PERMIAN BASIN AREA RATE CASES
No. 90
Supreme Court of the United States
May 1, 1968
390 U.S. 747
Argued December 5-7, 1967
J. Calvin Simpson argued the cause for the Public Utilities Commission of California; Malcolm H. Furbush argued the cause for the Pacific Gas & Electric Co.; John Ormasa argued the cause for the Pacific Lighting Gas Supply Co. et al., and C. Hayden Ames argued the cause for the San Diego Gas & Electric Co., all in support of the order of the Federal Power Commission. With Mr. Simpson on the brief for the Public Utilities Commission of California was Mary Moran Pajalich. With Messrs. Furbush, Ormasa and Ames on the brief for Pacific Gas & Electric Co. et al. was Frederick T. Searls. Roger Arnebergh filed a brief for the City of Los Angeles, and Edward T. Butler and Thomas M. O‘Connor filed a brief for the City of San Diego and the City and County of San Francisco, in support of the order of the Federal Power Commission.
Bruce R. Merrill argued the cause for the Continental Oil Co.; Crawford C. Martin, Attorney General, argued the cause for the State of Texas; Boston E. Witt, Attorney General, argued the cause for the State of New Mexico; Herbert W. Varner argued the cause for the Superior Oil Co.; Robert W. Henderson argued the cause for the Hunt Oil Co. et al.; J. Evans Attwell argued the cause for Bass et al.; Justin R. Wolf argued the cause for the Standard Oil Co. of Texas; James L. Armour argued the cause for the Mobil Oil Corp.; Louis Flax argued the cause for the Sun Oil Co., and Carroll L. Gilliam and Oliver L. Stone argued the cause for the Amerada Petroleum Corp. et al., all in opposition to the order of the Federal Power Commission.
Briefs of amici curiae were filed by Louis J. Lefkowitz, Attorney General of New York, Kent H. Brown and
MR. JUSTICE HARLAN delivered the opinion of the Court.
These cases stem from proceedings commenced in 1960 by the Federal Power Commission under § 5 (a) of the Natural Gas Act,1 52 Stat. 823,
I.
The circumstances that led ultimately to these proceedings should first be recalled. The Commission‘s authority to regulate interstate sales of natural gas is derived entirely from the Natural Gas Act of 1938. 52 Stat. 821. The Act‘s provisions do not specifically extend to producers or to wellhead sales of natural gas,5 and the Commission declined until 1954 to regulate sales by
The Commission initially sought to determine whether producers’ rates were just and reasonable within the meaning of §§ 4 (a)8 and 5 (a) by examination of each producer‘s costs of service.9 Although this method has been widely employed in various rate-making situations,10 it ultimately proved inappropriate for the regulation of independent producers. Producers of natural gas cannot usefully be classed as public utilities.11 They en-
The perimeter of this proceeding was drawn by the Commission in its second Phillips decision and in its Statement of General Policy No. 61-1. The Commission in Phillips asserted that it possesses statutory authority both to determine and to require the application through-
The rate structure devised by the Commission for the Permian Basin includes two area maximum prices. The Commission provided one area maximum price for natural gas produced from gas wells and dedicated to inter-
Each of the area maximum rates adopted for the Permian Basin includes a return to the producer of 12% on average production investment, calculated from the
The allowances included in the return for the uncertainties of exploration were, however, paralleled by a system of quality and Btu adjustments.26 The Commission held that gas of less than pipeline quality must be sold at reduced prices, and it provided for this purpose a system of quality standards. The price reduction appropriate in each sale is to be measured by the cost of the processing necessary to raise the gas to pipeline quality; these costs are to be determined by agreement between the parties to the sale, subject to review and approval by the Commission. The Commission ultimately indicated that it would accept any agreement which reflects “a good faith effort to approximate the processing costs involved....” 34 F. P. C. 1068, 1071. In addition, the Commission prescribed that gas with a Btu content of less than 1,000 per cubic foot must be sold at a price proportionately lower than the applicable area maximum, and that gas with a Btu content greater than 1,050 per cubic foot may be sold at a price proportionately higher than the area maximum. The Commission acknowledged that the aggregate revenue consequences
The Commission derived from these calculations the following rates for the Permian Basin.27 Gas-well gas, including its residue, and gas-cap gas, dedicated to interstate commerce after January 1, 1961, may be sold at 16.5¢ per Mcf (including state production taxes) in Texas, and 15.5¢ (excluding state production taxes) in New Mexico.28 Flowing gas, including oil-well gas and gas-well gas dedicated to interstate commerce before January 1, 1961, may be sold at 14.5¢ per Mcf (including taxes) in Texas, and 13.5¢ per Mcf (excluding taxes) in New Mexico. Further, the Commission created a minimum just and reasonable rate of 9¢ per Mcf for all gas of pipeline quality sold under its jurisdiction within the Permian Basin. It found that existing contracts that included lower rates would “adversely affect the public interest.” FPC v. Sierra Pacific Power Co., 350 U.S. 348, 355. The Commission permitted producers to file under § 4 (d),
The Commission acknowledged that area maximum rates derived from composite cost data might in individual cases produce hardship, and declared that it would, in such cases, provide special relief. It emphasized that exceptions to the area rates would not be readily or frequently permitted, but declined to indicate in detail in what circumstances relief would be given.
This rate structure is supplemented by a series of ancillary requirements. First, the Commission provided various special exemptions for producers whose annual jurisdictional sales throughout the United States do not exceed 10,000,000 Mcf. The prices in sales by these relatively small producers need not be adjusted for quality and Btu deficiencies. Moreover, the Commission by separate order commenced a rule-making proceeding to reduce the small producers’ reporting and filing obligations under §§ 4 and 7,
Second, the Commission imposed a moratorium until January 1, 1968, upon filings under § 4 (d) for prices in excess of the applicable area maximum rate. The Commission concluded that such a moratorium was imperative if the administrative benefits of an area proceeding were to be preserved. Further, it permanently prohibited the use of indefinite escalation clauses to increase prevailing contract prices above the applicable area maximum rate.30
On petitions for review, the Court of Appeals for the Tenth Circuit held that the Commission had authority under the Natural Gas Act to impose maximum area rates upon producers’ jurisdictional sales. It sustained, but stayed enforcement of, the Commission‘s moratorium upon filings under § 4 (d) in excess of the applicable area maximum rate. It approved both the Commission‘s two-price system and its exemptions for small producers. Nonetheless, the court concluded that the Commission failed to satisfy the requirements devised by this Court in FPC v. Hope Natural Gas Co., supra. It held that the Commission had not properly calculated the financial consequences of the quality and Btu adjustments, had not made essential findings as to aggregate revenue, and
II.
The parties before this Court have together elected to place in question virtually every detail of the Commission‘s lengthy proceedings.32 It must be said at the outset that, in assessing these disparate contentions, this Court‘s authority is essentially narrow and circumscribed.
Moreover, this Court has often acknowledged that the Commission is not required by the Constitution or the
III.
The issues in controversy may conveniently be divided into four categories. In the first are questions of the Commission‘s statutory and constitutional authority to
We turn first to questions of the Commission‘s constitutional and statutory authority to adopt a system of area regulation and to impose various supplementary requirements. The most fundamental of these is whether the Commission may, consistently with the Constitution and the
It is plain that the Constitution does not forbid the imposition, in appropriate circumstances, of maximum prices upon commercial and other activities. A legislative power to create price ceilings has, in “countries where the common law prevails,” been “customary from time immemorial . . . .” Munn v. Illinois, 94 U.S. 113, 133. Its exercise has regularly been approved by this Court. See, e. g., Tagg Bros. v. United States, 280 U.S. 420; Bowles v. Willingham, 321 U.S. 503. No more does the Constitution prohibit the determination of rates through group or class proceedings. This Court has repeatedly recognized that legislatures and administrative agencies may calculate rates for a regulated class without first evaluating the separate financial position of each member of the class; it has been thought to be sufficient if the agency has before it representative evidence, ample in quantity to measure with appropriate precision the financial and other requirements of the pertinent parties. See Tagg Bros. v. United States, supra; Acker v. United States, 298 U.S. 426; United States v. Corrick, 298 U.S. 435. Compare New England Divisions Case, 261 U.S. 184, 196-199; United States v. Abilene & S. R. Co., 265 U.S. 274, 290-291; New York v. United States, 331 U.S. 284; Chicago & N. W. R. Co. v. A., T. & S. F. R. Co., 387 U.S. 326, 341.
No constitutional objection arises from the imposition of maximum prices merely because “high cost operators may be more seriously affected . . . than others,” Bowles v. Willingham, supra, at 518, or because the value of regulated property is reduced as a consequence of regulation. FPC v. Hope Natural Gas Co., supra, at 601. Regulation may, consistently with the Constitution, limit stringently the return recovered on investment, for investors’ interests provide only one of the variables in the constitutional calculus of reasonableness. Covington & Lexington Turnpike Co. v. Sandford, 164 U.S. 578, 596.
It is, however, plain that the “power to regulate is not a power to destroy,” Stone v. Farmers’ Loan & Trust Co., 116 U.S. 307, 331; Covington & Lexington Turnpike Co. v. Sandford, supra, at 593; and that maximum rates must be calculated for a regulated class in conformity with the pertinent constitutional limitations. Price control is “unconstitutional . . . if arbitrary, discrim-
One additional constitutional consideration remains. The producers have urged, and certain of this Court‘s decisions might be understood to have suggested, that if maximum rates are jointly determined for a group or area, the members of the regulated class must, under the Constitution, be proffered opportunities either to withdraw from the regulated activity or to seek special relief from the group rates.34 We need not determine whether this is in every situation constitutionally imperative, for such arrangements have here been provided by the Commission, and we cannot now hold them inadequate.
The Commission declared that a producer should be permitted “appropriate relief” if it establishes that its “out-of-pocket expenses in connection with the operation of a particular well” exceed its revenue from the
The Court of Appeals held that these arrangements were inadequate. It found the Commission‘s description of its intentions vague. The court would require the Commission to provide “guidelines which if followed by an aggrieved producer will permit it to be heard promptly and to have a stay of the general rate order until its claim for exemption is decided.” 375 F. 2d, at 30. We cannot agree. It would doubtless be desirable if the Commission
Nor is there reason now to suppose that petitions for relief will not be expeditiously evaluated; for the Commission has given assurance that they will be “disposed of as promptly as possible.”38 If it subsequently appears that the Commission‘s provisions for special relief are for any reason impermissibly dilatory, this question may then be reconsidered.
Furthermore, it is pertinent that the Commission may supplement its provisions for special relief by permitting abandonment of unprofitable activities. The producers
Finally, we cannot agree that the Commission abused its discretion by its refusal to stay, pro tanto, enforcement of the area rates pending disposition of producers’ petitions for special relief. The Court of Appeals would evidently require the Commission automatically to issue such a stay each time a producer seeks relief. This is plainly inconsistent with the established rule that a party is not ordinarily granted a stay of an administrative order without an appropriate showing of irreparable injury. See, e. g., Virginia Petroleum Jobbers Assn. v. FPC, 259 F. 2d 921, 925. Moreover, the issuance of a stay of an administrative order pending disposition by the Commission of a motion to “modify or set aside, in whole or in part” the order is a matter committed by the
For the reasons indicated, we find no constitutional infirmity in the Commission‘s adoption of an area maximum rate system for the Permian Basin.
We consider next the claims that the Commission has exceeded the authority given it by the
Reliance is next placed upon one sentence in the Report of the House Committee on Interstate and Foreign Commerce, which in 1937 recommended passage of the
Finally, the producers urge that two opinions of this Court establish the inconsistency of area regulation with the
The producers next rely upon a dictum in the opinion of the Court in Bowles v. Willingham, supra. The Court remarked that “under other price-fixing statutes such as the
Such a construction is consistent with the view of administrative rate making uniformly taken by this Court. The Court has said that the “legislative discretion implied in the rate making power necessarily extends to the entire legislative process, embracing the method used in reaching the legislative determination as well as that determination itself.” Los Angeles Gas Co. v. Railroad Comm‘n, 289 U.S. 287, 304. And see San Diego Land & Town Co. v. Jasper, 189 U.S. 439, 446. It follows that rate-making agencies are not bound
We are unwilling, in the circumstances now presented, to depart from these principles. The Commission has asserted, and the history of producer regulation has confirmed, that the ultimate achievement of the Commission‘s regulatory purposes may easily depend upon the contrivance of more expeditious administrative methods. The Commission believes that the elements of such methods may be found in area proceedings. “[C]onsiderations of feasibility and practicality are certainly germane” to the issues before us. Bowles v. Willingham, supra, at 517. We cannot, in these circumstances, conclude that Congress has given authority inadequate to achieve with reasonable effectiveness the purposes for which it has acted.
We must now consider whether the Commission exceeded its statutory authority by the promulgation of various supplementary requirements. The first of these is its imposition of a moratorium until January 1, 1968, upon filings under
The validity of the moratorium order turns principally upon construction of
Certain of the producers urge that
We cannot construe the Commission‘s statutory authority so restrictively. Nothing in
The deficiencies of the producers’ construction of
The question remains whether the imposition by the Commission of a moratorium until January 1, 1968, was
We cannot, given the apparent stability of production costs, the Commission‘s relative inexperience with area regulation, and the administrative burdens of concurrent area proceedings, hold that this arrangement was impermissible. We need not attempt to prescribe the limitations of the Commission‘s authority under
A collateral issue of statutory authority must be considered. The Commission supplemented its mora-
Indefinite escalation clauses “cause price increases . . . to occur without reference to the circumstances or economics of the particular operation, but solely because
The producers do not suggest that the Commission and Court were there mistaken; they urge instead that the Commission has acted inconsistently with its decision in Pure Oil Co., 25 F. P. C. 383, and that it has wrongly invalidated existing contracts. The Commission declined in Pure Oil to declare unenforceable escalation clauses included in previously executed contracts. It reasoned that since the contracts lacked severability provisions, to strike the escalation clauses would, under “familiar principles of law,” destroy the contracts; it feared that this would prove “many times” more prejudicial to the public interest than would the escalation clauses. Id., at 388-389. The producers assert that the Commission has now committed the error that it avoided in Pure Oil. The Commission rejoins that it has not stricken the escalation clauses; it has merely limited their application to prices no higher than the area maximum rates. Alternatively, the Commission avers that even if the contracts have been frustrated, neither the public nor the producers can suffer, since producers’ prices may be as high as, but not higher than, the area maximum.
We think that the Commission did not exceed or abuse its authority.
The next supplementary order to be considered is the Commission‘s creation of various exemptions for the smaller producers. The difficulties of the smaller producers differ only in emphasis from those of the larger independent producers and the integrated producer-distributors; but these differences are not without relevant importance.49 Although the resources of the small pro-
The Commission reasoned that, in these circumstances, carefully selected special arrangements for small producers would not improperly increase consumer prices. Moreover, it concluded that such exemptions might usefully both streamline the administrative process and strengthen the small producers’ financial position.54 The Commission provided two forms of special relief: first, it released small producers from the requirement that quality adjustments be made in price;55 and second, it commenced a rule-making proceeding intended to relieve them from various filing and reporting obligations. See 34 F. P. C. 434. The Commission asserted that the consequences for consumer prices of the first would be de minimis; it expected that the second would measurably reduce the small producers’ regulatory expenses.56
Finally, we consider one additional question. Certain of the producers have urged that, having adopted a system of area regulation, the Commission improperly designated the Permian Basin as a regulatory area. It is contended that the Commission failed to provide appropriate opportunities for briefing and argument on questions of the size and composition of the area. We must, before considering the rate structure devised for the Permian Basin by the Commission, examine this contention.
The Commission‘s designation of the Permian Basin as a regulatory area stemmed from its Statement of General Policy, issued September 28, 1960. 24 F. P. C. 818. The Commission there announced its intention to regulate producers’ interstate sales through the im
On December 23, 1960, the Commission ordered the institution of this proceeding, for which it merged three of the producing areas separately listed by the Statement of General Policy. 24 F. P. C. 1121. It unequivocally announced that “no useful purpose would be served at this time by delaying the discharge of our primary responsibility . . . by entertaining issues . . . that the areas we have delineated . . . might be inappropriate for ratemaking purposes.” Id., at 1122. It appears that no hearings were conducted, and no evidence taken, on the propriety of the areas thus designated by the Commission for inclusion in this proceeding.
We do not doubt that significant economic consequences may, in certain situations, result from the definition of boundaries among regulatory areas. The calculation of average costs might, for example, be influenced by the inclusion or omission of a given group of producers; and the loss or retention of a price differential between regulatory areas might prove decisive to the success of marginal producers. Nonetheless, we hold that the Commission did not abuse its statutory authority by its refusal to complicate still further its first area proceeding by inclusion of issues relating to the proper size and composition of the regulatory area.
We therefore conclude that the Commission did not, in these proceedings, violate pertinent constitutional limitations, and that its adoption of a system of area
IV.
It is important first to delineate the criteria by which we shall assess the Commission‘s rate structure.58 We must reiterate that the breadth and complexity of the Commission‘s responsibilities demand that it be given every reasonable opportunity to formulate methods of regulation appropriate for the solution of its intensely practical difficulties. This Court has therefore repeatedly stated that the Commission‘s orders may not be overturned if they produce “no arbitrary result.” FPC v. Natural Gas Pipeline Co., supra, at 586; FPC v. Hope Natural Gas Co., supra, at 602. Although neither law nor economics has yet devised generally accepted standards for the evaluation of rate-making orders,59 it must, nonetheless, be obvious that reviewing courts will require criteria more discriminating than justice and arbitrariness if they are sensibly to appraise the Commission‘s orders. The Court in Hope found appropriate criteria by inquiring whether “the return to the equity owner [is]
The Commission cannot confine its inquiries either to the computation of costs of service or to conjectures about the prospective responses of the capital market; it is instead obliged at each step of its regulatory process to assess the requirements of the broad public interests entrusted to its protection by Congress. Accordingly, the “end result”60 of the Commission‘s orders must be measured as much by the success with which they protect those interests as by the effectiveness with which they “maintain . . . credit and . . . attract capital.”
It follows that the responsibilities of a reviewing court are essentially three. First, it must determine whether the Commission‘s order, viewed in light of the relevant facts and of the Commission‘s broad regulatory duties, abused or exceeded its authority. Second, the court
The first issue is whether the Commission properly rejected the producers’ contention that area rates should be derived from field, or contract, prices. The producers have urged that prevailing contract prices provide an accurate index of aggregate revenue requirements, and that they are an appropriate mechanism for the protection of consumer interests. The record before the Commission, however, supports its conclusion that competition cannot be expected to reduce field prices in the
The field price of natural gas produced in the Permian Basin has in recent years steadily and significantly increased.61 These increases are in part the products of a relatively inelastic supply and steeply rising demand; but they are also symptomatic of the deficiencies of the market mechanism in the Permian Basin. Producers’ contracts have in the past characteristically included indefinite escalation clauses. These clauses, in combination with the price leadership of a few large producers,62 and with the inability or unwillingness of interstate pipelines to bargain vigorously for reduced prices,63 have
We do not now hold, and the Commission has not suggested,67 that field prices are without relevance to the Commission‘s calculation of just and reasonable rates under
We next examine the Commission‘s decision to create two maximum area rates for the Permian Basin. Under the Commission‘s rate structure, the applicable maximum price for a producer‘s sale is determined both by the moment at which the gas was first dedicated to the interstate market, and by the method by which the gas was produced. It follows that two producers, simultaneously
The premises of this arrangement are two. First, the Commission evidently believed that price should be employed functionally, as a tool to encourage the production of appropriate supplies of natural gas. A price is thus just and reasonable within the meaning of
Second, the Commission concluded that price could usefully serve as an incentive to exploration and production only if it were computed according to the method by which gas is produced. Natural gas produced jointly with oil is necessarily a relatively unimportant byproduct. The value of oil-well gas is on average only one-seventeenth that of the oil with which it is produced. See 34 F. P. C., at 322. It cannot be separately sought or independently produced; its production is effectively restricted by state regulations intended to encourage the conservation of oil. Accordingly, the supply of oil-well gas is, as the examiner observed, “almost perfectly inelastic.” Id., at 323.
On the other hand, gas-well gas is produced independently of oil, and of state restrictions on oil production. More important, the Commission found that a separate search can now be conducted for gas reservoirs; cumulative drilling experience permits at least the larger producers to direct their programs of exploration and development to the search for gas.70 The supply of gas-
We find no objection under the Natural Gas Act to this dual arrangement. We have emphasized that courts are without authority to set aside any rate adopted by the Commission which is within a “zone of reasonableness.” FPC v. Natural Gas Pipeline Co., supra, at 585. The Commission may, within this zone, employ price functionally in order to achieve relevant regulatory purposes; it may, in particular, take fully into account the probable consequences of a given price level for future programs of exploration and production. Nothing in the purposes or history of the Act forbids the Commission to require different prices for different sales, even if the distinctions are unrelated to quality, if these arrangements are “necessary or appropriate to carry out the provisions of this Act.”
The Commission‘s responsibilities include the protection of future, as well as present, consumer interests. It has here found, on the basis of substantial evidence, that a two-price rate structure will both provide a useful incentive to exploration and prevent excessive producer profits. In these circumstances, there is no objection under the Natural Gas Act to the price differentials required by the Commission.
The symmetry of the Commission‘s incentive program is, however, marred. The Commission held in 1965 that the higher maximum rate should be applicable to gas-well gas committed to interstate commerce since January 1, 1961. It is difficult to see how the higher rate could reasonably have been expected to encourage, retrospectively, exploration and production that had already occurred. There is thus force in Commissioner Ross’ contention that this arrangement is not fully consistent with the logic of the two-price system.72
Nonetheless, we are constrained to hold that this was a permissible exercise of the Commission‘s discretion. The Commission believed that its Statement of General Policy, issued September 28, 1960, had created reasonable expectations among producers that higher rates would thereafter be permitted for initial filings under
We must next examine the methods by which the Commission reached the two maximum rates it created for gas produced in the Permian Basin. The Commission justified its adoption of a two-price rate structure by reliance upon functional pricing; it suggested that two prices, with an appropriate differential, may be used so as both to provide an incentive to exploration and to restrict to reasonable levels producers’ profits. In turn, it computed the two area maximum prices directly from costs of service, without allowances for noncost factors. The price differential which the Commission expects to serve as an incentive is the product of differences in the time periods and geographical areas for which costs were
Although we would expect that the Commission will hereafter indicate more precisely the formulae by which it intends to proceed, we see no objection to its use of a variety of regulatory methods. Provided only that they do not together produce arbitrary or unreasonable consequences, the Commission may employ any “formula or combination of formulas” it wishes, and is free “to make the pragmatic adjustments which may be called for by particular circumstances.” FPC v. Natural Gas Pipeline Co., supra, at 586. We have already considered the Commission‘s adoption of a two-price system and of a moratorium, and have concluded that they are each reasonably calculated to achieve appropriate regulatory purposes. It remains now to examine its computation of the area maximum prices from the producers’ costs of service.
The Commission derived the maximum rate for new gas-well gas from composite cost data intended to evidence the national costs in 1960 of finding and producing gas-well gas. It reasoned that these costs should be computed from national, and not area, data because, first, the larger producers conduct national programs of exploration, and, second, “much, if not most, of the relevant information”77 was available only on a national
The maximum just and reasonable rate for all other Permian Basin gas was calculated from cost data intended to reflect the historical costs of gas-well gas produced in 1960 in the Permian Basin. The examiner had computed this rate by essentially the same method he had used for new gas-well gas, with certain cost components adjusted by back-trending. The Commission‘s staff, on the other hand, offered a comprehensive study of historical costs of service. The Commission adopted both methods, using the examiner‘s back-trended cost
The Commission reasoned that excessive producer profits could be minimized only if the rate for flowing gas were derived from the most precise available evidence of actual historical costs. It therefore held that these costs should be taken from area, and not national, data.
The Commission‘s staff obtained the data necessary for its computation of historical costs from questionnaires completed by producers. The information used by the staff, and ultimately adopted by the Commission, was taken from questionnaires submitted by 42 major producers, which together account for 75% of all the gas produced in the Basin, and 85% of all the gas-well gas. Nonetheless, some two-thirds of all the gas produced in the Permian Basin is oil-well gas, and Sun Oil estimates that the staff‘s gas-well gas data were thus applicable only to some 15.3% of the total production of natural gas in the Basin in 1960.79
It is further contended that the Commission impermissibly used flowing gas-well gas cost data to calculate the maximum rate for old gas, thereby disregarding entirely the costs of gas produced in association with oil. The Commission‘s explanation was essentially pragmatic. It reasoned that the uncertainties of joint cost allocation preclude accurate computations of the cost of casinghead and residue gas. Further, the Commission averred that it is administratively imperative to simplify, so far as possible, the area rate structure. The Commission regarded its adoption of a single area maximum price for all gas, except new gas-well gas, its residue and gas-cap gas, as “an important step toward simplified and realistic area price regulation.” 34 F. P. C., at 211.
We turn now to the Commission‘s computation of the proper rate base. The Commission‘s method here differed significantly from that frequently preferred by regulatory authorities. It did not use a declining rate base and return, but instead computed an average net production investment, to which it applied a constant rate of return. The Commission assumed for this purpose that a gas well depletes at a uniform rate, and that it is, on average, totally depleted in 20 years. It found that the annual capital-recovery cost, including depletion, depreciation, and amortization, was 3.95¢ per Mcf. Allowing one year for a lag between investment and first production, the Commission obtained an average production investment of 43.45¢ per Mcf. The proper return per Mcf was then calculated by multiplying this figure by the rate of return.
The producers argue that this has the effect of postponing revenue, and thus discounting its present value; they suggest that the Commission should properly have
We next consider whether the rate of return adopted by the Commission was a permissible exercise of its regulatory authority. The Commission first asserted that rates of return must be assessed by a comparable-earnings standard. Under such a standard, earnings should be permitted that are “equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties.” Bluefield Co. v. Public Service Comm., 262 U. S. 679, 692; FPC v. Hope Natural Gas Co., supra, at 603. Although other standards might properly have been employed,83 the Commission‘s decision to examine comparable earnings was fully consistent with prevailing administrative practice, and manifestly was not an abuse of its authority.
The Commission relied for purposes of comparison chiefly upon the rates of return that have recently been permitted to the interstate pipelines. It found that pipelines had been given returns of 6.0 to 6.5% on net investment, with a yield on equity of 10 to 12%.84
Commission noted that producers characteristically have less long-term debt than pipelines,85 and that the financial risks of production are somewhat greater than those of transmission.86 It reasoned that these differences warranted a more generous rate of return for producers. In addition, the Commission stated that the risk of finding gas of less than pipeline quality, created by the Commission‘s promulgation of quality and Btu standards, should be reflected in the rate of return. Finally, the Commission sought to determine the rate of return recently earned by producers of natural gas. It found that accurate rates of return could not be calculated with assurance, although the Commission‘s staff offered evidence of an average return for nine companies over five years of 12.4% on net investment.87 The Commission concluded that, despite its statistical deficiencies,On balance, the Commission selected 12% as the proper rate of return for gas of pipeline quality. We think that this judgment was supported by substantial evidence, and that it did not exceed or abuse the Commission‘s authority. The evidence before the Commission fairly suggests that this rate will be likely to “maintain [the producers‘] financial integrity, to attract capital, and to compensate [their] investors for the risks assumed . . . .” FPC v. Hope Natural Gas Co., supra, at 605. Further, the distributors and public agencies before the Court have not suggested, and we find no reason to believe, that this return will exceed the proper requirements of the industry.88 Certainly, as we shall show below, this return is no more than comparable to that characteristically allowed interstate pipelines.
Nonetheless, there remains one further issue essential to an accurate appraisal of the return permitted by the Commission. The Commission‘s computation of the rate of return was specifically premised in part on the additional financial risks created for producers by the Commission‘s promulgation of quality and Btu standards.89 Its opinion in these proceedings included a series of specific quality standards.90 The Commission ruled that gas that fails to satisfy these standards must be sold at prices lower than the applicable area maximum; the amount of the reduction necessary in each sale is to be initially determined by the parties, subject to review by the Commission. Further, natural gas with a Btu content of less than 1,000 per cubic foot must be sold at a price proportionately lower than the applicable area maximum, and gas with a Btu content of more than 1,050 per cubic foot may be sold at a price proportionately higher than the area maximum.91 The Commission conceded that it could not precisely determine the revenue consequences of these adjustments, although its opinion denying applications for rehearing provided various estimates. It appears to be conceded that the quality of gas produced in the Basin is characteristically lower than the Commission‘s standards, and that the standards are therefore likely to be more significant than they might be in other producing areas.
The producers urge, and the Court of Appeals held, that this arrangement is doubly erroneous. First, it treats as a risk what properly is a cost, and thus evades the necessity of appropriate findings on the revenue consequences of the quality adjustments. Second, it reduces the rate of return actually permitted individual producers to an unascertainable figure of less than 12%, and thus prevents an accurate appraisal of its sufficiency. We find both suggestions unpersuasive.
We cannot now hold that it was impermissible for the Commission to treat the quality adjustments as a risk of production. It must be recalled that the Commission
The Commission estimated in its opinion denying applications for rehearing that the quality adjustments would result in average price reductions of from 0.7¢ to 1.5¢ per Mcf. In turn, the amount of these adjustments will be reduced by price increases for high Btu content, and by revenue from plant liquids.92 We believe that, in the circumstances presented, these estimates were adequate. The Commission‘s information about existing contracts was evidently not sufficiently complete to permit precise calculations from previous experience. Moreover, since the adjustments are to be, in the first instance, the product of agreement between the parties,
The Commission did not provide specific findings as to the effect of these revenue adjustments upon the producers’ rate of return. This was an unfortunate omission, but it does not preclude evaluation of the Commission‘s conclusions. It would appear, and counsel for the Commission have estimated, that the rate of return “on average quality” natural gas sold in the Permian Basin might, after quality adjustments, yield “as little” as 10 to 12% on equity.94 These figures presumably must be adjusted upward for sales of pipeline quality gas, sales of gas with a high Btu content, and revenue from plant liquids. Even as adjusted, however, the aggregate return permitted to producers will apparently exceed only slightly that customarily allowed pipelines, for the quantities of pipeline quality and high Btu content gas produced in the Permian Basin are evidently quite small. Nevertheless, the record before the Commission contained evidence sufficient to establish that these rates, as adjusted, will maintain the industry‘s credit and continue to attract capital. Although the Commission‘s position might at several places usefully
V.
We have concluded that the various segments of the Commission‘s rate structure do not separately exceed or abuse its authority. Nonetheless, certain of the producers have argued vigorously that the aggregate revenue permitted by the rate structure is, or might be, inadequate. They urge that the imposition of maximum prices computed from composite costs reduces contract prices to a maximum premised on a cost average; and they conclude that the Commission has therefore denied them the revenue necessary for appropriate programs of exploration and development. Related questions troubled the Court of Appeals. It held that the Commission must, under Hope, place in balance revenue and requirements, and that findings must be provided that will permit reviewing courts to assess the skill with which the Commission has employed its scales. Although we
Three interrelated questions are pertinent. First, the adequacy of the Commission‘s aggregate revenue findings must be assessed. Second, we must consider the producers’ contentions that the Commission has significantly underestimated the deficiencies of present programs of exploration. Finally, we must determine whether the Commission‘s use of averaged costs has created a rate structure that is unjust and unreasonable in its consequences.
We turn initially to the adequacy of the Commission‘s revenue findings. It must be emphasized that we perceive no imperative obligation upon the Commission, under either the Natural Gas Act or the decisions of this Court, to provide an apparatus of formal findings, in terms of absolute dollar amounts, as to aggregate revenue and aggregate revenue requirements. It is enough if the Commission proffers findings and conclusions sufficiently detailed to permit reasoned evaluation of the purposes and implications of its order. Compare Chicago & N. W. R. Co. v. A., T. & S. F. R. Co., 387 U. S. 326, 345-347 (1967). As we shall show, the Commission‘s revenue findings were not, in the circumstances of these proceedings, unduly imprecise. The ambiguities about which the Court of Appeals expressed concern were two. First, the court faulted the Commission for the imprecision of its findings as to the revenue consequences of the quality and Btu adjustments. We have already found adequate the Commission‘s estimates of the necessary price reductions. Second, the court stated that the rate structure could not be accurately assessed, since the Commission has incorporated in its calculations both cost and noncost factors; it believed that “the Commission
We find this unpersuasive. Although the Commission‘s exposition of these questions might have been more carefully drawn, it has quite appropriately incorporated in its calculations factors other than producers’ costs.97 Cost and noncost factors do not, as the Court of Appeals supposed, race one against the other; they must be, as they are here, harnessed side by side. The Commission‘s responsibilities necessarily oblige it to give continuing attention to values that may be reflected only imperfectly by producers’ costs; a regulatory method that excluded as immaterial all but current or projected costs could not properly serve the consumer interests placed under the Commission‘s protection. We have already considered each of the points at which the Commission has given weight to noncost factors, and have found its judgments consistent with the terms and purposes of its statutory authority.98 There is no reason now to
Nor can we hold that the Commission has underestimated the deficiencies of current programs of exploration. The producers’ argument has been uniformly premised upon the assertion that the ratio of proved recoverable reserves to current production is an accurate index of the industry‘s financial requirements. The producers urge that this ratio has dangerously declined,100 and conclude that any reduction of prevailing field prices will jeopardize essential programs of exploration. There is, however, substantial evidence that additions to reserves have not been unsatisfactorily low,101 and that
Finally, we turn to the contention that these area maximum rates were derived from averaged costs, and therefore cannot, without further adjustment, provide aggregate revenue equal to the producers’ aggregate requirements. The producers that support the judgments below emphasize that revenue in 1960 from all jurisdictional sales in the Permian Basin averaged 12.72¢ per Mcf.105 They contend that this revenue will, under the Commission‘s order, be reduced by the amount of any necessary quality deductions, by refunds, and by loss of revenue from abrogation of contract prices above the area maximum rates. The producers conclude that the Commission‘s rate structure will necessarily cause revenue deficiencies, measured by the difference between actual average revenue (12.72¢ less these adjustments) and 14.5¢ per Mcf, the rate assertedly found by the Commission to be just and reasonable for flowing gas. They urge that the Commission was properly obliged to balance revenue and costs either by increasing the area minimum rate, or by placing the area maximum rates above average costs.
The inadequacies of this reasoning are several. First, it neglects important characteristics of the rate structure. We understand the Commission, despite certain infelicities of its opinion,106 to hold that the just and reasonable rate for old gas not of pipeline quality is 14.5¢ per Mcf,
Moreover, the Commission‘s computation of its area rates was not intended to reflect with complete fidelity either the producers’ average costs or their sources of revenue. First, the actual average unit costs of casinghead and residue gas are substantially lower than the average unit costs of flowing gas-well gas;108 yet the maximum rate for all associated and flowing gas was derived entirely from the latter. It follows that the producers’ net revenues from sales of casinghead and residue gas will prove higher than the return formally permitted by the Commission. Second, producers receive significant payments for liquid hydrocarbons extracted by the pipelines during their processing of gas-well gas.109 The maximum rate for new gas-well gas
Finally, the producers have ignored the limits of the Commission‘s statutory authority. This Court has held, under the
It does not, however, necessarily follow that the Commission was forbidden to consider, as it selected maxi-
The regulatory system created by the Act is premised on contractual agreements voluntarily devised by the regulated companies; it contemplates abrogation of these agreements only in circumstances of unequivocal public necessity. See United Gas Co. v. Mobile Gas Corp., 350 U. S. 332 (1956). There was here no evidence of financial or other difficulties that required the Commission to relieve the producers, even obliquely, from the burdens of their contractual obligations. We do not suggest that the Commission need not continuously evaluate the revenue and other consequences of its area rate structures. A principal advantage of area regulation is that it centers attention upon the industry‘s aggregate problems, and we may expect that, as the Commission‘s experience with area regulation lengthens, it will treat these important questions more precisely and efficaciously. We hold only that, in the circumstances here presented, the Commission‘s rate structure has not been shown to deny producers revenues consonant with just and reasonable rates.114
There remain for consideration various additional objections by the producers to the Commission‘s cost determinations, and to the sources of information from which those determinations were derived. These questions were not decided by the Court of Appeals. Although this Court ordinarily does not review an administrative record in the first instance, United States v. Great Northern R. Co., 343 U. S. 562, 578 (1952);
Moreover, the circumstances here parallel closely those in Chicago & N. W. R. Co. v. A., T. & S. F. R. Co., 387 U. S. 326 (1967). It was there said that the “presentation and discussion of evidence on cost issues constituted a dominant part of the lengthy administrative hearings, and the issues were thoroughly explored and contested before the Commission. Its factual findings and treatment of accounting problems concerned matters relating entirely to the special and complex peculiarities of the railroad industry. Our previous description of the Commission‘s disposition of these matters is sufficient to show that its conclusions had reasoned foundation and were within the area of its expert judgment.” Id., at 356. This reasoning is entirely applicable to the circumstances presented here; we hold, as did the Court there, that no useful purpose would be served by further proceedings in the Court of Appeals, and that there is no legal infirmity in the Commission‘s findings.115
Lastly, we reach questions of the validity of the refund obligations imposed by the Commission‘s orders. Two categories of refunds were created. First, producers must return amounts charged in excess of the applicable area rates, including quality and Btu adjustments, for periods following September 1, 1965, the date of effectiveness of the Commission‘s order. 34 F. P. C., at 243. The Commission imposed interest of 7% upon these refunds.116 Second, producers must refund amounts collected in excess of the applicable area rates, including quality and Btu adjustments, during previous periods in which their prices were subject
The Court of Appeals initially sustained the Commission‘s refund orders. 375 F. 2d, at 33. On petitions for rehearing, however, the court held that “no refund obligation may be imposed for a period in which there is a group revenue deficiency.” Id., at 36. The court believed this to be an essential corollary of the Commission‘s asserted obligation to bring into balance group costs and group revenues; it would have permitted the Commission to order refunds only in periods in which aggregate revenue is found to exceed aggregate revenue requirements, and only as to the amount of the excess. The Commission was expected to apportion any refunds “on some equitable contract-by-contract basis.” Ibid.
We find the court‘s reasoning unpersuasive. The Commission may, in the course of its examination of the producers’ financial positions, consider the possible refund consequences of its rate-making orders; but its power to order refunds is not limited to situations in which group revenues exceed group revenue requirements. Area regulation offers a more expeditious method for the calculation of just and reasonable rates, and it will necessarily more rigorously focus the Commission‘s attention upon the producers’ common problems. It does not, however, lessen the significance, or modify the
Wisconsin v. FPC, supra, does not require a different result. It did not, as the Court of Appeals evidently supposed, create any imperative procedure for the disposition of refunds from locked-in rates.118 The Commission there held that, given its decision to begin a system of area regulation, it was not in the public interest “to reopen these proceedings, to determine a cost of service on the basis of completely new evidence and to attempt to determine rates on the basis of Phillips’ individual cost of service.” 24 F. P. C., at 1009. No just and reasonable rates had been, or could then have been, calculated for Phillips’ sales in the relevant periods. The Commission did not urge,119 and this Court did not hold, that Phillips’ revenue deficiencies imposed a limitation upon the Commission‘s authority to require refunds; the Court merely sustained the Commission‘s refusal, in the
The Commission reasonably concluded that the adoption of a system of refunds conditioned on findings as to aggregate area revenues would prove both inequitable to consumers and difficult to administer effectively. Such arrangements would require consumers to accede to unjust and unreasonable prices merely because other prices, perhaps ultimately benefiting other consumers, had proved improvident. Nor would these arrangements necessarily serve the interests of the improvident producers; they might merely permit more prudent competitors to escape refunds on concededly unlawful prices.120 We hold that the Commission‘s refund orders do not exceed or abuse its statutory authority.121
The motions for leave to adduce additional evidence are denied, the judgments of the Court of Appeals are affirmed in part and reversed in part, as herein indicated, and the cases are remanded to that court for further proceedings consistent with this opinion.
It is so ordered.
MR. JUSTICE MARSHALL took no part in the consideration or decision of these cases.
I.
What the Court does today cannot be reconciled with the construction given the Natural Gas Act by FPC v. Hope Natural Gas Co., 320 U.S. 591, 602 (1944). In that case we said, in determining whether a rate had been properly found to be “just and reasonable” under the Act, that
(1) “it is the result reached not the method employed which is controlling“;
(2) it is “not theory but the impact of the rate order which counts“;
(3) “If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end.”
The area rate orders challenged here are based on averages.1 No single producer‘s actual costs, actual risks, actual returns, are known.
The “result reached” as to any producer is not known. The “impact of the rate order” on any producer is not known. The “total effect” of the rate order on a single producer is not known.
It is said, however, that if any producer is aggrieved, it may apply for relief and if it fails to obtain relief it can resort to the courts. But unless we know the standards which will govern in case it applies for relief, we are, with all respect, mouthing mere words when we say the
It was urged in the separate opinion of Mr. Justice Jackson in Hope that a system of regulation be authorized which would center not on the producer but on the product “which would be regulated with an eye to average or typical producing conditions in the field.” 320 U.S., at 652. But the Court rejected that approach, saying that
Group regulation of rates is not, of course, novel. It has at times been authorized. The
In the present cases the Commission found averages; but there are no findings as to the typicality and representative nature of those averages.2 We certainly cannot
The Commission found no median. Moreover, as we observed in another context, it did not find what was “the average cost” of groups made up of individual members who have “a close resemblance” when it comes to the “essential point or points which determine the
With respect to the cost of new gas-well gas, the Commission did not determine whether the average costs compiled from the questionnaires or derived from industry-wide data were typical or representative.
In finding the cost of flowing gas, the Commission noted that the 1960 level of costs compiled by the staff in large part from the questionnaire responses was “fairly representative of the costs during the three year period ending in 1960” (34 F. P. C. 159, 213) and that “[t]he 1960 test year is . . . typical of current and future costs of the flowing gas. . . .” Ibid. This reference to “representative” and “typical” costs, however, dealt only with the question of time-i. e., the staff‘s use of 1960 data in developing its composite cost presentation was deemed permissible since 1960 was found to be a typical and representative year.
The Court professes to find that the Commission adequately determined that the averages it employed were “typical” and “representative.” Ante, at 802-803, n. 79. But the statements plucked from the Commission‘s opinion do not support that interpretation.
The Commission also observed, with respect to the questionnaire data, that 42 of the major producers (representing all but one of the major producers in the Permian area) responded on the Appendix B questionnaires. The Commission agreed with the Examiner that “the data provided by the major producers with respect to their Permian production was fully representative of area costs,” and that exclusion of the Appendix C returns from small producers would have only a de minimis effect. 34 F. P. C., at 214. But although the data submitted by the major producers were found to be typical data for the area, and I assume also for the major producers in the area, there are no findings whether the averages
The Commission‘s statement that the sources used “in combination provide an adequate basis for the costs we have found” certainly cannot be read as a finding that those sources were “typical and representative.” Nor does the fact that the sources were “recognized, published statistical data sources,” or “well-recognized and authoritative,” mean they also contained typical and representative averages.
An average cost is not only apt to be “misleading“; it may indeed not be representative of any producer.
The Commission allowed a 12% rate of return, the return being “on capital invested in finding new gas-well gas.” 34 F. P. C., at 306, 343. “Production investment costs” constituted this “capital invested” and were the bases to which the Commission applied the 12% rate to arrive at a return of 5.21¢ per Mcf to be included in the rate base for new gas-well gas. 34 F. P. C., at 197, 204. These “production investment costs” included successful well costs, lease acquisition costs, and the cost of other production facilities. But they were likewise determined on the basis of averages. See 34 F. P. C., at 197-198, 295, 377-382.
The average per capita income of a Middle East kingdom is said to be $1,800 a year. But since one man-or family-gets most of the money, $1,800 a year describes only a mythical resident of that country.
The 12% return allowed by the Commission and computed on an average-cost basis may likewise have no relation whatever to the reality of the actual costs of any producer.
One producer‘s cost, though varying from year to year, may average out at $1 per Mcf. Another‘s may average out at 5¢ per Mcf. Does that make 52.5¢ per Mcf repre-
The Commission could follow the lead of the Interstate Commerce Commission and produce rates on a group basis. But it simply has not done so in any rational way.
Averages are apt to take us with Alice into Wonderland. That is one reason why the case should be remanded to the Commission for further findings.
The Commission will allow individual application for relief from these new rates. But it has not prescribed the terms and conditions on which relief will be granted. It has said, however, that an individual producer must show more than that its cost of service is greater than the averages on which the rate is based. 34 F. P. C., at 180.
In a regulated industry there is no constitutional guarantee that the most inefficient will survive. Hegeman Farms Corp. v. Baldwin, 293 U.S. 163, 170-171 (1934). That assumes, however, an ability to withdraw from the business. But a producer of natural gas may not abandon its existing facilities that supply the interstate market without Commission approval. United Gas Pipe Line Co. v. FPC, 385 U.S. 83 (1966).
The Commission says that a producer will be able to obtain relief to cover its out-of-pocket expenses. 34 F. P. C., at 226. Do they include return, depreciation, depletion, exploration, development, and overhead? The Court of Appeals did not know (375 F. 2d, at 30); and we certainly do not. The remand by the Court of Appeals for further definition was therefore clearly necessary. For even if we need not know the precise impact of the new group rate on each producer at the time of the group rate order, we certainly must know the conditions on which a producer can get relief before we can say that a rate as to it is “just and reasonable.”
II.
If we move to the regulation of the group as such and consider the impact of these rate orders on it, we are likewise not able on the present record to perform our function of judicial review.
It is impossible to say whether the proper revenue requirements of the group can be satisfied under this rate order. For the costs represent averages; and there is no way for us to find from the record whether these averages are typical and what the impact of the rates on the group will be.
The error is compounded when the costs used are the purported costs of gas-well gas and do not include the costs of casinghead gas, residue gas derived therefrom, and gas-well gas from combination leases. The Commission concluded that the costs of casinghead gas and residue gas produced therefrom did not exceed the costs for gas-well gas. Yet at the same time it rejected proffered evidence of higher costs of processing gas to remove liquid hydrocarbons. Commission expertise should not be allowed to make its own “facts” to justify the desired result.
With that standard in mind it allowed price reductions (1) where the gas contains more than 10 grains of hydrogen sulphide or 200 grains of total sulphur per Mcf; (2) where it contains more than .009 pound per Mcf of water; (3) where it contains more than 3% by volume of carbon dioxide; (4) where the gas pressure is less than 500 pounds per square inch.
When any of these standards are not met, the applicable ceiling price is adjusted downward by the net cost of processing the gas to bring it up to standard.
Under the Commission‘s standards about 90% of the flowing gas moving interstate from the Permian Basin is not of the pipeline quality that the Commission has prescribed. 375 F. 2d, at 30. What the costs will be to convert the gas to these new standards is not found in this record. Perhaps this deficiency is due to the fact that the Commission, almost as an afterthought and not with clear, advance notice, decided to deal with detailed quality standards. But without knowing these costs through competent evidence, neither we nor the Commission has any way even to guess at whether the new rates will satisfy the criteria of Hope.
III.
The Court approves the Commission‘s treatment of the quality adjustments as a risk of production. But
Any unknown cost is a risk. But the Commission should not be permitted to excuse its failure to solicit or proffer appropriate evidence concerning the cost of converting gas into pipeline quality by labeling that cost a “risk.” The Court of Appeals recognized this point. See 375 F. 2d, at 31-32, 35. Commissioner O‘Connor noted in his opinion concurring in the denial of rehearing that: “To bury the quality impact in our rate of return determination is to overlook the basis for the 12 per cent allowance: comparable return on equity of 10-12 per cent by the far less risky operations of transmission companies.” 34 F. P. C., at 1081. And, as one commentator recently observed:
“The Commission stated that the rate of return also reflected the risk of finding gas of less than pipeline quality-a clever way of avoiding the quality discount problem. Since there was no evidence in the record as to what those discounts would be, one can only say that ‘risks’ were involved. It is a novel doctrine, indeed, that the rate of return should be adjusted to reflect the risk that the regulatory cost computations are incorrect.”3
The Court concedes that the lack of specific findings concerning the effect of the quality adjustments upon the rate of return was “an unfortunate omission.” Ante, at 812. But it proceeds to scratch about for evidence
Behind the veneer of the Court‘s opinion may be an unstated premise that the complexity of the task of regulating the wellhead price of gas sold by producers is both so great and so novel that the Commission must be given great leeway. But the permissible bounds, so far as judicial review is concerned, are passed when guesswork is substituted for reasoned findings, when the Commission can avoid finding “costs” by the convenience of calling them “risks,” when rates of return are computed for those mythical producers who happen to meet the “average” specifications.
If the task of regulating producer sales within the framework of the Natural Gas Act is as difficult as the present cases illustrate, perhaps the problem should be returned to Congress. But certainly we do little today to advance the cause of responsible administrative action. With all respect, we promote administrative irresponsibility by making an agency‘s fiat an adequate substitute for supported findings.
IV.
New Mexico and Texas, in which the Permian Basin is located, have comprehensive oil and gas conservation codes.5 A substantial portion of their taxes on the pro-
“First, the Commission must determine the quantity of gas needed to constitute an adequate future supply. Secondly, it must make a conclusion as to the level of exploration and development which will produce the needed gas supply. Finally, it must prescribe a rate which will elicit that level of exploration and development.”
They argue that where Commission rates are lower than existing contract rates, continued operation is uneconomical in many so-called “stripper fields“:
“Although daily per well production from these fields is relatively low, their combined remaining recoverable reserves nevertheless constitute a considerable percentage of the total reserves for the area which will be forever lost if it becomes necessary to plug and abandon these fields for economic reasons.”
The Court of Appeals did not entertain these objections (375 F. 2d, at 18) because it read the Hope case as foreclosing them.
Hope, however, did not involve regulation of producers of natural gas, only interstate pipelines. At that
“If the Commission is to be compelled to let the stockholders of natural gas companies have a feast so that the producing states may receive crumbs from that table, the present Act must be redesigned. Such a project raises questions of policy which go beyond our province.” 320 U.S., at 614.
Now that Phillips has put the prices of producers under federal control, the interests of the producing States must be considered, appraised, and weighed as an important ingredient of the “public interest.” Regulation of wellhead prices by the Commission directly influences the level and feasibility of production, and can significantly affect the producing States’ regulation of production. See Phillips Petroleum Co. v. Wisconsin, supra, at 689-690 (dissenting opinion).6
As the Court today says in another context, price in functional terms can be “a tool to encourage” the production of gas. Ante, at 760. The effect of price on the regulatory responsibilities of the several States must therefore be weighed, unless contrary to the mandate of the Act regulation of production is to pass into federal hands.
What the merits may be on this issue we do not know. The matter is complicated. For example, it seems
If the processor is willing to gather and process the gas because of the value of the liquids extracted, it might be that a producer would be willing to sell its casinghead gas rather than flare it, in order to obtain some payment for the gas. On the other hand, the price of the casinghead gas might well be critical for marginal producers, whose revenues from the sale of casinghead gas justify keeping their oil wells in production. But we have no
It may be that the posture of Hope was the reason why this phase of the case was not developed. Whatever the reason, it must be developed if the interest of the producing States is not by judicial fiat to be subjected entirely to complete federal supremacy, contrary to the promise in the Natural Gas Act.