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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:

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.