A cost which the experience in the industry shows that they’re spending per Mcf, whatever that means, of gas, to do sufficient exploration to find new gas; well, that’s one basic cost.

There are other costs; the operating costs of lifting gas and then drilling this particular area.

We have derived, in effect, a composite cost of service for the Permian Basin.

William J. Brennan, Jr.:

And this involves no consideration of actual field pricing?

Richard A. Solomon:

This involves no consideration of actual field pricing.

Now, to what extent in determining the final area price, the Commission will give consideration to the actual field prices, whatever that means, because in any area at the present moment, there are all sorts of prices.

There’s the price of the new gas and the price of gas sold five years ago and the price of gas sold 10 years ago.

I cannot assure this Court.

I can only say that everything the present Commission has done since it took over this business and has been pushing to get these cases decided indicates that their primary interest is setting a reasonable price based upon cost and economic considerations of how to get the gas produced and into the interstate market and not upon contract considerations 20 years ago, 10 years ago or even today.

Potter Stewart:

It is going to be on averaging operation, an averaging process though, isn’t it?

Richard A. Solomon:

Yes.

Now, there may be different prices for different types of gas.

Potter Stewart:

Yes.

Richard A. Solomon:

There are some — one of the great problems that we have, which is an issue now, is to whether you should have the same price for what’s known as gas well gas, which is gas produced by itself and a casinghead gas, which is gas —

Potter Stewart:

Comes up with oil.

Richard A. Solomon:

— that comes up with oil, and there may be all sorts of different economic indicia as a result.

It may be that exploration costs and needs for looking for gas well gas are entirely different from dealing with gas which is really a byproduct of oil.

These variations may exist but we’re looking to set a price for a type of gas in an area.

Potter Stewart:

In their field.

Can you at some point be able to summarize your statement in summary form the factors that led the Commission to dismiss the Section 5 proceedings?

I’d like to hear that.

I understand before you —

Richard A. Solomon:

The Section 5 proceeding as to Phillips was dismissed because one, the Commission determined that it could not determine a reasonable price for the future using the individual company cost-of-service basis as of 1960 on the basis of a test year of 1954.

Arthur J. Goldberg:

Could it not have reopened that’s referred —

Richard A. Solomon:

That’s — that’s two.

That’s two.

It determined — it — it determined in its discretion as of 1960, and I say that because I think its discretion as of 1960 is a priori as of 1963, but it determined that it would not reopen the record to bring it up to date and to then try to figure out a proper rate design for the 350 Phillips rights.

Because it believed that this would be a time-consuming, difficult job which would produce results which you didn’t think were very useful and that it could better focus its time and attention on doing what it did think was useful, and that is putting its people, people who are experienced in the Commission on this type of problem to work as hard as possible to get the area rate determinations made.

Now, in so doing, it recognized that there was an interim period and it did establish an interim program which had been described here this morning which consisted of establishing ex parte, no hearing, there is no question about that on the basis of expertise, two rates in each area, a new gas rate and an old gas rate; the old gas rate was for increases and in almost all cases is substantially lower than the gas rate, which are basically holding the line devices because it recognized there was an interim period and we’re told that there’s a holding of line device that’s been completely ineffectual.

Well, I don’t think that’s true.

We pointed out in our brief that the fact is that just this period, September 20, 1960, does constitute a watershed in which prices which had been going up on a curve which were all too high have not — have gone down.

And prices have more or less been stabilized in one or two areas.

We’ve pointed it out in our brief that the price for October of 1962 indicated that things were still stabilized.

Our information now is that the price for November 1962 was identical with October 1962, but it isn’t merely a stabilization matter because in this last 18-month period, there had been no less than $30 million of refund ordered from the producers to the pipelines.

This is hard cash going back to the pipelines and we’re all going back further.

Hugo L. Black:

From what basis —

Richard A. Solomon:

What?

Hugo L. Black:

— those refunds ordered for what year?

You say $30 million?

Richard A. Solomon:

Yes, sir.

Hugo L. Black:

What basis — what year; that I don’t quite understand?

Richard A. Solomon:

These were of two types, one that was described by Mr. Mann as a result of Section 7 proceedings because it is in — untrue, Your Honor, that our initial price line is the price line which is the CATCO price line.

It is the price line that the Commission will act but anybody who wants a hearing has got a right to a hearing and in a hearing, these prices may come down.

In the Skelly hearing mentioned in our brief, the prices came down as much as 2 or 3 cents.

In the CATCO case itself they came down.

That’s one way refunds come back.

The other way —

Tom C. Clark:

Are those based on bonds?

Have they given bonds for refunds?

Richard A. Solomon:

Yes, yes, yes.

Tom C. Clark:

Has there been any bond for refunds in Phillips?

Richard A. Solomon:

Well, I don’t know whether there’s been a bond for refunds in Phillips.

Mr. Heady I’m sure will know, but they are — there’s — either bonds are corporate undertaking, I understand.

Hugo L. Black:

But if you can’t — if you can’t decide Phillips on the basis, what good is the bond or anything else with reference to the refund?

If you can’t —

Richard A. Solomon:

First of all —

Hugo L. Black:

— decide it now as of 1954 or whenever it was.

Richard A. Solomon:

First of all, leaving out these eight rates, we are deciding those.

We’re moving to decide Phillips as fast as we can but we’re doing it in the area of proceeding.

Now, this isn’t quite as silly as it sounds —

Hugo L. Black:

As of 1954, the reasonable value as of 1954?

Richard A. Solomon:

All these rates which are subject to refund, they’re not 1954 rates.

All these rates which are subject to refund are in the various areas of proceedings or held for the various area of proceedings and when we decided Permian Basin for example, that involves 35% of Phillips’ rates.

Of all companies — of all companies in the United States of America, Phillips is probably the last company to start now to try individual company rate basis because it so happens — and this may be luck, I don’t know, it so happens that 35% of Phillips’ rates are going to be decided as to refunds and as to the future in this Permian Basin case.

I also want to indicate in addition to $30 million refunds, in addition to the actual price line, this business that we haven’t had any effect is not true for another reason.

We point out in our brief the initial price line, which I deny was the highest prices in each area, and that’s perfectly clearly proved by the Eastern Seaboard brief itself which is complaining about a whole bunch of prices in Southern Louisiana higher than this price line.

Since we put those price lines into effect and as we point out in our brief in over 600 cases, people have come to us to certificate sales of gas at a price which we said we will not certificate this gas at this price.

If you want to come down in price to this ceiling, we’ll consider certificating it, but unless you come down, no so.

Now, that is not non-regulation.

That may not be the most perfect regulation.

We will be perfect only when we can decide the area of prices, but we have not gross mistake to say that the Commission has abdicated its responsibilities during this interim period.

Potter Stewart:

Upon what — upon what foundations were the two sets of prices in the Statement of General Policy based?

Richard A. Solomon:

The Commission stated that they were based upon consideration of the existing prices in the area plus their knowledge of costs and other economic information at the time.

I think with all due respect to the Commission at that time that it is true that serious consideration was given both to the — certainly to the initial prices to what was the going price — the field price at that time.

But it was not the highest field price.

The initial price in Southern Louisiana was set at about 21.5 cents.

Subsequently, we have reduced that by two cents, but the initial price that the Commission set in Southern Louisiana was about 21.5 cents.

And yet, as Mr. Mann points out in his brief, there were a lot of sales in Southern Louisiana at 23 cents.

Similarly, the initial price in the Texas District 4 was set at 18 cents.

There were some 20-cent sales in that thing but we didn’t use them, and that price was subsequently cut down to 16 cents.

Richard A. Solomon:

The Commission —

Potter Stewart:

Under what procedure is that price been cut down to 16 cents?

Richard A. Solomon:

The Commission had a hearing which determined what the prices were pursuant to the CATCO inline rule after hearing in Texas District 4 as of September 28, 1960.

The hearing showed that the prices that the old Commission had set at 18 cents were too high, so the Commission reduced the price for the future as well as reducing those rates which were involved in that case.

Potter Stewart:

Now, as to — as to new filings of prices in that field, the — the — the price will be different from — from that in the Statement of General Policy and the Commission’s opinion on this case.

Richard A. Solomon:

That’s right.

There’s a Fifth Amendment to the Statement of General Policy.

Potter Stewart:

There’s a what?

Richard A. Solomon:

There’s a Fifth Amendment which happens to be [Laughter] — I think my friend from Phillips would agree that I am not taking the Fifth Amendment that he is taking.

We have amended this thing as time to time goes on as circumstances have indicated.

But this is an interim program.

Potter Stewart:

With respect —

Richard A. Solomon:

The final program is not what we can do to hold the line.

The final program is the area rate program, the cost-based area rate program to fix uniform rates for the same type of gas for all producers in the various areas of the country.

Why did the Commission justify the proceedings instead of merely suspending them?

Richard A. Solomon:

I don’t know.

Is there any —

Richard A. Solomon:

I think maybe it would have been wiser, as you will note in the recent Hunt case where we similarly we’re not able to make any decision but we’re sending the case back, we sent it back only for further evidence on the Section 4 increased rates there, but we didn’t dismiss the Section 5 proceeding and of course, one of the reasons for that was, that we were well aware that this case is going to be argued at this time and that it would be foolhardy to dismiss a proceeding which this Court, we hope not but might order us to go ahead with.

I don’t know why the Court dismissed the Section 5 proceeding rather than holding it in advance.

What I think — well, I just want to say I don’t really think it makes too much difference because —

I suppose I’m —

Richard A. Solomon:

— I don’t really think — excuse me.

Well, my point is simply this.

In this estimated three to 14 years, whatever that figure is —

Richard A. Solomon:

Not our estimate.

No, I understand that that’s out of the blue or it’s Judge Prettyman’s not out of the blue.

Richard A. Solomon:

No, it’s not Judge Prettyman’s estimate either.

Well, alright.

It’s in Judge Prettyman’s opinion.

Richard A. Solomon:

Right.

What would happen — is there any method supposing this delay goes on for 10 years or whatever it is?

Is there any method by which any consumer interest can come in and say to the Commission that the ad hoc protection, as you’ve described, interim protections are not adequate and getting a hearing on them?

Richard A. Solomon:

Yes.

We can —

On this proposal?

Richard A. Solomon:

— reinstitute — we can reinstitute the 5 (a) proceeding tomorrow.

To get the reviving —

Richard A. Solomon:

Yes.

You could lift it out of the —

Richard A. Solomon:

Yes, we can — we can reinstitute the Section 5 proceeding and I really don’t think it makes too much difference whether a 5 (a) proceeding, which is a proceeding for future is suspended or —

It might be not.

I was just —

Richard A. Solomon:

We can reinstitute it and if the Commission really felt that we could reach meaningful decisions on an individual cost-of-service basis for these major companies, including Phillips, we really felt that there was much likelihood of doing so without disrupting our continuing efforts to do what we think make sense, I’m sure we would.

Basically, what you’re being asked to decide is that the Commission’s judgment as to how it can best use its mind power and spend its time in attempting as quickly as possible to get nationwide area pricing, whether it can be done best by deciding the Phillips case and the Pan American, which is the second biggest producer and hasn’t been started yet, and the Humble, which is the third biggest producer and hasn’t been started yet, those cases on an individual basis or whether we can do it best by the area basis, and we have decided, the old Commission decided and the new Commission still believes that we can perform this difficult task best by the procedure we have adopted.

Arthur J. Goldberg:

Mr. Solomon, to put it down, if you started to say that [Inaudible] adopting to the area [Inaudible].

Am I quoting you correctly and if I am what is the [Inaudible]?

Richard A. Solomon:

Well, I don’t think you’re quoting me correctly but I think you’re right.

What I said was that we have made clear that in area pricing, we are considering costs, but I want to go on and say that the question came up during the course of the Permian Basin case.

What did we mean by saying we’re considering costs and the Commission changed its mind on this, to be perfectly frank.

At first, the question came up by some of the producers I think or maybe with some of the interveners, can we introduce cost-of-service type presentations?

And at first, the Commission said, “No, we don’t want any cost-of-service type presentations.

We just want cost information generally,” but the present Commission has changed this and it has said, “We don’t want individual company cost-of-services, but if you think it is useful in showing us how an area price can be done to introduce composite cost-of-service of analogous type companies, come ahead and do so” and to that extent, the cost-of-service principles, but considered on an area basis are involved.

Hugo L. Black:

Mr. Solomon, I want to ask, and yet I’m unable to understand precisely the reasoning by which you reconcile what was done in Hunt and the later cases and the dismissal of the five proceedings against Phillips, unless it’s simply be by reason of change in the Commission.

Richard A. Solomon:

No, sir.

The Hunt case was one of the six cases — seven cases which I mentioned before.

It’s the time it dismissed Phillips.

The Commission thought maybe it could make some decisions.

First of all, it has made a decision on Phillips, remember, with respect to the Section 4 aspects of the case.

There were Section 4 aspects, increased rate problems of past periods involved in Hunt.

Also, the Hunt case had a much lighter cost test year.

Richard A. Solomon:

So the Commission in Hunt and in Gulf and a number of these other cases refused to terminate the case at that time.

It was an examiner’s decision in Hunt.

The examiner filed that Hunt’s cost-of-service was way above its revenues — pardon me, above its revenues that we should dismiss the Section 4 increased rates without refunds and that we should dismiss the Section 5 proceeding along line of Phillips.

When this came before the Commission, the Commission found it was unable to make any determination as to Hunt’s cost-of-service on an individual company basis because the record was inadequate.

The Commission might have dismissed it on that ground.

It simply said to Hunt, “You haven’t shouldered your burden or proof of showing these increased rates were justified.”

The Commission didn’t feel that that was appropriate in view of the fact that, one, this record had been made prior to Phillips when there were no guidelines, and two, the Commission had refused to terminate this proceeding, but it forced Hunt and everybody else to go ahead with it.

Under these circumstances, the Commission has remanded this case to give Hunt an opportunity to show, if it can, what its cost-of-service was.

And if this —

Hugo L. Black:

That means that that case is being decided on the cost-of-service.

Richard A. Solomon:

That means that that case may be decided on the cost-of-service, and so may a number of the other cases.

Hugo L. Black:

And in this case, however, it was thought impossible to do it and suit was dismissed.

Richard A. Solomon:

No sir, it was not thought impossible to do it.

It was thought unwise to do it because they would — because of the fact that they would have to start over again and because of the fact they thought it would take unnecessary time and effort to do so away from moving to the area pricing in that way.

Now —

Potter Stewart:

On the Hunt case, I’m looking at your brief on the top of page 42.

It said that — I read that as implying that the hearing examiner is just supposed to sit on the 5 (a) aspect of the Hunt case pending this area pricing —

Richard A. Solomon:

The Hunt remand directs the examiner to allow Hunt to make a record with respect to the Section 4 proceeding.

Potter Stewart:

Yes, yes.

Richard A. Solomon:

It doesn’t terminate the Section 5 proceedings —

Potter Stewart:

No.

Richard A. Solomon:

— but it holds them in suspended animation.

Potter Stewart:

Well, it remands them —

Richard A. Solomon:

Is that right?

Potter Stewart:

Technically, it remanded that, as I suppose to the hearing examiner too, but —

Richard A. Solomon:

Well technically, I’m not sure about that.

But I think there are grave doubts as to whether the hearing examiner is supposed to go ahead with the Section 5 aspect of the case at all.

Potter Stewart:

Well, that’s — that was my interpretation reading that — that little portion of the opinion on the top of your — of page 42 of your brief.

Richard A. Solomon:

Well, I’m sure — I’ve really taken too much of my colleague’s time, but I suggest that whether I’m right or not, it’s set out in full in the Eastern Seaboard’s reply brief and I think they’re just holding this case in the case and not attempting to go ahead with the Section 5 proceeding at this time, in Hunt at least.

Earl Warren:

Mr. Heady.

Kenneth Heady:

Mr. Chief Justice, may it please the Court.

I represent Phillips Petroleum Company.

At one time I believe Phillips was the principal subject to these proceedings.

We have heard considerable discussion today regarding the general approach of the Commission to the regulation of independent producers.

I would like to turn from that subject, if I may, and to direct the attention of the Court to the specific findings which the Commission made in this proceeding on the basis of the record before it and to the disposition of this case which the Commission made on the basis of those findings.

In particular, I want to address myself to the question of Mr. Justice Harlan with respect to why did the Commission dismiss the Section 5 (a) proceeding and to the second question raised by Mr. Justice Goldberg as to why did the Commission dismiss the proceeding rather than to reopen the proceeding.

Hugo L. Black:

What page of the record did you refer to this?

Kenneth Heady:

I will reach that, Your Honor.

Hugo L. Black:

I thought you said that’s part of the record.

Kenneth Heady:

I intend to discuss the record pretty much in its entirety, Mr. Justice Black.

Hugo L. Black:

I — I just thought you had referred to a particular page.

Kenneth Heady:

No.

I — I will in a few moments.

On the basis of this record, the Commission made four basic findings.

These basic findings apply both to the Section 5 (a) proceeding and to the consolidated Section 4 (e) proceeding.

These basic findings were at first that 1954 where the adjustments for known changes through 1956 constituted an appropriate test year for the purposes of these proceedings.

Secondly, the Commission determined that for that test year, the cost-of-service determined by the Commission was almost $9 million higher than the revenues provided by the contract rates including these consolidated Section 4 (e) increases.

Thirdly, the Commission determined that there was no evidence to show that any of the individual contract rates were under the discriminatory or preferential.

And fourth, the Commission determined that this record was inappropriate for the purpose of determining rates for the future.

Now, each of these basic findings is supported by substantial evidence.

None of them were challenged in the various applications for rehearing.

The first three of these — I mean or three of these findings have never been questioned.

The only finding which has been questioned at all is the finding relating to the subject of discrimination and that issue was raised for the first time after this Court had granted certiorari.

For the moment, let me deal with the finding that this record was inappropriate for fixing rates for the future.

To do that, I think it would be helpful to go back and contrast the situation of this case as it was presented to the examiner and as it was presented to the Commission.

It became obvious relatively early in these proceedings that cost-of-service, however determined, was going to be in excess of the contract revenue.

Now, contrary to the statements of Mr. Bennett and Mr. Brown, Phillips was not advocating cost-of-service.

We had gone into this proceeding.

We knew that we were going to be met with a cost-of-service and we intended to deal with that subject as best we could by meeting them on common ground.

Certainly, it was not our position that cost-of-service was the only way in which this case would be decided.

Kenneth Heady:

Now, at the — on the basis of the cost-of-service determined by the Commission, it was apparent as I say, that that cost was going to exceed the revenue.

Phillips took the position before the examiner that if cost-of-service was to be the sole criterion, then under those circumstances, Phillips was entitled to contract rates which would return that cost-of-service.

Consequently, Phillips proposed that the Commission set aside its contract rates and permit it to charge rates higher than were provided by its contracts.

That contention raised serious objections on the part of many of the interveners.

The examiner touched on — or did more than touch upon that question.

If you will turn to page 75 of the record, you will see there the beginning of a rather extensive discussion by the examiners under the heading, Phillips’ right to Section 5 (a) increases under the Mobile-Sierra Pacific arguments.

The examiner determined that the Commission was entitled to and should set aside Phillips’ contracts and permitted to charge rates higher than were provided by its contract.

But in the sum — that finding then was the basis for vigorous exceptions on the part of many, but not all, of the interveners in that proceeding.

Some two years and nine months elapsed between the time of the close of the record and the decision of this case by the Commission.

During that interval of time, many of the contract prices provided for higher rates, many of the contracts were renegotiated to provide for higher rates.

Consequently, by the time this case was decided by the Commission, the issue of whether the Commission should raise Phillips’ rates above its contract level was in a sense moot because of the fact that by that time, the contract price is already provided for higher rates.

And this was the significance, I think, of the Commission’s statement at page 324 and 325 of the record in which the Commission said that this record was not appropriate for fixing rates for the future.

The Commission says that, “We do not deem inappropriate or require that Phillips file rates for the future based upon the present record.”

The significance of that statement was that it made little sense to the Commission to undertake — to set aside contracts so that it could raise rates above the level of the contracts only to find that the levels to which it had raised above the contract were then below what the contracts were providing.

Consequently, the Commission said that on the basis of this record, it makes no sense in reason or justice to attempt to fix rates for the future on the basis of this record.

Now, we come to the question as to whether the Commission should have dismissed or should have reopened this proceeding.

With regard to that question, this particular proceeding was first instituted in 1948.

There were already two separate and lengthy hearings in this record.

It seems to me that it was well within the discretion of the Commission to say that we are not going to continue this already bulky proceeding and reopen it for the receipt of new evidence instead we will set this proceeding down for a new proceeding.

Now, I make no argument as to whether or not the new proceeding ordered by the Commission was or was not the proper type of proceeding.

That I leave to the Commission, but I do make the point that on the basis of the record before it, the Commission was entitled to terminate this proceeding and go forward to some other proceeding and that the findings made by the Commission did support that decision.

Now, with respect to the 4 (e) proceedings, the Commission did use this record to turn — to determine that these particular Section 4 (e) increases, had determined rates less and provided revenues less than the cost-of-service while they were in effect and that there was nothing to show that these individual rates were unduly discriminatory or preferential.

Now, I want to emphasize —

Potter Stewart:

The question that you’ve just stated is the only question really before us, isn’t it?

The validity of the new proceeding is not really before us.

Kenneth Heady:

It seems to me that that is correct, Your Honor, that the only question which is actually before this Court was, whether or not, the Commission was entitled to terminate the Section 4 (e) proceedings, and I emphasize that that question is not really before this Court because of the fact that in the applications for a rehearing, none of the interveners, none of the present petitioners, attacked and challenged the Commission’s finding that there should be no refunds involved.

Now, there was one exception to that, that one exception was the State of Wisconsin.

Wisconsin in its application for rehearing did contend that there should have been, perhaps, refunds for those rates which are in excess of the average cost-of-service, but that contention was urged only mildly in the Court of Appeals and it has been abandoned here.

Consequently, I question whether we have even the disposition of the 4 (e) proceedings properly before this Court.

That — but in substance, I agree with — with Your Honor that that is the only basic issue which is involved if it is properly here.

Kenneth Heady:

Now, I want to emphasize that these basic findings of the Commission and the dismissal of this proceeding based on those findings do not directly affect any future proceeding involving Phillips or any other producer.

Under Section 5 of the Natural Gas Act, as Mr. Solomon has pointed out, the Commission is free at any time to institute a Section 5 investigation.

The dismissal of these proceedings did not and has not affected that power.

Similarly, with respect to the unconsolidated Section 4 (e) proceedings, those proceedings remain pending as a part of other proceedings, not a part of this proceeding.

The Commission has in fact exercised its power to set 5 (a) proceedings by ordering a 5 (a) proceeding with respect to Phillips’ rates in the Permian Basin area and the South Louisiana area.

It could this afternoon, so far as Phillips is concerned, institute an order with respect to an investigation of Phillips’ rate in their entirety.

It seems to me that the only question for review by this Court now is whether these basic findings of the Commission authorized the Commission to dismiss these particular proceedings.

The future proceedings and how the Commission should conduct itself in these future proceedings is to me not properly before this Court.

It is simply asking this Court to exercise advisory administrative powers which admittedly this Court does not have.

Now, with respect to the Section 5 (a) proceedings and the dismissal of those proceedings, the Commission’s power to fix rates for the future is dependent upon the finding that the existing rates are unjust and unreasonable or unduly discriminatory or preferential.

The language of the act specifically makes that finding a condition precedent to the fixing of rates for the future by the Commission.

Historically, in pipeline rate cases, it did not pose any particular problem because of the fact that the Commission has generally found that the existing rates were too high.

The Commission has then declared those existing rates to be unjust and unreasonable.

It has then proceeded to prescribe lower rates or require the pipeline company to file lower rates, but here, the Commission was — was faced with the opposite of the usual historical situation.

It was faced with a situation in which revenues were less than costs.

No one now contends that that finding which is unchallenged obligated the Commission to hold that the existing contract rates were unjust and unreasonable.

The Commission expressly found that there was nothing to show that they were discriminatory.

Under these circumstances, no one challenged the Commission’s finding that the record in this proceeding was not appropriate for the purpose of fixing rates for the future.

All that these petitioners did in substance was to urge an application for rehearing, that the Commission reopen the record if it thought that this present record was inadequate.

But that objection was not that the Commission had failed to fix rates upon this rate, but that the Commission had failed to provide for obtaining a new record in which new evidence might be obtained and that that new proceeding was precisely the kind which these petitioners would desire to have.

It resulted, — so far as the Section 5 proceedings are concerned, the Commission did not find and it was not required to find that Phillips’ existing rates were unjust or unreasonable.

The Commission did not find and it was not required to find that Phillips’ existing rates were unduly discriminatory or preferential.

But without those findings, the Commission had no power over these proceedings to fix rates for the future.

The fact that the Commission permitted the existing rates to stand without expressly determining that these existing rates were just and reasonable is not a matter of any significance.

This Court made it clear in the Mobil case that the power of the Commission is simply the authority to review rates established in the first instance by the natural gas companies being regulated and to set aside or modify only those rates which it determines to be unjust or discriminatory.

A rate once having been reviewed by the Commission and not having been found to be unlawful, stands on its own and is not dependent upon any affirmative finding of the Commission that that rate is just and reasonable.

Now, the Court also made it clear in the Mobil case that to this extent, there is no difference between Section 4 and Section 5.

This principle applies to both of those sections.

In actuality, the petitioner’s contentions that the Commission should have reopened this record are — are nothing but pleased to the discretion of the Commission.

As a matter of fact, I think it’s clear that the Eastern Seaboard’s contentions are just that.

Kenneth Heady:

I don’t think they have ever gone further than — than to contend that this was a matter of discretion.

In their view, it was an abuse of discretion, but nevertheless they have treated it as a matter of discretion.

As I pointed out, so far as the — as the Section 4 (e) proceedings are concerned, it seemed to me that the Commission’s findings, its basic findings are as applicable to those as to the 5 (a) proceedings with this one difference.

The Commission there did decide that — and specifically the question of refunds.

It determined that in view of the fact that the cost-of-service was in excess of the revenues and the fact that the existing rates were not shown to be discriminatory, that there was no basis on which to attempt to order refunds of those Section 4 (e) increases.

Now, the Commission did point out that since those increases have been superseded by later increases and therefore were no longer in effect and that the later superseding increases were the subject of other and separate pending Section 4 (e) proceedings that this record was not an appropriate place in which to attempt to establish future rates for these Section 4 (e) proceedings.

It seems to me that on — on the basis of its finding in this proceeding that the Commission did precisely the only thing it could do with respect to this Section 4 (e) proceeding and that was to hold that no refunds were required and that these particular Section 4 (e) proceedings should be dismissed.

With regard to the Hunt case, which has been discussed here to some extent, one contention made by the petitioners here is that that case holds that the mere fact that total cost-of-service exceeds total revenue may not always be relied upon to sustain individual rate increases.

That finding, of course, was based upon the record in the Hunt case.

Whatever findings and whatever decisions the Commission may have made on the basis of the Hunt case so far as this record is concerned, the Commission did hold that the mere fact that an overall cost-of-service exceeded the total revenue did justify these particular increases because of one, the fact that cost exceeded revenues and secondly, the fact that there was nothing to show that the individual rates were discriminatory.

The Commission was not required to make any further inquiry so far as Phillips was concerned.

Perhaps for Hunt, I don’t know what the record showed in that proceeding.

There’s one other matter regarding these Section 4 (e) increases that might bear some slight discussion.

One other attack was made upon these — on three of these Section 4 (e) increases by California.

These contract provisions provided that the — whenever the wholesale commodity index had increased by a prescribed number of points and the purchaser from Phillips had obtained a general increase in its rates, then Phillips was entitled to a proportionate increase in its rates, proportionate, that is to the increase received by the pipeline company.

These are the clauses which California designates as the so-called Spiral Escalation Clause.

California nowhere contends that these increases were not justified by Phillips’ cost.

As a matter of fact, the three increases involved were to levels which were less even than the average unit cost-of-service determined by the Commission.

California’s contention is simply that the mere existence of these contract provisions in some way violated some unstated public policy and that the Commission should have rejected these increases without even considering the question of whether the increases were required or justified.

California never states precisely why it is that the mere existence of these contract provisions should violate some public policy, especially in view of the fact that any increase provided by them must be justified on other grounds.

Now, California in its brief seems to be attempting to create the impression that the Commission allowed these increases merely because of the contract provisions.

But quite to the contrary, all that the Commission did was to consider these contract provisions authorized Phillips to utilize the rate filing procedures of Section 4.

That’s all that the Commission considered that these provisions did.

Phillips was required to justify these contract provisions on other grounds.

To that extent, the Commission treated these contract provisions no differently than any other contract provisions.

In this instance, the Commission determined that these particular increases were justified on the basis of Phillips’ cost and California has never contended otherwise.

Certainly, there is no public policy which would require or even permit the Commission to ignore these contract provisions.

In fact, California seeks a retroactive amendment which would deny Phillips the right to file an increase to which it is admittedly entitled.

These particular provisions have been upheld by the Court of Appeals for the Tenth Circuit.

Similar or — provisions providing for indefinite increases at indefinite times had been upheld by other circuits and in fact by this Court.

Kenneth Heady:

It would have been obviously a clear error under those circumstances for the Commission to have rejected these increases.

In summary, let me say that —

Hugo L. Black:

Why do you say admittedly right?

Kenneth Heady:

Because of the fact that the Commission found that the total contract revenues, including these particular increases provided revenues less than the cost-of-service and the fact that there was nothing to show that any individual contract rate was discriminatory.

Now, California has not challenged either of those findings.

It seems to me that none of those circumstances, Calor had — Calor — oh California has admitted the findings of the Commission that those rate increases were justified.

The position of California —

Hugo L. Black:

In California, the gentleman has argued here awhile ago, they admit that your rates were valid.

Kenneth Heady:

California has never challenged and did not, in its application for rehearing, challenged the Commission’s finding that cost-of-service exceeded revenues for the test year nor did it challenge the position that the rates were not shown to be discriminatory.

Let me say one thing further with respect to the test year.

The argument is made that the test year doesn’t establish anything with regard to later year, but that finding overlooked — that contention overlooks the fact that the Commission found that the 1954 test year with adjustments was representative for the purposes of this proceeding.

And that effect and by that finding, the Commission has in effect found that the 1954 test year was representative of all of the periods that these particular contract increases were in effect —

Arthur J. Goldberg:

[Inaudible]

Kenneth Heady:

Those increases in revenues are subject to later Section 4 (e) proceedings, which were not a part of this proceeding, no evidence was introduced with respect to — they could — there could have been no decision in this record with respect to those increases.

That matter of course occurs in any time, even with a pipeline company.

Arthur J. Goldberg:

[Inaudible]

Kenneth Heady:

That this proceeding —

Arthur J. Goldberg:

Was inappropriate.

Kenneth Heady:

Was inappropriate?

Arthur J. Goldberg:

[Inaudible]

Kenneth Heady:

The Commission very carefully states that the 1954 test year was appropriate for the purposes of this decision.

Now —

Arthur J. Goldberg:

But they haven’t been appropriate, have they?

Kenneth Heady:

They — they — they have used it to the extent of the 4 (e) proceedings.

And in fact, the Commission has said that the 1954 test year was appropriate for the purpose of testing the 4 (e) increases.

They did go on and say that the 1954 test year was not appropriate for the purpose of fixing rates for the future either in the Section 5 (a) proceeding or the Section 4 proceeding.

Arthur J. Goldberg:

From this deal?

Kenneth Heady:

That and the fact that the contract provision has changed in the meantime and the issues presented to the Commission were different than those presented to the examiner.

Yes, that’s right.

Hugo L. Black:

There’s one thing I didn’t understand and I understood you to say that no increase has occurred by reason of the dismissal of the 4 (e) proceedings.

Hugo L. Black:

Does that mean that the attack could still be made with reference to those rates at that time?

Kenneth Heady:

No, Your Honor.

The Commission — as I read the Commission’s decision, specifically decided that the 4 (e) increases were justified and that no — no refunds were required.

Hugo L. Black:

So that it’s nothing they could do so far as this refund — this ends the refund chances if they’re — if they have a word.

Kenneth Heady:

It ends the refund chances with respect to the 12 particular Section 4 (e) increases which were consolidated with this proceeding.

The balance of the increases which were filed during and after this hearing and this proceeding remained the subject of pending proceedings there will be perhaps an opportunity for refund in those proceedings.

Hugo L. Black:

That’s for future?

Kenneth Heady:

That’s for future.

Well, that’s for future proceedings for determination —

Hugo L. Black:

What I understand then from you is that — it hasn’t been perfectly clear but does it make any difference now — what could be shown that the Commission by dismissing this on the ground that it couldn’t decide it at this time on the basis where the method which it asked has permanently cut off the chance to get a refund if these rates were invalid?

Kenneth Heady:

No, Your Honor.

Your — your question assumes that the Commission terminated the 4 (e) proceedings because it could not decide it.

The Commission did decide —

Hugo L. Black:

Alright.

Well —

Kenneth Heady:

— the Section 4 (e) —

Hugo L. Black:

— if they did — if whatever the reason, it has cut off by determination any chance to get a refund later.

Kenneth Heady:

It has cut off that chance to get a refund because of the Commission’s findings that the increases were justified.

Hugo L. Black:

So you’re standing on the basis that they actually have decided the case on its merits.

Kenneth Heady:

That is correct, Your Honor.

Hugo L. Black:

I didn’t so understand from the government.

I’m — I’m — it’s evident I misunderstood it.

Earl Warren:

Mr. Mann.

J. David Mann, Jr.:

Mr. Mann, may it please the Court.

I would respond first to Mr. Solomon’s suggestion that the real question here is whether the Commission should be compelled to go down two roads simultaneously.

I suggest to this Court that the question is whether the Commission may refuse to go down any road during the time while its area rate experiment is in progress, whether it can in fact abandon a known road simply because it’s rocky in favor of an unknown road which has not even been chartered.

While this experiment goes forward, and I would remind the Court again that the companies for whom I speak are not opposed to the Commission’s going forward with its area rate experiment.

They are actively engaged and presumably will continue to assist the Commission in its efforts in this regard, but while the experiment is in progress, while it is going forward, refundable, bonded dollars are being collected at the rate of $158 million annually, $ 22 million of those dollars are Phillips’.

Now, Mr. Solomon suggests that the Commission is basing regulation on a cost-of-service basis and indeed, it is in part as is reflected by its own evaluation of the examiner’s decision here and its own opinion 338 in this case, as it has reflected in the Hunt decisions, which are before you, opinions 365 and 369, as it is already going forward, at least it’s — did in the Permian Basin procedure.

The Commission does indeed recognize the need for some relationship between the revenues of a company and its income or — and it’s — and it’s requirements in terms of revenue.

J. David Mann, Jr.:

The Commission recognizes the need for cost.

The problem is not that.

It’s that the Commission refuses to go forward on a company by company basis.

And in accordance therewith is unable, we contend, and I think properly so to give us any kind of interim protection while its experiment is going forward.

Arthur J. Goldberg:

Mr. Mann, [Inaudible] examiner of the Commission [Inaudible]?

J. David Mann, Jr.:

Mr. Justice Goldberg, I think that we – to answer the question in several ways, first of all recognize that Phillips Petroleum Company itself, this single company, represents 10% of the jurisdiction of gas being sold in this country today.

It represents alone as much gas as being considered in the entire Permian Basin proceeding, so it is important.

Now secondly, as far as time is concerned, indeed it did take time to try this case.

We started back in 1957 and the record was long, and there were many false starts.

The parties who participated in this proceeding had many suggestions to make as to how to proceed.

The examiner sit through the week [Inaudible] in — in a — in an extraordinarily patient and capable way.

The Commission then considered this and the Commission resolved many of these issues so that in consequence, a great deal of ground had been plowed in this proceeding.

And indeed, the — the — the ground plowing that has been done here by the examiner has been followed by other examiners and they have learned their lessons from this.

The Commission has in consequence in the — in the proceedings in which the company by company approach has been used and we list them incidentally, some of them in our Appendix A, a great deal of progress has been made and much, much less time, in my opinion, would be required.

And third and finally, if this is a relative matter, if it’s a matter of relating how much time is going to be required to finish this case at long last on the one hand as compared with going forward on the area approach and conceivably by mid-1964 finding the rates for the Permian Basin procedure — producers, 35% of Phillips’ gas being there.

If it’s a relative thing, I would point out that many of the legal issues which are going to be involved in the Commission’s decision of the first area price proceeding are going to be long and complex and complicated.

Now, this is not necessarily to condemn it, but simply to say that it is that kind of question which it seems to me we will not get if the Commission here decides the Phillips case on a company by company basis.

The discrimination, confiscation argument which Mr. Justice Black discussed with Mr. Solomon this morning, one of the — one of the virtues of a — of a company by company approach is that at least it enables the Commission the examining authority to weigh and evaluate all of the costs of the company on the one hand and all of its revenues on the other.

Then by prescribing or first letting the company come in with a schedule of rates to return that cost-of-service, there may be some positive assurance that the company is at least recovering its cost-of-service.

That is — that is one of the very important major benefits and advantages of the company by company approach, which incidentally poses a very serious problem in the area price proceeding.

Hugo L. Black:

This case seems to leave considerable questions to whether it’s part to conduct proceedings and to regulate a big industry like this in the time enough so that you can never get a final judgment before the figures are obsolete.

J. David Mann, Jr.:

Well, certainly Mr. Justice Black, the record in this case would indicate that it takes a good while and I think that there is no doubt that in the major cases, it will take some time.

But again, it’s a relative matter.

I cannot say to you in complete honesty that it’s going to take any less time to do it on an area basis.

In fact, it’s my own personal judgment it may well take more time to reach the Commission decision level following which we will have a many unknown legal questions that are going to have to be resolved.

Secondly, Your Honor —

Hugo L. Black:

But in passing on the price, does the Commission have a problem?

It recently appeared with reference to the condemnation of the land when the government buys some property that the prices vary according to the hopes of the prices that the Commission will make?

J. David Mann, Jr.:

Well, I find that question rather difficult to answer.

I would say that it has been my experience that the pricing of gas in the field has been based pretty much on — on what the market will bear.

J. David Mann, Jr.:

Now, at the moment of January 1963, and this —

Hugo L. Black:

(Voice Overlap) very, very varying — it’s been very, very varying — here from a very short time.

J. David Mann, Jr.:

I beg your pardon, sir?

Hugo L. Black:

We’ve had many cases which indicates a skyrocket up pretty high in a very, very short period of time.

J. David Mann, Jr.:

That is — that is right, sir.

The pipelines have had a tremendous demand for gas.

They have gone in to the field and each time they seek either to construct a new line or to expand an existing pipeline, they require a substantial major block of gas.

They go into the field, they find its gas.

And it has been their experience in the past that each time they do, and this by the way is in your CATCO decision.

I think this is fully discussed there, each time they do, the gas price simply reaches a new higher plateau.

So that in sum, I would say that the experience in the marketplace and the field has been that gas seeks to be sold in a seller’s market and any pipeline which seeks to buy it is going to have to pay or even buy a major block of gas.

You’re going to have to pay at least as much as or slightly more than the last highest price in the area.

I would respond incidentally to Mr. Justice Goldberg with respect to the producer cases which are listed in our Appendix A of the brief which are a number of the major cases on which substantial work has been completed and would respond to Mr. Solomon by saying with respect to Humble and Pan American, which are I believe number two and three or three and two in the list following Phillips in size.

It is indicated very clearly there that the field investigation of these producers has been completed.

And if the lessons which have been learned in this case could be applied to those cases and the other cases listed in that appendix, it seems to me there certainly could be very rapid progress to be made and more importantly still, the results which would be obtained could be used by the Commission and applied in fixing prices by areas.

What is needed most, if the Court please, is a just and reasonable rate.

The Commission has yet to fix a just and reasonable rate for any major producer in the country and that is where we have to start.

That is what is needed and we trust that the Commission will be asked to come to grips with this matter in this case and decide it so that we may have at long last a just and reasonable rate.

Hugo L. Black:

Is there any difference between you and the counsel for Phillips as to the reason why the Commission dismissed both 4 (e) and 5 (a) terminated the proceedings?

J. David Mann, Jr.:

I think, Mr. Justice Black, there may be no difference between us as to why the Commission did it.

The difference we have is in — is in the extent of its propriety.

Hugo L. Black:

Do you think that they did it on the merits of the plans of increase?

J. David Mann, Jr.:

The Commission did it on the merits as applied only to the cost of service for 1954 related to the 12 Section 4 (e) cases that were then before it.

It did not come to grips with the real problem that it had.

It did not come to grips with the problem which this Court told that it had and told it to grapple with namely to fix Phillips’ rates, with all of them.

It in effect did nothing more than put in action, let the — actually, it’s 10 of the 12 Section 4 (e) rate stand.

It did not fix Phillips’ rates and so there is a difference between the two.

Potter Stewart:

As I understand it, you — you would concede that it couldn’t have — have made a decision on the merits in the 5 (a) proceeding on the present record, don’t you?

J. David Mann, Jr.:

I would concede Mr. Justice Stewart that the record was stated to the extent that —

Potter Stewart:

Inadequate — inadequate final foundation for any decision on the merits 5 (a).

J. David Mann, Jr.:

I think — I think —

Potter Stewart:

I understood you to say that.

I want to be sure —

J. David Mann, Jr.:

I think that it — it is true that whatever the Commission did with that record, it did have to update it.

I think the record — the record was so long in the making that it did have to be updated, and we urged the Commission to update it and in our application for rehearing, for example.

We — we call to the Commission’s attention facts which it did know and which were before it to point out precisely why it had to be updated.

But if it didn’t update it, it was simply closing its eyes to the reality of Phillips’ gas prices and also was ignoring the Court’s mandate to fix Phillips’ rates.

William J. Brennan, Jr.:

[Inaudible]

J. David Mann, Jr.:

That is right, Your Honor.

Tom C. Clark:

[Inaudible]

J. David Mann, Jr.:

I beg your pardon, sir?

Tom C. Clark:

That would not be necessary in the 4 (e) cases that they — the 12 that they dismissed, would it, that they were superseded by later filings?

J. David Mann, Jr.:

They — they were all superseded by later filings, Mr. Justice Clark, but I believe the one I mentioned to you this morning points up the kind of thing that could happen and did happen and might well have happened in connection with the other Section 4 (e) then pending but not consolidated, namely that even though the particular proceeding before the Commission represented an increase which let us say fell below the cost level line, they were — and accordingly was locked in, if you will, there were subsequent increases in the case I cited this morning, the one to 23.5 cents, which clearly was above and beyond all reason and above the CATCO inline level —

Tom C. Clark:

That couldn’t have set that though on the lock-in, could they?

I’m asking for information, I don’t know about that.

J. David Mann, Jr.:

They — they could have disposed this one and all the others had it update the new record.

Tom C. Clark:

Like you said, the one that — that superseded it is too high or too low even with the same —

J. David Mann, Jr.:

I think what would have happened, and again, perhaps I’m speculating, but it seems to me that what would have happened and what we suggested would be an appropriate approach would be for Phillips.

Once it knew the cost-of-service which it was entitled to collect for Phillips to submit to the Commission for its initial examination a schedule of rates covering all of its sales designed to return that cost-of-service, our position being that Phillips first of all is in the best position to do this because of its knowledge of its contractual relationships.

And secondly that it is a convenient starting point and does the least amount of damage to existing market relationships as among the producers on the one hand and the pipelines on the other.

And I think that in the process of this, prices like this, 23.5 cent price would have sorted out very nicely.

Tom C. Clark:

The remaining 4 (e)’s, I understood Mr. Bennett you to say there are about a hundred filings during this period?

J. David Mann, Jr.:

There — there were — they were pending before the Commission on September 28, 1960 I believe, Your Honor, 95 —

Tom C. Clark:

What happened to the 87 — I mean, on the about 83, wasn’t it?

No, —

J. David Mann, Jr.:

Well, many — many of those, Mr. Justice Clark, are still pending.

In addition, there have been others which have been filed and of course, there are also before the Commission, and I don’t know how many of these, there are several so-called initial price rates, which have been filed which are at high levels above the Commission’s area prices or inline levels.

Tom C. Clark:

Those are all pending, you think?

Most of those are pending?

J. David Mann, Jr.:

Yes, sir.

J. David Mann, Jr.:

They’re — they’re pending and to a certain extent are susceptible to the kind of protection that is available under the — under the refund and bonding provisions of the Act, which as this Court pointed out in — in this Number 48 this term just gives the consumer no protection at all because of the transitory nation of the population.

Tom C. Clark:

They wouldn’t be able to determine those, would they, under the area pricing plan, the 4 (e)’s, wouldn’t it?

J. David Mann, Jr.:

I — as I understand it, it would be the Commission’s hope that it could do this.

It’s — it’s — it’s hoped that it can be done.

And —

Tom C. Clark:

And to see that they do that for their future under the 5 (a) but I was wondering how they’d do it under 4 (e).

J. David Mann, Jr.:

The difficulty — the difficulty would be that — let us say they do find a — a just and reasonable rate, now assuming the — the lawfulness of it, assuming they find a just and reasonable rate for the Permian Basin, this represents only a portion of Phillips’ sales.

Now, that would mean that until they had made similar determinations of “just and reasonable” rates in other areas, they would not be able to fix the total just and reasonable rates for Phillips.

Tom C. Clark:

How many areas does Phillips have?

J. David Mann, Jr.:

I suppose most all — all areas would be my —

Tom C. Clark:

Would you participate in the area of determination geographically?

J. David Mann, Jr.:

Did I participate?

No, sir, Mr. Justice Clark, those were — those were done simply by the Commission.

The —

Tom C. Clark:

To his body?

J. David Mann, Jr.:

That is right.

There was no — there was no hearing.

I think that this was done, as I understand it, upon the Commission’s understanding and appraisal of the various geological structures, as well as geographic areas and upon the experience reflected by the data in his file.

Tom C. Clark:

Thank you.

Arthur J. Goldberg:

[Inaudible]

J. David Mann, Jr.:

The answer to the second part of the question, Mr. Justice Goldberg, is no, it does not tell the — it did not tell the Commission how to exercise it, but I would invite your attention to pages 405 and those following of the record, and I would quote from the opinion commencing at the bottom of page 405, “Therefore…” — and this goes to the jurisdiction at point — “Therefore, Phillips is a natural gas company within the meaning of the Natural Gas Act and the Commission should fix the rates at which these sales are made.”

And then if you were to look also at the Commission’s order reinstituting the investigation —

Arthur J. Goldberg:

Court of Appeals.

J. David Mann, Jr.:

That is — that is right.

Yes, sir and this — this Court of Appeals decision was affirmed by the — by this — by this Court on June 7, 1954.

Arthur J. Goldberg:

[Inaudible]

J. David Mann, Jr.:

Particularly, Your Honor, during the time between now and such time in the future, as the Commission’s area experiment may — and we hope prove to be successful, but we just do now know and nor do we know whether it will be two, four or 14 years, but it certainly is going to be a protracted period and it is for this period that we are especially concerned.

Thank you.