Wisconsin v. Federal Power Commission

PETITIONER:Wisconsin
RESPONDENT:Federal Power Commission
LOCATION:Beaumont Mills

DOCKET NO.: 72
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the District of Columbia Circuit

CITATION: 373 US 294 (1963)
ARGUED: Jan 09, 1963
DECIDED: May 20, 1963

Facts of the case

Question

  • Oral Argument – January 09, 1963 (Part 2)
  • Audio Transcription for Oral Argument – January 09, 1963 (Part 2) in Wisconsin v. Federal Power Commission

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

    Kent H. Brown:

    Your Honors, may it please the Court.

    These cases present for review, a September, 1960 determination by the Federal Power Commission which is affirmed by a divided court below upon the basis of several fundamental misconceptions of its import and of its ramifications.

    By its determination, the Commission for the second time in a decade, declined to apply the heart of the Natural Gas Act to Phillips Petroleum Corp — Company, the largest independent producer of natural gas, supplying over 10% of the interstate market and to fix just and reasonable rates for its sales.

    In a 1951 determination, the Commission had declined to do so under the erroneous impression that it lacked jurisdiction over sales by producers to interstate pipelines.

    That was reversed by the court below in 1953 with a remand order which specifically directed the Commission to proceed to fix just and reasonable rates for all of Phillips interstate sales.

    In June of 1954, this Court affirmed.

    With that, the Commission’s responsibility was twofold.

    First, it was duty bound to proceed with this batch to carry out the mandate of the courts.

    Secondly and equally importantly, it was duty bound to take steps promptly to stabilize producer rates and charges in the interim, pending the completion of its first task.

    As will be shown for six years owing 1954, it did neither and those charges soared.

    Belatedly, following six successive Court of Appeals adjournments that this Court meant what it said in 1959 in the CATCO case about the Commission’s duty to stabilize and to hold the price line, pending the determination in the instant Phillip rate case.

    The Commission did, in 1960, give a form of lip service to the duty to stabilize, at, I point out immediately, 1959 and 1960 levels, not 1954 levels.

    It flatly refused however in the instant determination to perform its foremost function and that is why we, who have put on the penalty for the Commission’s procrastination and will continue to do so for the foreseeable future, are here today again as a last resort.

    Upon receipt of the remand order in 1954, the Commission entered an order vacating its prior determination of the investigative proceedings it had instituted in 1948 against Phillips.

    It did nothing, however, by way of scheduling the matter for hearing and two years elapsed during which time, Phillips exercising its prerogative under Section 4 of the Natural Gas Act filed successively 12 increases in particular sales which under Section 4 may be suspended for a maximum of five months after which they go into effect virtually automatically.

    Finally, in 1956, the Commission entered an order consolidating those 12 rate increase proceedings with the pending Section 5 investigative future ratemaking proceeding and scheduled both as consolidated for hearing beginning June of 1956.

    The hearings proceeded and were terminated in December of 1957.

    During the course of the presentation, there were four separate cost-of-service studies presented to the examiner, carefully analyzed, cross-examined by all parties.

    All used the 1954 as the test year adjusted to take into account known changes.

    15 months later, on April 6, 1959, the examiner rendered a most exhaustive analysis of the record and his recommendations, for futu — fixing the Phillips future rates.

    Before analyzing the examiner’s decision, I would digress momentarily to record developments during the interim and the date of this Court’s order of remand and 1959, the date of the examiner’s initial decision.

    First, the period was marked by a multitude of Section 4 rate increase filings by Phillips and by others developing into what has come to be called a pancaking process; namely, a rate increase for one sale is filed, it goes into effect.

    It is in effect subject to investigation which is never instituted, settlements included.

    Finally, the company will file another increase for that same sale which goes into effect and supersedes the first increase.

    This is the pancaking process.

    This was done by Phillips and enormous amounts of money were collected by it subject to refund under Section 4 of the Natural Gas Act.

    The period was also marked by a study upward spiral of similar nature in the initial prices for gas, new gas dedications.

    The Commission’s rationale for permitting of this was in those days it would investigate the propriety of those prices in subsequent Section 5 proceedings like this one should be instituted against each major producer.

    They were instituted against virtually all of the major producing industry.

    The period was also marked initially by a concerted refusal on the part of producers in the Section 4 and Section 5 cases that the Commission instituted to disclose in any way shape or form their costs of operation.

    Kent H. Brown:

    Their representation was that the cost-of-service method of regulating independent producers was impractical, impossible or worse and their theme was hammered to the point of redundancy.

    The Commission at this time and the producers were aligned in Congressional pursuits, seeking congressional exemption of the producing industry from the impact of the Natural Gas Act or at minimum, outlawing the use of cost-of-service as a method of evaluating and testing their rates, both efforts failed.

    Finally, during the period, there were two several marked decisions by the courts below and the Fifth Circuit holding in substance the cost-of-service was of necessity, at least the starting point, the Commission must use in order to evaluate any rates of any utility subject to its jurisdiction.

    Coming back to the examiner’s decision, he first noted the criticism of the feasibility of the cost-of-service approach, but noted also that it had been rendered in a vacuum in that up until his decision, there had been no opportunity for applying or endeavor to apply the traditional means of evaluating the rates of an independent producer, his was the first attempt.

    During the proceedings, Phillips and all of the party’s participants had proceeded upon the assumption that of the course this was the process that would be utilized to evaluate Phillips’ rates.

    Phillips found no difficulty in the presentation of the case.

    Parties who’ve submitted other cost-of-service found no difficulties in the presentation of the case.

    The examiner exhausted — exhaustively analyzed each of the four cost-of-service matters submitted to him and concluded that Phillips’ cost-of-service for the test year 1954 was $57 million which translated in terms of a per unit cost-of-service of 11.6 cents per Mcf of gas sold.

    He also found that for 1954, test year revenues apart from any increases subsequently filed were $45 million resulting in a deficit operation on the surface for that particular test year.

    He directed Phillips to file calculated rates for all of its 1954 sales for continuing to produce the requisite 11.6 cents per Mcf average revenues for those sales, thus supplying Phillips with the full return of its entire cost-of-service.

    And incidentally, cost-of-service as I use it here always includes a fair return upon the actual expenses and the actual operations.

    He also directed that Phillips filed similar rates for all of its then current, continuing sales which would have the effect of increasing sum.

    Phillips’ sales at that time ranged from one cent per Mcf to as high as 23 cents per Mcf depending on a particular sale.

    His direction would have produced a schedule of rates ranging from say 10 to 15 cents per Mcf for all of those sales.

    Hence, some would have forced — have been increased many, a great bulk of this rate increase filing subsequent to 1956.

    Iis range as I’ve indicated, the 23 cents would have been reduced.

    Phillips submitted after the examiner’s decision was rendered a schedule of rates which as I’ve indicated started with a maximum of 15 cents and tapered down, indicative that the direction was quite feasible.

    Hugo L. Black:

    What year was that?

    Kent H. Brown:

    In 1959 sir.

    A year and a half later, in September 1960, the Commission issued its opinion in this long awaited initial determination of just and reasonable rates for producers.

    Its opinion like the examiner starts off with an analysis of the theory of regulation of independent producers and unlike the examiner, however, deals with the numerous representations of impracticality, endorses the representations wholeheartedly and finds the system of cost-of-service analysis for independent producers not a feasible means of fixing their rates.

    Preferring to adopt and test such rates on an entirely new process of evaluation of the operations of producers in specified areas of the country and fixation of an even level of rates for all gas served or sold in that area, it’s called by all producers, area ratemaking process.

    Simultaneously with that pronouncement of preferred process which as I’ve pointed out was an entirely noble one, the Commission issued its statement of General Policy Number 61-1 in which it defined and prescribed 23 separate areas of the country and pulling them out of the thin blue air, if you please, this promulgation was without notice, without hearing, without evidence, prescribed two levels of rates for each of the 23 areas with decimal precision.

    The first group was to be a guide to the Commission in the certification of new gas dedications under Section 7 and an indication to the applicant of whether he might anticipate receiving an unconditional certification if his price was below that for the area fixed in the statement, or a conditioned certificate confining him to the area of initial price level, absent a demonstration of why he should have more.

    The second group of prices was prescribed for guidelines in evaluating rate increase files.

    By that, a rate increase filed under Section 4 below the prescribed level would according to the Commission not be suspended or subjected to an investigative proceeding.

    If it was above the prescribed rate increase level, it would be suspended and subjected to a Section 4 process.

    Now, the evolution of those prices was a complete enigma initially, but since the Commission has made it perfectly plain that they were in substance for initial prices, the then going line for new gas dedications in 1959 and 1960.

    For the Section 4 line was in effect a weighted average of the gas, price of all gas being delivered, at that time, in that particular area of the country.

    These were to be the guides that the Commission would use in evaluating Section 7 and Section 4 applications.

    Kent H. Brown:

    It made it perfectly plain also, however, that it had no intention of denominating them as just and reasonable or that they were to be used for evaluating anything that under that standard in the Section 4 or Section 5 cases.

    It was to provide a guideline per the mandate of this Court in CATCO to hold the line, to stabilize the price level while they evolved just and reasonable rates in the pending Section 5 cases which have been instituted against major producer.

    The Commission went on, however, to here say that this case have been presented to it on a cost-of-service basis and with the only means by which it could evaluate it and proceeded to do so in precisely the same manner as had the examiner, and if you please, emerge to the cost-of-service less than that.

    The examiner had described and found nearly $54 million for the 1954 test year which average is 11.1 cents per Mcf reach of Phillips 1954 sale.

    However, having done so, it then refused and declined to adopt the examiner’s recommendation and to proceed in the manner in which everyone had anticipated that it would i.e. the exercise of Section 5 duties and fixed prescribed just and reasonable rates for Phillips then pending and future sales.

    It said first that it knew that Phillips’ costs had increased between 1954 and 1960.

    And that the 1954 test year was presumably stale and it would be a result without reason to fix — purport to fix Phillips’ future rates in 1960 on the basis of a 1954 test year.

    It refused, however, to its — it so felt, remand the matter to the examiner for an updating of the test year, saying that instead of doing so, it would dismiss and terminate the Section 5 investigative proceeding entirely and await the evolution of area rates and area ratemaking proceedings to be instituted later and fix Phillips and all other independent producers’ just and reasonable rates.

    At the conclusion of those investigative proceedings which were anticipated to consume or require at least another decade.

    The Section 4, proceedings, the rate increase proceedings which had been superseded as to which the interest was primarily involving the necessity for Phillips to affect refunds of any excess over the just and reasonable rates for the period, the Commission pointed to the deficiency that it found for 1954 and presumed that that deficit status continued through 1958, the year in which these particular 12 Section 4 cases were superseded by even higher ones and hence, dismissed that — those proceedings as well.

    The Commission knew, it indicated in its opinion that it was cognizant that there were pending before it at that time, some 95 to 100 separate rate increase filings made by Phillips through the period 1956 through 1960 that were not technically encompassed and consolidated in the pending proceeding from which it knew that in 1960, Phillips was deriving revenues of approximately $90 million of which — and of these it took pride purportedly of which the Commission said 82% or $70 to $74 million of Phillips’ total revenues, jurisdictional revenues, were being collected under Section 4 suspension cases subject to refund.

    This was the means by which the Commission said, “We are able to protect the public as to these tremendous increases pending the evolution of area rates to emerge from proceedings we will start subsequent, just the fact that they’re being collected subject to refund, $70 million of the $90 million for revenues of that year.

    Yet the Commissioner refused to remand to the examiner for consideration of those rates and the analysis of them in the light of the standards of Section 5 and Section 4, i.e. are they just and reasonable, unjust or discriminatory and as to the latter, I repeat, Phillips’ rates ranged from 1 cent per Mcf for some sales to 23.5 cents per Mcf for many others.

    The Commission said that there was no evidence of discrimination in this record, hence there was no basis for activity under that aspect of Section 4 and Section 5 and dismissed the whole kit and caboodle.

    The court below upon review of the determination sustained the Commission by a two-to-one vote.

    It first analyzed the situation in terms of the 1954 to 1959 period during which the particular rates, Section 4 rates subject to review were analyzed — were in fact and concurred with the Commission in its surmise that the deficit operation continued through 1958, at least.

    It then analyzed the period after the forthcoming area rate proceedings and made some remarks about privy of that endeavor which was of course were wholly premature in that we do not know yet and we will not know or as the court below said, “At least four to 14 years.”

    What if anything will emerge from any of the pending area ratemaking endeavors?

    Potter Stewart:

    What — where do this 14 year figure come from, that’s used throughout the briefs, I wondered who does — what that was or what’s the significance of the 14 years?

    Kent H. Brown:

    It is taken from the words of Judge Prettyman below writing for the majority, where he found it, I do not know sir.

    The Court returned to the most important aspect of the case, however, i.e. what it called the present rates, meaning, the rates that were now in effect in 1960, were in effect in 1960 and those that will continue to be in effect as increased by Phillips’ first contractual obligation to do so anytime for this period of four to 14 years or whatever it is that we await the evolution of the area rates.

    Although the Commission itself contemplated no control during this period, the court below recognized that some form of interim regulation was requisite and said that the Commission could use the SGP, the Statement of General Policy price levels for not only testing the validity or propriety of service propriety of applications under Section 47 for new sales and Section 4 rate increase purposes but in testing the propriety of existing rates in Section 5 proceedings, in that the Court was in error.

    First, the Commission did not so intend those figures.

    Secondly, it will be entirely impossible for so to utilize them because they were nothing but products of fiat.

    How can you direct a producer to reduce his rates in the basis of the comparison with the figure of that nature?

    So finally, the use of those figures would produce nothing but fair field price basis for testing.

    Judge Fay, he dissented in which he pointed out that the area ratemaking process was only in the offing that in the interim, a regulation of some nature was required and he felt that on this record, the Commission could adequately do so, as it had itself demonstrated by the exercise of the individual company cost-of-service process and fixed rates.

    If there were any deficiencies in the process and we are not here advocating that there are not, there are imperfections, ratemaking is not a precise science, but it has been done for 50 years.

    It has the process that is only that is known to the law at this juncture as being entirely legal and lawful.

    It is the one the Commission, I submit, was required to proceed under and apply unless and until it evolved in adequate substitute.

    Kent H. Brown:

    It could not dump the ship in the middle of the stream and let us all float out to the ocean.

    Our principal legal contentions on that subject are to precisely that effect, namely the Commission we feel was duty bound and obligated to proceed with this batch in 1954 to carry out the mandate of this Court to fix just and reasonable rates and its high time, it was done.

    Thank you very much Your Honors.

    William M. Bennett:

    Mr. Chief Justice and members of the Court.

    This is a case of national importance.

    It can be demonstrated by the fact that a mere one cent increase in the price of the volumes of gas delivered in interstate commerce amounts to $80 million increase annually across the nation.

    So far as California is concerned, our gas bill exceeds $300 million a year.

    We are dependent primarily, almost totally upon the El Paso Natural Gas Company for our gas which we obtain from out of state sources and in turn El Paso is the largest single customer of the Phillips Petroleum Company.

    This case has a long and almost a discouraging history to it.

    The Court of Appeals below, following the mandate of this Court, in the Phillips decision specifically directed that the Commission should fix the rates for Phillips and it hasn’t been done.

    A proceeding was opened pursuant to that mandate and pursuant to Sections 4 and 5 among others of the Natural Gas Act.

    And this is not that type of case in which the Commission has discretion to open.

    This case was opened because it was directed to be opened by this Court and by the Court of Appeals below to find out the way to regulate producers for the protection of the consumers of the United States of America and so, when we come to the question of whether they had the power to dismiss, this has great bearing upon that.

    Section 4 for example, under which this case was conducted, specifically provides in plain language that the Commission shall fix just and reasonable rates, Section 5 directs that they shall fix rates — just and reasonable rates and it simply was not done here.

    Coming to the examiner’s decision, it was a first effort, it was a pioneer effort, it took 82 days and there were four major cost-of-service studies presented.

    One by Phillips itself which insisted that this case be tried upon the cost method and that is very important as I shall hereinafter demonstrate.

    The examiner said, in the record before this Court, it may be noted at the outset that Phillips itself has taken the position throughout this proceeding that its just and reasonable rates should be determined under the cost-of-service method rather than under a field price method.

    The Swerdling decision grasped the producer problem, it applied a rate base to it.

    It settled the very difficult problem of allocation as between oil and gas.

    It fixed the rate of return and in that rate of return, it used it for the vehicle that it is to give compensation for the admitted risk which is in this business which makes it somewhat different from other utilities, but there was a compensation given for the risk and it went on in short to apply the rate based method to Phillips as a producer.

    The examiner pointed out that this being the first case, there were problems which were encountered for the first time, but the fact that he did it demonstrates that it can be done and that it was done on a cost-of-service method.

    The examiner went on to point out that this task of regulating producers could be made simple by self-help upon the part of the Commission and he referred to the fact that when they first commenced to regulate pipelines, they did not have a system of uniform accounts nor did they then, nor do they now have such for producers and he suggested that that might be adopted.

    And California incidentally has also asked the Commission to do that very thing and so he must realize that some of the difficulties which are stated are not being cured simply because there is no uniformity of accounting being prescribed which the Commission has the full power under the Natural Gas Act to do.

    The examiner’s decision after completion and after demonstrating that that which could not be done was done then went to the Federal Power Commission itself.

    And at that time, the Commission consisted of Commissioners Kuykendall, Commissioner Stuppe and Commissioner Klein.

    There were only three votes on Opinion Number 338 which took over and modified the opinion of Examiner Swerdling.

    The important thing to note in the Opinion Number 338 by those three Commissioners, not the present Commission, is that they described the Swerdling cost-of-service method as being unworkable, impractical, ineffective and that it would lead to absurd results.

    It is somewhat as though I were to say, this building could not be built, literally.

    Mr. Swerdling did it and the Commission after saying it was unworkable, applied it to Phillips in this very case.

    Arthur J. Goldberg:

    [Inaudible]

    William M. Bennett:

    There is not Your Honor by the words which are employed in the briefs, but I shall demonstrate when I come to it.

    There is a startling inconsistency between the action of the new Commission and the action of the old Commission and the words of the new Commission in its position before this Court and I shall come to that momentarily.

    Now, I would point out to this Court that the previous Commission discarded for the producing industry the cost basis for regulation.

    And you must bear in mind that it could not have been done based upon any evidence in the Phillips case before Examiner Swerdling because he found, quite to the contrary and as I pointed out, the Phillips Petroleum Company itself said that it could be done and wanted it done that way.

    So, where then comes this experience which is not in this record from which they could conclude that it was not workable.

    I suggest that it comes from some history which we find in the statement of Chairman Kuykendall to the House Committee on Interstate and Foreign Commerce wherein after the decision of this Court in 1954 saying that producers were subject to regulation, the Commissioner in a letter to that Committee said, “The question remains however, whether the Supreme Court’s decision in the Phillips case reflects the true public interest or whether legislation amendatory to the Natural Gas Act is needed for that purpose.”

    And he concluded in this letter which he read to the Committee by saying, “Consequently, we believe that the Federal Government should not undertake the control or the regulation of rates of those engaged in the production, gathering, processing and so on and so forth of the selling of natural gas.”

    That was one piece of the experience I think which went into that conclusion that it wasn’t workable.

    It was more of an attitude than experience because they had had no experience.

    Then when the attempt to exempt failed, the Commission in 1938, in its 38th Annual Report suggested to the Congress that there should not be the cost basis, but rather a standard for pricing or evaluating natural gas as a commodity, not regulation but simply market price.

    So, I would suggest that an attitude, if not a biased, accounts for this language, that they were determined not to regulate in the first instance and after they were told to regulate, they tell the Congress it’s still not in the public interest and after the exemption attempt didn’t work, then they said, “Well, let’s regulate upon a commodity basis.”

    I suggest that’s the basis for the experience.

    Now, I also point out that —

    [Inaudible]

    William M. Bennett:

    Yes, they do, Your Honor but the majority of course ruled otherwise.

    Now, let me point out some other experience which is the basis for this most unorthodox finding if we’re supposed to find upon records.

    In its brief at page 7, which is filed before this Court, this Commission says, “It was not until the receipt of the examiner’s report that the Commission had the opportunity to examine this major case.”

    In the Commission’s view, the most important question was whether cost-of-service should be applied.

    The Commission concluded in the light of its experience in this and other cases and bear in mind the experience in this case proved that it could done, but the Commission concluded in the light of the experience in this and other cases during the recent five years that the cost method would not work and in the footnote it listed the experience in the other cases and listen to what the government recites.

    A number of minor cases involving slender records relatively few sales and little or no attempt to face the basic problems raised here are cited in Footnotes 8 and 9 of the Commission’s opinion.

    That those minor cases involving slender records, few sales and no experience and no attempt to face up to the problem constitute the experience of the Commission leading to the language here that it is not workable.

    Arthur J. Goldberg:

    [Inaudible]

    William M. Bennett:

    Yes, Mr. Justice Goldberg, it did.

    Arthur J. Goldberg:

    [Inaudible]

    William M. Bennett:

    Yes, it is the Commission’s function to make the determination, but the Commission is bound to make determinations based upon records before it or in the alternative upon some other expertise or experience and I hope that I have demonstrated to the Court that there was no experience.

    There was an attitude contrary to regulation of producers as this Court knows and as the Congress was told and I don’t submit that that is tantamount to evidence upon which a judgment so important as this could or should’ve been made.

    Arthur J. Goldberg:

    [Inaudible]

    William M. Bennett:

    Yes, Your Honor and the —

    Arthur J. Goldberg:

    [Inaudible]

    William M. Bennett:

    Yes, it is their job and I will come shortly in this case to the point from experience where they have gone back to cost-of-service which casts I think, even greater doubt upon this language and certainly, it seems to me, would reinforce my position that they do not accept that premise of cost-of-services is unworkable.

    William M. Bennett:

    They do not accept it by what they do.

    Now, following Opinion 338, there were promulgated these price lists and in passing, let me point out that prices are not rates.

    Nowhere in the Natural Gas Act do you find that the duty or even the authority of the Commission to promulgate prices, that’s usually the function of the marketplace.

    The Commission failed to find a lawful rate in this case.

    It terminated, even though it was directed by the Court of Appeals pursuant to what this Court said to fix the just and reasonable rates of Phillips.

    We don’t know what those just and reasonable rates are as I’m standing here and as I say, the prices were then promulgated without notice, without hearing.

    Now, if they mean nothing, of course, there is no harm.

    But if they mean something, there’s great harm and whether legally they mean something or nothing, imagine the great example to the industry that these prices coming from this great agency set and are having and that cannot be minimized.

    I propose not to talk about cost because as I conclude, I will place to the Court that in my judgment, the choice here is between regulation which means cost and no regulation which means no cost as they propose it.

    Potter Stewart:

    Your position that the Commission is required to consider rates on a cost basis exclusively?

    William M. Bennett:

    No, Your Honor, it isn’t — that is not completely my position and I shall develop it in this discussion which I am about to begin, but let me begin this way, why cost?

    Why should we use cost?

    Well, it’s quite simple in the beginning.

    Congress in enacting the Natural Gas Act intended cost.

    This Hope — this Court in the Hope case pointed out that the Act provided for regulation upon recognized and more or less standardized lines and regulation means costs and in the Hope case, you proved the cost method involving Natural Gas Company as is Phillips.

    Pipelines, how are they regulated?

    Costs, no other way, traditional rate based method.

    Producers, how are they regulated, costs.

    The City of Detroit case involved the production activities of a pipeline operation and in that case, the Court of Appeals pointed out that it was the duty of the Federal Power Commission in fixing the return upon production property to do it upon a cost basis.

    And what did the Federal Power Commission do with the language from the City of Detroit case, in the Union Oil case cited in all the briefs, they concurred, they accepted it and they said, “This is the law” and they proceeded to regulate producers upon a cost basis in name only, not in fact but at least they utilized the right words consistent with the directions of all of the Courts of Appeal in the United States without exception as to cost.

    What does the staff of the Power Commission do?

    Since 1938, it, interpreting that Act has always used cost.

    Before the Phillips case it used it.

    The examiner of the Commission, Mr. Swerdling used it in the Phillips case.

    The Commission itself in the Phillips case even though it said it wasn’t workable, did utilize it.

    Now, this Court itself, in opinions written by Mr. Justice Douglas has said upon three occasions and those opinions have not been modified in anywise, whatsoever that in fixing a return upon production properties, the rate base method as it were used by the Commission is quite lawful and acceptable and I’m referring to the Hope case where Hope had production properties.

    I’m referring to the Colorado Interstate Gas case where they had production properties and I’m referring to the Panhandle case where they had production properties.

    And in each and every one of those cases, the Commission used the cost method to fix the return upon the natural gas producing properties and this Court said, “That is the way to do it.”

    [Inaudible]

    William M. Bennett:

    No.

    [Inaudible]

    William M. Bennett:

    That is correct, Your Honor.

    They did not say it was the exclusive way, I concede that.

    Now, let me point out that since the Phillips case, there is the case known as the Glassell case cited in the briefs and the Commission there used the cost-of-service method.

    Let me point out that in the Hunt case, the Hunt Oil case which is cited in the briefs, on October 17th, 1962, the present Commission remanded the Hunt proceedings and directed in this language that cost-of-service evidence be received.

    Cost-of-service which was the method used in this proceeding and others pending before the Commission prior to the commencement of the area rate proceedings and as we have previously indicated, we intend to continue to process and decide such proceedings as promptly as the record in each case permits.

    Then on November 30th, 1962, in the Hunt case, this present Commission said and I’m quoting, “In summary, the basic defect in all of Hunt’s cost-of-service presentations is a utilization of allocation methods rejected in Phillips, this Phillips case and a failure to provide information with which a proper cost-of-service for Hunt could be determined.”

    And so, I would now say to the Court in answer to the question that this present Commission, despite what it says in its briefs in defending the language from the past that cost-of-service is unworkable as to producers is utilizing it in the two cases I’ve cited to this Court and I’ve said that it intends to utilize it in other producer cases, not that there are many because they’re in a state of limbo, the pending area rate determinations, but when they do have producer cases which somehow get to them over and above area rate proceedings, they’re going to use cost-of-service and that must mean Mr. Justice Goldberg that it’s workable.

    Now, a few observations coming from common sense would seem to be an order here about cost.

    How does American industry or the financial community conduct its affairs except upon a cost basis?

    Phillips is no different, it happens to be subject to regulation.

    Its books are kept upon a cost basis, its return is measured upon a cost basis, and costs in the regulatory field are simply the measurement whereby we properly can limit return.

    In unregulated sectors of the economy it’s a measurement but there’s no limit upon the return at least in theory, but it is inevitable.

    It is impossible to regulate an industry without cost as the tool to do it.

    [Inaudible]

    William M. Bennett:

    My answer runs this way, if Your Honor please.

    The Commission may state and the Supreme Court may agree that there is no single way to regulate as the Hope case did.

    It’s the end result that counts, but that presumes that there is some other acceptable, practical and lawful method at hand.

    Now, why do I say at hand because the Natural Gas Act does not speak in futuro.

    It demands consumer protection now and this Court in your Phillips decision demanded consumer rate protection through the regulation of producers now, not in 1970 or not in 1980, but now.

    And I don’t quarrel with the right to experiment, none of us quarrel with that right, but we quarrel with the laying down, with the laying down, with the placing upon the shelf of the mandate of this Court of the only tool, of the only weapon which is available to regulate this industry.

    That is the vice of this case and when I come to the relief, I asked, I will spell out what I think they should do in the meantime and I would suggest now that in terms of whether or not they have the right to depart from cost, if the reasons they gave, one of them was, it was not workable.

    And if the previous Commission found it — in all of its experience, say Phillips to be workable and even used it in Phillips.

    If the present Commission is using it in the Hunt case and in the Glassell case, if the examiners of the Commission are using it in their Section 4 and 5 investigations of producers as they are, then I would say that the premise from which we leaped off into the area experiment is not a sound premise.

    If it’s more than the premise, if they considered it a compelling reason to experiment, haven’t I demonstrated that that is not a reason?

    Doesn’t the Commission itself through the utilization of cost-of-service tell this Court in reality, regardless of its briefs that it is workable?

    Now, if something is unworkable, we abandon it, fine, but if something is workable, does it still follow that we abandon it when area rates is nothing more to date but a grand experiment.

    Judge Prettyman said, we make it, the answer to it in four to 14 years.

    And —

    [Inaudible]

    William M. Bennett:

    I think I —

    [Inaudible]

    William M. Bennett:

    Yes Your Honor, I’m pushing it hard but obviously I’m taking advantage of what he said and I hope the Court will [Laughter] receive it in that light but —

    [Inaudible]

    William M. Bennett:

    Well, but —

    [Inaudible]

    William M. Bennett:

    I don’t know how long it will take.

    I think it will not take 14 years, but let me read what the Government says as to how long it will take.

    This is on page 29 of the Government’s brief.

    “The experience of the first six years of producer regulation led the Commission at that point to estimate that nearly 13 years would be required in order to dispose of the cases pending.”

    Pardon me, I’m in error on that that — I didn’t mean that the way it came out, that 13 years referred to the number of cases pending, I was mistaken, I misspoke myself.

    And I thought that was a source of Judge Prettyman’s 14 years but it is not, but in any event, I think we all agree it is going to take a great deal of time.

    Now, what I am saying here is that cost-of-service was prematurely abandoned.

    It was abandoned for the wrong reason.

    And remember now, we’re abandoning a method which the staff demonstrates and which the Commission itself both past and present by its use, shows it’s workable and we don’t have to quarrel about whether it’s lawful or has to pass test of constitutionality, it is.

    Let me examine area rates then by way of comparison and contrast.

    As I say, it started in what I consider to be an erroneous premise.

    It started by rejecting a known and an effective and a practical method.

    It starts with a description that it may take from four to 14 years.

    It is supposed to result in stability, it hasn’t yet.

    And I would point out that under the Natural Gas Act, if after we get through these massive hearings with all of these producers, Section 4 of the Act as the Hunt case in the Fifth Circuit points out that a single producer may arise and file for an increase despite this grand experiment and even more than a single producer, it may be all of them and where then is this stability coming out of this master production?

    I would point out that many lawyers have grave doubts as to the constitutionality of the area method because the Natural Gas Act seems to say that rate should be fixed upon an individual basis.

    I would point out that the Commission is being less than correct in saying that they measure their workload by all the dockets, you measure the workload by the number of producers and there are only 295 producers who account for 91% of the production of this country.

    And if they were regulated, the rest would fall in line because it is not economic sense that pipelines are going to rush to small uneconomic producers to pay them high prices for gas when they can get it from the larger producers at a lower rate.

    I would point out that the leveling off which is talked about in the Government’s brief comes not from area prices, it comes from the fact that there happens to be on overabundance of natural gas in this country at this time.

    Now, let me conclude by saying that the protection we’re getting from the price list is nothing but a myth, no protection at all.

    Commissioner Morgan of the present Commission has described these as simply fair field prices and that’s what they are.

    And in the very Phillips case itself, in which the Commission said, “In the meantime, we’re getting the protection of the price list.”

    There are five dockets in that Phillips case, which were permitted to go into effect, the rates, schedules and the prices of which are above the agency’s own price ceilings.

    It’s obviously in error but that’s what happened.

    William M. Bennett:

    Now, Judge Prettyman says if the area experiment turns out to be a failure, we have our remedy then.

    We don’t have a remedy then, we need it now.

    And so, I say in conclusion that in the meantime, they should take up the processing of the producers on a cost-of-service basis, select the largest one first, the largest ones first, get the job done, set some examples, set some principles and the problem will go away, I predict.

    All regulation has this difficulty in the beginning, only you’ve got to make a beginning.

    I am claiming, from the statement of Chairman Kuykendall, that here was a man who was opposed sincerely but philosophically from personal conviction to regulation of producers.

    He did not believe it could or should have been done and he wrote Opinion 338, and I say, if that represents bias or less than an open mind, then so be it.

    I don’t question his right to have that point of view, but I happen to disagree with it strongly and I happen to think that this Court and the Congress have settled the question a long time ago.

    [Inaudible]

    William M. Bennett:

    The present Commission has an intolerable heritage, great difficulties.

    The present Commission has come out with a good decision for my state involving our pipeline company, but the present Commission in adopting the unworkable premise as to cost-of-service made an error in my opinion and I think that what they’ve done subsequently indicates that they themselves know it.

    They were not bound to wet themselves to this concept of regulation and all of the difficulties, Your Honor, that they pose as to why cost-of-service method won’t work are just as applicable to the area experiment because unless this Court says that costs are not necessary, are they permitted to dispense with costs in the area rate experiment?

    For example, they say in the brief before you that cost-of-service method is not appropriate or it’s difficult because of grave problems of allocation.

    Well, in area rates, are we not going to allocate between oil and gas?

    In area rates, are we going to abandon cost-of-service?

    I don’t know nor does anybody unless you can tell them and I would like to talk about this now because this is the real tragedy of this case.

    Unless, they can have some idea that where they’re going is going to be practical and effective and if that going takes time, and if it’s fraught with failure at the end and ends that way, what happens to consumers in the meantime when they are not going through this list of the dominant producers in the country and regulating them one by one.

    Do you know for example that in the area rate experiment, there are only two areas thus far selected, hearings are going forward in one?

    Now, both of these areas combined only cover 35% of the system of Phillips, what about the balance of it?

    To me frankly, this is nothing more than turning your back upon that which has been pioneered and worked out by people before us and by this Court and deciding from commendable motives, no doubt, to do it another way, another unknown way.

    And so, it’s difficult, I know to say an agency abuses its discretion, but remember your mandate which says regulate, remember the Natural Gas Act.

    And the gravity of the harm that will follow if this thing ends up in failure will then certainly be able to be called an abuse of discretion.

    And what I’m asking is, do we have to wait to find out that long that it’s a mistake to come here and seek our remedy and if we do, and if we’re right that it’s all for naught, we will never, ever make up, not my money, not the money of this Court but the money the consumers and Congress has spoken for their interest as has this Court.

    Thank you, Your Honors.

    Earl Warren:

    Mr. Mann.

    J. David Mann, Jr.:

    Mr. Chief Justice, may it please the Court.

    The petitioners for whom I appear here in No. 74, the Long Island Lighting Company, Philadelphia Electric Company and the United Gas Improvement Company have participated actively in this case, commencing with the first day of its trial.

    They have this position in this proceeding at this point.

    First of all, they do not contend that the Federal Power Commission must regulate only on a company by company cost-of-service basis or for that matter indeed, on any other specific basis.

    They do believe, however, that the Commission’s choice among methods does not include the method to do nothing in the way of fixing lawful just and reasonable rates under the Act and at this point, I would direct my thought to Mr. Justice Harlan’s question to Mr. Bennett.

    It seems to me that the problem we have here is not Your Honor, whether ultimately the Commission’s area rate approach is going to prove to be workable and if so, to what extent?

    J. David Mann, Jr.:

    The problem we have here is that we need something which is workable, which is lawful and which can positively be applied during the time when the Commission with our help, I trust, can workout a more useful, workable method such as that which it now proposes under its area rate approach.

    So that as far as the companies for whom I speak here are concerned, we simply contend that this case should be remanded to the Commission because the Commission did abuse its discretion and that it acted irresponsibly and in utter disregard of the Court’s mandate, that it fixed just and reasonable rates for Phillips.

    This is an important landmark case.

    I will remember that when Mr. Heady and others and I were working on this case in 1957, we looked upon it as a case in which we were hopefully helping the Commission to establish truly workable methods of regulation.

    The industry looked to this case as a solution to many of its longstanding problems.

    They looked to the Commission to come up with a just and reasonable rate and a method for finding just and reasonable rates for Phillips.

    The Commission did not do this.

    It did not comply with this Court’s mandate.

    As Judge Fahy put it and as other counsel had pointed out, Judge Fahy said, “It came so close to doing what it said it should not do as to demonstrate that it is able to do what it has failed to do.”

    Now, this inaction, we contend on the part of the Commission, is in error for two reasons.

    One, on a general policy industry important point of view, it has left the industry and the public, including the consumers most especially in the lurch.

    It has left us to regulation under what is little more than a fair field price standard.

    With respect to the error of the Commission as it regards Phillips itself, as Mr. Brown pointed out initially, the Commission disregarded entirely some $22 million being collected annually by Phillips in some 95 Section 4 (e) cases that were pending before it but which were not consolidated with its proceedings.

    It ignored also the fact that even if it took only Phillips 1954 sales but priced them on a 1960 basis, the result would have indicated revenues some $6.5 million in excess of a cost-of-service.

    This is to say nothing of the new sales of gas which Phillips by that time was making.

    Another thing, this Court will recall as presented to it in numerous proceedings including the CATCO case and as was before it in the Transco-Seaboard proceeding which was sent back to the Commission under per curiam remand that at the time of this case, we were confronted with numerous 23.5 cent gas prices in South Louisiana.

    In one of its orders involving the Transco-Seaboard proceeding, the Commission assured us with respect that one of Phillips sales that is made from the so-called Tigre Lagoon Field in South Louisiana that it — although it resulted from two triggering of favored-nation increases, starting with 8.5 cents, going up to 23.5 cents, the Commission assured us in its order that we would be protected against this kind of thing.

    This too, the Commission ignored when it dismissed Phillips’ Section 5 and finally, as I have said before and this other counsel has pointed out, the Commission did ignore this Court’s mandate.

    It also disregarded its own order.

    When a Commission set this proceeding down for rehearing, when it reinstituted its Section 5 investigation, its orders specifically said that it was going to determine whether any of Phillips’ rates was unjust and unreasonable and accordingly, it was going to fix Phillips rates.

    I suggest to you that it was not possible for the Commission to comply if it did not look at all of Phillips rates, how could it possibly have determined whether any of them was unjust or unreasonable.

    It simply looked at the 12 consolidated Section 4 (e)’s before it and then terminated the Section 5.

    The court below, when it reviewed this matter, treated the case as it has been outlined by Mr. Bennett.

    And then importantly, it seems to me from the standpoint of where we find it today, recognized that the Commission had to carry out some sort of an interim regulatory program.

    Justice Prettyman admitted that interim protection while the Commission is in the process of carrying out its area experiment has got to be brought about.

    He said, however, and this it seems to me is the fatal error of the decision.

    He said that the Commission’s General Policy Statement rate levels were themselves just and reasonable.

    Now, the respondent, the Federal Power Commission has never itself contended that this is so.

    The Commission has never contended that the General Policy Level which it has prescribed are just and reasonable rates.

    They’re simply guideline rates and yet, by holding them as just and reasonable and holding that because he believed them just and reasonable, they were sufficient as standards under which the Commission could operate.

    J. David Mann, Jr.:

    Judge Prettyman and the court below erred.

    The respondent’s position since the time of the argument in the court below has changed most substantially.

    As Mr. Bennett has pointed out, its decision in the Hunt case, Opinion 365 which appears as the appendix to our reply brief, really amounts to a confession of error on the part of the Commission which we also discuss in our reply.

    In paraphrasing the Opinion 365 in Hunt, and this appears at page 12 of our reply brief, the respondent has concluded that the use of individual company cost as a method for determining whether an independent producer’s increased rates are just and reasonable appears to be necessary, if it is to pass upon such rates at all prior to the establishment of area rates.

    I say also accordingly it’s necessary under the Gas Act to determine the justness and reasonableness of Hunt’s increased rates by its individual cost, updating them if necessary to do the job.

    They say it is necessary under the Act to determine whether Hunt’s increased rates are unduly discriminatory or preferential, regardless of whether or not its overall revenues are supported by overall cost.

    And finally, they say, it may prove necessary under the Act to test the lawfulness of Hunt’s non-refundable rates in the course of passing on its increase rates and for that reason they hold open Hunt’s Section 5.

    Despite these admissions and departure from its previous position as set forth before the Court of Appeals and is contained in its papers in opposition to our petition for writ of certiorari, the respondent still contends that its Opinion 338 should be affirmed and they set forth several reasons for this which I would like to discuss.

    First, they say that they are really doing a creditable job of protecting the consumers through the application of their General Policy Statement price level through settlements and through the use of their Section 4 suspension and refund powers.

    Let’s consider these reasons.

    First, as to the suspension and refunds, Phillips in 1960, still was collecting some $22 million annually subject to refund.

    They were collecting $3 million annually over the old gas ceiling which had been — have been imposed by the Commission in the several areas.

    Nationally, some $158 million annually is being collected with accruals to date of about three quarters of a billion dollars.

    This, it seems to me, reflects a position completely inconsistent with the position taken by the Commission in its brief in the Tennessee case and which was reflected by agreement of this Court in its order and opinion in Number 48 handed down in which it pointed out that refunds certainly afford the consumer no protection.

    Secondly, the General Policy Statement levels which the Commission is using as has been pointed out, these are nothing more than field price levels.

    The new gas ceilings are the highest prices which prevailed in 1960.

    The old gas levels are simply the average of all prices which prevailed at the end of 1959.

    Now, we do not have data on the nation as a whole but with respect to South Louisiana which is so important in the gas supply particularly of the Eastern Seaboard, the gas coming from South Louisiana and this is discussed in our reply brief at page 6 and also in our appendix to our reply brief at page 28.

    Some 94% of the gas moving in interstate commerce out of South Louisiana in 1960 exceeded the old gas ceiling, 70% of it was over the inline price ceiling which was suggested by this Court in its CATCO opinion and 55% is even over the new gas ceiling of 21 and a quarter cents in South Louisiana.

    We submit that this not protection for the consumers.

    Finally, as to the third vehicle the Commission is using namely the settlements.

    It points with some pride to the fact that they have resulted in refunds of $5.8 million in annual reductions and $3 million in future rates.

    And it seems to me that this is rather shocking for the reason that all of the cases, out of which to the $5.8 million and the $3 million spring are cases which were sent back to the Commission by remands from this Court in CATCO and Transco-Seaboard by the D.C. Circuit in the Hope case and by the Fifth, Ninth and Tenth Circuits.

    It is out of the remands, if you please, of cases in which the Commission originally certificated a 23.5 cent price, which because of the pressure of the Courts have been reduced and it is those cases which result in the refund.

    As for as settlements of rate cases, there have been only a few and significantly, they have been brought about because of the fact that in those cases examiner’s findings or staff evidence of cost-of-service have been submitted.

    These three reasons, I submit, are not sufficient to justify the Commission’s going forward with its area rate experiment without any interim providing the consumer with some sort of lawful protection.

    We suggest that the method it used in this case itself in deciding to dismiss the Section 4, the method it has used in Hunt and the method which its examiners have used is, while perhaps not the very best method in the world, certainly a lawful method and a method which it can and should use until such time as we all know whether the area experiment is going to bear fruit.

    Thank you.

    Earl Warren:

    Mr. Solomon.

    Richard A. Solomon:

    May it please the Court.

    Richard A. Solomon:

    There have been a considerable amount of discussion here today as to what happened before the Commission decided this case and considerable amount of discussion as to what happened since the Commission decided this case.

    And I think it might be of some value to examine a little bit, beginning of my argument what the case was about and what we did decide in this case.

    Now basically, this Phillips case consisted of two parts.

    The first part and the part which I won’t discuss very much here because I don’t really think that it is the crux of my friends’ argument discussed in the brief with respect to eight increase rates of Phillips which had been packaged together with its overall rate system, which were in effect between sometime between 1954 and 1956 in which all but one minor one had terminated as of 1958 or 1959.

    Now, with respect to these eight rates, the Commission did use the cost-of-service which had been derived by the examiner after a great and laborious effort and which have been modified by the Commission after a great and laborious effort and using that cost-of-service as a test decided that since costs during the test year, a test year which nobody suggested to the Commission was stale for this purpose, that costs during this test year were at least some $9 million higher — lower than — higher than revenues.

    And since all of these increases put together only amounted to about $5.5 million that it could reach a reasonable judgment without going ahead and determining the exact just and reasonable rate that each one of these things should’ve been set at during the period several years earlier when it was in effect that it could reach a reasonable judgment and the only question left as far as that part of the case was concerned, i.e. that there was no basis to order Phillips to make refunds with respect to those eight rates.

    Potter Stewart:

    That was a Section 4?

    Richard A. Solomon:

    That’s the Section 4 point.

    Potter Stewart:

    And these were so-called locked-in base?

    Richard A. Solomon:

    They were locked-in a sense that as of the time of the Commission’s decision with one, very minor one, none of them had any present existence.

    Potter Stewart:

    They had been superseded by —

    Richard A. Solomon:

    They’d been superseded by others.

    Potter Stewart:

    By filing the higher rate.

    Richard A. Solomon:

    Right.

    Now, the other part of the case and a part of the case which I will want to spend my time on because it’s obviously an important thing is with respect to the general hearing looking into the determination of all of Phillips’ rates.

    Under Section 5 of the Act which by its very terms necessarily is a determination of Phillips’ rates for the future.

    Now, with respect to this aspect of the case, the Commission at the end of its decision here terminated the proceeding because it believed that the record made on the basis of 1954 cost information was out of date stale for purposes of fixing rates for the future as of the end of 1960 and I should imagine even clearer as of 1963.

    And equally important because having gone through this difficult process for the first time in a major rate case, the Commission as of that date and the Commission as of this date also was convinced that individual company cost-of-service pricing were independent producers of natural gas who are selling a commodity, gas, to the pipelines was not a feasible, workable, meaningful way of regulating this profit.

    The Commission instead said that what we are going to do and what we have done is to work to establish not Phillips’ rates and then California Company’s rates and then the Texaco Company’s rates and then Gulf’s rates and of course I don’t mean to say that it could all be seriatim, we would do our best to do them at the same time, but we’re not going to attempt to fix individual companies, company by company.

    We’re going to attempt to fix the rates at which gas are sold and each of the major production areas of the country for all of the companies who are producing and selling gas in those areas.

    Potter Stewart:

    Many areas, are there, as determined?

    Richard A. Solomon:

    The Commission’s Statement of Policy which appears in the record at 348 has about 23 of them.

    I think that this can lead to a misconception however.

    For example, of those 23 or 4 areas, three of them are involved in the so-called Permian Basin case which is the first of the Commission’s cases and I’m sure that in having area hearings, there will be other packaging that will come along.

    William J. Brennan, Jr.:

    Does it appear on what basis the lines of an area were established?

    Richard A. Solomon:

    The lines of the areas were adopted on the basis of the Commission’s best judgment in 1960 subject to future change as either its information or record information in the area hearings were demonstrated.

    William J. Brennan, Jr.:

    Because I would suppose, the geography of an area would be then important, would it not?

    Richard A. Solomon:

    Pardon?

    William J. Brennan, Jr.:

    The geography which comprises an area would be quite important, wouldn’t it?

    Richard A. Solomon:

    Well, this is exactly why, for example, in the Permian Basin case which happens to involve one of the largest production areas in the country in which three of these pricing areas touched rather that attempting to try the case area by area.

    Richard A. Solomon:

    We packaged the three pricing areas which involved this one production area together.

    So that we weren’t treating this separately and similarly, I’m sure when we get to the so-called Texas Gulf Coast production area which is Texas Railroad Districts one, two and three, I think it’s quite possible that — if not probable, that these cases will be tried together so that this can — problems of adjacency can be threshed out and (Voice Overlap) —

    William J. Brennan, Jr.:

    Were the parties in those proceedings, are they heard on the definition of the merit?

    Richard A. Solomon:

    As far as I know, the Commission — I’m not sure.

    But I should imagine that this is a problem which at least some stage of the game, somebody claims that they are not in the area, they’re obviously would be entitled to a hearing.

    Now, whether this is an issue in the area hearing, I don’t really know.

    I have I recollection that the Commission said, at least at the outset, let us try it on these areas and we can see whether these are correct areas at a subsequent date.

    The point I wish to make is that my opponent’s objection to what the Commission is doing, why is not so much with either of our determinations not to decide, to dismiss the Section 4 proceeding or not to decide the Section 5 proceeding on this record, but rather on our failure while we were moving to area rates to continue to use in the Phillips case and all other cases of the major producers, at least, this difficult individual company cost-of-service technique which the Commission had found was an inadequate and inappropriate technique.

    And the real question involved in this case is whether the Commission must go down two streets at the same time or can in the exercise of its discretion as to how to best and quickest do the difficult job of fixing just and reasonable rates for gas throughout the United States, can use its resources as it has determined is the best method of doing it.

    My opponents argue that area rates at best will take years to formulate, although I think it’s perfectly clear that this 14-year figure is an estimate Justice Prettyman got from one of our colleagues in explaining how long it would take.

    [Inaudible]

    Richard A. Solomon:

    We have estimated in our brief here that the first area proceeding involving Permian Basin which of course is a key one can be decided by the Commission by the middle of 1964.

    The Permian Basin case is already in being, if not merely in being evidences in as I speak today, as far as I know, the Commission’s exhibits which were put in, in November are in process of cross-examination.

    We believe —

    William O. Douglas:

    [Inaudible]

    Richard A. Solomon:

    What —

    William O. Douglas:

    How long would it take for the Commission to have not dismissed these two proceedings?

    Richard A. Solomon:

    How long would it have taken the Commission to have decided the Phillips case?

    William O. Douglas:

    Yes.

    Richard A. Solomon:

    Well, we have estimated that if this Court was to remand the Phillips case with constructions to proceed to it, that it would take approximately the same amount of time to decide the Phillips case.

    William O. Douglas:

    Middle of 1964?

    Richard A. Solomon:

    Middle of 1964.

    Now, these are estimates and it may very well be that with cooperation and with speed that we might be able to decide a reopened Phillips case somewhat earlier than the — we can complete the Permian Basin or it may work the other way.

    Tom C. Clark:

    When did you start the Permian Basin area proceedings?

    Richard A. Solomon:

    The hearing was instituted on December 20th, 1960, two months after decision in this case.

    Tom C. Clark:

    That’d be about four years?

    Richard A. Solomon:

    It will be about four years, yes sir.

    Tom C. Clark:

    Do you have 23 areas?

    Richard A. Solomon:

    Well, as I said, we do not have 23 areas because the Permian Case involves three of the areas and there will be further packaging.

    As a matter of fact, — oh, in the second area, the South Louisiana area, there’s a considerable amount of work that’s been done in the case, we’ve got a lot of information as to producers and other people have submitted to us.

    Richard A. Solomon:

    But I think it is no secret that one of the reasons why it has not advanced as far as Permian; one reason of course is that you use one pile of case at a time.

    But another is that there are discussions which have been going on with representatives of both the producers, including Phillips and the distributors including Mr. Mann’s clients, looking towards the possibility of speeding up all these other areas by maybe getting the national information for these area hearings in all or one time rather than trying to treat them seriatim.

    Tom C. Clark:

    But there are more producers in the Louisiana area, they go to the area than they are in the Permian?

    Richard A. Solomon:

    More producers?

    Tom C. Clark:

    [Inaudible]

    Richard A. Solomon:

    There are an awful lot of producers in the Permian Basin area.

    Most of the big producers are in the Permian Basin area.

    My understanding was there are only two or three producers with over $10 million worth of sales annually that were not in the Permian Basin.

    Permian Basin is 10% of the sales of the nation.

    It’s a big established gas filed by no means is smaller.

    Tom C. Clark:

    What’s the percent of the other one?

    Richard A. Solomon:

    Southern Louisiana is about 20%.

    Tom C. Clark:

    It’s a newer field, isn’t it?

    Richard A. Solomon:

    It’s the newer field, yes.

    Sir, —

    Tom C. Clark:

    Its potential is much greater, isn’t it?

    Richard A. Solomon:

    I should imagine it’s potentially much greater.

    It also has certain difficulties that the others don’t have at which might have been one of the reasons why it was not used as a pilot case and that it involves the offshore (Voice Overlap) —

    Tom C. Clark:

    Submerged drilling.

    Richard A. Solomon:

    What?

    Tom C. Clark:

    Submerged drilling.

    Richard A. Solomon:

    That’s right, yes.

    It has cost problems, I’m afraid, which we don’t have in the Permian case.

    Arthur J. Goldberg:

    [Inaudible]

    Richard A. Solomon:

    Well, let me answer your question this way.

    First of all, there is no change on the attitude of the Commission that the best way to do this job is by area pricing.

    The new Commission is pushing if anything harder and faster than the old Commission to establish area pricing.

    Now, this is — I’ll take this out of term because I think it is important.

    The old Commission at the time it dismissed the Phillips case, on the theory that it was not good planning from its standpoint to start this case over to get the material which would be needed to get a new decision in Phillips had about 9 or 10, maybe a little bit more other cases which were fairly far advanced they thought at that time on an individual cost-of-service basis which — the one Hunt which you heard about was one of them.

    The question came up is to — in view of the Phillips decision whether to dismiss this out of hand and the Commission in a series of orders in 1960 and 1961 refused.

    Richard A. Solomon:

    It was reluctant, obviously, having spent a great deal of time and effort in these cases to dismiss them out of hand without seeing whether there wasn’t something that could be salvaged from these proceedings and it has allowed these cases to go on.

    I don’t think the record in — what’s happened with respect to these other cases is very much hope that if we really just put our mind to it, we could easily and quickly decide Phillips on a cost-of-service basis as well as the other nine or ten big people because the fact is that although we’ve refused to terminate this and allowed this to go on, of the nine cases, I used this figure, there were three others which were settled without any examiner’s opinion, of these nine cases, three of them haven’t been decided by the examiners yet over two and a quarter years after the Phillips decision, although they were presumably in advanced stages then.

    Two others have been decided within the last three months, two years thereafter and the decisions of the examiners in these cases to the extent that they attempt to follow the Phillips principles as they do on cost-of-service, do not indicate as our friends assume that if only we’d proceed with cost-of-service we would get the type of results of a huge rollback that they’re talking about.

    Because of these six examiner’s decisions, four of them and these six examiner’s decisions used not 1954 test years but 1957 and 1958 test years and with these test years, four of the six examiner’s decisions come up with the result that we had in Phillips that there was a deficiency, less revenues as contrasted with cost as of these later years.

    Now, were said — it said that we confessed error because we remanded this Hunt case.

    We didn’t decide that case.

    The Commission didn’t decide this Glassell case say Mr. Bennett cited.

    The Commission hasn’t decided on 5 (a) basis any of these new cases and I don’t know whether we’re ever going to be able to but we are not throwing them out the window, we’re going to see what can be done but in the Hunt case which is the first one that came before the Commission on the examiner’s decision, what the Commission found was that it was impossible to decide it even if we try to apply the Phillips’ techniques.

    And as I will indicate a little later in my argument, the basic assumption that is made here that because a cost-of-service was derived in the Phillips case that that shows that the Commission has there or could have there if they’ve only gone ahead and made the final “dotting the i and crossing the t”, worked out cost-of-service, individual company cost-of-service pricing just isn’t correct because there’s a very major problem perhaps as major certainly as difficult as the deriving of a cost-of-service which the Commission — because of the way it decided Phillips never faced up to those.

    And that is the problem of rate design and by that what I mean is this.

    It’s one thing to find after a great deal of work and effort in making allocations and everything like that, it’s one thing to find what the cost-of-service is and match it up against the revenues in the test year but that doesn’t answer the question that you’re fixing just and reasonable rates under Section 5.

    That doesn’t answer the question of how the individual rates of a company like Phillips which has over 350 rate schedules scattered throughout the United States and ranging, as my friends have indicated, from very low to very high.

    Now, the individual rates are going to be worked into this schedule, you have a serious, difficult rate design problem.

    Now, the examiner in the Phillips case proposed a rate design.

    He proposed a rate design which was a uniform rate for Phillips, a uniformed standard rate for Phillips throughout the country.

    It would vary only with respect to the grades and types of gas, but generally speaking, it’s a tariff system, one rate; one company.

    Of course, there’d be different rates for different companies in any given area, but one rate; one country throughout the country and this is a feasible rate design, I guess.

    There are difficulties with it.

    It involve serious problems under this Court’s Sea Arrow case because it requires making findings that contract rates with contract provisions which wouldn’t prevent raising the lower ones must be set aside because this is necessary in the public interest.

    I’m not saying that this type of rate design is illegal or improper.

    I do say that it was a rate design which nobody else with the possible exception of Phillips in this Phillips case wanted, liked or was pushing the staff of the Commission joined by most of the interveners including – especially the State of Wisconsin which is one of the petitioners here was arguing that this type of rate design would so upset the entire balance of sales of gas which have been growing up over the 20 years that it was a hark.

    And they said, the only thing you can really do is after you got this one cost-of-service for the whole company then break it down by individual areas and have separate cost-of-service for each of the areas.

    The Eastern Seaboard interveners which is the term we use for Mr. Mann’s clients in case Number 74 didn’t suggest that, but they had a — still a separate rate design which was also calculated to prevent the general dislocation that the examiner’s rate design would have required.

    And the Commission, as I say, although it didn’t decide it, did indicate and as petition for — in its decision on rehearing that it didn’t agree with the basic theory of the examiners rate design because that rate design, as I indicated, was based on the assumption that we should have level rates because different rates for Phillips throughout the country was discriminatory.

    And the Commission found in this case that the fact that you have different rates in the Hugoton field of Kansas where gas was discovered 50 years ago and is very close to the surface as contrasted with higher rates in the offshore lands off Southern Louisiana did not in and of itself show any discrimination.

    All of which to get back I guess in my point, merely goes for the proposition that this idea that we had done everything but decide in Phillips and that we could go ahead with Phillips and within a month or two, or three or four months, come out with a new, complete decision establishing Phillips’ just and reasonable rates or as many sales throughout the country just isn’t true.

    As I said I’m not saying to this Court that we cannot decide an individual cost-of-service for Phillips within the next two or three years, I won’t even say that we couldn’t decide it before we’ll decide the Permian Basin case, but the suggestion that follows as night and day is really a foolish suggestion.

    Now, let me get back to why the Commission abandoned individual company cost-of-service.

    First, let me state that it’s a misnomer to talk in terms of individual company cost-of-service as the established method for fixing the price just and reasonable prices of producers of natural gas which the Commission junked because it wants to experiment with an area pricing method, this just isn’t so.

    Whatever the reasons why — whatever the history between 1948 and 1960 may indicate to a historian, the fact is that as of 1960, September 1960 and as of January 1963, there is no established individual company cost-of-service method for fixing the rates of gas producers, independent gas producers.

    Richard A. Solomon:

    It can be done, I’m sure.

    Tom C. Clark:

    Do they have a posted price like they do in oil or gas?

    Richard A. Solomon:

    No sir, no sir.

    They have instead contract prices which are submitted to the Commission and the contract price — you see, gas is sold generally on 20-year contracts.

    You will have a contract to sell gas at a fixed price.

    It might be with provisions to raise it at various times.

    This contract price will be submitted to the Commission and either approved in the certificate or can — or not approved.

    And if they want to raise it at some time, if the contract permits them, they come to the Commission with an increased price and the prices at the present moment vary from producer to producer within a field and of course they vary from field to field.

    Tom C. Clark:

    I thought perhaps your company might like it does in oil, post a price at which it might buy from those it did not contract with.

    Richard A. Solomon:

    The pipelines in buying gas from the producers, I think approximate the post pricing but the price that a pipeline will be buying gas today will not make up all of the prices because since you have a 20-year continuum, you have prices which are gas halfway through this period, half quarter way through, etcetera.

    Tom C. Clark:

    Escalated price, I wanted — if you’d tell me just how the Commission then goes down, we’ll say into the Permian Basin and how do they arrive at area price on the Permian Basin that are in those three cases, we’ll take just one case. Did they get all the contracts there and see what the medium is or just (Voice Overlap) —

    Richard A. Solomon:

    We’ve got all the contracts there.

    We’ve got all the information from all the producers there, cost information as well as economic information of their nationwide exploration and development activities and their nationwide production activities.

    We have got all the information there as to their operations in Permian Basin itself.

    And we are attempting by looking at the cost and economic information coordination because part of this problem is a nationwide problem and for the specific area to determine a price of gas to be solved from there which will, as low as possible because that of course is our statutory obligation, but still be sufficiently high to bring gas to the interstate market which of course being specific high — specifically high to pay for the exploration and development activities of the gas company and bring this gas to the existing market.

    Tom C. Clark:

    (Voice Overlap)

    Richard A. Solomon:

    But I do want to make clear here Justice Clark that the suggestion that going to area pricing is junking cost considerations is completely untrue.

    Tom C. Clark:

    What weight do they give the going price?

    Every field I suppose has a — or every contract has a going price, isn’t it?

    So what weight do they give that?

    You say they take the cost of development, and everything?

    Richard A. Solomon:

    The extent, if any, to which the so-called area price, field price, existing field price will be given to — by the Commission in the Permian Basin case or the other area cases still has to be determined.

    But if there’s one thing that is clear, it is that the Commission has no intention of fixing area prices merely on the basis of field prices, the prices actually being bargained for in here.

    Tom C. Clark:

    That depends on the cost of exploration, production, everything?

    Richard A. Solomon:

    Yes, sir.

    Well, we — but — we’re attempting to find — now, exploration of course is a problem which is not limited to any particular field.

    With respect to Permian Basin and all other areas, the exploration expenses have to be on a national basis because people are exploring all over, you don’t want them to limit them to the fields that they’re in.

    We have attempted, we are driving average exploration cost for all producers throughout the United States, applying this to the other Permian Basin cost.

    Tom C. Clark:

    Of course, some exploration must — most expensive as you indicated like in the Gulf?

    Richard A. Solomon:

    That’s right and that is averaged in.

    Tom C. Clark:

    It goes in with the —

    Richard A. Solomon:

    That’s right.

    Tom C. Clark:

    — shallow areas —

    Richard A. Solomon:

    We’re not trying to fix a price for Permian Basin which will only have the exploration cost for Permian Basin or a cost for Southern Louisiana which will only have the exploration cost for Southern Louisiana.

    Exploration cost at least that’s the way the staff has been producing — putting this case on so far is based on the assumption that exploration for gas is a nationwide activity and that the area parts of the case are not exploration expenses.

    They are development and operational and expensive.

    The question of how deep you have to drill on a particular basin to get gas is a particular basin or area of problem, but exploration throughout the United States is a diff — very different problem.

    Hugo L. Black:

    You said you.

    Arthur J. Goldberg:

    [Inaudible]

    Hugo L. Black:

    Excuse me.

    Arthur J. Goldberg:

    [Inaudible]

    Richard A. Solomon:

    Well, I want to be very clear with my answer to you.

    The Commission, although it hasn’t resolved these problems and there will be arguments I’m sure made that we have to fix area prices at a level which will allow each individual producer in that area to make its cost-of-service which is indicated here includes a reasonable return.

    Everything the Commission had said so far indicates that that is not what it intends to do, that it is not intending to fix area prices to guarantee everybody a full return because as this Court has made clear even in cases dealing with the genuine utilities as contrasted with people selling a commodity, as Justice Douglas made clear in Colorado Interstate and some of those other cases, public utility regulation does not guarantee people upfront and is particularly true here when we’re dealing with the production of natural gas, a mining type activity, we’re inevitable.

    Some people are lucky and some people are unlucky, some people go out and drill ten holes and finally get some gas on the eleventh, somebody else will come along and drill on the first shot and get gas.

    The same amount of gas, same quality gas, the Commission is not going to fix a just and reasonable price for the first man’s gas ten times as high as for the second man’s gas.

    And that has been made clear in our brief as — that is the — one of the major reasons why we have gotten away for them — this individual company pricing system because in an area like Permian Basin or Southern Louisiana, it doesn’t make any sense.

    You’re not really performing an economic function to talk in terms of setting just and reasonable prices for two well, side by side, coming from the same field, one at five cents and one at 15 cents, depending upon the peculiarities of an individual company that happens to own that or as we point out in our brief even one want because many of these areas you have joint efforts and if you follow the individual company cost of system, cost-of-service of pricing method to its logical conclusion, you’d have different prices for different — same gas from the same well.

    The fact is that the techniques of ratemaking which were developed by this, in this country over the last 75 years, with respect to the semi-monopolistic activities of a public utility or a pipeline, gas pipeline, or a telephone company just have very little relationship to the very different problem we’re dealing with here and this has been recognized I think carefully by this Court which is always refrained from imposing on the Commission any one type of method because they recognize that this problem was in the background.

    Hugo L. Black:

    Suppose you picked the rates for an area of 15 per units, whatever your unit is, 15 cents per unit?

    One company comes in and says, that’s alright for all of them — most of them, I can’t operate without losing my business.

    This is confiscation to me.

    What happens then?

    What would the Court have to do?

    Richard A. Solomon:

    Well, first of all, the Commission would have to look into this problem.

    Obviously, we are going to have to set up a procedure whereby the man who believes that there is confiscation can bring his claim to the Commission initially and then presumably to the Court.

    Hugo L. Black:

    Suppose he chose —

    Richard A. Solomon:

    But I’m not suggesting —

    Hugo L. Black:

    Suppose he chose it.

    Richard A. Solomon:

    What?

    Hugo L. Black:

    Suppose he chose it, you picked an average rate, you — as I have understood it —

    Richard A. Solomon:

    Well —

    Hugo L. Black:

    — different companies have different costs and make different amounts of profits.

    Suppose one of them chose that the rate you fixed on the average confiscates his property, let’s assume that he’s proven it, what happens then?

    Richard A. Solomon:

    Well, of course he —

    Hugo L. Black:

    Does he have to follow those rates?

    Richard A. Solomon:

    No.

    Of course, you’re asking me to move ahead of the Commission in deciding this problem —

    Hugo L. Black:

    Well, I’m sort of thinking about your problem that you are — of the difficulties of fixing individual rates and I understood you to say, maybe I’m wrong that the — if you fix them altogether, that wouldn’t necessarily raise them to the highest cost then, how could you keep from doing it, raising it to the highest cost then?

    Richard A. Solomon:

    As this — Your Honor, will undoubtedly remember this problem is not a new one in price fixing ratemaking activities of the various governmental agencies.

    In the Tagg Brothers and Moorhead case decided by this Court I think in 280, a problem came up under the Agricultural Packers and Stockyards Act very similar statute, very, very similar to the Natural Gas Act where the Secretary of Agriculture in fixing the prices for a certain merchandising man in Denver Stockyard I think fixed a level price based upon his analysis of the entire economics of the thing and somebody came up and said that this price is too low for me and this Court and that case said that that part of the — you’re not guaranteed a profit, you don’t have it —

    Hugo L. Black:

    I understand that.

    Your answer to me then, as I understand it is, that even though the rates you fixed would be confiscatory to the Phillips for instance because of its higher cost than others, it will have to sell at that price that you think.

    As I understand that’s your answer?

    Richard A. Solomon:

    Or get out of the interstate market.

    Hugo L. Black:

    Or get out of the business?

    Richard A. Solomon:

    Interstate market.

    Hugo L. Black:

    Interstate market.

    Byron R. White:

    But isn’t there some doubt Mr. Solomon, that there is still gas in there, [Inaudible]

    Richard A. Solomon:

    Well, I think this is right.

    I think that it is more of a theoretical problem than anything else that the — at least and certainly, the very high cost producer is not going to be able to get his cost anyway.

    This is not surprising Justice White because in this business particularly, you will have lots of people who at least at varying times are not making a full return.

    They may be spending all their money in investment at that time.

    Hugo L. Black:

    I started to quit that for lunch, but l asked you that because I thought about the fact that the basic rates are fixed originally according by the company and rather difficult to unfix those rates and they vary according to what they think, they ought to get or what they can give.