*1 v. FEDERAL POWER WISCONSIN et al. COMMISSION et al. May 20, Argued January 9, 1963. Decided 1963.*
No. 72. Federal Power Com *Together et v. with No. al. California 74, Long Island Lighting et al. v. Federal al., Co. mission et and No. al., to the same et also on certiorari Court. Power *2 in No. petitioners for cause Brown argued Kent H. Reynolds, John W. were him on the briefs 72. With Tulane, Roy G. Assistant Wisconsin, Attorney General L. Torkelson, Morton E. Attorney General, William M. Suchow.' and Barbara Simons petitioners for cause argued the M. Bennett William Simpson. J. Calvin briefs was him the With on 73. No. petitioners for the cause Mann, argued Jr. J. David Kadane, K. David him the briefs were With No. 74. McDevitt, Samuel Moll, P. Vincent D. Bertram Graff Jr. Holtzinger, and John E. William W. Ross Miller, for Federal cause argued A. Solomon Richard brief him' on the respondent. With Commission, Power Howard Spritzer, Cox, Ralph S. General were Solicitor Fribourg. Arthur H. Forquer and Wahrenbrock, Leo E. E. Phillips Petro- the cause Heady argued Kenneth brief were him on the With respondent. Company, leum McAllister. McGee Lambert Charles E. opinion delivered Harlan Justice
Mr. Court. deci- this Court’s since passed have years nine
Almost Wisconsin, S. 347 U. v. Petroleum Phillips Co. sion in has Power Commission Federal holding independent an charged over the jurisdiction case, involving gas. present natural producer independent same producer, Phillips Petroleum (Phillips),1 sequel is a to that earlier decision and strik- ingly the unique illustrates problems confronting the its goal efforts achieve the of effective regulation.
T. Following the remand the Phillips case, the Commis- sion, proceeding under § 5 Act-,2 Natural Gas reinstituted general- investigation of the lawfulness of Phillips’ respect rates'with to its sales natural in interstate commerce. Later, it consolidated with that- invéstigation 12 proceedings (e) under 4§ of the Act3 1Phillips is large integrated company oil producer' which is also a gas. It is .natural known “independent” as an in that it does not engage in the gas pipeline interstate business and is not affiliated *3 any with gas pipeline company. interstate 2 (a)5 Section of the Natural Act, Gas 52 823, Stat. 15 U. S'. C. provides: (a), 717d § “Whenever the Commission, hearing after a upon had its own upon motion complaint- or any State, of municipality, State com- mission, gas distributing or company, shall find any rate, charge, or classification demanded, observed, charged, by any or collected natural-gas company in any. connection with transportation or sale of gas, subject' natural jurisdiction to the of the Commission, or that any rule, regulation, practice, or affecting contract such rate, charge, or classification is unjust, unreasonable, unduly discriminatory, or preferential, the Commission shall just-and determine the reasonable rate, charge, classification, rule, regulation, practice,- or contract to be.thereafter observed and force, in and shall fix by the same order: Provided, however, That power shall have no to order any any increase in rate currently .contained the effective schedule of such gas natural company on file with the Commission,- unless such increase is in accordance with a new by schedule filed such natural company; but the may order a decrease existing where unjust, rates are unduly discriminatory, preferential, otherwise unlawful, or' are not the lowest reasonable rates.” 3 (e) Section 4 of the Natural Act, Gas 823, Stat. as amended, Stat. IV) U. S. C. (Supp. (e), provides: 717c any . “Whenever such new schedule is filed the Commission shall authority have ... upon to enter hearing a concerning the lawful- in- rate specific of lawfulness certain the involved which June (d) between § 4 Phillips under by filed creases sus- had been increases these All of May 1956. and five-month maximum the by the Commission pended subse- and had (e)) (§.4 by statute permitted period any portion refund to subject into effect gone quently (ibid.). With found excessive ultimately be might beén had increases of these exception, each minor one which were all increase,4 subsequent aby superseded such pending and, service; classification, or charge, rate, of such ness filing with upon Commission', thereon, the hearing and decision company affected natural-gas to the delivering and schedules such- suspension, such writing reasons for of its thereby a statement use of defer such schedule suspend operation of may period longer service, for a but not classification, or charge, rate, such - go into otherwise it would when beyond the time months than five or after completed before hearings, either effect; full after effect, the Commission goes classification, or into service rate, charge, proper, would be thereto as with reference may such orders make pro- If the effective. become it had after initiated proceeding ain expiration at an order made ceeding been concluded has company natural-gas motion suspension period, classification, change rate,‘charge, proposed making filing, the charges are or increased Where go shall into service or effect.. require order,, by may, effective, the Commission made thus by the Com- approved bond, to company to furnish natural-gas keep Commission, to by the any ordered amounts mission, refund- such by reason received amounts of all detail accurate accounts were amounts such whose behalf whom and increase, specifying decision, to order hearing and completion of the upon and, paid, portion of interest, the. refund,'with company natural-gas such *4 justified. by decision found not charges or increased such .increased, charge sought, to be involving or a rate hearing any .At just charge is or the increased rate proof show burden of the Com- natural-gas company, and upon shall and reasonable questions of such hearing decision and give to- shall mission pending before it and decide questions over other preference possible." speedily as same as $21,234, and we are annual increase 'an exception involves The by' superseded since been has Phillips this increase by advised by Commission. suspended filing, later suspended turn subject are the separate (e) § proceedings not now before us.5
Hearings these consolidated proceedings begin did not until June 1956 and extended over a period of almost 18 months. All parties proceeded on the assumption that the lawfulness of Phillips’ rates was to be determined on the basis of its jurisdictional cost of service for the test year. 1954,6 four full-scale cost-of-service studies were presented. A Commission Examiner in April 1959 issued a comprehensive (24 decision F. 590) P. C. comprising over 200 pages, in which he found that Phillips’ jurisdic- tional cost service for year the test was $57,280,218. He then ordered Phillips to calculate a rate which, when applied to 1954 volumes, produce would revenues sub- stantially equal to its year test cost of service. This rate, with appropriate adjustments for quality, pressure, etc., was to be applied to all of the company’s rate schedules on file with the Commission at the time approval. pne
Over year later, September 1960, the Commis- sion issued the opinion that is the subject of present litigation. 24 F. P. C. 537. Its basic conclusion was that the individual company method, cost-of-service based on theories original prudent cost and investment, was not 5An increased rate which is superseded later by a further increase is thus only effective for the limited intervening period, called the “locked-in” period, and significance retains (e) iri proceedings only respect of its refundability if found See, infra, pp. unlawful. n 304-305. phrase “jurisdictional cost of service” as used' here means the producer’s system-wide cost of (z. e.,. service operating all expenses, including depreciation, depletion, taxes, plus a fair return on the rate.base) for its sales of gas subject natural to the Commission’s jurisdiction. The year “test 1954” means the year calendar adjustments with changes certain in costs and increases in rev enues through challenge 1956. No here, made- either side to any aspect of the Commission’s Phillips’ jurisdic determination of tional cost of service for year. the test *5 determining the rates for method desirable or a workable “ultimate solu- the that and producers independent of area known as be come to what has lay tion” gas, for based prices fair of “the determination approach: industry” of the requirements financial on reasonable country. areas producing of the various for each rates would means This atC., P. 547. 24 F. on an individual than rather basis, area on an established end, toward steps initial As basis. company it issued time the same things at did two Commission a First, .promulgated it proceedings. 'in these opinion since 61-1), (S. G. P: Policy of General Statement area- forth set in which it occasions, on several amended filings increased rate and initial for “price by-area levels” compelling of absence in the stated that and by producers, would rates, and initial not certificate it would evidence price levels.7 these exceeded rates, which increased suspend begin would it announced Second, Commission a major pro- cover designed to each hearings, a series involving hearings, these one (At least ducing area. way.) now well under Basin, is the Permian rea- gave several here, opinion in its Commission, The company the individual rejecting unsuitable sons In par- at 542-548. C., 24 F. P. method. cost-of-service typical of a business that, unlike emphasized ticular in- natural producing business utility, public invest- relationship between fixed, determinable no volved might hugeA investment public. to the and service ment might a small investment while gas, a trickle of only yield an individual concept of Thus the a bonanza. lead for calculat- as basis investment,” “prudent company’s originally issued, appears at Policy, as of General Statement hearing, notice or Reg. issued 9578. It was without 25 Fed-. pur price were “for the levels expressly stated that use action-by and their guidance initial pose rights or fix the ultimate any party of substantive will deprive any rate level.” justness and reasonableness ing call forth necessary would capital also, protect from consumers excessive charges, seemed Further, wholly place. out of the Commission noted that *6 company individual cost-of-service method gave rise to staggering cost allocation problems,, could such result widely varying prices gas coming anomalies from a single field even from a single jointly well, and owned would an create intolerable administrative burden requiring a separate rate determination for each several thousand independent producers.
Returning to the proceedings before'it, the Commisssion decided that, despite its disapproval of the cost-of-service method, the whole case having been tried on that basis, a final administrative determination of cost of sérvice for the test year should be made. It proceeded then resolve a number difficult questions, including those relating to of production allocation and exploration costs, allocation of costs between natural and ex- tracted' liquids, and rate return, and arrived at a 9f system-wide jurisdictional cost of service for year the test of $55,548,054 figure which substantially exceeded —a jurisdictional revenues ($45,568,291) for year.8
With this determination in hand, turned to the consolidated 4 (e) proceedings, § involving specific rate increases filed through May 1956, and found those had produced increases increased revenues of only about $5,250,000 annually, or considerably less than the total deficit for the test year. It also that there stated was nothing in the record to any show that of the increased- “unduly were discriminatory preferential.” or then concluded that since it could not order refunds of , portion any of these increases-, view of the continuing rehearing, On the cost of service was redetermined to be $54,525,315, per subject or Mcf, neceásary adjust certain 11.10090 purchased gas- ments for costs, gathering taxes, royalties. These adjustments would average increase the unit- cost to about 12.160 per Mcf. deficit, and since all increases had been superseded, there would be no purpose in continuing § the 4 (e) proceedings and, with two exceptions, they were terminated.
The two exceptions concerned rate increases under “spiral escalation” clauses in Phillips’ contracts,9 and these two proceedings kept were open because the proper- amount of the particular increases depended on the amount of increases, if' any, allowed to certain pipeline customers of Phillips in their own rate proceedings then pending before the Commission. The Commission re- fused-to hold such spiral clauses void ab initio, fact a rate increase in one of the 10 terminated 4 (e) pro- ceedings had resulted from the operation of a spiral escalation clause.
The Commission recognized that there remained almost *7 100 other (e) § 4 proceedings, involving increases by filed Phillips, that had not been consolidated in this case. It said that since the present record indicated that Phillips’ costs exceeded revenues at least through 1958 it was in- viting Phillips to file motions to terminate all 4 (e) § proceedings relating to increases prior filed to 1959, thus limiting future consideration of Phillips' rates to and after. Whether this invitation has been accepted by Phillips is not disclosed, but in any event none of these other § 4 (e) proceedings is before us now.
Turning to the § 5 investigation of the lawfulness of Phillips’ existing rates, the Commission first noted that there was considerable disagreement over how these rates should be set.—whether they should be approxi- mately uniform throughout the country or should vary from area to area. It then said that it was aware that both costs and prices had greatly increased sinee 9These provided clauses’’ that when specified commodity price index by increased more than a certain points number of gen and a eral increase Phillips in a pipeline customer’s resale gone rates had into effect, then Phillips’ rates to that customer could be proportionally increased. “deem did not it therefore 1958) and after
(and especially Phillips file require or prescribe appropriate it record.” present upon future based for the public would Concluding that the 575-576. C., F. P. at potential refund by Phillips’ adequately protected standards pricing the area (e), by 4§ under obligations by Policy, of General Statement announced initiated, the Com- to be proceedings the area (a)5 present of the § termination ordered the mission investigation. rejected rehearing, application
On submis- reopen the case for suggestion it should said that data. 24 F. P. C. 1008. It sion of 1959 cost exigencies regulation of consumers and the “interest brought on an proceedings in rate will be better- served company basis,” on an area basis rather than individual area method would lead to “more effective and that the . regulation producer sales.” 24 -expeditious had rejected F. P. at 1009. the claim C., also some terminating (e) proceedings erred in the 4 because average in excess of of the increased rates were unit service, reiterating showing cost of that there had been no preference of undue discrimination or' and that the total resulting up revenue from the increases did not make year deficit shown the test determination. in a review, Appeals, thorough
On' the Court and in formative affirmed decision of the Commis opinion, App. Judge sion. U. S. D. F. 2d 369, 303 Fahy, C. 380. *8 argued dissenting part, that whether or not the area rate method of rate regulation solution, was the ultimate having gone far in proceeding so by deciding should have finished it aon cost-of-service justness basis the Phillips’ past reasonableness increases and of present rates. To failed have to do so, believed, he was a clear abuse discretion. We granted certiorari because of importance of this case in the administration and future operation of the Natural Gas Act. S. 369 U. 870. arguments both in parties, their briefs and
at the bench, have covered a broad range of subjects, including a number of other administrative actions and proceedings past, present, and future —that are not —
before us today. layWe these subjects collateral to one side focus on the three precise questions that have been brought here for review: whether the Commission erred (1) in refusing to reject certain increased rates because they were on spiral baséd escalation clauses; (2) terminating the 10 (e) § 4 proceed- consolidated ings involving increases now superseded leaving and in two such proceedings only for open a limited or purpose; (3) discontinuing the 5 investigation of the law- fulness of Phillips’ current rates. Of these ques- three tions, which will be considered in the order stated, third is the only one vigorously pressed by all petitioners and is clearly the principal issue in the case.
II. California, alone among the petitioners, challenges the Commission’s refusal to declare void ab initio spiral escalation clauses in Phillips’ contracts on which rate in- creases three of the 12 § (e)4 dockets were based'.10 Such clauses, contends, California are manifestly incon- sistent with the public interest, they because constitute a price mechanism by “[cjonsumers which natural are caught in a maelstrom.” But we
.. have at grave least doubts that this question may be raised California at this time. As to two of the three dockets, the claim would appear premature, since the dockets are still pending, and the increases there involved may eventually be if disallowed the pipeline increases on which they depend are themselves dis-
10See swpra. note
304 docket, the third As to by the Commission.
allowed by termi- fully effective made has been increase particular ques- the sale since but (e) proceeding, 4§ nation to tion, appears and pipeline Michigan-Wisconsin is to the may whom California interests, no one affect no California 11 by the (§ (b)) “aggrieved” is represent properly order. Commission’s contention. no merit California’s we see
Further, prospectively announced has that the Commission is true containing filing contracts accept for it would a different quite been' would have but it clauses,12 such rate past declared that to have matter for the Commission they were based because simply were ineffective increases ’ of a contract clause The effect spiral provisions. only permit producer course, is type,- If the Act. (d) of 4 filing provisions § to the resort estab- must still challenged, producer the increase is con- the terms of the wholly apart from lish its lawfulness , a seller to right sustained tract. Thus we have author- which, effect, a contract an under file increase Line Co. any Pipe him Gas to do at time. United ized so Division, 103. Light, 358 U. S. Memphis Gas and Water v. in scope, de- here are far more limited spiral The clauses of external they do on the occurrence events. pending as III. terminating erred in claim only for leaving open two others (e) dockets,
4§10- pressed primarily by Wisconsin purpose, a limited should considering contentions, their York. In New (b). amended, 717r 831, 11 52 U. S. C. Stat. Reg. 1983, 232A, By 232, Reg. 26 Fed. Order Nos. 26 Fed. spiral con 2850, escalation clauses announced that Commission April 3, 1961, on or after would be tained in contracts executed 1356, By 242, Reg. inoperative Order No. Fed. and without effect. containing such clauses announced that contracts April unacceptable filing would on or after 1962. be notéd again that all of .the increases involved were prior filed to the end 1956, and have since been super- *10 seded or “locked in” by subsequent increases13 which, with one exception, have been suspended and made subject of separate § 4 (e) proceedings.
The Commission’s termination of these § (e)4 dockets was a decision on the merits. It was based on the finding that the annual increase in produced revenue by these increased rates was substantially deficit, less than the for year test 1954. Petitioners’ principal objection ap- pears to be that-Phillips’ overall, and unit (per Mcf.), revenues increased so substantially that they may have exceeded during costs period 1955-1959 for which the increases were allowed. But the fact is that Phillips’ average unit revenues during this period never rose sig- nificantly above year its test unit revenue requirements by determined the Commission.14 Moreover, peti- tioners do not claim, nor could they on this record, that the test year cost of service was higher per unit than in subsequent years. And assuming that unit costs did not decline, it is clear that the increases here did not even bring unit up revenues to those unit costs. Whether other subsequent increases involved in separate proceed- ings, not before us resulted in revenues exceeding cost of service in years-has later no effect on the propriety of ter- minating. these § 4(e) dockets. Thus the factors that may have made the record stale for purposes of deter- mining in the § 5 (a)-investigation whether Phillips’ present rates are unjust or do unreasonable not make the record stale for purposes of determining the lawfulness of these past increases. 13See 5, supra. note 14Phillips’ year test unit revenue requirements, on the basis of
the Commission’s determinations, were per about Mcf. See 12.160 note supra. Data Phillips’ from annual reports, filed with the Commission, show average jurisdictional revenues as follows: 8.9$ (1955); (1956); (1957); 9.4$ (1958); 9.9$ (1959). 11.1$ 12.3$ terminated the Commission claim also
Petitioners failed to because improperly (e) proceedings the were question the increased finding that any make goes contention But reasonable. just did. of what substance and not the form validity their in,” “locked rates were increased these Since was question the sole issue; not at was the future re- had to be increases of the part any all or whether of sub- the basis Having decided Phillips. funded bring revenues did not the increases evidence'that stantial concluded, properly service, the Commission to cost up dockets, to these respect with before it only matter on the imposed. obligation could no refund Commission, rehearing before urged on It was increased rates some court'below, in the *11 and that at most average cost of service were above (e) § those only should have terminated Commission not did exceed the increased rates in which dockets rejected of average unit service. .The cost nor- would Phillips’ rates stating that contention, made, widely at were greatly because sales mally vary conditions, and that differeñt and under separated points entering pro- a gained by nothing or there was little particular of allocation investigation tracted costs.to Phillips was already known that it is past rates “when C., 24 F. P. at cost of service.” earning whole not 1009. justified,15 and.peti- was this conclusion
We believe theory all abandoned the appear tioners to have but inconsistency necessary find no this determination We between Co., in Hunt Oil 28 F. P. Commission’s recent decision C. (e) taking proceedings for the which the Commission remanded § additional evidence and stated: this case us that increased of the record in convinces “Our examination just specific always be to be rea- sales cannot found some of 4 (e) dockets improperly § were terminated merely particular because increased rates in those average dockets exceeded Rather, they cost. urge now variation, in that the the increased rates great was so to compel the they conclusion were “discriminatory and preferential per se.” The Commission noted that there nothing was in the record to show unlawful dis crimination, and it clear is mere differences in rates under this Act are not se per unlawful. But any event, we need not reach the merits of the claim of discrimina tion because .properly not before us. It was pre sented to the cou-rt nor below, was it raised adequately on application to the Commission for rehearing, a step required by § 19 (b) of the Act in preserve order to a point for judicial review. e. See, g., Sunray Mid-Con tinent Oil Co. v. Federal Power Comm’n, 364 S. 137, U. 167.
IV. question final is whether the Commission justi- was fied in terminating the 5 investigation of the reason- ableness of.Phillips’ current rates. Preliminarily, it is important to observe that the Commission’s accomplish- ments since original Phillips case, the validity Statement General Policy 61-1, the pur- actions taken solely sonable on the comparison basis of a company- individual wide costs company’s with that year.” revenues in test C., F. P. *12 at 626. The record the Hunt chse is us, not before but it is evident from the opinion Commission’s that, case, unlike the present certain increased rates there involved were not “locked higher in” and were than the ' currently prevailing production rates in the area. Thus the factors' may have merited supplementation limited of the record in that ease respect with (e) to the proceedings present § were not here. It should also be noted Hunt, that in here, the Commission de- cided pursue to inquiry broad 5 into the lawfulness of producer’s all of the present p. 314, rates. See infra. method pricing area lawfulness it, to
suant To a for review. the Court before not themselves are upon do bear these matters however, extent, limited this to terminate decision of the Commission’s propriety (a) proceeding. 5§ is whether the the issue recognize^ petitioners
As the a discretion discretion, of an abuse .termination constituted urge is petitioners but which general is broad which in this gone has proceeding in a narrower good a deal to initiate whether or not a decision far than in the case of Federal Power Co. Minneapolis Gas v. an See inquiry. 212. F. 2d Under- Comm’n, D. App. S. C. U. that the result are their claims position lying petitioners’ in the regulation or no effective of termination little regu- area rate development of before the period interim- years to may many take lation, regulation that such eventually be held may the method evolve, and that invalid. feasi- not of one mind as to the petitioners
1. The are regulation, bility area method and lawfulness rate right to although questions no one the Commission’s appears to come experiment. California undertake the cost-of- company the individual closest to the view that regulation only lawful basis service is the Method of the area is therefore invalidity and that the approach from departure we believed that such predictable. If being sus- if chance concepts little, any, had present pressed say hard Commis- would be tained, we terminating had not abused its discretion sion experiment. the area (a) proceeding undertaking while § 5 and if the fail, almost regulation For if area were sure method of determin- company individual cost-of-service abandoned, ing. the reasonableness of rates had been then virtually prospect no effec- there would be foreseeable of cost-of- regulation. problems Difficult as tive may they not warrant a regulation be, would service process. administrative breakdown *13 toBut declare that a particular method of regula- rate tion is so sanctified as to maké it highly unlikely any that other method could be sustained would be wholly out keeping with this Court’s consistent and clearly articu- lated approach question to the of the Commission’s power regulate rates. It has repeatedly been stated that no single method need be followed the Commission in considering the justness and reasonableness of rates, Federal Power Comm’n v. Natural Pipeline Co., Gas U. S. 575; Federal Power Comm’n v. Hope Natural Gas Co., 320 U. 591; S. Colorado Interstate Gas Co. v. Federal Power Comm’n, 324 S. 581, U. and we reaffirm prin- ciple today. As the Court said in Hope:
“We held in Federal Power Commission v. Natural
Gas Pipeline. Co., supra, that
the Commission was
not bound to the use
any
single formula or combi-
nation of
formulae
determining rates.
Its rate-
making function, moreover, involves the making of
‘pragmatic adjustments.’’
Id., p.
.
586. And when
the Commission’s order is challenged in
courts,
the question is whether that order ‘viewed in its en-
tirety’ meets the requirements of the
Id.,
Act.
p.
586. Under the statutory standard of ‘just and rea-
sonable’
is the result reached not
the method
employed which is controlling.”
opinion *14 in requirements financial “reasonable on the based 547, and C., at 24 F. P. .area, production in each dustry” composite cost-of- that oral argument at advised we were proceedings. rate in the area be considered will data service in developed rates to say the cannot we Surely, as to high be so likelihood in all will proceedings these producers, deprive as to low or so consumers, deprive rate.16 and reasonable just right to a their reg- inherent in difficulties unusual recognize the We gas.17 natural commodity as a such price ulating the backed judgment, considered Commission’s respect the We the individual reasoning, that persuasive sound or suit- a feasible is not method cost-of-service company producers. independent the regulating one for able approach area hopes the share the Commission’s We solution. the ultimate to be may prove 16 Appeals in Court the interpret the decision doWe 260, 230 Comm’n, App. D. C. S. 97 U. Power v. Federal Detroit court, com individual view of that that, in the suggest 810, to F. 2d independent in required used to be is the method service pany cost of express the did regulation. The court producer rate natural charge pipeline could a considering price'which that, in view must be used service wells, cost of from its own gas produced 268, C., 230 App. D. at departure.” U. S. point of 97 least as “at context, may in that meant have the court Whatever 2d, at 818. F. relating any questions it did not have before that it clear Fahy, Judge interesting to note it is method, and area in case: opinion below this in his opinion, said the Detroit author of pursuing such a from Commission to deter the not seek “We should using init proceedings, or from in future area method] method [the App. 112 U. S. along already those lines.” initiated any proceedings Pipe Eastern also Panhandle 2d, See 379, F. at 390. C., at D. 94, F. App. C. Comm’n, 113 S.U. D. Power Federal Co. v. Line 3. 76 2d in Justice of Mr. Jackson opinions the discussion See 591, Gas Co., 320 U. S. Hope Natural Comm’n v. Power Federal Power v. Federal Gas Interstate Co. in Colorado 628-660, and 581, 608-615. Comm’n, 324 U. S.
2. This is not a case which the Commission has right up walked to the line and then refused to cross it— which, a case, in other words, all necessary the evidence to a determination had been received but the determina- tion was not made. Here, the concluded that the record, relating to the year test was too stale in 1960 to permit a finding justness and reason- ableness of Phillips’ current rates. In view of this inade- quacy, and since the Commission establish must unlawfulness of present rates before taking further action §a proceeding, continuation of proceeding would required have remanding the case for receipt of evidence as to costs in at least one subsequent year. test None of petitioners specifically challenges the Com- mission’s *15 that, conclusion (a) § 5 purposes, the record in I960; was stale a it is stale today.18 fortiori question Thus the whether the Commission abused its discretion in terminating proceeding the must be meas- against ured only remanding alternative: for addi- tional evidence. Such a remand undoubtedly would have consumed time considerable and energy, including that of the Commission and staff, and its would almost cer- tainly have involved another by decision hearing a exam-' iner, another appeal to the Commission, petition another for rehearing and judicial further review qomplex of difficult issues. In short, the rejected alternative by the Commission would have resulted in regu- definitive 18The fact that may record this have been stale time certainly rendered decision does not mean that no proceeding can be decided before the record becomes out of date. pilot This proceeding was one length of unusual and complexity, the Commission noted that both costs and revenues “increased greatly” year between the year test and the of decision. The Com presumably mission has great learned a deal in this case which will use of to it in area proceedings, and there is no sup reason to pose that proceedings those will be incapable rendered of decision by the march of time.
lation Phillips’ of or in immediately the riéar future. Indeed, years might elapsed several have before even.the regulation method of regards which the Commission as unsuitable would have become effective to even this one producer.
It3. is contended a that, as of the decision to result terminate public this'§ will proceeding, receive significantly protection less against charging of exces- sive prices by Phillips (and others) period the interim before the area method light- day. sees the Were case, it would bear our importantly on review of the Commission’s exercise of its discretion. But in this con- First, nection several factors should be-noted. the record pot before us does paint picture public interest private profit. sacrificed the'altar of Indications are that at least 1959 Phillips’ jurisdictional revenues unt.il up did not catch to its Although cost service. revenues substantially increased after -time, observed that costs have also risen and we dramatically, assuming no basis for grossly rates are current .have unreasonable.
Second, Phillips’ most of rates now in increased effect subject pending (e) proceedings are are thus §.4 being collected subject obligations, refund. Refund true, provide protection it is do not as much as the elimi rates, nation unreasonable see Federal Power Comm’n Co., v. Tennessee Gas Transmission S. 154- U. *16 155, they undoubtedly significant but are and cannot be ignored, petitioners some of the would have us do. Third, it is clear that since the Commission’s decision in this proceeding, upward producer the trend in prices least, substantially arrested, has been and in im- one at portant area trend has actually been downward.19 Al- Louisiana, is The South and' the downward trend due area is part of certain ordering to settlement rate cases and the of sub stantial refunds. purport
though Policy did Statement General. note just supra, to establish and reasonable see rates, statement, along levels' declared in with price implementation program appear there announced, played significant accomplishing have a role in to. result.
Fourth, problem it must be remembered that present exist period this transitional would still if. of new (a) proceeding reopened taking were for the § how much time evidence; way predicting there is no would be for a final to but required rendered, decision inevitably it would be substantial. It therefore evident is protection protection. the choice not between or no though will protection, There in either event be some years. doubtless with room for for. improvement, several forcing Petitioners claim that to re- open (a) investigation delay this 5 area unduly § will not proceedings provide and will fact useful informa- tion for rate-making purposes. Commission, area The with equal vigor, that it does not the facilities states have to reopen (and this case all that have reached others approximately to stage) same and at the same time proceed expeditiously with its area investigations. estimates that the proceedings, Permian Basin area a case involving Phillips’ some sales and jurisdictional 35% roughly of sales all producers, completed will be 10% in about required the same time that would be to com- plete proceeding relating Phillips remanded alone. It warns if required reopen it is this and similar proceedings, may unduly the result be to delay the area investigations, compelling while to a adherence unworkable, method the Commission provid- deems thus ing significantly protection less for the public both long and the short run. cannot Court resolve this dispute against
Commission and tell it that it has made an error of law— abused its discretion —in deciding how best to allocate *17 might
resources. The case be different if the ap- area proach had being sustained; little or no chance of if the present ripe record were now for determination of reason- able rates for an Phillips company on individual cost-of- service or basis; if it were public would manifest receive significantly protection less period in the interim than if proceeding had not been terminated. But as we already have concluded, none of conditions these exists, and their absence a reversal of the Commission would abe sheer act interference the details of the process. administrative might Indeed, it well have the effect of postponing even further the time when effective regulation will be realized.
Finally, the fact in this Commission case termi- nated (a) § the 5 proceedings, rather merely than holding them in abeyance Hunt it did Co., Oil 28 F. P. C. 623,20is a significance. circumstance no At oral argument general counsel for the Commission assured us .that the Commission remains free to reactivate the inves- tigation of Phillips’ individual rates if the area proceedings unduly are delayed or if circumstances should otherwise warrant. The distinction between termination and sus- pension (a) of the 5 proceedings is thus one of form and not of substance. In either event the Commission retains the flexibility it must at have this still period formative in a difficult regulation. area of rate
Affirmed. 20 Hunt, In hope proceed said: “It our that area ings timely will result in a determination Hunt’s rates'for However, future. adequate in order protection to assure to consumers against any unreasonably high may rates of subject Hunt which not be early to an determination on an area abeyance basis will hold we further (a) aspects action on pending of the case area rate determinations, with understanding proceedings may subject some or all of Hunt’s rates to reactivation if future circumstances should so C., dictate.” 28 F. P. at 626. Justice, The Chief Clark, with whom
Mr. Justice join, Brennan and Mr.- Justice Black Justice Mr.. *18 dissenting. continue as of the Commission labors Sisyphean
The only to tum regulation hill of up producer it marches and less done. undertaken again down with little ble resulting regulation Act, under the years 16 without After jurisdic it had no position that from the Commission’s this Court decided production gas, tion over the Wisconsin, 672 347 S. Corp. Petroleum v. U. Phillips with the Commission charged there (1954).1 The Court both pro Phillips’ operating expenses, over supervision fix to and ducing gathering, and directed gas. of Phillips’ rate for the' sale just a and reasonable Examiner determined Presiding later years Five per Mcf. and Phillips’ 1954 cost of service be 11.6620 Phil He directed and allowed it a rate return. 9.25% and an per Mcf. for 1954 lips preliminary filed year A and a half adjusted subsequent years. rate for > handed down its decision. It found later the Commission Phillips’ per 1954 cost of to be Mcf.2' service 11.10090 a fair and return would be determined 11%. Phillips’ jurisdictional substantially found revenues less in 1954 than these contra to recom allowables and, mendation of the Examiner and its own it terminated staff, all (e) discharged save- two of the 4§ proceedings, from further refund Phillips obligation thereunder investigation its own 5 dismissed these subse quent covering some 95 substantial rate increases 1 problems lurking For a discussion of the under the decision see Douglas separate dissents Mr. writer, and of the 347 Justice S., respectively. 690, U. at 687 and figure The for unit cost of service was announced 11.10090 amending opinion order denying rehearing. Commission’s figure subject purchased gas gather costs, was redetermination for ing royalties. taxes and
made In Phillips. addition, it assumed from these figures the rates “probably” were not ex- cessive through 1958 and invited motions to dismiss proceedings, approving these thus existing and increased rates for the 1955-1959 period on the sole basis of 1954 costs and revenues. It also concluded that was there “nothing in the record to show past that these rates . . . unduly are discriminatory or preferential,” P. at F. C., despite the fact that they from per varied Mcf. to 5.50 13.50,with one at per Mcf. But not all. Con- currently with this action the Commission issued sua sponte a Statement of General No. Policy 61-1, 24 F. P. C. 818,25 Reg. Fed. 9578, which it long-estab- discarded its lished cost in favor of an area basis of fixing rates. method It promulgated two lists area prices, covering one initial *19 § under 7 certificates and another for increasing rates gas for sold existing contracts to 4 subject (e). under In § arriving at these price levels the Commission said that it considered “all of the relevant facts available to us,” including cost information, “existing and historical price structures, volumes of production, trends in production, price in trends the various areas over a number of years, trends in exploration and development, trends in demands, and the available for gas.” markets F. P. atC., 819. For gas the new level § 7 certification price, there can be no doubt that the level guide established as a is the highest permanently certificated rate in the respective areas as of September 1960. The gas other level an- (for (e) nounced contracts) was average but weighted price gas sold from the respective in areas 1959. It is therefore say accurate to . both levels were based on existing price structures as September e., averaged i. field prices. The Examiner, contrary to the Commission, had found the cost method only more entirely accurate but comparison feasible in and, with no method, area more delaying. parties them- in the conclusion including Phillips, selves, concurred Examiner be determined Phillips’ rates should Nevertheless cost of service. of its over-all on the basis addition, contrary and, to the the Commission held price accompanying of policy statement issued the since and has hearing or record without notice, levels In sum- manner. this times in several like amended them its cost-of-service junked mary fashion work years of a half-dozen wasted program, regulation untried, un- new, with a experimenting and is now thereon doubtful is of which, addition, program inchoate tested, all over gas the consumers consequence As a legality.3 large metropoli- in the particularly States United Midwest and the Seaboard, the tan cities of Eastern wild- pricing area for the Commission’s pay will West Coast will the consumer in the end I goose predict chase. hunt and the goose of the biggest find himself to be the the dead duck. producer small aas result saying that, without pass I cannot let this here, action of the Commission’s approval of the Court’s will irretrievable country suffer consumers of shall now offer of dollars. I amounting to billions loss rate-base calculation examples the Commission’s few this conclusion. support of 1954 that op Service Cost I. Gross Errors Computations. n ter- out, the Commission pointed
As the Court has *20 also 10 con- (a) proceeding but only § minated the latter against Phillips, (e) proceedings 4§ solidated . “[a]ny to allow . . Presiding found failure ... Examiner proper cost here deter recoup . of service as sufficient to . . public contrary inherently and to the interest. mined, unfair would possible respect to viola question with might also raise a serious against prohibition confiscation.” the constitutional tion of . C., at 780 F. P. (cid:127)
CO 00 r-H peri- for the by it received revenue ground that the on the In' view of of service. less than cost involved- was ods contention from the aside necessary, it is disposition dismissal, proceedings there, those of was no basis for year’s findings, 1954 on that covering years subsequent findings of its cost-of-service the basis for us to examine upon predicated orders are all for 1954. The dismissal and if it be whole of erroneous the 1954 cost' service Thus, while the of dismissal falls. basis for the orders challenges specific argued here have not petitioners Appeals, and the Court before raised discre- its the Commission abused contention their necessarily (e) proceedings terminating tion in determination validity of-the question includes the likelihood In addition, cost of service. regarded approval as an will be Court’s affirmance for cost-of-service standards- highly questionable these other fostering application their thus determination, of them. cases, calls for discussion gas4 expenditure purchased for from its direct Aside appears to be Phillips’ largest single item costs development which was allowed expense, and exploration allocation. $58,313,230 of some before We amount of service. going other items into cost first examine and allowance, development,.depletion and Exploration develop- and Exploration interest allocation and costs.— company 1954 on the books was expense ment undeveloped rentals, $47,474,039, including drilling lease surrendered, dry holes and leases, and land tools, expired 1954; pur Phillips 688,811,312 it. sold Mcf. natural juris 407,984,210 produced 375,690,912 Mcf. Its chased Mcf. (The sales ran of this total. difference between dictional 71.9% higher produced the total volume sold the somewhat total volume uses, losses, purchased company results from residue returned to etc.) leases, *21 expenditures a “re- geological'activities. and On these Why of $10,839,194. and item was allowed turn taxes” items, particularly on these the consumer should pay expired holes” and surrendered “dry ($11,306,964), offshore leases ($9,479,898) undeveloped leases appears is a for the it ($17,765,332) experts; matter but Phillips charged dry to me that off the holes its since got in 1954 nothing taxes and the consumers whatever expired undeveloped from and surrendered leases and off- leases, expense shore such should not be included expense per rate base. This alone amounted to 4.2810 Mcf. of of of allowed cost service total 11.10090. Phillips in this also a tax Moreover, connection, enjoyed depletion gas of on all production. allowance This 27%% n allowancefor year was Phil- $44,784,723, giving a tax lips saving $20,000,000. of over This latter sum was However, depletion included in the rate base. is allowed as an exploration certainly incentive to its savings Phillips’ expense should be deducted from total regard. Since the book deficit between total revenue of appears cost service for 1954 was it $8,900,000, a correction of this item alone would turn that deficit profit. into nice gas.
(b) Allocation cost betioeen oil and —Much gas produced interstate sale is “associated gas,” e., i. it is oil produced along casing- with and is known as gas. Fifty-seven gas production head percent Phillips’ gas associated only but accounted .for 13.42% In produce combined revenue. addition some wells liquids condensate and condensate which must' be gasoline separated through plants. question The is how much of the expense exploration, operation, etc., of' chargeable gas. Phillips wells should be to used'a B.t.u. method which expense gas. allocated 61.88% cut 32.742%,- this to equivalent 4.2810 per Mcf. The Examiner had recommended while 30.46% experts up Wisconsin came with and Pacific 20.812% *22 with As is only noted above of Phillips’ 23.98%. 13.42% combined revenue comes from gas associated while comes from oil. Still the Commission has allo- 86.58% cated almost one-third of the exploration cost gas, to which only in brings oné-seventh of the combined revenue. This is a most important item since each shift means 1% over a half million in dollars the rate base.
(c) gas. Purchased allowed increased rates Phillips —If says its gas cost of will rise automatically under per- its centage type purchase contracts. This item of $1,671,733 was disallowed the Examiner since the suppliers were not shown to have been to any entitled increase. As the points out an increase in rate would not in- crease the. percentage Phillips obligated was It pay. would require Phillips pay the pro-ráta increase rates due on percentage gas, but it recoups plus profit when that is' sold. I submit, as Examiner found, that of this allowance million and a half in the cost basis is erroneous. Increases through automatic escalator clauses—which effect the same result —are not permitted because not based on any increase in cost of. production. In approving this practice in percentage contracts the Commission creates a perfect loophole for these producers and invites more contracts this nature. (d) Expense for money Interest. — borrowed for 1954 amounted to $9,892,308. On its tax return Phillips claimed an allowance of only $3,743,077. This variance in cost of money seems to have occurred by reason of an exchange of Phillips’ outstanding bonds for common stock. The Commission allowed larger figure on the basis that it was a “known change” that probably would not occur in years. other It is interesting to note that “known change” theory was not applied to the “San Juan If there it would applied made 1955.5 have transfer” against Phillips $8,000,000 of some made a difference Certainly base. common fairness would re- change” tó all application theory the “known quire the an simply not isolated one. cases, cost-of- readily apparent the Commission’s In addi- service calculations for are full holes.. I do is correct assuming, not, cost tion, permitted should not be to extend subsequent years cost and 1954 revenue into they years. through and hold that too are deficit rate-making face, keeping pro- on its is, This with record itself shows error of Moreover, cedures. method. The Examiner found that, the Commission’s of its defi- Phillips’ presentation costs, own over-all *23 higher ciency significantly for 1956 “was not than year 1954 cost of 24 Phillips’ derived test service.” however, increased C., Phillips’ revenues, F. P. at 773. they In 1957 were year subsequent each 1954. some they $8,000,000 1954; $17,000,000 above increased some in 1959. In $28,000,000 and about 1960 1958 revenue' $90,856,248, practically was which was twice that of 1954 ($45.6 million). These all known to the Commis- facts, required reappraisal a of the cost of service for all sion, years arbitrary rather use subsequent than necessary of the 1954' The data could have been figures. from had quickly Phillips course, obtained its which, readily I am had and, sure, total revenues available its cost for 4§ basis each increase likewise calculated.6 properties Phillips The known as San Juan transfer were change” $8,000,000 made in 1955 and involved total of some “known assigned prop which was not allowed. The reason was that other support erties were but I find no added record this conclusion-. connection, appears strange In this the. Commission has System exempted producers required from the Uniform of Accounts Consequences.
II. The Dismissals and Their problem, however, real is not much so in Phillips’ for that level; has long gone by since the board and may consumer as well forget The increased it. levels that became effective between and the date of the decision in April 1959 are the main rub. The Examiner understood this when, final his order, he directed Phil- lips to file uniform rates which would, when applied to sales made in 1954, bring Phillips its 1954 costs al- return. lowed He directed further that the same schedule of rates applied to all sales made subsequent to 1954 through the date of his decision and to all sales there- after. requirement Under if the subsequent cost of service did increase and was not offset increased rev- enues the company could recoup itself with 4§ rate in- creases. This the Commission to do refused and thereby left Phillips free to collect rates as high per 23.50 Mcf.. and subject to no refund. The Commission excused itself ground that there would be no reason to fix Phillips’ rates on a cost basis since it was going to adopt the area plan. It also found the staleness year test pre- vented application to subsequent years but obviously this was not the reason. In the place, first it used the “stale” test year of 1954 to justify its finding of deficit through 1958. In addition all parties had agreed upon year. Investigation covered 1955 and 1956. Hear- ings began in Juné 1956 ran through 1957. Phillips *24 itself presented 1956 the data, year latest full at the time .of the closing of the hearings. They were to used show of natural-gas companies, 1, part 18 CFR, c. system 201. No has as yet been prescribed producers. for Moreover, the reports annual required pipelines from enable the Commission to promptly deter- pipeline mine expense, returns, earnings, report etc. This pro- for merely ducers shows sales under each rate Finally, schedule. pipelines,- filing when rate increases, §4 must attach detailed cost' justification. requirement No such producers. is made of
323 prac- all for was identical 1954 of experience cost the thát found. so Examiner the and with purposes tical case the decide to Examiner the for months required report detailed and comprehensive more a prepare and See problems. of the grasp his clear reflected which administrative major many Thus, like 590-818. P. C. F. complete. to years six five took one this proceedings, the all what stale year test makes if this ask, IBut, not infre- us reach Those that cases? rate major other or equal for an in the been have quently not should stale, if Even period. longer Examiner hearing, investigation, whole dumped the have doing so, Before drain. down work staff Report, down already laid had it opinion, same in the determining cost for case in the standards detailed cost only determined it had Indeed service. its governing standards formulated Phillips but had there- return allowable and calculated of return Admitting discarded. then ofAll under. been might have years subsequent statistics additional solely concerned been have data would such necessary, standards already determined of these application with years. to those more (a) cases § 5 (e) and is § the 4 dismissal of the disregard disturbing indicates
unfortunate says (e) cases Court § 4 theOn interest. consumer the sub- are in effect now rates Phillips’ increased “most very thisAt . . . .” proceedings 4 (e) pending ject nonrefundable at making sales is Phillips moment revenues annual produce which Mcf. per high as 23.50 Commission’s excess of $3,000,000 than more Com- this score On levels.7 price 61-1 SGP where Louisiana more extreme South 55% is even The situation Commissioner's exceed the flowing prices which at gas is now exceeding the prices flowing at is ceiling; over. price” “initial 94% flowing prices at over price’.’; and “increased Commission’s 70% *25 mission authorized a large number of § 7 high price sales without providing any for conditions. This action was re versed Atlantic Refining Co. v. Public Service Comm’n York, New 360 U. S. 378 (1959), and like cases. Al though § 5 proceedings have been filed on these cases there are substantial numbers of other such sales that have never been tested and are not now contested. Section 5 proceedings operate prospectively and so, of course, all of the sales are nonrefundable. The statistics indicate that of the 1960 revenue by received 13 major producers about $250,000,000. (roughly 83%) is not subject to refund.8 Furthermore, the Court says that the rates covered § 4 (e) proceedings dismissed herein “were in,’ docked their validity for the future was not at issue; the- sole question was whether all or any part of in creases had to be refunded by Phillips.” The fact is that the Commission has used this same “stale” 1954 price year which it discarded, including its income level, in determining that refunds were not due for the subsequent four years and in dismissing those proceedings. Hence dismissal forecloses any recovery of excess rates for the periods covering those proceedings, e., i. the four-year pe riod 1954-1958, which the Commission has found non- which exceed the level the Commission found “in line” for CATCO gas after our remand in Atlantic Refining Co. v. Public Service Comm’n New York, 360 U. (1959). S. 8 The' Court seems to admit protection the' Congress envisaged (e) practice illusory. First it comes late; too next, many of the consumers entitled to refunds cannot be found, etc. See Federal Power Comm’n v. Tennessee Gas Co., Transmission U. S. 145, (1962). 154-155 An even more realistic consideration is these refunds have permitted been to reach the astronomical figure of $158,000,000 year, of which amount Phillips has been receiving some $74,000,000. If day” the “evil producer ever arrives where he pay must up, from where will money come? would bankrupt average producer. The Commission would necessarily, protect order service interstate customers, be obliged compromise or forgive them. the 1954 as determined shown, As I have
refundable. legality. as to its questions serious by the Commission has *26 entirely on it— years Certainly subsequent the —based true, may dismissed. be should not have been While obligations . . n .do not as the Court that “Refund says, of unrea- protection as much as the elimination provide (a)5§ sonable it must be remembered that here the rates” precipitous action? Why ease also dismissed. was years! had on books for six proceedings The been the until Why pending did Commission leave them not the all of Phillips’ responsibility final determination no filings? more than 95 Commission makes The answer. There is none. (a) proceeding
The dismissal of 5 likewise un- § was justified. re- proceeding Continuation would have quired a remand but the conclusion of the Court “several years'might elapsed” have before a determina- guess. years tion of the issue is a bad two has been yet since nothing sight this dismissal and there is for a final proceeding. decision on Permian area Basin The has 22 go. Commission areas to Meanwhile more all including areas, Phillips’, escaped regulation have years years. a total of nine If 1954-1963, in 1960 the (a) Commission had remanded proceeding § it could long decided, since have been since the enormous increase Phillips’ ($45.8 $90.8 revenue for I960- in 1954 to million in 1960) definitely‘shown million would have an exces- rate. The found, contrary sive Examiner had con- Court, clusion of the cost of the 1956 service not was “significantly higher” than 1954. All that would have necessary been to project three-year was this to the period inclusive. I 1957-1959, Phillips, could wager, .have done this almost if overnight, already it did not figures have the The available. Commission in determining standards to be used had allowed every cost item save the alloca- tion on associated which could easily have been cor- The remainder percentages rected on the involved. system accounting had Phillips’ approval received the readily would have revealed its costs. n § says (a) proceeding
The'Court that a new 5 can if true, filed. This is but it were filed tomorrow, more already nine will years than have been lost to the consumer! Commission, my view, had no excuse for valid
dismissing (e) thé proceedings. § It fol Co., course in Hunt Oil exactly opposite lowed F. P. C. 623. The inapposite Court dismisses this case as but its technical distinction merits no discussion. As I see it the conclusion in Hunt pending dismiss the proceedings with direct conflict action takén *27 here.
I have considered record page by page by this —line given line —and have the my Commission’s action most careful attention. There is but namely,, one conclusion — erred in its determination of the cost of in return; dismissing service and and the .1954 (e) and § proceedings, concluding rather than the case determining just a and it rate, reasonable arbitrary acted in an entirely and unreasonable manner outside of concepts the traditional of administrative due process. Fallacy op op
III. The the Statement General
Policy. As the says, validity Court the of Statement, SGP and accompanying the rates 61-1, it is not before the despite Court. But this declaration I notice that proceeds Court to discuss the strongly Statement and im- a plies validity. view as to its I think it both premature dangerous pass any judgment to at stage this of the proceedings. legal There are serious questions lurking intimate not and we should policy application in the it. presented under case is a definitive until approval here questions raise these to appropriate I deem reasons only outline but to on merits issue join consideration the Court’s about reservations my doubts I serious While do have of the case. aspect this approach of this legality wisdom both the about certainly not case is determination, price treatment. them full-dress give which to is method cost-of-service true is of course It It regulation.” natural non of qua “sine not the single follow a must that the Commission not much so presently historic, abandoning that, rather but method manner summary legal one undoubtedly used re- gas without production it left the here, done Congress has directed. which the regulation quired will action the Commission’s denied that hardly be can by the years for a number producers leave —estimated regulation effective at to 14—without Appeals up Court gas: the consumer injury to irreparable and will result prices are the producer spiraling only brakes to its attached which the “guide prices” being legally established than These, rather SGP 61-1. highest reflecting the guides nonreviewabíe rates, are They have bind- weighted price. no rate or certificated a floor rather well Indeed, they may ing effect. establish a ceiling. than legal hurdle of must run the pricing
In area *28 addition, must constitutionally sound, include and, attack to be rate at the producer area the individual showing it would be confisca- costs; his fixed will recover otherwise share, optimistic I cannot the Court’s tory illegal. by tested “the 'rea- rate, area that the Commission’s view industry’ pro- in each requirements fináncial sonable gas facts of indus- likely to do this. The area,” duction vary producer’s that one costs crystal it clear try life make immeasurably from another’s and cannot be off— leveled n at least until discovered. For example, Phillips’ dry holes cost about $11,000,000, its surrendered leases $9,000,000 offshore, and its undeveloped ones $17,000,000. Are these items, to be included the “reasonable financial require- ments” fix used to the area? If they it are will be unfair for the reason that other producers in the area ormay may not have such had costs. Inevitably, the area average will be lower than high cost producer. Hence the “financial requirements of the industry” will not sat- isfy him.- If the rate is set require- “financial ments” of the higher producer cost it will be higher than that necessary to make just it reasonable the lower cost producer; thus resulting in a windfall to the latter. If the requirements” “financial of the lower producer cost are used it will result in a rate that will confiscate of the higher cost producer. If higher and lower costs are averaged, as the Commission indicates intends to do, higher then the producer cost will still not recover his, costs and the rate will be confiscatory. On the other hand the lower cost producer will receive a windfall. And so, as I squeeze it, see' area plan is in a e., any cri- —i. teria the Commission uses would not reflect individual just and reasonable rates. Moreover, it must be remem- bered that the burden of proving just and reasonable rates is on the producer and he cannot precluded from offering proof relevant of his cost. This he will demand in the event his statistics show his above costs those fixed for his area. And so the cold truth is that, after all of its area pricing investigation and the fixing of a rate pur- suant thereto, the producer aggrieved at that rate may demand and be entitled to a full hearing on his cost. result is. additional .delay, delay and delay until inevitable day when there is no more gas to regulate.
Typical of this simple fact of gas industry life is the announcement last November 15 that *29 of the gas for the prices two had recommended staff . “guide- It was below the area. Basin Permian (Phillip) and, further, 61—1 SGP lines” of the Commission’s not floors. ceilings but be prices that these suggested protest. up vigorous sprang there Immediately .Inde- support their to withdraw threatened pendent-producers meeting was held Wash- A pricing plan. of the area that it was insisted the where ington with Commission area followed in each prices” “realistic uniform original promise” “implied consistent with the were assured producers in this case. The 61-1 SGP is not position that “staff’s months later the three Tipro See Re- necessarily that of the Commission.” crystal a require 1963. It does not Feb.-Mar. porter, of the conclusion regardless happen ball to see what will sug- to make the rates' If it decides the Commission. producers will floor, respective independent gested if rates are made proceedings; require individual cost thousands, of old rates will be and a ceiling, both a floor pay will the bill. floor and the consumer raised goes are difficult with- problems That the Commission’s they to be it complicated appear But as saying. out for it to solve them. Other entirely seems feasible congestion problems. faced with like agencies have been Board Indeed both the National Labor Relations Wage they and Hour found that could not Administration confronting They adopted all them. process situations procedures exempted inconsequential ones. See (1958). suggestion B. Rep. N. L. R. Ann. 7-8 do likewise has much merit. appears year' Phillips, before of all producers selling then in interstate each commerce, 4,191 producers less than 2,000,000,000 sold cubic feet gas annually, being only the total of their sales 9.26% then sold interstate commerce. Landis, See Report Regulatory Agencies to the President-Elect (1960), 55. In the opinion Commission’s in this case it stated 3,372 that there were producers interstate in selling *30 1960. The number has therefore decreased almost thou- sand since Phillips the decision in 1954, which indicates producers some of the smaller have from escaped their interstate However, if all of those who commitments.. escaped were in the less than 2,000,000,000 cubic feet bracket there would still remain 3,000 producers some (cid:127) whose sales are miniscule. therefore to appears me inconsequential producers by the might hundreds well be temporarily exempted. The Commission could then concentrate on large producers (20 the of them con- trol over gas) interstate pressures without the 50% incident to the smaller ones. The integrated producer of large volume inevitably is going to be low pro- cost ducer. Hence his will be an effective floor from which the producer small might well be adjusted. This give would protection consumer rate. over the overwhelming amount interstate more quickly9 and would give assurances to the small producer that he protected would- be from confiscation. Inconsequential
IV. Matters. are There two inconsequential matters that the Court discusses. The first escalation clause several Phillips’ contracts. The Commission has promulgated a series of rule-making condemning spiral orders escalation clauses being against public By interest. Orders 9Four involving major producers cases have been decided the’ Examiners investigations and five major producers of other have now completed. been These nine producers, with Phillips, handle 30% of all gas. major interstate Still no rate case has been decided since Phillips. Only two area investigation. cases are under These two areas—Permian and South only Louisiana —furnish of all inter 32% gas. state The South Louisiana case will years take several complete. respectively, 609, and F. P. C. 232A, 25 Nos. 232 clauses that these announced 2850, Reg. Fed. would be 1961, April 3, or after executed in contracts 339, 27 P. C. F. And Order No. effect. without containing such contracts Reg. 1356, announced Fed. April 2,1962. filing after unacceptable be would clauses attack under contracts argues that The Commission order refus- its and hence to 1954 prior were all dated here course, is, This upheld. should find them ing void how the clauses is it understandable sequitur. Nor a non unaccept- interest public against effective become with blessed provisions are identical but in 1961 able to such I cannot subscribe date. to that validity prior pro- requires since Court However; a doctrine. from the wholly apart lawfulness to “establish ducer *31 ex- become I cannot of the contract” terms [escalation] what- no effect clauses have Obviously the over-it. cited a rate from determining the reasonableness soever in trig- do have the effect They standpoint. public They should be com- rates. filing of increased gering the (e)4§ two when the by the Commission outlawed pletely are decided. pending left proceedings basic to the compared when point other miniscule The varying widely Phillips’ is whether the case questions in discriminatory pref- unduly “on their face were No. 72. The by petitioners as erential,” contended issue, regarding it passing refrains from Court on. rehearing before the or on below court not raised a court precludes of the Act (b) Commission. Section in the raised considering objection not from an on review ap- but Commission, rehearing before the petition raised adequately Wisconsin pears petitioner that rehearing petition,10 and in its of discrimination issue point challenged the rehearing, (1), petition for Wisconsin’s regarding regulation, on the policy statements Commission’s juris- whether is to determine in this case ground l:the issue that the Commission in denying rehearing stated that Phillips’ rates “normally vary greatly . . . and there is nothing show to these rates are discriminatory or preferen- tial.” 24 P.F. at I C., regret 1009. Court has chosen this occasion to stand on compare technicality, Federal Trade Comm’n Co., v. Broch & U. S. (1962), public when interest stands the loss. pat- ently discriminatory nature the rate result- increases, ing in. rates'varying from to per Mcf. 5.5# 17.5# cannot seriously questioned. The Examiner found that on the date of the Phillips decision prices ranged from to a high of per 1.2# Mcf. 15.7# concluded He to continue such a rate preserve structure would “for Phil- lips an unduly general discriminatory rate structure, which would be contrary the public interest . . . .” 24 P. C., F. at 790. The Commission staff also found that “Phillips contract rates so vary widely, even as between contracts for the same service from the same producing areas, as patently contravene the public interest, gen- erating and perpetuating preference undue and undue Id., discrimination.” at 790-791. While the issue of discrimination was only raised generally in the Court of Appeals,11it implicit was in the questions broad on which granted we certiorari. While the issue minor as com- pared to the primary issues here, it certainly results miscarriage of justice for the Court, on such a highly tech- nical ground, to permit the Commission’s disposition to *32 stand, to the irreparable injury of the consumers of gas. dictional rates and charges or demanded, classifications observed, charged or by. collected Phillips, any rules, or regulations, practices or affecting unjust, contracts are them, unreasonable, unduly dis- ' criminatory preferential. or Natural 4, Gas Act 5.” (Emphasis §§ added.) points See 2, Brief Long Lighting Island Cd., petitioner petition in No. for review of the Commission’s order in the Court of Appeals.
V. As I reminded in the beginning, the Congress directed that gas moving in interstate commerce be-sold at just and reasonable rates. The basis of such a determination must have some reference to the costs of the service. The Commission has, however, failed to require this. Instead it has declared the 1954 test year, which thoroughly investigated, to be “stale” but nevertheless used its find- ings for that year to release Phillips from regulation not only for 1954 but also for the four succeeding years. Pursuant thereto it dismissed the § 4 (e) proceedings and § 5 proceeding covering periods. those In addition (cid:127) the Commission has abandoned its cost-of-service pro- gram of rate fixing and has embarked on an area basis regulation which is questionable. highly It has also pro- mulgated, without any hearing, guidelines rates as have no support in evidence as to their justness and rea- sonableness. Through this course of conduct the Com- mission’s program of producer regulation which —of' Phillips is the keystone permitted the —has continued col- lection of untested, unreasonable, unjust, discriminatory preferential rates. and. This situation under the present timetable will continue for years. For these reasons I believe that public interest requires that this case be reversed and to the remanded Commission with directions fix the just and reasonable Phillips involved herein. I theréfore dissent.