Appendix — FPC v. Texaco Inc.
Supreme Court brief1974
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APPENDIX
Supreme Court of the United States
OCTOBER TERM, 1972
No. 72—1490
FEDERAL POWER COMMISSION, PETITIONER
Vv.
TEXACO INC., ET AL.
No. 72-1491
DUDLEY T. DOUGHERTY, ET AL., CO-EXECUTORS,
ESTATE OF MRS. JAMES R. DOUGHERTY, ET AL.,
PETITIONER
Vv.
TEXACO INC., ET AL.
ON WRITS OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
INDEX
App.
Documents Record Pages Pages
Description of Document:
Relevant Docket entries vi
INDEX-Continued
Notice of Proposed
Rulemaking, Docket
No. R-393, Exemp-
tion of Small
Producers from
Regulation, as
published in
Federal Register,
Volume 35, page
12220, July 30,
1970 1-13 1-13
Response of New York
Commission and Mo-
tion to Dismiss 14-20 14-21
Comments of Phil-
lips Petroleum
Company 49-63 22-31
Comments of Mor-
rill & Patton 65-73 32-42
Views and
Comments 195-204 43-50
[Comments of James
M. Forgotson, Sr.] 216-241 51-72
Views and Comments
of Tennessee Gas
Pipeline Company,
a Division of
Tenneco Inc. 252-259 73-80
Comments of Glover
Hefner Kennedy
Oil Company upon
Proposed Rule-
making 260-269 81-88
Comments and Recom-
mendations of Con-
solidated Gas Sup-
ply Corporation 278-286 89-96
INDEX-Continued
Documents Record Pages Pages
Transcript of Con-
ference held on
December 8, 1970 T-1 - T-51 97-134
Order No. 428,
Order Establish-
ing Blanket Cer-
tificate Proce-
dure for Small
Producer Sales
and Providing
Relief from De-
tailed Filing
Requirements, ,
issued March 18,
1971 311-329 135-154
Application for
Rehearing 330-333 155-158
Order No. 428-A
Order Revising
Annual State-
ment, issued
April 9, 1971 335-338 159-161
Application for Re-
hearing and Recon-
sideration of In-
dependent Natural
Gas Association
of America 356-368 162-173
Application for Re-
hearing of Tennes-
see Gas Pipeline
Company, a Divi-
sion of Tenneco,
Inc. 369-393 174-198
iv
INDEX-Continued
App.
Documents Record Pages Pages
Application of Warren
Petroleum Corpora-
_ tion for Rehearing
and Reconsideration
of Order No. 428 395-398 199-202
Application of Con
solidated Gas
Supply Corpora-
tion for Rehearing,
Reconsideration
and Modification 400-409 203-213
Petition for Rehear-
ing and for Stay
of Public Service
Commission of the
State of New York 410-417 214-220
Application of Phil-
lips Petroleum
Company for a Re-
hearing of Order
No. 428 431-444 221-230
Amendment to Ap-
plication by
Phillips Petrole-
um Company for a
Rehearing of FPC
Order No. 428 448-453 231-237
Order No. 428-B
Order Modifying
Order No. 428 and
Denying Applica-
tions for Rehear-
ing, issued July
15, 1971 456-469 238-253
INDEX-Continued
Order Allowing Certiorari in
No. 72-1490
Order Allowing Certiorari in
No. 72-1491
254
vi
1970
July 23 Notice of Proposed Rulemaking m FPC Docker:
No. R-393
1971
March 18 Issuance of Commission Order No. 423
April 9 Issuance of Commission Order No. 428-A
July 15 Issuance of Commission Order No. 423-B. mod-
fying Order No. 428 and denying reheamme of
Order No. 428 '
THE COURT OF APPEALS PROCEEDING
1971
July 15 Petitions for review filed by Tennessee Gas Pipe-
line Company, a Division of Tenneco. Inc_
Docket No. 71-1558, by Texaco Inc. m Docket
No. 71-1560, by Consolidated Gas Supply Car
poration in Docket No. 71-1561, and by Inde
pendent Natural Gas Association of Amenca @
Docket No. 71-1562
July 30 Petition for review filed by James M_ Forgotsos.
Sr. in Docket No. 71-1603
August 4 Petition for review filed by Public Service Com
mission of the State of New York m Docket No.
71-1612
August 10
August 12
August 13
August 2?
vii
Petition for review filed by Independent Natural
Gas Association of America in Docket No.
71-1627
Petition for review filed by Warren Petroleum
Corporation in Docket No. 71-1647
Motions of Mrs. James R. Dougherty, ef al to
intervene in Docket Nos. 71-1557, 71-1560,
71-1561, 71-1562, and 71-1603
Order granting Mrs. James R. Dougherty’s
motions to intervene in Docket Nos. 71-1558,
71-1560, 71-1561, 71-1562, and 71-1603
Petition for review filed by Tennessee Gas Pipe-
line Company, a Division of Tenneco, Inc. in
Docket No. 71-1722
September 10 Petition for review filed by Phillips Petroleum
Company in Docket No. 71-1727
September 13 Petition for review filed by Texaco Inc. in
Docket No. 71-1729
September 27 Order consolidating Docket Nos. 71-1558.
1972
January 25
Apnl |
71-1561, 71-1562, 71-1603, 71-1612, 71-1627.
71-1647, and 71-1722 for all purposes
Order consolidating Docket Nos. 71-1727 and
71-1729 with those previously consolidated
Motion of petitioner in Docket No. 71-1558 to
dismiss petition in Docket No. 71-1558
Vili
April 27 Order dismissing petition in Docket No. 71-1558
December 12 Opinion and judgment of the Court of Appeals
setting aside Commission Order Nos. 428, 428-A,
and 428-B
December 22 Petition for rehearing filed by the Commission
December 27 Petition for rehearing filed by Mrs. James R.
Dougherty
1973
February 5 Order of the Court of Appeals denying petitions
for rehearing
(1)
(1}
UNITED STATES OF AMERICA
FEDERAL POWER COMMISSION
(18 CFR Parts 154, 157 and 250)
Exemption of Small Producers )
a ) Docket No. R-393
NOTICE OF PROPOSED RULEMAKING
(July 23, 1970)
Notice js hereby given pursuant to 5 U.S.C. 553 and
Sections 4, 5, 7 and 16 of the Natural Gas Act that the Commis-
sion proposes prospectively to exempt from regulation under
the Natural Gas Act all existing and all future jurisdictional sales
made by small producers, as hereinafter defined. This would not
include percentage sales made by small producers pursuant to
percentage sales contracts. Nor would it include sales to inter-
state pipeline companies by their affiliates.
As a result of the promulgation of Section 157.40 of the
Commission’s Regulations under the Natural Gas Act (18 CFR
157.40) in Order No. 308 issued October 29, 1965 (34 FPC
1202) small producers were accorded some relief from the filing
requirements in Sections 4 and 7 of the Natural Gas Act for
sales in the Permian Basin area. The groundwork for this relief
was formulated in’ Opinion No. 468 (34 FPC 169). Subse-
quently, the same treatment was extended to sales in Southern
Louisiana in Opinion No. 546 (40 FPC 530). Specifically, if a
producer receives a small producer certificate pursuant to
Section 157.40, it may commence new jurisdictional sales in the
Permian and Southern Louisiana areas at rates no higher than
the applicable just and reasonable base rates determined in
Opinion Nos. 468 and 546, respectively (plus upward Btu
adjustment for first and second vintage sales in Southern
Louisiana). Such a certificate also eliminates the need for filing
(1)
quality statements with respect to existing sales where other.
wise required by those
[2]
opinions, but this is significant only where the gas is below
pipeline quality. It also obviates the need for a rate change filing
up to the applicable ceiling but this is of little importance since
there are few small producers collecting rates below the appli
cable ceiling who are contractually entitled to higher rates. The
relief previously granted has been inadequate for small pro
ducers since they still bear many of the expenses and burdens of
complying with regulatory requirements, particularly when they
seek the same treatment accorded large producers. Such relief
has also increased the difficulties inherent in processing small
producer filings from an administrative viewpoint instead of
decreasing these problems as was intended.
Mr. Justice Clark speaking for the Court in F.P.C. v. Hunt,
376 U.S. 515 (1964) recommended that the Commission con-
sider procedures for the exemption of small producers. Our
present proposal would relieve small producers in all areas of
almost all of the expenses and burdens connected with regula
tory matters after exemption is authorized. It should also
facilitate more effective regulation of large producers by
permitting us to expend our efforts with respect to natural gas
production exclusively on such large producers. Small producers
account for a relatively small share of the natural gas produced
nationally. Moreover, as a practical matter, the small producer is
normally not in a position to obtain more for the sale of its gas
than the large producer whose jurisdictional sales are subject to
the ceilings prescribed by the Commission in each area. The
impact on the consumer of exempting small producers from
regulation should thus be minimal. The exemption of small
producers should also encourage them to increase their
exploratory efforts which are important in the discoveries of
new sources of gas.
wa,
(3)
Under our proposal small producers upon application
therefor will be exempted by Commission order from all pro-
visions of the Natural Gas Act and the Commission’s Regula-
tions otherwise applicable to the jurisdictional sales covered by
such exemptions,
[3]
except for the requirement that they submit annually a docu-
ment setting forth their total volume of jurisdictional sales. The
exemption so ordered would continue as long as the small
producer's jurisdictional sales do not exceed 10,000,000 Mcf in
a calendar year when aggregated with all jurisdictional sales of
affiliates as hereinafter defined. Should“a ‘producer cease to
qualify 2 a small producer, it would be required to file separate
certificate applications and individual rate schedules for future
sales bu: the exemption previously granted would remain in
effect for sales made under contracts dated prior to such
terminaton.
If the rules proposed here are adopted, any order granting
exemption to a small producer pursuant to such rules would
provide for the exemption to be effective 45 days after the
issuance of such order. In this connection we propose to allow
pipeline purchasers to file rate increases which are limited to
tracking rate increases resulting from the exemption of small
produces by waiving, where necessary, the requirement for
supportng schedules under Section 154.63 of our Regulations
(18 CFR 154.63), provided such schedules are submitted within
four moiths from the date of the pipeline’s increased rate filing.
Produces who have received small producer certificates under
the present provisions of Section 157.40 or who have applied
and quaify but have not yet received such a certificate would
not be required to file new applications unless otherwise
directedin any order issued herein.
Th: exemption for small producers proposed here would
include,inter alia, jurisdictional sales made by a small producer
to a large producer. However, the resale of such gas by the large
(3)
producer would remain subject to our jurisdiction. If there ar
any problems in this regard, large producers in their comments
should discuss these problems.
We have not proposed any disposition of increased rates
collected subject to refund in Section 4(e) cases or initial rates
collected under temporary certificates issued pursuant to
Section 7 by small producers for the period prior to the
effective date of the exemption. The proceedings to which we
refer here are those proceedings where the Commission has not
[4]
yet taken any action and none is now pending as a result of an
examiner’s decision. Interested parties, however, in their com-
ments are invited to address themselves to the questions of
terminating such proceedings and relieving the small producers
of any potential refund obligation therein.
Accordingly it is proposed to amend Part 154, Rate
Schedules and Tariffs, Part 157, Applications for Certificates of
Public Convenience and Necessity and for Orders Permitting
and Approving Abandonment under Section 7 of the Natural
Gas Act, and Part 250, Forms, in Chapter.!, Title 18 of the
Code of Federal Regulations in the manner set forth below.
The Commission also proposes to waive the provisions of
Section 154.63 of the Commission’s Regulations under the
Natural Gas Act solely to the extent necessary to permit the
tracking by pipeline purchasers and by pipelines purchasing
from such pipeline purchasers of rate increases resulting from
the exemption of small producers, provided that with respect to
such pipelines which are not presently authorized to track
supplier increases either through approved settlements or out-
standing orders of the Commission the supporting schedules
required by Section 154.63 shall be filed within four months
from the date of such pipeline increased rate filing; and
provided further that the rate or rates as revised by such
tracking filings shall be collected subject to reduction and
refund from the effective date of such increased rate or rates.
4
wa,
(6)
The proposed amendments to Parts 154 and 157 of
Subchapter E, Regulations under the Natural Gas Act, and to
Part 250 of Subchapter G, Approved Forms, Natural Gas Act,
Chapter 1, Title 18 of the Code of Federal Regulations would
be issued under the authority granted the Federal Power
Commission by the Natural Gas Act, particularly sections 4, 5,
7 and 16 (52 Stat. 822, 823, 824, 825, 830, 56 Stat. 83, 84, 61
Stat. 459, 76 Stat. 72, 15 U.S.C. 717c, 717d, 717f and 7170).
[5]
All interested persons may submit to the Federal Power
Commission, Washington, D.C. 20426, not later than September
8, 1970, data, views, comments, and suggestions, in writing,
concerning the proposed amendments to the regulations and the
proposed exemption application and annual statement forms.
An original and nine conformed copies should be filed with the
Commission. In addition, interested persons wishing to have
their comments considered in the clearance of the proposed
exemption application and annual statement forms under the
provigions of the Federal Reports Act of 1942 may at the same
time submit a conformed copy of their comments directly to
the Clearance Officer, Office of Statistical Standards, Office of
Management and Budget, Washington, D.C. 20503. Submissions
to the Commission should indicate the name and address of the
person to whom correspondence in regard to the proposal
should be addressed, and whether the person filing them
requests a conference at the Federal Power Commission to
discuss the proposed amendments to the regulations and the
proposed forms. The Commission will consider all such written
submissions before acting on the matters herein proposed.
(6)
A, The following are proposed amendments to Part 157.
Chapter 1, Title 18 of the Code of Federal Regulations.
1. Revise “8 157.40, Small producer certificates of public
convenience and necessity” so that it will read as follows:
5
(6)
§ 157.40 Exemption of small producers
(a) Definitions.
(1) A ‘Small Producer’ is an independent
producer of natural gas as defined in § 154.91 of this
chapter, who is not affiliated with a natural gas pipe-
line company and whose total jurisdictional sales on a
nationwide basis, together with such sales of
‘affiliated producers’ are not in excess of 10,000,000
Mcf at 14.65 psia during any calendar year. As used
in this section, the term ‘jurisdictional sales’ includes
volumes of gas paid for but not taken under prepay-
ment clauses or otherwise, and volumes of gas sold
under other independent producer rate schedules in
the proportion that the independent producer seeking
to come within this section has an interest in such
sales, but does not include sales made pursuant to
percentage sales contracts.
(2) ‘Affiliated producers’ are persons who,
directly or indirectly, control, or are controlled by, or
are under common control with, the applicant pro-
ducer. Such control exists if the producer has the
power to direct or cause the direction of, or as a
matter of actual practice does direct, the management
and policies of a person, whether such power is
exercised alone or through one or more intermediary
companies, or pursuant to an agreement, and whether
such power or practice is established through a
majority or minority ownership or voting of
securities, common directors, officers or stock-
holders, voting trusts, holding trusts, associated
companies, relationship of blood or marriage, or any
other direct or indirect means. For the further pur-
poses of this section, the term ‘agreement’ shall not
include any agreement for the
‘agreement’ shall not include any agreement for the
[7]
operation of a natural gas producing property or a
plant processing natural gas unless such agreement
otherwise establishes the power to direct or cause the
direction of the management and policy of a person.
(3) ‘Small producer sales’ are (i) sales by a small
producer of his own interests under his own con-
tracts; (ii) sales of all interests under a small pro-
ducer’s contract if producers not qualifying as small
producers have interests which in the aggregate are no
greater than 12-4 percent; and (iii) sales of a small
producer’s interests under another producer’s
contract.
(b) Requirements for exemption. Upon the approval
of appropriate applications made pursuant to the
provisions of this section, Small Producers will be
granted exemption with respect to their ‘small
producer sales’ of natural gas in interstate commerce.
(1) Small Producers may apply for exemption
to cover all previous and all future jurisdictional sales,
which do not raise the producer’s total jurisdictional
sales on a nationwide basis above 10,000,000 Mcf
during any calendar year. Applications by these
producers shall include the following information: (i)
total jurisdictional sales on a nationwide basis for the
year preceding the application; (ii) a list of outstand-
ing certificates and rate schedules together with
names and percentage of interest of other interest
owners under such rate schedules; (iii) a list of out-
standing rate schedules of others in which applicant
owns an interest together with applicant’s percentage
of interest; and (iv) the names of all owners (stock-
holders, partners, joint venturers, etc.) of the
applicant with an interest of 10 percent or more,
7
(7)
(7)
their percentage of ownership in the applicant and in
any other natural gas company, and
[8]
any positions such owners may hold with another
natural gas company.
(2) An applicant for exemption who has no
outstanding certificate issued by, or rate schedule
filed with, this Commission for the sale of natural gas
shall include the following information in his applica
tion:
(i) a list of all contracts.to sell natural gas in
interstate commerce,
(ii) source of production, total rate and the
annual volume delivery obligations of the
producer under each such contract,
together with names and percentage of
interest of other interest owners under each
such contract, and
(iii) a list of owners of the applicant with an
interest of 10 percent or more, their
percentage of ownership in the applicant
and in any other natural gas company and
any position such owners may hold with
another natural gas company.
(3) The application shall contain the inform2
tion required by the form set out in § 250.10 of this
chapter. A conformed copy shall be served upon each
of the applicant’s purchasers.
(c) Duration of the exemption.. The exemption
authorized hereunder shall remain in effect for small
producer sales until the Commission on its own
motion or on application terminates such certificate
because the producer no longer qualifies as a small
producer or fails
[9]
to comply with the terms of the exemption. Upon
such termination the producer will be required to file
separate certificate applications and individual rate
schedules for future sales but the exemption will still
be effective as to those made under contracts dated
prior to such termination.
B. The following are proposed amendments to Part 154,
Chapter 1, Title 18 of the Code of Federal Regulations.
1. Revise paragraph (f) of § 154.91, § 154.104 and § 154.110.
As revised, these portions of Part 154 will read:
$154.91 Applicability. )
ese2288
(f) Filings by certain non-signatories. Where the
operator and the signatory co-owners in a particular
sale have secured exemption pursuant to § 157.40
covering the sale, and where any non-signatory co-
owner’s interests are not covered by such exemption,
such co-owrc: may file rate schedules, rate changes,
or certificate applications with respect to such
interests notwithstanding the provisions of paragraph
(d) of this section.
$ 154.104 Annual statements by small producers.
Annual statements certifying to the matters
enumerated in the form set out in § 250.11 of this
chapter shall be filed by all producers, either
individually or by groups, who have been exempted
under the provisions of Section 157.40. The state-
ments shall be submitted by April 1 of each year for
the-preceding calendar year.
(9)
(10)
[10]
$ 154.110 Applicability of 8 154.92 through
154.102.
Sections 154.92 through 154.102 shall apply
only to those persons specified in § 154.91 and shall
not apply to small producer sales which are exempted
under § 157.40 of this chapter.”
C. The following are proposed amendments to Part 250,
Forms, Chapter 1, Title 18 of the Code of Federal Regulations
1. Revise the title of § 250.10 so that it will read:
§ 250.10 Application for small producer
exemption.
Revise the test of § 250.10 by substituting there-
for the proposed form entitled “Application for
Small Producer Exemption” all as set out in
Attachment A hereto.
2. Revise the title of § 250.11 so that it will read:
$ 250.11 Annual statement for’ inde-
pendent producers holding small
producer exemptions.
Revise the text of $ 250.11 by substituting
therefor the proposed form entitled “Annual
statement for independent producers holding
small producer exemptions” all as set out in
Attachment B hereto.
The Secretary shall cause prompt publication of this notice to
be made in the Federal Register.
By direction of the Commission.
Gordon M. Grant,
Secretary
10 »
(11)
im
TH
i
ty
rH
of
s
AEH
rent wentere, otc)
4
ghee the total porietictionsl enles volunss of cont
of effilietren.)
Bev (6-72)
mr ieame? (1¢ oe liet aame of Geyer and caller ter cont ankle and cote
(12)
Lael
— ne —
wren — eee ome
a ae t — -
_ f opiticentel
— —aes om
onan muLeR — — or a
NOTEs Place oe coterics (©) efter cout co-eusers sane whues interest \= sat te Sp eavered By te Sate
— fwe TRS
-_ eo
- (13)
[13]
Attachment A - Page | of 1
$250.11 Annual Statement for Independent Producers holding
Small Producers Exemptions.
(See § 157.40 of this chapter)
* hereby certify that total sales subject to the jurisdiction
of the Federal Power Commission made by the undersigned and
its affiliates for the calendar ycar 19 _ were
Mcf at 14.65 psia. The pertinent
information relating to cach of these jurisdictional sales is as
follows:
»
Area Purchaser Volume Price
(Name of Small Producer)
(Signed)
(Representative Capacity)
(Docket No.)
FPC Form 314B
(3-71)
13
(14)
[14]
BEFORE THE
FEDERAL POWER COMMISSION
Initial Rates for Future Sales of Natural Gas )
Docket No. R-389A
Exemption of Small Producers from Regulation )
Docket No. R-393
Termination of Moratorium in Southern Louisiana )
Docket No. R-394
RESPONSE OF NEW YORK COMMISSION
AND MOTION TO DISMISS
Just six weeks ago, Judge J. Skelly Wright, speaking for a
unanimous panel of the United States Court of Appeals for the
District of Columbia Circuit, began his landmark decision n
Moss v. C.A.B., D. C. Cir. No. 23627 (July 9, 1970), with this
stark and incisive statement of the issue:
“This appeal presents the recurring question
which has plagued public regulation of industry:
whether the regulatory agency is unduly oriented
toward the interests of the industry it is designed to
regulate, rather than the public interest it is designed
to protect.”
Answering this question in the affirmative in Moss, the
Court found that the CAB, in granting the airline industry rte
increases without following the proper hearing requirements,
had demonstrated that it was unduly oriented toward the
14
(15)
regulated industry and insensitive to the airline-riding public:*
accordingly, the Court invalidated the Board’s order granting
increases and remanded the case for further proceedings.
[15]
With the ink not yet dry on Judge Wright’s decision in
Moss, the Federal Power Commission, in a series of three
notices of proposed rulemaking issued during the latter half of
July, has proposed, without statutory authorization, to dis-
mantle regulation of rates charged by producers for the
interstate sale of natural gas at the wellhead. The entire
program—which hardly reads like the work product of a
government agency charged by law to assure consumers “a
complete, permanent and effective bond of protection from
excessive rates and charges,” Catco, 360 U.S. 378 at 388-is of
highly questionable legality, is patently unwise, and, because of
its present deleterious effects, should be abandoned at the
eatliest possible moment.
It is ten years since the late Dean Landis, in his memorable
Report on Regulatory Agencies to the President-Elect, wither-
ingly observed:
“The Federal Power Commission without ques-
tion represents the outstanding example in the federal
government of the breakdown of the administrative
“These defects stem from attitudes, plainly
evident on the record, of the unwillingness of the
Commission to assume its responsibilities under the
* After all, there is more to rate-making than providing carers with
sufficient revenue to meet their obligations to their creditors and to their
stockholders.” Moss, slip op. p. 20.
1S
(15)
Natural Gas Act and its attitude, substantially con-
temptuous, of refusing in substance to obey the
mandates of the Supreme Court of the United States
and other federal courts.
“. .. The Commission’s past inaction and past
disregard of the consumer interest has led the states
to seek to force it to discharge its responsibilities. It is
somewhat of a phenomenon in our national life for
the state utility commissions to be ranged against a
federal commission in an effort to protect consumers
against monopolistic and excessive rates . . .” Landis
Report, 54-56.
[16]
The current regulatory picture—as revealed by the three
rulemaking notices—is in many respects more distressing than it
was at the time of the Landis Report. Whereas in 1960 the
Commission could be criticized for its failure to fix just and
reasonable wellhead prices, today the criticism is that, having
finally determined just and reasonable area rates and having
been sustained on appeal, the Commission now proposes to
abandon the rates thus determined and escalate sharply the
prices to be charged the consumer. And the Commission’s sole
basis for this proposed abandonment of its regulatory
responsibility is the current gas supply situation as it relates to
the interstate market. Yet the Commission has failed to act on
the New York Commission’s request, filed over eighteen months
ago, for an investigation into the adequacy of natural gas
reserves (Docket No. R169-470) and, without either investigat-
ing the causes of the supply situation or inviting the Justice
Department to do so, has simply assumed that the shortage has
been caused by the prices fixed by the Commission in its
September 1968 opinion in the Southern Louisiana Area Rate
Proceeding.
16
a (17)
If, however, the shortage has not been caused by the price
et in Opinion No. 546, then it necessarily follows that the
shortage cannot and should not be solved by elevating those
prices. As the Honorable George P. Shultz-surely the
highest-ranking economist in the administration—has recently
{17]
“is capable of behaving irrationally for short periods,
and even of contriving an apparent disaster by ceasing
exploration [and] dramatically revising its reserve
additions downward... [Such industry action
could] produce an appearance of crisis calling for
immediate ‘corrective’ action, ¢,.-- higher
prices...”
Secretary Shultz expressly warned of the difficulty of dis-
tinguishing between “a fake disaster and a real one” since “the
facts’ for decision will be produced largely by these same firms
and associations.”
Until the Commission has satisfied itself on the basis of
testimony that has been subjected to cross-examination that (1)
the present gas shortage has been caused by unduly low
interstate price ceilings, (2) that the shortage will be eliminated
or at least substantially alleviated by higher ceilings, and (3)
that the cost placed on the consumer of the higher ceilings is
not disproportionate to the volume of new supplies, the
Commission should not, and cannot lawfully, tamper with its
present ceilings.
In the fifteen years following the Supreme Court’s Phillips
decision, when consumers were seeking relief from excessive
* Testimony before Senate Judiciary Subcommittee on Antitrust and
Monopoly, March 3, 1970.
17
(17)
producer prices, no reductions in any producer prices was made
until after the producer had been granted a full hearing, the
examiner had issued a decision, the case had been argued to the
Commission, and the Commission had fully deliberated and
entered an opinion. And even then, stays of the reductions were
granted pending judicial review. (And, in the case of the
important Southern Louisiana area, reductions continue to be
stayed even after judicial affirmance.) In contrast, when the
industry demands an increase in the ceilings, the Commission
proposes that it be granted instanter—without hearing,
[18]
without proof, without possibility of refund. This disparate
treatment of consumer and industry claims can hardly be
expected to inspire confidence in the administrative process.
We turn now to certain of the more glaring defects in the
three rulemaking dockets.
R-389A: Increased Initial Rates
1. The Commission’s intention to permit, via rulemaking,
higher new gas rates that “will be firm rates, not subject to
refund” violates the Commission’s statutory obligation to
protect the consumer from excessive rates, as explicated m
considerable detail by the Supreme Court in Atlantic Refining
Co. v. Public Service Commission of New York, 360 U.S. 378
(1959).
2. We believe that any determination to allow a higher
rate of return in the computation of unit costs than that
allowed in Opinion No. 546 should rest upon an evidentiary
record.
3. We believe that the Federal Power Commission can give
no significant weight to market price or commodity value
18
, (19)
concepts. The basic function of regulation is to establish a price
other than what would obtain in the absence of regulation, but
| “market price” merely defines what the unregulated price
would be.
R-393: Small Producer Exemption
1. No rational basis has been shown to justify exemption
of small producers. The procedures for small producers estab-
lished in Permian and Southern Louisiana reduce the regulatory
burden on those producers
[19]
to a minimum so long as they receive no more than the area rate
ceilings. There is no visible support for the claim that “the relief
previously granted has been inadequate for small producers.”
Nor is there visible support for the implication that present
regulation of small producers has absorbed any significant time
of the FPC staff so that “more effective regulation of large
producers would result” if small producers were exempted.
2. The Commission’s contention that “the small producer
is normally not in a position to obtain more for the sale of its
gas than the large producer” has little present relevance, for in
fact these are not normal times. As the Commission well knows,
necessitous buyers have been willing to pay 10¢ or more above
the FPC ceilings to meet shortages, see, ¢.g., emergency
purchases by Natural Gas Pipeline Co. purportedly pursuant to
Order No. 402. An increase of 10¢ per Mcf on the 15% of the
gs sold by small producers would equal an additional
$180,000,000 to be borne by gas consumers.
3. It is difficult to square the Commission’s present
willingness to create a regulatory gap over 15% of the gas sold
interstate with its vigorous refusal to allow a regulatory gap over
the 4% of the gas used for compressor fuel, California v. Lo Vaca
19
(19)
Gathering Co., 379 U.S. 366 (1965).
4. The proposed rule opens the way for the major
producers to sell their gas in interstate commerce free from FPC
regulation by selling their reserves in place to small (or non-)
producers, who would in turn resell the reserves under a
conventional sales contract to an interstate pipeline.
[20]
R-394: Termination of Moratorium
The Commission’s notice sets forth no rational basis for
lifting the moratorium provisions of Opinion No. 546. The
entire thesis of the two-price system in area ratemaking was that
the incentive function was to be provided by the new gas price.
Raising the price of flowing gas will merely enrich the oil
industry and provide it with additional funds to build refineries
or tankers or explore in the North Sea. The Commission’s
assertions that there are “indications of cost increases” which
have affected exploration can refer only to increases in the costs
of new gas; there are no indications that the costs of flowing
gas, determined by Opinion No. 546, have risen above the rates
fixed by that opinion. (It should be noted that the rates in
Opinion No. 546 were fixed in excess of costs to take into
account future cost increases.) If, and it is a highly unlikely if,
the costs of flowing gas exceed the area ceilings, the producers
have a present forum, in AR69-1, to so demonstrate. Abolition
of the moratorium provisions would not generate additional
supplies, but would merely burden the consumer with higher
prices.
In view of the foregoing, the Public Service Commission of
the State of New York respectfully requests that the Com-
mission dismiss the rulemaking dockets at R-389A, R-393, and
R-394. In view of the importance of the questions raised by this
20
. (20)
motion, we respectfully request that it be set for oral argument.
Respectfully submitted,
PUBLIC SERVICE COMMISSION
OF THE STATE OF NEW YORK
By [s] Kent H. Brown
Kent H. Brown, Counsel
44 Holland Avenue
Morton L. Simons
1819 H Street, N.W.
(49) :
[49]
UNITED STATES OF AMERICA
FEDERAL POWER COMMISSION
Exemption of Small )
Producers from ) Docket No. R-393
Regulation )
COMMENTS OF
PHILLIPS PETROLEUM COMPANY
Pursuant to Notice in this proceeding issued July 23, 1970,
Phillips Petroleum Company (Phillips) submits herewith its
comments upon and objections to the proposed rule-making.
Correspondence in regard to this proposal should be addressed
to the following:
Kenneth Heady
Legal Department
Phillips Petroleum Company
Bartlesville, Oklahoma 74004
Sam Jennings
Manager, Laws and Regulations Division
Gas and Gas Liquids Department
Phillips Petroleum Company
Bartlesville, Oklahoma 74004
Because of the objections raised herein, Phillips requests
that a conference be held to discuss the proposed amendments
to the regulations and that the persons above named be notified
of the time and place of such conference.
[50]
Phillips expresses no objection to the desires of the
Commission to relieve small producers “of the expenses and
burdens connected with regulatory matters”, except to note
that such expenses and burdens constitute an equal deterrent to
large producers to the commitment of their gas in interstate
22
og (1)
commerce. To the extent that the proposed rule-making con-
templates higher prices for small producers than large pro-
ducers, however, Phillips believes that the proposed regulations
are both unwise and unlawful. If the Commission seeks amend-
ments to its regulations which will foster an increase in
exploratory efforts for natural gas and an increase in commit-
ments of the results of such efforts to interstate commerce, the
Commission’s action is misguided and misdirected. The ills of a
nationwide gas shortage may not be cured by attempts to hide
the symptoms. Efforts of interstate purchasers to obtain new
commitments of natural gas reserves will not be aided by the
proposed regulations. On the contrary, the proposed regulations
will constitute the greatest incentive to intrastate sales by large
producers since Opinion 468.
[Si}
1. Receipt by Small Producers of Above-ceiling Prices
Demonstrates That Ceiling Prices to Large Producers
Are Too Low.
Exemption of small producers from price ceilings appli-
cable to large producers presents an inexplicable paradox. On
the one hand, the Commission recognizes that, “...as a
practical matter, the small producer is normally not in a post
tion to obtain more for the sale of its gas than the large pro-
ducer whose jurisdictional sales are subject to the ceilings pre-
scribed by the Commission in each area.” On the other hand,
the Commission expects that, “The exemption of small pro-
ducers should also encourage them to increase their exploratory
efforts which are important in the discoveries of new sources of
gas.” Either the small producer will in fact receive such above-
ceiling prices, then the exemption amounts to no more than
relief from “the expenses and burdens of complying with
regulatory requirements”, and the effects upon exploration may
-be expected to be minimal. On the other hand, if the small
producer does receive above-ceiling prices, the willingness of
pipeline purchasers to pay such above-ceiling prices rests upon
factors totally unrelated to the circumstance that the sale is by
asmall producer.
23
(52)
[52]
Underlying the philosophy that the Commission may per-
mit small producers to receive above-ceiling prices is the wholly
fallacious concept that large producers may, directly or
indirectly, be forced to sell their gas in interstate commerce at
an artifically restricted price. There is no logical reason why an
interstate purchaser would willingly pay a small producer more
for a small quantity of gas than it would pay a large producer
for a substantial quantity of identical quality gas. Payment of
such above-ceiling prices to small producers would simply con-
stitute irrefutable proof that the regulated ceiling price was too
low to induce a commitment of gas into interstate commerce. It
is wholly illogical to assume that a large producer would be
inspired and induced to carry on an expensive exploratory pro-
gram and commit his resulting discoveries of gas into interstate
commerce at prices which are unacceptable to and refused by
small producers.
If in fact small producers should regularly be offered and
receive above-ceiling prices, large producers would have no
alternative except to seek to protect themselves from the
innumerable problems arising from such price differentials.
Under the trend of recent court decisions, payments of
above-ceiling prices to small producers might well establish
market values for royalty purposes applicable to large pro
ducers. Cf. J.M. Huber Corporation v. Denman, 367 F.2d 104;
[53]
Texas Oil & Gas Corporation v. Vela, 429 SW 2d 866. In this
respect, this Commission’s decision in Opinion No. 562,
Denman, et al. y. J. M. Huber Corporation, et al., _..FPC__.,
is likely to create rather than resolve confusion. It certainly is
not inconceivable that knowledgeable royalty owners would
refuse to grant oil and gas leases to large producers, preferring
to reap the advantages of unrestricted sales by small producers.
State tax collectors may likewise decide that values for tax pur
poses are fixed by sales by small producers rather than regulated
ceiling prices applicable to large producers.
These circumstances, alone or in combination, would
virtually drive large producers to seek unregulated markets for
24
~~,
their gas in order to maintain parity with small producers. The
Commission recognizes in its Notice that “small producers
account for a relatively small share of the natural gas produced
nationally”, yet by this proposed regulation the Commission
seems determined to limit the supplies of gas available for the
interstate market to that small share produced by small pro-
ducers.
(55)
[54]
Contentions will be made that these dire predictions will
not come to pass. But the issue is not whether they will or will
not. The issue is whether exemption of small producers will
serve any useful purpose. If in fact small producers achieve sub-
stantially higher prices than large producers, then the pre-
dictions herein made are a distinct possibility. If in fact small
do not realize any appreciable benefits from exemp-
tion from regulation, then these regulations will have served no
useful purpose.
Objectives sought by exemption of small producers are
laudable, but we believe the Commission is misdirecting its
efforts. Substantial increases in exploration, which is the
ultimate end sought, can be realized only by higher ceiling
prices applicable to all producers, not just to exempted small
producers.
2. The Proposed Regulations Unlawfully Discriminate
Against Phillips.
The proposed regulations are patently and’ unlawfully dis-
criminatory as to Phillips and other large producers who
155]
are engaged in the purchase of natural gas for processing and
resale. Page 3 of the Notice states:
“The exemption for small producers proposed here
would include, inter alia, jurisdictional sales made by
a small producer to a large producer. However, the
resale of such gas by the large producer would remain
subject to our jurisdiction. If there are any problems
in this regard, large producers in their comments
should discuss these problems.”
\
25
(55)
Problems abound for large producers im this propos
Phillips has long been engaged in the business of purchasing and
processing natural gas for the extraction of natural gas liquids
and resale of the remaining residue gas. Extraction of natura
gas liquids is a business separate and apart from the sake of
natural gas. Phillips Petroleum Company, Opmion No. 338, 24
FPC 537, 562. If this proposed regulation were to become
operative, Phillips either would not be able to purchase gas from
small producers at all or would be forced to purchase gus af
prices more than it could permissibly receive for the resale of
such gas. In either event, the proposal scems designed to drive
Phillips from the business of extracting natural gas liquids from
purchased gas.
In fact, the Commission here seems to be executing the
veiled threat first made in the Permian Basin Decision, Opmioa
No. 468. The Commission there stated:
[56]
“Hunt urges that residue gas must be priced higher
than gas-well gas so that a processor selling residue gas
can cover his processing costs plus a retum on hs
investment in addition to the price of the gas-well gas
he purchases. This reasoning ignores the fact that “
salable liquid hydrocarbons are derived from the gas
that is processed. The principal purpose of such pro-
cessing is the removal of these liquids so that revenue
may be realized from them. There is every reason to
believe that the value of the liquids will be sufficient
to justify gasoline plant processing of new gas-well
gas. If not, there is no apparent economic reason to
encourage the processing at gasoline plants.” (34 FPC
at 211)
The proposed regulations make sheer mockery of the state-
ment, “There is every reason to believe that the value of the
liquids will be sufficient to justify gasoline plant processing of
new gas-well gas.” Under the proposed regulations ther &
nothing to prevent a pipeline purchaser from paying the anal
producer an above-ceiling price plus the value of all of the
-» (58)
fequads contained. There is simply no way under such conditions
that the producer-plant operator could remain in businesss.
These harsh results are by no means mollified by the state-
ment in the first paragraph of the Notice that the proposed
sgulations “would not include percentage sales made by
57]
small producers pursuant to percentage sales contracts.” This
jon would mean simply that producer-plant operators
gach 2s Phillips could purchase gas from small producers under
percentage contracts only where no interstate pipeline was will-
ing or able to make such purchase. No rational small producer
would choose to sell his gas to Phillips at a percentage of the
ceiling price if the gas could be sold to an interstate pipeline at
prices well above the ceiling plus liquid values.
Contrast this treatment of large producers with the pro-
vaions of page 4 of the Notice applicable to interstate pipelines:
“The Commission also proposes to waive the pro-
visions of Section 154.63 of the Commission’s regu-
lations under the Natural Gas Act solely to the extent
mecessary to permit the tracking by pipeline pur-
chasers and by pipelines purchasing from such pipe-
ime purchasers of rate increases resulting from the
exemption of small producers***”
Discrimination could not be more clearly stated. Pipelines
puschasing from small producers are to be held harmless from
the increased costs resulting from such purchases. Even those
papelines purchasing from the original’. _~
[58]
papcine purchaser are afforded protection. The large indepen-
deat producer, on the other hand, is specifically prohibited
from imcreasing its resale rates to take into account higher prices
paid to small producers.
Justification for such discrimination does not exist. There
iS no rational basis for preventing producer-plant operators from
imcreasing their rates to account for above-ceiling rates paid to
exempted small producers. Nor is there rational basis for
(58)
requiring large producers to bear any portion of this additional
expense out of nonjurisdictional liquid revenues. Problems of
rate determination for large producers are no more complicated
than those for pipelines which are expressly permitted to take
such above-ceiling rates into account in fixing their resale rates.
Experience in rate adjustments of this type has already
been gained under the regulatory policies imposed by Opinion
No. 468. That decision expressly provides that “The ceiling
price for new gas-well gas will be applicable to residue gas which
is derived from new gas-well gas.” (34 FPC at 211) Con
sequently, new gas-well gas purchased by Phillips from another
producer retains its character even though resold by Phillips
under a contract applicable to flowing gas. Phillips has filed and
the Commission has accepted rate schedules which,
[59]
although generally applicable to flowing gas, specify the higher
ceiling rate for that portion of the gas delivered which is pur-
chased from other producers under contracts qualifying such
gas as new gas-well gas.
No reason exists or has been suggested why similar modi-
fications could not be made in Phillips’ rate schedules to
account for above-ceiling rates paid to exempted small pro
ducers. For lack of such reason, the proposed regulations must
be classed as arbitrary and capricious as well as discriminatory.
Aside from such effects upon Phillips and other large
producer-processors of natural gas, the consumer is by no means
served by this proposed discrimination against large producers.
A very substantial portion of Phillips’ present supplies of gas
purchased and resold in interstate commerce is represented by
purchases of gas from small producers who would be exempted.
Generally these contracts are of relatively short duration or
have been in effect for a sufficient length of time that these
contracts will expire by their own terms in the relatively near
future. By virtue of their exemption, these small producers
could terminate deliveries to Phillips at the expiration of their
contracts.
(61)
For the consumer, such terminations would mean either
added costs for both gas and facilities or loss of such gas
supplies to intrastate markets. At the end of the contract term,
the small producer would have the option to contract directly
with the previous interstate purchaser from Phillips or with
another interstate purchaser. In the event a new contract is
made with an interstate purchaser, new facilities must be con-
structed by the purchaser to handle such gas. The consumer
must pay not only the cost of the above-ceiling prices to the
small producer but the cost of the new facilities as well. In the
meantime, Phillips’ existing facilities are idle or only partially
utilized.
Should Phillips seek to maintain its gas supplies by enter-
ing into a new contract with the small producer at the same
above-ceiling prices offered by the interstate purchaser, Phillips
must divert such gas from the interstate to the intrastate
market, since obviously, Phillips cannot purchase the gas at
above-ceiling prices and resell it at ceiling prices. Phillips’
diversion of such gas to the intrastate market would not con-
stitute an unauthorized
[61]
abandonment, since the abandonment, if technically such
occurs, would be by the exempted small producer and no per-
mission would be required. In any event, it would be clearly
confiscatory to seek to require Phillips to continue to purchase
the gas at a price higher than it was allowed to receive upon
resale.
These considerations demonstrate the fallacy of the
theories adopted in Opinion No. 468 that “abandonment” is an
adequate substitute for above-ceiling prices in hardship cases. In
Permian, the Commission asserted, “Even in situations where
* producers are able to show that they are entitled to relief from
the obligation to continue to sell flowing gas at the appropriate
area ceiling, in most cases it may be sufficient to permit them to
abandon their unprofitable sales.” (34 FPC at 226) The
Supreme Court was persuaded to accept this platitude and even
(61)
to accept abandonment as the primary relief in such circum-
stances:
“Indeed, the Commission has already acknowledged
that only in ‘exceptional situations’ would the aban-
donment of unprofitable activities prove detrimental
to consumers, and thus impermissible under § 7 (b).”
(Permian Basin Area Rate Cases, 390 US 747, 773)
[62]
In the light of the present needs of interstate pipeline com-
panies to maintain all of their existing supplies, forced abandon-
ment in lieu of above-ceiling prices to large producers can
hardly be classed as service to the consumer.
3. Statutory Authority For Total Exemption Is At Least
Doubtful.
Whether statutory authority exists for total exemption of
small producers is a matter semmingly not considered by the
Commission. The Commission is authorized to classify natural
gas companies by size and to differentiate the degree of regu-
lation among such classes. Authority to classify, however, does
not inherently include authority to exempt. While the existence
or lack of such authority might ordinarily be a matter of more
concern to small producers than to large producers, in view of
the discrimination against Phillips referred to above in the pro-
posed regulations Phillips must and does hereby challenge the
proposed regulations as exceeding the statutory authority of the
Commission. We find no warrant in the Natural Gas Act or in
the decisions construing the Act for such exemption.
Conclusion
As an effort to induce increased exploration for natural
gas, exemption of small producers misses the mark.
[63]
Solutions for gas supply problems are to be found in adequate
prices applicable to all producers, not to small producers alone.
It is folly to believe that allowing above-ceiling prices to small
producers will thereby enable the Commission to induce or even
force substantial sales by large producers at unrealistically low
prices.
30 _—
(63)
To reach the ends sought, the proposed regulations are
unwise. In the manner in which they would be enforced, the
proposed regulations are unlawful.
Respectfully submitted,
PHILLIPS PETROLEUM COMPANY
KENNETH HEADY
JOHN L. WILLIFORD
By /s/ John L. Williford
Attorney for
Phillips Petroleum Company
Frank Phillips Building
Bartlesville, Oklahoma 74004
31
(65)
[65]
MORRILL & PATTON
ATTORNEYS AT LAW
GEORGE P.MORRILL = BEEVILLE, TEXAS 78102 P. O. BOX 610
D. DEAN PATTON PHONE 398-1921
August 25, 1970
Federal Power Commission
Washington, D.C. 20426
RE: NOTICE OF PROPOSED RULEMAK-
ING EXEMPTION OF SMALL PRO-
DUCERS DOCKET NO. 393
Gentlemen:
Pursuant to the Notice of Proposed Rulemaking, Docket
No. R-393, entitled, “Exemption of Small Producers, from Reg-
ulation” and your request for comments from all interested
persons, I submit for your consideration the following views,
comments and suggestions.
First, with reference to my own qualifications, this is to
advise that I have practiced law in South Texas for approx+
mately 34 years, during which time I have represented a sub-
stantial number of independent oil and gas producers and some
majors and have been intimately familiar with the oil and gas
industry. I am firmly convinced that the exemption of small
producers from regulation under the Natural Gas Act will result
in the discovery, production and dedication to interstate com-
merce of substantially more gas, will increase the quantity of
gas available to the consumer and will have very little effect on
the ultimate consumer price.
The Commission’s Notice proposing an exemption of small
producers from regulation under the Natural Gas Act, seems to
32
-
(66)
be based largely upon the de minimis aspects of the small pro-
ducer in terms of the total volume of gas produced and sold
annually by the gas industry. While this fact lends support to
the relief of the small producer from price regulation since the
dollar impact on the consumer in any event will be relatively
small, I do not believe that this position presents the real im-
portance of the small producer to both the gas industry and the
consumer.
[66]
Historically the small producer has been the pioneer or
wildcatter. He has been the one who has been willing to risk his
own capital to venture into new potential gas supply areas and
to bear the risk and expense of finding new gas reserves. Addr
tionally, the small producer has been in effect, the catalyst for
assembling large segments of capital into joint ventures for ex-
ploration and development of gas reserves. "
The small producer, with limited capital, and the necessity
for a prompt return for himself and to satisfy his associates and
investors, has had to be aggressive in the drilling of exploratory
wells and in the development of discovered reserves. The large
producer, on the other hand, has had almost unlimited capital
and through the years, adopted a policy of purchasing large
_leaseholdings in likely areas or trend plays, holding the leases
and paying delay rentals thereon, in many instances waiting for
development in the area. If the exploratory efforts of the small
producer proved fruitful, the large producer, who usually had
holdings in the area, then moved in with its greater capital
resources, and developed the newly discovered gas field, and in
many instances, purchased the interest of the small producers,
adding them to its already substantial reserves. But, the small
producer has been the one who in so many instances has been
responsible for the discovery of many substantial reserves pre-
sently owned by the large producers and committed to inter-
state commerce. Thus, although the small producer may be de
33
(66)
minimis in terms of the total amount of gas produced and sold
annually, the great importance of the small producer lies in his
gas finding function. The small amount of gas sold by the small
producer in interstate commerce does not present a fair, nor an
accurate picture as to the real importance of the small producer
from the standpoint of discovery of gas reserves.
The advent of Commission producer regulation added a
tremendous additional burden to the small producer, both in
expense of compliance and legal expenses and in paper work.
Because of the small producer’s limited operations, the percent-
age of increase in cost to the small producer has been propor-
tionately greater than to the large producer. Additionally, stead-
ily rising costs of exploration and development, plus the r-
duction in the depletion allowance,
[67]
have all tended to reduce the incentive of the small producer
and his ability to attract capital to conduct exploratory opera-
tions. Many of the small producers have been forced to substan-
tially curtail their exploratory operation and some have with-
drawn from the oil and gas business entirely, all of which has
caused a substantial loss in the exploration for and discovery of
new reserves. Relief from the burdens imposed by Commission
regulation should attract more capital to the oil and gas business
and will induce more small producers to further their gas ex-
ploratory operations.
At a time of critical gas shortage, increased gas exploratory
efforts are particularly important and, therefore, I believe
should receive primary emphasis. Not only is the consumer not
econcmically harmed by the exemption of the small producer
from Commission regulation, but more importantly, the con-
sumer will be benefited as a result of the increased gas explore
tion ty the small producer.
wan
(68)
The attempt by the Commission to regulate the small pro-
ducer has proven to be an almost impossible task and has
created confusion, chaos and inefficiency in the Commission’s
oepration. The exemption of the small producer would benefit
the Commission in that the Commission’s staff could devote its
time to the relatively few large producers who are responsible
for the production and sale of the major portion of the gas in
interstate commerce. Thus, as a result of this exemption, the
Commission would be in a much better position to more effi-
ciently and properly perform its primary function of consumer
protection.
The rising costs and the diminishing profits of the small
producer, resulting in a large measure from Commission regula-
tion, has caused a continuing decline in investment funds for gas
exploration. As a result, the exploratory operations of the inde-
pendent producer have of necessity been substantially curtailed.
The exemption of the independent or small producer from:
Commission regulation would increase the flow of investment
funds, would stimulate exploratory operations and result in the
greater discovery of gas reserves.
[68]
Because of the tremendous expense of compliance with
Commission Regulations, the uncertainty as to the price which
the producer will ultimately receive for his gas, plus the possibil-
ity of refund obligations, have caused the small producer not to
dedicate its gas to interstate commerce, but on the contrary, to
sell the gas in intrastate commerce. Attached hereto as Exhibit
“A” is a statement of the experience of one group of small
producers who sold their gas in interstate commerce and have
regretted it ever since. This case illustrates why small producers
who have had such experiences would probably never again
dedicate gas to interstate commerce and bear the expense of
Commission regulation and assume the risk of the ultimate price
reduction and refund obligations. If, on the other hand, the
35
(68)
small producer is exempted from Commission regulation, then
the small producer would increase its exploratory efforts and
dedicate more gas for interstate consumption.
The Commission suggests, in the Notice, that interested
parties are invited to address themselves to the question of
terminating present proceedings and relieving the small pro-
ducers of any potential refund obligation therein.
Everything which has been said above about the importance of
exempting the small producer from Commission regulation
applies equally to the termination of present proceedings
against the small producer and the release to the small producer
of monies which he has earmarked for refund. Moreover, if the
dollar impact upon the consumer is de minimis as a result of the
small producer exemption for the future, then logically it would
seem to be equally de minimis for amounts collected, subject to
refund for the past. Due to the numerous imperfections in the
refund procedure, there is no real assurance that the refunds, if
ultimately required, will be “flowed through” to the ultimate
consumer. Therefore, if the refunds are insisted upon, they will
simply be a windfall to the distributors, to which the distribu.
tors are not really entitled. Because of the small amount of gas
sold by the small producers in interstate commerce, even if the
refunds of the small producers were flowed through to the ulti-
mate consumer, it would not amount to over a few cents and
would be of no real consequence. If these refund proceedings
were terminated and the obligation of the small producers to
make refunds were cancelled, it would make practically no ef
fect on the price of gas to the ultimate consumer, but would
result in placing the small producer in a position to use such
monies for further exploration and discovery of additional re-
serves so badly needed.
[69]
Freedom of Commission regulation would assure the small
36
wn
(69)
of an adequate price for the gas freed of the expense
and burden of Commission regulation and refund, and would
thus put the small producer in a position to assume its tradi
ional role of pioneer in exploratory operations. If the
Commission desired, the refunds so released to the small pro-
ducer could be earmarked for discovery and development of gas
reserves. The termination of the refund proceedings and reliev-
ing the small producer from any potential refund obligation
would stimulate the exploration for further gas reserves, and
would result in the discovery and commitment of additional gas
reserves to interstate commerce.
Respectfully submitted,
/s/ George P. Mormill
George P. Morrill
Morrill & Patton
GPM:mbb Attorneys at Law
(70)
[70]
EXHIBIT “A”
To Comments of George P. Morrill
On Notice Relating to Exemption of
Small Producers from FPC Regulations
In 1960, a Family Group of small producers, comprised of
a widow, three children and six trusts, owned about 30% of the
gas reserves under the Normanna Field in Bee County, Texas, in
Railroad Commission District No. 2. The remaining 70% was
owned by majors and several independents. Negotiations for the
sale of such gas were had with almost every interestate and
intrastate pipe line company in the business. Finally, about 3%
of the gas was sold by one of the majors to Houston Pipe Line
Company for intrastate consumption for a price commencing at
the rate of 16¢ per mcf, with a 2¢ per mcf escalation during
each of the three succeeding five year periods. Under the terms
of this contract, this gas is presently selling for 20¢ per mcf, and
on October 1970 will escalate to22¢ per mcf. The Family
Group of small producers (referred to as “FG’’) was offered and
could have made the same intrastate sale to Houston Pipe Line
Company. At the same time Natural Gas Pipeline Company of
America had offered FG a gas sales contract commencing at
18%¢ per mcf. Ip a quandry as to what to do, FG engaged
competent Washington attorneys, specializing in FPC matters.
By September of 1960 the Federal Power Commission had
for six fruitless years heen attempting to regulate the producer
on the Cost, of Service Approach and everything was in a state
of chaos, turmoil and confusion. On September 28, 1960, FPC
rejected the Cost of Service Approach and adopted the Area
Price Approach for independent producer regulation and at the
same time issued its Statement of General Policy No. 61-1: The
Statement of General Policy No. 61-1 (herein referred to 3
“61-1”) established a price, which was later referred to 3
38
(71)
“Guideline Price”, of 18¢ per mcf for gas in Railroad Commis-
sion District No. 2. The whole tenor of 61-1 convinced our
Washington attorneys and practically everyone in the business,
that if the gas was sold at a price not to exceed the maximum
rate of 18¢ per mcf in Railroad Commission District No. 2, that
such price would be acceptable to the FPC and no refunds
would be required. At this time it was the policy of FPC that if
a refund was to be required a certificate would be issued upon
the condition of refund and if a certificate was issued without
any condition requiring a refund, no refund would be required.
Additionally, under the law as it existed
71]
at such time, decided in the case of Sunray - Midcontinent Oil
Company vs. FPC, 270 Fed. 2d. 404. FPC had no authority to
direct a refund on an unconditioned Temporary Certificate. In
addition, members of the FPC in various talks before interstate
groups, had assured the producers that any price not exceeding
the maximum prices provided in 61-1, would be accepted by
FPC and would not be reduced and no refunds would be re-
quired. Acting in reliance upon 61-1, the representations of
FPC, the existing case law and the belief in the inherent fairness
of FPC, FG rejected the intrastate sale to Houston Pipe Line
Company and entered into the contract with Natural Gas Pipe-
line Company of America. FG then made application for Certif-
icate of Public Convenience and Necessity and received a Tem-
porary Certificate, which was issued without any condition re-
quiring a refund. In the acceptance of such certificate, out of an
abundance of precaution, FG imserted the wording, “without
obligation to refund”. This acceptance was accepted by FPC
and on March, 1961, deliveries were commenced. Had FG had
any intimation of the trials, troubles and expenses to which
they would be subjected by reason of this interstate sale, and of
the complete change of position which FPC would later make in
its policy toward reduction of price and in requiring refunds on
unconditioned certificates, FG would never have made this sale
39
(71)
in interstate commerce.
Thereafter, the distributors contested the 18¢ price and
after an extended Examiner’s Hearing in which a large number
of other cases were consolidated, the price was reduced to 164
per mcf. The refund question was severed im this hearing and
held in abeyance. The Examiner's Hearing was appealed and
sustained by the FPC and thence upon consolidation with 2
large number of additional cases, was heard before the Ciscau
Court of Appeals and then by Consolidation with a still larger
number of cases, was heard in the Supreme Court. In the
Supreme Court so many additional cases had been consoladated
that any specific or peculiar problems relating to any individed
producer were largely lost in the shuffle. The distributos, #
through the proceedings, like a pack of hungry wolves, cm
tended for a price lower than 16¢ per mcf and strongly urped
that refunds be required even on unconditioned certificates. We
submit that the distributors were not as imterested im protecting
the interests of the consumer as they were m getting ths “wind
fall” of refunds which they hoped would ultimately find a safe
resting place in their own bank deposits. Before the Supreme
Court the staff of the Federal Power Commission completely
reversed its position and advocated the requirement of refunds
on unconditioned certificates. One of the justices asked the
attorney for the Staff, in his argument, if FPC had not asaned
the producers that there would be no refunds on unconditioned
temporary certificates, to which the attorney replied that such
was the case, but that FPC could
[72]
not be bound by representations or estoppel. It came as quite a
shock that FPC would make representations inducing produces
to dedicate their gas to interstate commerce and then repudmte
such representations. They felt that they had been entrapped.
The Staff was advised privately that this type of conduct might
result in getting refunds, but it would assuredly result m alos
40
—
of confidence in FPC which in turn would prevent the dedica-
fion of reserves of gas to interstate commerce, and that perhaps
sometime down the line these reserves might be badly needed.
The Supreme Court, pursuant to the request of FPC, granted
gefunds on unconditioned Temporary Certificates, and pursuant
theseto, FPC required refunds from both large and small pro-
ducers, together with interest.
(72)
Had FG not relied upon the representations of FPC, FG
would have sold its gas to Houston Pipe Line Company in an
jatrastate sale, would have been saved all of the tremendous
fame and expense involved in FPC Regulation, would have been
gaved tremendous legal expense, would not have been required
fo make any refunds, and would presently be receiving 20¢ per
mcf, and beginning October 1970, 22¢ per mcf instead of 16¢
per mcf, which they are now receiving.
At great sacrifice to themselves, FG deposited the required
sefunds in escrow, and since this costly experience, have done
very little exploration and any gas reserves found have been sold
to imtrastate commerce. We realize that the personnel of the
FPC has changed since the events outlined above, but FG having
kad their fingers burned so badly, on this occasion, will prob-
ably never dedicate another cubic foot of gas to interstate com-
merce so long as they are under FPC regulation. The refunds so
held in escrow at this time will have practically no effect upon
the price of gas to the ultimate consumer. As a matter of fact,
because of the many defects in the refund procedure, it is
highly unlikely that these monies would ever be “flowed
through” to the consumer, but will come to rest in the pockets
of the distributor, as the windfall to which the distributor is not
entitled and which will serve no useful purpose.
There is a possibility of deeper gas reserves under the
Normanna Field. These reserves are not committed to interstate
commerce and so long as small producers are subject to FPC
regulations there is absolute certainty that if such additional gas
41
(72)
reserves are found and developed, that they will not be dedi-
cated to interstate commerce.
[73]
Over the years FG have done a tremendous amount of
wildcat, exploratory drilling and have been successful in dis-
covering considerable gas production. If they are exempted
from FPC Regulation it will stimulate their development opera
tions, will no doubt result in the discovery of additional gas
reserves, and with the assurance of a firm price and no refunds,
will probably result in the dedication of such gas to interstate
commerce. But, unless they are exempted from FPC regulation,
with the experience which they have had, their exploration, if
successful, will go to intrastate commerce. Accordingly, we
strongly recommend the exemption of small producers from
FPC regulation as proposed in the Notice of Proposed Rulemak-
ing, Docket No. 393, and the release to the small producer of
any refunds required, or in escrow in any pending proceedings.
[si George P. Morrill
George P. Morrill
(196)
[195]
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL POWER COMMISSION
In the Matter of:
Docket No. R-393
Come now HUNT OIL COMPANY, H. L. HUNT, HASSIE
HUNT TRUST, CAROLINE HUNT SANDS, LAMAR HUNT,
W. H. HUNT, N. B. HUNT, SECURE TRUSTS, A. G. HILL,
HIDALGO GAS PRODUCTION CORPORATION, C. M.
LANGTON, TRUSTEE, ALINDA HUNT HILL TRUST, HUNT
PETROLEUM CORPORATION, HUNT INDUSTRIES, W. H.
HUNT TRUST ESTATE, N. B. HUNT TRUST ESTATE,
LAMAR HUNT TRUST ESTATE, H. L. HUNT, JR. TRUST
ESTATE, CAROLINE HUNT TRUST ESTATE, LYDA HUNT-
CAROLINE TRUSTS, LYDA HUNT-BUNKER TRUSTS,
LYDA HUNT-LAMAR TRUSTS, LYDA HUNT-HERBERT
TRUSTS, LYDA HUNT-MARGARET TRUSTS and PLACID
OIL COMPANY, hereinafter jointly referred to as “Hunt, et al”
and submit, in response to the Notice of Proposed Rulemaking
ued by the Commission on July 23, 1970, their views and
comments relative to rules proposed to be promulgated in the
ae ii
[196]
For the reasons hereinafter set forth Hunt, ef al supports
the Commission’s proposed exemption of small producers from |
43
(196)
rate regulation as a step in the right direction but offers certain
suggestions for improvement of the proposal:
In support hereof, Hunt, et al. would show the following:
I
Small producers are, and have long been, of vital impor-
tance to the nation’s natural gas producing industry. Although
it is said that they account for only ten percent of all
jurisdictional natural gas sales! their production cannot be
considered of little importance on an area basis*. Most
important is the small producers’ contribution in exploring for
new gas supplies wherein they account for approximately 80
percent of all exploratory well drilled.*
[197]
In their exploratory efforts they frequently drill prospects
deemed too risky by the larger producers when viewed in the
context of potential reserves to be discovered. Their drilling
efforts often prove or disprove the presence of gas bearing
structures, and the information gained is useful to all producers,
large and small, in their search for new gas supplies. And yet, it
is upon the small producer that the burden of regulation has
weighed most heavily. Under the Commission’s present cost
based rate making system only the costs of the largest producers
1 Response of Federal Power Commission Staff; Initial Rates for
Future Sales of Natural Gas for All Areas; Docket No. R-389A (Page 24)
2Opinion No. 468, p. 12; Area Rate Proceeding, Docket Nos.
AR61-1, et al
3The record of the Southern Louisiana Area Rate Proceeding
(Docket No. AR61-2) shows that small producers drilled 78.1% of all wells
drilled in 1960 (T. 23,923-8) of which 31% were exploratory wells. Of the
remaining wells drilled only 17% were exploratory wells. (See also Exhibit
181.)
44
(198)
are considered while small producer costs are ignored. This
procedure of basing rates upon large producer costs is especially
inappropriate for small producers since their costs are uniformly
higher than those of larger producers.* These higher costs are
due to their unique methods of operations founded upon a
higher percentage of exploratory drilling, always expensive and
extremely risky, and smaller lease holdings which necessarily
support smaller reserves when drilling is successful. Full
[198]
participation in area rate making proceedings is never feasible
for small producers, and minimal compliance with the Commis-
sion’s certificate and rate change procedures in disporpor-
tionally burdensome. It is known that many of the smaller
producers are not receiving the rates for their gas sales to which
they are entitled by contract simply because they are not
sufficiently familiar with the Commission’s procedures to know
that they must file for higher rates. For each of these reasons
Hunt, et al is of the opinion that the exemption of small
producers is warranted and supports the Commission’s proposal.
While supporting the Commission’s proposal in general,
certain comments are hereinafter made which should be given
serious consideration prior to the adoption of the proposed
rules.
Il
In its commentary on the proposed rules the Commission
states:
“See Exhibit 23—Area Rate Proceedings (Southern Louisiana)
Docket No. AR61-2. See Exhibits 68-J and 69-J Area Rate Proceedings
(Hugoton-Anadarko and Texas Gulf Coast) Docket Nos. AR641 and
AR64-2.
45
(198)
“The exemption for small producers
' proposed here would include, inter alia,
jurisdictional sales made by a small pro-
ducer to a large producer. However, the
resale of such gas by the large producer
would remain subject to our jurisdiction.”
(page 3)
It is not uncommon for one producer to sell gas to a
second producer who, after performing a transporta-
[199]
tion, compression or processing service, resells the gas to an
interstate pipeline. In this arrangement the second producer
contracts to seel the gas at a rate slightly higher than he pays
the first producer for the gas. This price spread compensates the |
second producer for the services he performs for the benefit of
the first producer. Under this fact situation, if the first producer
is established as a “small producer” and thus exempted from
rate regulation, he can receive the full contract rate for his gas
sold to the second producer. If however, the second producer
does not qualify as a small producer, his resale of the gas pur-
chased would be subjected to regulation and the possibility of
being prevented from realizing his contractually supported rate.
Should he not be permitted to collect and retain his contract |
rate, the negotiated contract price spread would be lost and the
profitability of the project impaired. In effect these circum-
stances would be to require the second producer, the large pro-
ducer, to fund the small producer’s exemption. This would be
patently unfair and probably unlawful. It appears that there are
two possible solutions to this problem. They are: (1) deny the
small producer’s exemption or (2):
[200]
permit the second producer to collect his resale rate without
46
(201)
refund obligation insofar as the resold gas originates from small
producers. Hunt, ef al. favors solution (2). In no event should
the second producer be restrained, by rate change moratorium
or otherwise, from collecting his full contract rate.
Ill
Proposed Section 157.40 defines a “small producer” as
one “who is not affiliated with a natural gas pipeline company
and whose total jurisdictional sales on a nationwide basis,
together with such sales of ‘affiliated producers’ are not in
excess of 10,000,000 Mcf at 14.65 psia during any calendar
year.” Hunt, et al. submits that the line of demarcation between
small producers and large producers was arbitrarily established
by the Presiding Examiner in his Initial Decision in the Permian
Basin Proceeding’ and subsequently has been arbitrarily
adopted by the Commission.® Hunt, et al. does not object to
the use of the 10 million Mcf dividing point on an interim basis
but urges the Commission to undertake imme-
[201]
diately to determine the proper dividing point between the two
producer classifications. There are significant differences be-
tween small producers and the larger producers. These dif-
ferences should be defined and appraised before a permanent
dividing. point is established. For example, Hunt, ef al.
sponsored studies have shown that the larger the size of the
producer in terms of gas volumes sold, the lower is its costs.’
534 FPC 306 at 361—termed “the practical dividing line.”
$34 FPC 159 at 235—Permian Basin Decision 40 FPC 530 at
612—Southern Louisiana Decision
"See Exhibit 243 (Excluded) accepted as Offer of Proof; Area Rate
Prceeding (Southern Louisiana Area) Docket No. AR61-2. See also ex-
hibits described in footnote 4, supra.
47
(201)
Accordingly, cost differences should be a factor for con.
sideration. Smaller producers can neither acquire and hold large
lease blocks as can larger producers nor can they drill wells in
sufficient numbers to take advantage of the averages relative to
successful exploratory completions. They always have les
financial depth than do large producers and must endure greater
financial risks. Often they have less bargaining power with
prospective purchasers of their gas and obtain less favorable
terms due principally to the fact that they usually develop
smaller gas reserve packages. All of these factors should be
considered prior to establishing permanently the dividing point.
It is the
[202]
considered opinion of Hunt, et al. that once completed such
study would show that the proposed dividing point of 10
million Mcf annually is much too low and not supportable by
presently available facts. It is believed that an adjustment
upward to 25 million Mcf annually would be found to be more
reasonable and more easily supported by existing facts.
IV
At pages 3 and 4 of the Notice of Proposed Rulemaking
the Commission stated that it had not “proposed any disposi
tion of increased rates collected subject to refund in Section
4(e) cases or initial rates collected under temporary certificates
issued pursuant to Section 7 by small producers for the period
piior to the effective date of the exemption.” It further stated
that the proceedings to which it was referring were those where
the Commission had yet taken no action and none was pending
as a result of an examiner’s decision. Comments were invited on
this point.
(203)
It is the view of Hunt, et al. that small producers should be
relieved of all refund obligations at the time they are granted
exemptions. This view is consistent with the other positions
taken by Hunt, et ail. herein and consistent with the Commis-
sion’s recognition
[203]
of the many differences between large and small. producers
which support more favorable treatment of the small producers.
If exemption, and the right to collect contract rates as the result
of that exemption, is determined to be justified for the future
based upon conditions presently existing and known to exist in
the past it would seem appropriate for the Commission to apply
the rationale supporting that exemption to existing rates of
small producers now burdened with a possible refund obligation
and remove the refund concitions. This view is offered,
however, only upon the premise that under no circumstance
should a large producer be required to fund the small producer
price advantage as discussed in Section II hereof.
Vv
Correspondence with regard to the foregoing views and
comments may be addressed to:
(203)
Hunt Oil Company, et al.
1401 Elm Street
Dallas, Texas 75202
Attention: Mr. Robert W. Henderson
and
Placid Oil Company
2500 First National Bank Bldg.
Dallas, Texas 75202
Attention: Mr. Paul W. Hicks
[204]
WHEREFORE, Hunt, et al. respectfully requests that the
Commission give studied consideration to the views and
comments expressed herein and grant the proposed exemption
of small producers in accordance therewith.
Respectfully submitted,
/s/ Donald K. Young
DONALD K. YOUNG
ATTORNEY FOR
HUNT, ET. AL.
September 4, 1970
50
(218)
[216]
{COMMENTS OF JAMES M. FORGOTSON, SR.]
{217}
QUESTION PRESENTED
Whether [the] decision in the case of Phillips Petroleum Co.
y. State of Wisconsin,? applying the provisions of the Natural
Gas Act? to independent producers of unprocessed unassoct
ated and casing-head gas, should be reversed, because im
light of later actual experience and economic and technological
changes such application now constitutes such invidious and
arbitrary discrimination against said independent producers that
the application violates their guarantees of equal protection of
the law.
[218]
STATUTES INVOLVED
Section 1 (b) of the Natural Gas Act, 52 Stat. 821, as
amended, 15 U.S.C. § 717 (b) is involved and is reproduced
* * * in our Appendix.
CONSTITUTIONAL PROVISIONS INVOLVED
2347 U.S. 672 (1954)
315 11S.C. 717 (), et seq.
51
(218)
Constitution of the United States, Amendment V:
“No person shall . . . be deprived of life, liberty, or
property, without due process of law .. .”
Constitution of the United States, Amendment XIV, Sec-
tion 1:
“No state shall make or enforce any law which
shall . . . nor deny to any person within its jurisdic-
tion the equal protection of the laws.”
ss22%8
{220}
se¢+48
The Court of Appeals Opinions. Since this petition attacks
the very jurisdiction of the Federal Power Commission over
independent producers of unprocessed unassociated or casing-
head gas on constitutional grounds, the specific rulings * * * are
not relevant. However, as set forth fully in the next portion of
the petition, the continued application of a public utility
regulatory process to independent gas producers by the Federal
Power Commission * * * along with the misclassification of
utility-distributors as consumers or consumer interests * * *
significantly affect the importance of [this comment] .
(221)
REASONS * * *
1. Importance of this case to all segments of the natural
gas industry and all classes of consumers cannot be overstated.
A shortage of natural gas already exists. That shortage is
directly involved in this case * * *.
52
- (223)
The gas supply situation is greatly affected by the rates
prescribed by the Federal Power Commission in this case and
the regulatory process imposed on sales for resale in mterstate
commerce by independent producers of unprocessed unassoci-
ated or casing-head gas by this Court’s decision in Phillips Petro-
leum Co. v. State of Wisconsin, 347 U.S. 672 (1954). In fact the
supply situation is more affected by the last mentioned item
than by anything else. Thus, reconsideration and reversal of the
regulatory process instituted by this Court in Phillips Petroleum
Co. v. State of Wisconsin, supra, are indicated for the important
seasons which are set out below.
2. Even former decisions of the United States Supreme
Court sustaining the constitutionality of a specific state police
regulation do not preclude bringing subsequent suits to test
their validity in light of later actual experience, because regula-
tions, valid when made, may become arbitrary and confiscatory
in operation by reasons of later events. See Abie State Bank v.
Weaver, 282 U.S. 765 (1931).
{222}
* * * [T]he issue itself goes to the very jurisdiction of the
Federal Power Commission over the subject matter of the case.
[223]
53
(223)
3. The application of FPC price ceilings on sales for resaie
in interstate of umprocessed umassociaied aad
casing-head gas produced by independent producers s =
ducer. In light of current and evolving technology and econom-
ics in the fuel and energy industry, the application of the
provisions of the Natural Gas Act of 1938 to any of the sales of
This discrimination is against independent producers im favor of
distributor-utilities both of whom are suppliers and not com
sumers in the natural gas supply industry, and against these
same producers in favor of producers of fuels and enemy
gas, i.e., oil, liquid petroleum condensate, liquid petroleum gas,
coal, and lignite producers, who are all part of the nation’s
energy industry. Because such discrimination is imvidiou,
application of the Act to independent gas producers would be a
violation of constitutional guarantees of Equal Protection of the
Law, and thereby be violations of the Fifth Amendment of the
Constitution. Equal Protection of the Law guarantees ac
provided against discriminatory acts of the Federal Governmest
through inclusion of equal protection guarantees within the Dee
Process Clause of the Fifth Amendment. See Brown v. Board of
Education of Topeka, 347 U.S. 483 (1954) and 349 U.S. 29424
298 (1955), which by implication applied equal protection
[224]
to end racially segregated schools in the District of Columbn,
which are governed by federal, not state law. The Court stated
that all provisions of federal, state or local law requmg @
349 U.S. 294 at 298.
— |.
4. Legal creation of closed classes through economic
programs which advance the economic interests of
the closed classes constitutes a violation of the Equal Protection
a of the Law guarantees of the Federal Constitution.
(225)
The most recent United States Supreme Court decision
applying constitutional Equal Protection of the Law guarantees
(of the Fourteenth Amendment) to invalidate economic regula-
fon was the case of Morey v. Doud, 354 U.S. 457 (1957). Our
contention is that application of FPC price ceilings to wellhead
sales of unprocessed unassociated and casing-head gas by
independent producers comes within the purview of the rule for
applying equal protection guarantees to invalidate economic
segulations announced in Morey v. Doud, supra. This is in spite
of (1) the now substantially undisputed power of Congress to
pass nondiscriminatory economic regulatory legislation under
fhe Commerce Clause of Article I of the Constitution (N.L.R.B.
v. Jones and Laughlin Steel Corp., 301 U.S. 1 (1937); and
Wickerd v. Filburn, 317 US. 111 (1942); and (2) the equally
undisputed decisions that such regulation either by the States or
the Federal Government does not constitute a taking without
due process of law. (Federal Power Commission v. Natural Gas
Fipeline Company, 315 U.S. 575 (1942); Nebbia v. New York
291 US. 502 (1934)).
ses2+2t
In Morey v. Doud, supra, a three-judge District Court was
upheld by the United States Supreme Court in enjoining
eafoscement of the [Illinois Community Currency Exchange Act
of 1943 because said Act violated the
{225]
Equal Protection Provisions of the Fourteenth Amendment.
The Act in question provided a comprehensive system for
licensing and regulation of community for-fee check cashing
services and issuers of moncy orders and made operation of an
walicensed establishment a crime. In order to obtain a license
— ™
(225)
these establishments were required to pay both licensing and
investigative fees, furnish information to the [Ilinois State
Auditors Office, maintain specified amounts of cash on hand
and possess surety bonds in specified amounts. In addition, each
exchange had to be an entity financed and conducted as a
separate business entity. Finally, a license could not be issued
unless the State Auditor determined that its issuance would
promote a convenience and advantage to the community. The
American Express Company and its money orders were
explicitly exempted from the provisions of the Act.
In sustaining the lower court by a 6-3 vote, the majority of
the United States Supreme Court made the following points
clear with respect to application of Equal Protection Clause
provisions to economic regulatory legislation:
a. The prohibition of the Equal Protection Clause goes no
further than invidious discriminations.
b. The Equal Protection Clause does not take from the
States the power to classify in the adoption of policy laws.
c. The Clause permits the exercise of a wide scope of
discretion in classification and prohibits only those that are
purely arbitrary.
d. The practical result of some inequalit, in application of
the regulation is not sufficient to invalidate the regulation.
e. The Complainant must carry the burden of showing
that the law in question does not rest upon any reasonable
basis, but is essentially arbitrary.
[226]
‘f. Provisions to be valid cannot single out any con: any or
group of companies, irrespective of their unquestioned
reputations, and create a closed class with the accompanying
economic advantages to such company or group.
56
(227)
The creation of a closed class with the accompanying clear
economic advantage given to that class was the fatal defect in
the Illinois Act and will be the basis of any further application
of the Equal Protection guarantees to invalidate economic regu-
lation, state or federal. Morey v. Doud, supra, has never been
overruled by the United States Supreme Court.
This question subsequently has come before State
Supreme Courts, none of which have departed generally from
the basic 1957 rule, although most have failed to find creation
of a closed class in the facts presented and thereby have not
invalidated the legislation. See, ¢.g., Donohue v. O'Connell's,
Inc., 164 N_E. 2d 52, 18 111.2d 432 (1960)
Consequently, our theory is that the application of the
Natural Gas Act of 1938 to gas sales of unprocessed umassoci-
ated or casing-head gas by independent producers creates closed
classes or groups which are given accompanying clearcut
. Application of the Natural Gas Act and Federal
°>wer Commission price ceilings to independent producers
creates a closed class, the retail distributors in the natural gas
pendent producers in favor of the distributor-utilities.
The Court in the case below has classified the parties to
natural gas regulatory litigation as producers, consumers and the
Commission (meaning the Federal Power Commission). See
Continental Appendix A, pp. i-?-
[227]
It has classified producers and pipeline companies as producers,
utility-distributors as consumers or consumer interests, and the
Commission as the Commission. No argument can be had with
classifying the Commission as the Commission. From that point
57
(227)
onward, however, the court below has been in error. In reality
the three classes are: Suppliers (which includes producers, trans-
porters and distributors); Regulators, which balance the inter-
ests of consumers and suppliers in the interests of social ang
economic justice (which includes at least the Federal Power
Commission and state public utility or service commission and
which should include the conservation commissions of the
states); and Consumers, e.g., housewives or industrial enterprises
using gas as process fuel or heat source. This error has resulted
in identifying (as was made abundantly clear in the case below)
producers and distributors as members of different classes,
thereby permitting vastly unequal and inappropriate regulatory
treatment of the independent producers.
It is our contention that this error, which was so clearly
illustrated in the case below, has resulted in placing a discrim-
inatory burden on one of the members of the Supplier group in
order to protect another member of that same group from that
member’s own frequent lack of aggressiveness and continu. '
operations under many, often anachronistic state regulatory
laws on the grounds that this is protecting the consumer inter-
est. The latter interest actually is a far different species from the
interest of the retail public utility-distributor who is frequently
an entrepreneur operating at a profit with substantial earnings.
To do this legislatively goes beyond mere lack of wisdom,
providence and harmony with a particular school of thought.
See Williamson v. Lee Optical Co. of Oklahoma, 348 U.S. 483
(1955). It constitutes legislation which in light of current con-
ditions is arbitrary and in-
[228]
vidiously discriminatory. It has created(a closed class of entre-
preneurs within the supplier group (the distributors who already
have a regulated natural monopoly), who are subject to risks in
no way comparable to those of the independent producer of
58
(229)
unprocessed unassociated or casing-head gas. The distributors
cam a guaranteed rate of return for their security holders and
hav’ a competitive advantage against other energy sources, be-
caus of their being able to buy their raw material (either unas-
socited or casing-head gas in an untreated, unprocessed state)
at acontrolled maximum price, free from market forces.
What has occured is that one unit (the independent pro-
ducts) in the supplier group is in fact being regulated as a
pubic utility, which in fact it is not. Such regulation has been
evOling for nearly 17 years, to protect the interests of the
utiliy-distributors who hold a natural monopoly and whose
inteests have been judicially mis-identified with the consumers.
The results of this error have been extremely serious and
dleaty not in the best interests of the consumers. This error has
Mtibuted to a fuel shortage, particularly a shortage of natural
.with a possibility of natural gas rationing among consumers
and importation of liquefied natural gas from foreign countries
4 Pices at least two or three times higher than the current or
©Memplated price ceilings imposed on U.S. producers. Al-
thogh this only goes to the wisdom rather than the constitu-
ity of the application of the Natural Gas Act and govern-
™ally imposed price ceilings on independent producers, it
Put the issue into clearer perspective.
__ Indealing with the constitutional question of equal protec-
HON it is our contention that the Congress, by imposing a form
of Eublic utility regulation on natural gas producers, which the
Med States Supreme Court later
[229]
deaty stated are not public utilities, has not only misclassified
P\ucers, but also has put them under a regulatory program
) i sicidhliiss thesbs dines Boe Canes 390 US. 747 (1968).
59
(229)
which invidiously advances the conomic interests of the distrib-
utor by trying to assure him a supply of raw material at lower
than free market costs. Consequently, the distributors can make
a profit and expand their sales volume while (1) failing to take
significant aggressive steps, on a sufficiently realistic scale to
_work toward adequate supplies at competitive prices, and
(2) operating under anachronistic state regulatory laws, which
they make no effort to change.
To meet the test of equal protection all members of the
group should be treated alike to the greatest extent possible.
The test does not require either comprehensiveness of regula
' tion or absolute or mathematical equality of treatment. Neither
does it require dealing with all facets of the problem at the same
time, but allows legislative discretion to “attack some evils be-
fore attacking others.” Nevertheless, equal protection does not
or should not permit one member of a group to be regulated in
order to advance the economic interest of another group in the
same class without clear justification. In the current situation,
one member of the supplier group is advanced at the expense of
another and the consumer as well.
It might be argued that no discriminatory treatment exists
since both independent producers and distributors are public
utilities. There is no question about the propriety of treating
distributors with regulated natural monopolies as public utilities
and imposing some public utility regulatory procedures upon
them. That public utility regulatory procedures for independent
producers is not appropriate was made clear by Mr. Justice
Harlan in the Permian Basin Area Rate Cases, supra, and by
Judge Thornberry in the case below.
[230]
The issue then becomes whether the inevitable result of
any governmental price ceilings imposed upon independent pro-
ducers of unprocessed unassociated or casing-head gas must per-
force, regardless of freedom of the Commission to experiment,
60
(231)
be public utility treatment and be inappropriate. Our conten-
tion is that the answer to this question is yes and that the
treatment is so inappropriate as to be invidiously discrimina-
tory. This is because if a group which has no characteristic of a
public utility with a natural monopoly is nevertheless regulated
as one with the end result of advancing the economic interests
of another unit in the same group (the supplier group), then
there is invidious discrimination.
The courts in the abstract thus far have answered the
above question as no by saying that the Commission need abide
by no fixed formula and can pragmatically adapt policies and
procedures to meet changing conditions. Our contention is that
as a practical matter the answer will inevitably be yes, because
this is all that a regulatory agency like the Federal Power
Commission can do. It can develop formulas ad infinitum, but
they all have been and perforce will be based on allowing some
“fair” rate of return on capital and operating costs with or
without added nonmarket incentives to stimulate exploration
and development of reserves.
The Federal Power Commission’s actual performance up to
the present substantiates our conclusion.
In all of the gas rate cases the only real controversies in-
yolve what should be allowed as capital costs, what are operat-
ing costs, what should be allowed as a fair return on an invest-
ment (including such questions as whether expenditures for dry
holes or gas of less than pipeline quality constitute costs or
risks) and should incentives for exploration be allowed, and if
so how much. These are all classical public utility regulation
questions, whether they be based on (1) producer by producer
or well by well
{231}
costs, (2) area-wide average costs, or (3) nation-wide costs with
61
(231)
special consideration given to exploration and development in-
centives to encourage the finding of new gas. It is also public
utility regulation whether historic costs or projected costs are
used as the basis for calculating a “fair” return. In spite of all
protestations to the contrary, this is all the Commission or any
commission can ever do when it regulates by imposing price
ceilings on independent producers.
The Fifth Circuit *** said that the Federal Power
Commission has the power to set prices on the basis of costs
and that market variables do not necessarily have to influence
the calculation, but that the Commission must examine even a
cost computed rate against the ultimate statutory purposes it is
supposed to be carrying out. * * * The Court in its dictum went
on to say that it advocated a mixture of market (supply and
demand factors) and cost computed rates to regulate industry
performance.
It prescribed the following steps to be taken by the
Federal Power Commission in arriving at the price ceilings:
- (1) estimation of needs for consumer service—
demands for gas;
(2) use of the above estimation to fix the level of
service aimed at, explaining how the level of
service aimed at is related to estimated de-
mand in case demand is not to be fully satis-
fied by the regulatory program; and
(3) making findings as specifically as possible as
to how the rate it has set will affect the in-
dustry’s tendency to meet the level of service,
ie., what supply rate will be brought forth,
while at the same time preventing the occur-
rence of excessive prices.
aT 62
=
(232)
[232]
This is fine theory. However, econometrics is an inexact
science, at best, and the ultimate practical result will always be
a cost-computed ceiling with some lagniappe, supported by
some econometric theorizing and forecasting for its justifica-
tion, thrown in. Whether this lagniappe added to standard
public utility cost-computed prices is adequate, as a practical
matter, to maintain a healthy industry is almost purely a matter
of guesswork. This will be the case if anyone will realistically
look at what can be done with the science of econometrics with
currently available data and data collection methods and facil-
ities, with even the most advanced estimation techniques. The
result will be actually some variation of standard public utility
regulation for a group with none of the characteristics of a
public utility.
P79
Consequently, whether the Federal Power Commission has
evolved a potentially workable regulatory procedure after
nearly seventeen years or not, is really not material. Whatever
they develop will be a public utility regulatory procedure which
is a prima facie wrong approach for regulation of independent
producers of unprocessed unassociated or casing-head gas. When
this is coupled with the use of the regulatory process to advance
the economic interests of another supplier unit, the retail distri-
butor, who has a guaranteed market and the advantages of a
natural but regulated monopoly, it constitutes invidious dis-
crimination and violates the guarantees of equal protection of
the law unless some clear-cut justification for its exists.
This leads then to the question of where or what is the
‘ustification?
The major apparent justification is that the “end result”
brings lower or more slowly increasing prices of energy to the
consumer. Obviously, such an “end result” could be accom-
plished by better management of the utility-distributors, better
63
(232)
stoves or furnaces, better state regulation of utility-distributors
(including more
[233]
modern state regulatory statutes), improved capitalization of
utility-distributors, mergers of some distributors to bring about
more capital and a better inflow of management and technol
ogy, etc.; consequently this justification is arbitrary.
If achieving an end result by a means that results in invid-
ious discrimination against one unit of the supplier group (the
producer) to advance the economy of another supplier (the
distributor) rather than a more equitable and less discriminatory
alternative means is used, then the discriminatory means should
be held to violate the guarantees of equal protection of the law
and be declared invalid.
That protection of economic interests by the Due Process
Clauses of the Fifth and Fourteenth Amendments should not be
abandoned has been recently restated with great clarity. See
Streuve, The Less Restrictive Alternative Principle and Eco
nomic Due ess, 80 Harv. L. Rev. 1463 (1967). The author
delineates the less restrictive principle and advocates a retum to
its use by the Supreme Court as an independent ground for
invalidating over-broad regulations to permit a better balancing
of interests between private parties and the government. The
principle is that an economic regulation violates due process if
the government has a less restrictive alternative. In dealing with
regulations of personal freedom not involving either freedom of
_ expression or civil rights, the United States Supreme Court also"
indicated that a test of the less restrictive and burdensome alter
native on those regulated to accomplish the legislative end
sought was required by the Constitution. See Griswold v. Cor
necticut, 381 U.S. 479 (1965).
anes
(234)
The only other possible justification would be the monop-
olistic nature of the unprocessed unassociated and casing-head
gas sales market at the wellhead. This is discussed more fully
later, and it can be clearly stated
[234]
that no monopolistic situation exists. This fact was further em-
phasized by Mr. Justice Harlan speaking for the majority in the
Permian Basin Area Rate Cases when he characterized producers
as “intensely competitive vendors of a wasting commodity they
have acquired only by costly and often unrewarded search,”
390 U.S. 747 at 757 (1968).
That the distributor utilities are a natural monopoly and
subject to state regulation on a cost derived basis and that long—
line interstate processed natural gas pipelines frequently inte-
grated with their own production facilities might have shown
monopolistic tendencies in 1938 and afterwards at the state of
both technology and the economy then, and needed regulation
because they were immune from state regulation, does not
justify imposition of public utility regulation on non-integrated
independent producers’ sales of unprocessed unassociated and
casing-head gas at the wellhead today to curb a monopolistic
situation.
6. By singling out producers of unprocessed unassociated
or casing-head gas for governmental price ceilings, the Federal
Government has given a clearcut economic advantage to pro-
ducers of competing fuels and created a clearcut closed class,
ie., producers of other fuels, whose economic interests are
advanced by the regulation without clear justification.
Unprocessed unassociated or casing-head gas is a fuel or
energy yielding commodity just like coal, lignite, oil, liquid pe-
———ay
(234)
- compete with it in the national energy market. Consequently,
by singling out this one unprocessed commodity for govern-
mental price ceilings on independent producers, a closed but
large economic class is created with concomitant economic
advantages. Creation of such a class constitutes invidious dis-
crimination and violates equal protection guarantees unless the
unique
[235]
treatment is justified. Consequently, the issue is, is there any
unique characteristic of unprocessed unassociated or casing-
head gas or independent producers thereof to justify this classi-
fication.
a. Transmission or transportation.
In this country because of advances in technology, particu-
larly that related to transmission of fuels, coal and lignite slur-
ries as well as natural gas, oil, liquefied petroleum condensates
and liquefied natural gases can and are now being transported
by pipelines in interstate commerce, either for use or resale at
their remote destination. Coal, lignite, oil, liquid petroleum con-
densates, liquid petroleum gases, and heavier so-called bottle
gases (e.g., butane and propane) are also sold either at the well
head, mine shaft, excavation pit, refinery, or gas processing
plant to pipelines for interstate transmission and subsequent
resale or sold directly to customers, not for resale, who then use
pipeline facilities to transmit the product or commodity to loce
tions in distant states for use as fuels or energy sources. Further-
more, natural gas (methane) itself can be liquefied and shipped
via railroad tank car, truck, barge or ocean-going tanker rather
than by a pipeline to interstate or foreign destinations either for
resale or direct use, just as other hydrocarbon or fossil fuels and
the nuclear fuel uranium can be shipped. As a result there s
nothing unique about unprocessed unassociated or casing-head
gas or its producer’s in these characteristics which separates
66
(236)
them from other fossil fuels or nuclear fuels. The independent
producers simply supply a commodity to provide energy.
b. Scarcity and wasting asset nature of natural gas.
It can be assumed that natural gas is a wasting asset, in
actual or potential short supply in the United States. So are
coal, lignite, oil, liquid petroleum condensate, liquid petroleum
gases and uranium. Consequently, unproc-
[236]
essed unassociated or casing-head gas and its producers have no
unique characteristics in this regard.
c. Influence of price of commodity at wellhead on end
price of service or consumer use.
_ It can also be assumed that the price of unprocessed un-
associated or casing-head gas at the wellhead influences the re-
tail price of fuel or energy to both domcstic and industrial
consumers. So do the prices of all other fuels or energy pro-
ducing commodities such as coal, lignite, oil, liquid petroleum
condensates, and uranium. Similarly, it must be assumed that
the price of the actual service, i.c., end product of commodity
use (e.g., cooking, winter heating, electrical generation, indus-
trial process heating), is also highly determined by the price of
such items as household gas ranges, gas furnaces, boilers, steam
turbines and nuclear reactor components. Consequently, un-
processed unassociated or casing-head gas or independent pro-
ducers thereof, are not unique in that respect.
d. Uniqueness because of characteristics of retail.
distributors of the commodity.
It can also be assumed that unprocessed unassociated or
Casing-head gas for both domestic and industrial use is actually
67
(236)
usually distributed (after processing and shipment from the
well) to ultimate consumers (domestic and industrial) by
natural monopoly public utility distributor companies who ae
closely regulated as to prices and practices by state and in some
cases county or municipal statutes, ordinances and regulations,
whether the gas goes to the consumers as gas or is used as boiler
fuel to generate electricity. So are oil, coal, lignite, liquid petro
leum condensates and nuclear fuels when they are. used to gra
erate electricity or produce centrally generated piped-m stcam
for heating or industrial or other purposes. Only when gas goes
as gas for actual burning by the consumer does it differ from
oil,
[237]
coal, lignite, liquid petroleum condensates or uranium in being
distributed by a legally regulated natural monopoly —ie., a pub-
lic utility company. Even then, it is sold by the regulated utility
company in competition with electricity (such as for domestic
heating, cooking or cooling), which itself is in many cases ds
tributed by the identical utility company that distributes the
gas for similar purposes.
e. Natural gas is the ideal fuel and consequently
production by independent producers requires
unique treatment.
It must also be assumed that methane-natural gas (ue
associated or casing-head gas after processing to remove such
things as water, sulfur, carbon dioxide, helium, associated liquid
hydrocarbons and heavier gaseous constituents such as ethane,
propane and butane) is a very excellent fuel in that it has a high
BTU value per unit volume (averaging about 1,000 BTU/cubic
foot), and burns without fly ash or sulfur oxides, and without
many products of incomplete combustion ‘such as hydrocasbos
radicals and carbon monoxide. This makes it a virtual noe
polluter as far as air pollution problems go. However, nuciear
68
(238)
fecls produce no fly ash, sulfur oxide or other hydrocarbon
combustion air pollution products and have a much higher BTU
content per unit consumed (whether by weight or volume).
Moscover, both refining and combustion processes are being
ty ofl and work is proceeding rapidly on developing “synthetic”
estural gas by hydrogenation of coal. Consequently, processed
(methane) gas is an excellent fuel but is by no means the ideal
foci. Nevertheless, because of quality, convenience and price
(which is astificially lowered by Federal Power Commission
Regulation of the commodity), processed gas-methane is a pre-
ferred fuel with a growing demand.
[238]
£ Monopolistic characteristics of independent producers.
Finally, independent production of and sale of unpro-
cessed unassociated or casing-head gas at the wellhead, as distin-
gushed from its processing, transportation and distribution and
gale to ultimate consumers, is not monopolistic, but competi-
Gee. The competition is 2s great or greater than among other
fecis such as coal, lignite, oil, liquefied petroleum condensates,
liquefied petroleum gas, and uranium, in addition to other in-
dustries such as automobiles. Independent production is not a
matural monopoly like the public utility-distributors are, nor a
potential monopoly as a result of economic combinations,
collusions or other forces. Such things as transporters, inte-
grated transporter-producers, oF integrated distributor—
combines could be and might justify
special legislative treatment.
As a matter of fact, in 1970, according to the Federal
Power Commission itself, there were over 4,600 independent
peoducess engaged in interstate sales of natural gas for resale
and 70 independent producers controlled a total of approxi-
mately 85 percent of the interstate, sale for resale market :
aationwide. See Federal Power Commission Notice of Proposed
69
(238)
Rulemaking (Exemption of Small Producers From Regulation),
Docket No. R-393, July 23, 1970. Furthermore, new firms are
entering the interstate sale for resale market. In 1962, 10 per-
cent of this particular market was occupied by firms entering
after 1960. See Hodges, Natural Gas: Price Regulation vs
Supply, unpublished Richard J. Gonzalez Lecture, April 23,
1970, College of Business Administration, University of Texas.
If production rather than markets is analyzed, the four
largest producers at the national level controlled 32.1 percent of
production and the eight largest producers controlled 37.6 per-
cent of production as of 1962. By way of contrast, the pro
duction concentration for the four largest producers of all
' products in the United
[239]
States was 40 percent, with many basic industries such as auto-
mobiles, copper, soap, glass, electric light bulbs, and photog-
raphy equipment showing production concentration of 90 per
cent or above among the 4 largest producers of each product.
See Hodges, supra.
Even disaggregating the national market on a regional
basis, the top four gas producers in 1962 controlled only 24.7
percent of the Gulf Coast regional market for interstate sales,
and 22.9 percent of the Mid-Continent-Permian Basin regional
market for interstate sales for resale. Furthermore, the big four
in the Gulf Coast Region are not necessarily the same big four
in the Mid-Continent-Permian Basin Area. See Hodges, supra.
Since other fuels are substitutable for natural gas as fuels
ment is even less valid. In fact, the independent producers of
unprocessed unassociated or casing-head gas were described by
Mr. Justice Harlan as “intensely competitive vendors of a
wasting commodity they have acquired only by costly and
70
(240)
often unrewarded search.” See, Jn Re Permian Basin Area Rate
Cases, 390 U.S. 747 at 757 (1968). Consequently, natural gas
production and producers cannot be classified as unique from
other fuel and energy source commodity producers such as coal,
lignite, oil, liquid petroleum condensate or uranium in terms of
listic ch teristi
g. Conclusions
Because of the above factors, legislative classification of
independent producers of unprocessed unassociated or
casing-head gas appears to be more than unwise, improvident or
out of harmony with a particular school of thought. If it were
only those the classification would not meet the test necessary
for constitutional invalidity. See Williamson v. Lee Optical Co.
of Oklahoma, supra. Instead it appears to be clearly arbitrary.
[240]
This arbitrary classification of independent gas producers
has created a closed class of unregulated fuel producers and is
invidiously discriminatory against the regulated independent
producers, because all are producers of a similar commodity,
and only one has been singled out for federal price ceilings.
This is not to say or even imply that the Natural Gas Act
of 1938 is unconstitutional or even that its application to regu-
late prices of gas “sold” by integrated producer-transporter
companies to themselves or their subsidiaries on a non-arm’s
length basis are unconstitutional. It is the application of the Act
to the independent producers that is unconstitutional.
71
(240)
s2e2e238
Respectfully submitted,
/s) EDWARD H. FORGOTSON
EDWARD H. FORGOTSON
Suite 1300
1407 Main Street
Dallas, Texas 75202
Counsel for
[James M. Forgotson, Sr]
[September 14, 1970]
(241]
APPENDIX A
Title 15 $717 (b), U.S.C.
(b) The provisions of this Chapter shall apply to the trans-
portation of Natural Gas in interstate commerce, to the sale in
interstate commerce of natural gas for resale for ultimate public
consumption for domestic, commercial, industrial, or any other
use, and to naturalgas companies engaged in such transporte
tion or sale, but shall not apply to any other transportation or
sale of natural gas or to the facilities used for such distribution
or to the production or gathering of natural gas.
72
[252]
[252]
BEFORE THE
FEDERAL POWER COMMISSION
in the Matter of Docket No.
EXEMPTION OF SMALL PRODUCERS R-393
FROM REGULATION
VIEWS AND COMMENTS
OF
TENNESSEE GAS PIPELINE COMPANY,
A DIVISION OF TENNECO INC.
Pursuant to the Notice of Proposed Rulemaking issued by
the Federal Power Commission in Docket No. R-393 on July
23, 1970, Tennessee Gas Pipeline Company, a Division of Ten-
neco Inc., (Tennessee) submits the following views and com-
ments in response to the proposed Regulations.
In this rulemaking proceeding the Commission proposes
Regulations which, with the exception of an annual reporting
requirement, will totally exempt “small producers” from regula-
tion under the Natural Gas Act. The main purpose of the pro-
posed rule, as stated by the Notice, is to “relieve small pro-
ducers in all areas of almost all the expenses and burdens con-
nected with regulatory matters . . . and to encourage them to
increase their exploratory efforts . . .” While Tennessee supports
the Commission’s efforts to reduce the burdens of and simplify
“small producer” regulations, it feels that the subject proposal
will raise several perplexing problems.
73
——
(252
) ll
The basic problem with the Commission’s proposal, and
which, no doubt, will cause much future confusion in the event
the proposed rule is adopted, is the apparent lack of statutory
authority for the Commission to exempt “small producers”
from regulation under the terms of the Natural Gas Act.
[253]
In the Notice the Commission states that the ground work for
the proposed exemption was formulated in Opinion Nos. 468
and 546. In addition, the Commission cites certain dicta in
Justice Clark’s majority opinion in FPC v. Hunt, 376 U.S. 515
(1964).!
The Commission in discussing the “small producer”
problem in Opinion 468 said the following:
While we are convinced that there is a need for
distinctive treatment for small producers . . . we do
not believe it is necessary or desirable to provide out-
right exemption. We reach this conclusion assuming
that exemption is legally permissible despite the man-
datory language of Sections 4 and 7 of the Natural
Gas Act.*?
49 Section 4(a) states in part that “all rates and
‘In FPC v. Hunt, supra, and Wisconsin v. Federal Power Commission,
373 U.S. at 329 (1963) Justice Clark suggested that the Commission look
to the National Labor Relations Board for a method of handling
exemptions. These exemption practices consisted of the National Labor
Relations Board ceding its jurisdiction in certain cases to state or territorial
agencies. Therefore, there would remain a body with jurisdiction over
labor disputes if the National Board chose not to take the case. There are
no similar state or territorial agencies which could regulate the “small
producer” sales of natural gas for resale in interstate commerce.
74
—
[254]
[254]
Thus, the Commission itself has expressed serious doubt that a
full exemption of “small producers” would be legally permis-
ble. In this same vein, it should be recalled that the Supreme
Court in the First Phillips case made no reference to the size of
the natural gas producers in holding that Congress intended that
their sales of gas for resale in interstate commerce should be
regulated by the Federal Power Commission.?
Il
Another aspect of the proposed rule which the Commis-
charges” by “any natural gas company shall be just
and resonable.” In Section A(c) it is stated that
“under such rules and regulations as the Commis-
sion may prescribe, every natural gas company
shall file . . . . in such form as the Commission may
designate, ... all rates and changes ...”
Section 7(c) provides in part that “No natural gas
company . . . shall engage in the transportation or
sale of natural gas, subject to the jurisdiction of
the Commission . . . unless there is in force with re-
spect to such natural gas company a certificate of
public convenience and necessity . . .” (emph-
asis in original)
2 Phillips Petroleum Co. v. State of Wisconsin, 347 US. at 682. The
Court said: “... we believe that the legislative history indicates a
congressional intent to give the Commission jurisdiction over the rates of
al wholesales of natural gas in interstate commerce, whether by a pipeline
by the Fifth Circuit in Deep South Oil Co. of Texas v. Federal Power
Commission, 247 F.2d 882, 887. In that case the Court held that Deep
(254)
sioi should consider is that upon termination of existing gas
saks contracts, “small producers” apparently will be free to
entr new contractual arrangements, either on a jurisdictional or
a ron-jurisdictional basis. In this regard, at least two serious
questions are raised: (1) would a pipeline company be assured
of recouping its cost in paying the “going” field price to the
“snall producer” in order to keep the remaining reserves? and
(2)if the remaining reserves are contracted to another purchaser
(juasdictional or non-jurisdictional), would the present pipe-
[255]
line purchaser be required to obtain abandonment authorization
for his gas purchase facilities before the purchases could be
terminated? See: United Gas Pipeline Company v Federal Power
Commission, 385 U.S. 83 (1966).
IV
Under the proposed Regulations a person would qualify as
a “small producer” to the extent that he sells less than
10,000,000 Mcf annually. While it is unclear what would hap-
pen if a “small producer” exceeded the above volume, it should
be gticipated that a “small producer” would consciously with-
holc sales, and where possible deliveries, of gas near the end of
the year rather than lose his “small producer” exemptions. This
witkholding would occur, of course, during the cold months of
November and December, when natural gas is in a period of
great demand.
Vv
Under existing Regulations [Section 154.91(b)] the Com-
misdon recognizes that in many instances jurisdictional sales of
natural gas may be made, although the purchasing pipeline has
no ~ontractual relationship with the producers of the natural
gas. Such situations arise (1) when a plant or property operator
purchases natural gas from another on a percentage-of-the-
proceeds basis and resells such gas to a pipeline and (2) when a
plant or property operator sells natural gas to a pipeline under a
76
—
[256]
gs sales contract which has not been signed by a co-owner of
the gas producing property, ie., a “non-signatory co-owner”
situation. Under present Regulations, neither a “percentage
formula” seller nor a “non-signatory co-owner” may file certifi-
cate applications, rate schedules
{256}
or rate schedule changes. However, before such sales can be
terminated, the seller must secure abandonment authorization
from the Commission. See: Sections 154.91(d) and 154.91(e).
In the text of the Notice, the Commission specified that
the proposed exemption “would not include percentage sales
made by small producers”.> Apparently, such sales would
remain subject, inter alia, to the abandonment provisions of the
Natural Gas Act and the existing Regulations. The proposed
Regulations, however, are not so clear with respect to “small
producer” “non-signatory co-owner” sales, particularly in view
of existing Regulations (154.91(d)) which allow a “non-
signatory co-owner to take his gas in kind” and dispose of it
on some other basis, provided he first obtains, inter alia,
Commission abandonment authorization under Section 7(b) of
the Natural Gas Act.
If the Commission intended that “small producers” in
“non-signatory co-owner” situations should be free “to take
their gas in kind’’, then at least two significant problems must
be considered from the purchasing pipelines’ point of view.
3in proposed Section 157.40(a) (3) (iii), defining “small producer
sales”, the Commission included “sales of a small producer’s interests
under another producer’s contract”. This is apparently inconsistent with
the announced intention that “percentage formula” sales by “small
producers” would not be subject to the exemption. On the other hand,
proposed Section 157.40(a) (1) would exclude volumes sold by a “small
producer” under percentage contracts in determining whether the partic-
ular producer sold in excess of 10,000,000 Mcf annually.
77
(256)
First, it should be anticipated that small non-signatory co
owners will seek alternative dispositions for their gas, perhaps to
non-jurisdictional markets. Second, if an operator for a small
[257]
non-signatory co-owner continues to deliver gas to the existing
purchaser after an exemption is granted, serious uncertainties
may arise as to the pipeline’s obligations to the various interest
owners, particularly those that are exempted and with whom
the pipeline has no direct contractual relationships.
VI
In the Notice, the Commission states the proposed
exemption would not apply to “percentage sales made by small
producers.” It is unclear whether the Commission intended to
include royalty gas within the “percentage sale” concept. In this
respect the Commission held in Denman, et al., Opinion
No. 562, 42 FPC 164 at 174, that the royalty payment provi
sions in a lease from which a jurisdictional sale was made
constituted “a sale for resale of natural gas in interstate
commerce subject to regulation under the Natural Gas Act”.
vil
There are potential accounting and billing problems arising
out of this proposed rule. Tennessee is largely dependent upon
the operator’s invoice for any breakdown of the total volume
received at a delivery point which involves a commingled gas
stream. Classification of volumes of gas would have to be set
out on invoices by rate schedules and “small producers”
volumes (shown by each small producer and not in the
aggregate) in cases where the operator is billing for both large
producer gas and “small producer” gas. As a minimum,
verification of “small producer” volumes by the operator
should be required by the Commission.
78
[258]
[258]
There are also problems concerning the status of a
producer. On page 3 of the Notice, the Commission states that:
“producers who have received small pro-
ducer certificates under the present pro-
vision of Section 157.40 or who have
applied and qualify but have not yet
received such a certificate would not be
required to file new applications unless
otherwise directed in any order issued
herein.”
A pipeline may not have been served with these produces
applications and thus may be unaware that they qualify as
“small producer”. “Small producers” should, therefore, be
required to show a certificate or other proof of their “exempt”
status when selling gas to the pipeline company.
Vill
The present Regulations recognize that frequently one
producer will assign to another producer all or part of an
interest in a gas producing property which is covered by an
effective gas sales rate schedule. See Sec
tions 154.92(d 123), and 157.24 of the Regulations. Gen-
erally speaking, these Regulations provide for filings by the
assignee for authorization to continue a sale and to provide for
any refund obligations which may be imposed with respect to
gas deliveri either before or after the assignment. Under the
Commission’s proposal “small producers”, as assignees of gas
producing properties from “large producers”, apparently would
not be required to make the filings required by the present
Regulations. As a result, the pipeline purchaser could be
exposed to considerable uncertainty as to its obligations with
79
(258)
respect to dedicated acreage and/or reserves subject to 4
contract and rate schedule, particularly
[259]
in situations where only a partial assignment of interest is made
by a “large producer” to a “small producer”. See: Skelly Oil
Co., 35 FPC 849 at 856; Turnbull and Zoch Drilling Co,,
36 FPC 164 at 166.
IX
In the Notice, the Commission states in the first paragraph
that it proposes to prospectively exempt from regulation all
existing and all future jurisdictional sales made by “small
producers”. However, proposed Section 157.40(b)(1) provides
that “‘small producers may apply for exemptions to cover all
previous and all future jurisdiction sales ...” The use of the
word “previous” seemingly is inconsistent with the earlier use
of the word “prospectively”. In order to avoid any possibility
that the proposed exemptions would apply retroactively, it is
suggested that the word “previous” be changed to “existing”.
>, 4
In the event it is determined that a conference is necessary,
we respectfully request notification thereof. Correspondence
with respect to the Commission’s proposals in Docket
No. R-393 should be addressed to each of the persons shown
below.
Respectfully submitted,
TENNESSEE GAS PIPELINE COMPANY,
Harry S. Weich A DIVISION OF TENNECO INC.
Phillip D. Endom
Michael W. Moore
P.O. Box 2511
Houston, Texas 77001 By __/s/ Michael W. Moore
MICHAEL W. MOORE
Attorneys for ATTORNEY
(260)
From Regulation ) Docket No. R-393
COMMENTS OF GLOVER HEFNER KENNEDY
OIL COMPANY UPON PROPOSED RULEMAKING
Glover Hefner Kennedy Oil Company (GHK), pursuant to
the Commission’s Notice issued July 23, 1970 in the captioned
docket, hereby submits its comments upon the proposed rule-
ing in such docket. In support hereof, GHK states as
follows:
GHK is a partnership with its principal place of business at
1010 Kermac Building, Oklahoma City, Oklahoma 73102. Com-
munications or correspondence relating to these comments
should be addressed to:
Robert A. Hefner, Il
Managing Partner
Glover Hefner Kennedy Oil Company
1010 Kermac Building
Oklahoma City, Oklahoma 73102
il.
GHK is a small producer,’ with extensive natural gas lease
l According to the criterion specified im the proposed rule and in
$157.40 of the Commission’s Regulations, viz. total jurisdictional sales not
in excess of 10,000,000 Mcf annually.
(261)
[261]
exploration and development operations concentrated aimog
exclusively in the Anadarko Basin of Oklahoma and Texas, aaj
at depths therein below 15,000 feet.
GHK was created in the late 1950's for the express pur
pose of exploring for and developing natural gas reserves im the
deep protion of the Anadarko Basin. GHK’s operations accosi-
ingly are gas-oriented, and necessarily are carried out by a staff
highly specialized and expert in the fields of deep gas tech
nology and exploration.
GHK began exploration in the deep Anadarko Bam
1959, and has expended over $25 million in partially developing
leases acquired upon approximately 250,000 acres, including $5
million for geophysical data. The vast amount of geophysical,
geological and other information accumulated by GHK ce
vinced it that the deep Anadarko contains untapped reserves an
the range of 50 to 100 trillion cubic feet. GHK also was aware
of the high cost of drilling to depths of 20,000 to 25,000 feet,
but believed that the magnitude of anticipated reserves ds
coveries could justify such costs, assuming, of course, tha
sufficient compensation could be obtained from gas sales
cover costs, and return funds for further development oper
tions. Accordingly, upon completion of its initial well m the
deep Anadarko, the Green 1-1 Well im Beckham County.
Oklahoma, at a depth of 24,452 feet, and at costs m exces of
$4.5 million, GHK executed a gas sales contract at an initial rate
of 21.0 cents per Mcf. Although GHK knew
[262]
that the so-called guideline price in the area was 15.0 cents per
Mcf, GHK believed that it could derive some price relief, albest
prospectively, after a short time through expeditious Com
mission action upon its certificate application, filed im cay
February, 1970, proposed rate increase after certification, aad
possibly in the Hugoton-Anadarko Area Rate Proceding, Docket
82
—.
No. AR64-1, et al. However, delays ensued. A certificate was
jgued in late May, almost four months after filing, at a con-
dtioned imitial rate of 15.0 cents per Mcf22 and GHK’s pro-
posed rate increase filed in late May, was placed under suspen-
gon expiring in late November. Thus, for approximately 10
months, absent action in Docket No. AR64-1 compelling a
&ficrent result, GHK will have been deprived of almost 29 per
eat of its annual contract revenue, or approximately $84,000
with the prospect thereafter of having to make refunds of
amounts collected above the “just and reasonable” rate. It is
gbvious that these funds, whict could have been reinvested in
farther-development of GHK’s properties, were irretrievably
lost as a direct result of statutory and administrative delays
attributable to Commission regulation. This example
(263)
[263]
should make quite clear the inhibiting effect upon a small
producer's exploration and development program which regu-
lation under the Natural Gas Act, and particularly artificial,
wurcasonably low “guideline” prices, has had. GHK believes
that such regulation could very well squelch otherwise aggres-
swe and innovative E & D programs by it and other small
producers.
Ill
GHK thus strongly supports the small producer exemption
proposed in this docket.? While adoption of the rule cannot
2This 15.0 cents rate applies also to sales of gas from much shallower,
lower-cost Okishoma wells. There thus is no incentive for deep exploration
whese gas produced from a well completed at a cost of $4.5 million, as
hese, receives the same initial price as a shallow well costing $100,000.
3GHK supports 2s well any proposal to exempt from regulation
ender the Natural Gas Act all entities, including major producers, which
muke sales of natural gas in interstate commerce for resale, and which
mimvest revenues derived from such sales in exploration for, and
development of natural gas reserves.
83
(263)
erase past revenue losses and consequent declining rates of
exploration, the proposed exemption is in the public interest
for the following reasons:
A. Prescription by the Commission of the prices which the
small producer could realize for his gas has had effects well
beyond restricting return on investment. Such price regulation,
appreciably and adversely has affected the small producer’
principal source of funds with which to finance the search for
“gas and development of reserves once discovered, viz. firm reve-
nues from current sales. In this regard, small producers, have
been at a comparative disadvantage in raising
[264]
funds for such purposes. A gas-oriented small producer such as
GHK, in contrast to most. major producers, does not have other
operations, e.g. petroleum refining, to subsidize natural gas E &
D activities. Similarly, sources of debt capital available to large
integrated companies may not be readily tapped by small
producers. Further, as a direct consequence of regulation, prices
for gas sold by small producers have been neither adequate, nor
even firm in many cases, thus, leaving small producers without
any dependable source of capital for funding exploration and
development.
In the present nationwide gas supply shortage situation,
which by all indicators in the absence of corrective regulatory
steps may last for an appreciable time, the proposed exemption
would have the effect of permitting gas to be sold by small
producers at generally higher contract prices, and thus would
foster rejuvenation of E & D programs by small producers such
as GHK. This result should follow naturally from the mere
absence of the applicability to small producers of the artificially
low guideline prices governing producers’ initial sales prices
which prescribed ten years ago and unrevised today to reflect
current conditions, have proved an impediment to intensive
a4
_-
(266)
exploration and development, the best evidence of which is the
supply shortage itself.
It is particularly crucial for the Commission to encourage
the revitalization of E & D programs by small producers
[265]
in the deep Anadako Basin because of the sheer immensity of
untapped reserves in that province, because small producers are
the vanguard of deep drilling efforts, and because the province
is traversed by 15 interstate pipelines, all of which means that
successful development of the area would significantly con-
tribute toward alleviation of the gas shortage. Adoption of the
proposed exemption by allowing effectuation of small pro-
ducers’ contract prices, would reinstitute the viability of the
small producers’ principal source E & D capital—revenues from
current sales—and this in turn would provide a definite incentive
for needed revitalized E & D activities.
B. Without doubt, implementation of the proposed rule
would also have the effect, beneficial to the consumer of
“jurisdictional” gas, of allowing interstate pipeline companies to
complete effectively with intrastate purchasers for small
producers’ natural gas reserves, large blocks of which have in
recent years been diverted to the intrastate markets because of
higher prices which such producers received from intrastate
buyers.
West Texas provides the best documented example of this
fact. A producer of “new” gas from the Permian Basin must
accept a discount averaging 23% and going as high as 31% to
make sales to the jurisdictional market. Top price for gas in the
jurisdictional
[266]
market is 16.5 cents for new gas, while purchaser in the
85
(266)
intrastate market have paid up to 23.99 cents. If the juris.
dictional market had been competitive during 1968 and 1969,
some part of the 130 billion cubic feet of new annual pro-
duction going to the intrastate market during those years could
have been sold in interstate commerce. Under the exemption
proposed, at least in the near term, small producers’ wellhead
(contract) prices for such reserves will tend to rise. However,
. even at wellhead rates up to 30-35 cents per Mcf, the ultimate
consumer still should be paying prices less than, or approxi-
mately the same as those now paid for Canadian natural gas or
foreign LNG, both of which have been used increasingly by
distributors to supplement declining domestic natural gas sup-
plies. Such being the case, it is more in the interests of the
United States and gas consumers for the Commission to stimu-
late domestic production rather than subsidize foreign produc-
tion. By allowing small producers to sell gas at contract prices,
an effect of exemption from price regulation, the proposed rule
would so serve national interests.
C. As the Commission is aware, a serious problem en-
countered by small producers, caused by the mere fact of regu-
lation, is the irretrievable loss of cash flow resulting from shut-
in wells awaiting certificate authorization. Facts stated above as
to GHK’s own
[267]
situation illustrate the problem. That the problem is representa-
tive among small producers was recognized by the Commission
in its opinion in the Permian Basin Area Rate Proceeding, 34
FPC 159, 235 (1965):
“We recognize the burdens to small pro-
ducers of complying with the filing require-
ments promulgated pursuant to Section 7
of the Natural Gas Act before new gas sup-
plies can be connected. Such filings, which
86
_
(268)
are routinely handled by the larger com-
panies can, in the case of a small producer,
strain his resources. The time lag, even the
few weeks required under our expedited
procedures, can deprive a small producer of
badly needed income.”
Effectuation of the small producer exemption would elimi-
nate such losses caused by delays inherent in regulation, as well
as free the Commission’s administrative resources for expe-
ditious and-tHorough attention to matters involving large pro-
ducers and others, and thus is in the public interest.
IV
As part of the small producer exemption, the Commission
should relieve small producers of their potential refund obliga-
tions under temporary certificates and Section 4(e) proceedings.
To enforce such contingent liabilities would be contrary to the
basic purposes of the exemption and would offset its beneficial
effects, viz, emancipation of funds for E & D.
[268]
Alternatively, however, the Commission could lift such re-
fund obligations upon the condition that refund monies be
employed for exploration and development of reserves. Refunds
would not thus technically be “forgiven,” but merely alterna #
tively channelled. In such a manner, the Commission could be
assured directly that such funds would be used for the benefit
of ultimate consumers by potentially increasing gas supplies.
Vv
GHK does not request a conference to discuss the pro-
posed exemption, but desires to be informed of any conference
scheduled to be convened by the Commission so that its repre-
87
(268)
sentative may attend.
WHEREFORE, for the foregoing reasons, GHK urges the
Commission (1) to adopt the amendments to its Regulations as
proposed in its Notice of July 23, 1970 in this docket, and (2)
to adopt additional amendments relieving small producers from
refund obligations under temporary certificates and rate pro-
ceedings, or alternatively to. provide that refund amounts under
such contingent
[269]
obligations may be employed for exploration and development
of natural gas reserves, in lieu of refunds to purchasers, provided
that sufficient assurance is given to the Commission that such
amounts will be so employed.
Respectfully submitted,
GLOVER HEFNER KENNEDY OIL COMPANY
September 14, 1970. By: s/s Robert A. Hefner, III
Robert A. Hefner, Ill
Managing Partner
_—_
(279)
[278]
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL POWER COMMISSION
Exemption of Small producers )
From Regulation ) Docket No. R-393
COMMENTS AND RECOMMENDATIONS
OF
CONSOLIDATED GAS SUPPLY CORPORATION
Consolidated Gas Supply Corporation (Consolidated
Supply) hereby submits its comments and recommendations in
response to the Commission’s Notice of Proposed Rulemaking,
issued July 23, 1970, in the above-entitled matter.
Consolidated Supply is an operating subsidiary of Con-
solidated Natural Gas Company, a registered public utility
holding company, and is a natural gas company within the
meaning of the Natural Gas Act, subject to the Commission’s
jurisdiction thereunder. Consolidated Supply and its affiliates
comprise the Consolidated Natural Gas System, which serves
market areas in New, York, Ohio, Pennsylvania and West
Virginia. Consolidated Supply, which is the principal supply
arm of the Consolidated System, depends for a relatively small
but nonetheless substantial and critically important portion of
its gas supplies upon contracts with small producers as defined
in the proposed regulations, particularly in the Appalachian
Area. Consequently, Consolidated Supply has a vital interest in
the subject matter of the rule-making proposed in this Docket.
[279]
Small Producer Exemption Proposed
Needs Modification
The proposed regulation would exempt small producers
with respect to their small producer sales of natural gas in inter-
89
(279)
state commerce under the Natural Gas Act, apparently
including (1) certificate regulation under Section 7(c) and (e);
(2) rate regulation under Sections 4 and 5; and (3) abandon-
ment regulation under Section 7(b). The regulation proposed
would prescribe the forms of application for exemption and
annual statements to be filed by producers holding small
producer exemptions.
The proposed regulation should, for the reasons stated
below, be modified as follows:
(A) Small producers should be exempt from certifi-
cate and rate regulation only to the extent that their small
producer sales are made at rates not in excess of applicable
ceiling guideline rates or just and reasonable area rates, if
the latter have been determined for the area, subject to a
provision for petitioning for amendment or waiver per-
mitting higher prices, as suggested in the Commission’s
Notice of Proposed Rulemaking issued October 16, 1969,
in Docket No. R-371;
(B) Small producers should be exempt from com-
pliance with Section 7(b) of the Natural Gas Act with
respect to the abandonment of their small producer sales
only when they have obtained the written consent of the
pipeline purchaser to such abandonment; and,
[280]
(C) Annual statements by small producers should be
expanded to show, in addition to the volumes of annual
sales as proposed in Attachment B to the Commission’s
Notice herein, by areas and jurisdictional purchasers the
volumes sold and the prices charged (including what part,
if any, constituted production or severance tax
reimbursement).
The indicated purpose and effect of the proposed exemp-
tion would be to relieve small producers of the many expenses
_
(281)
and burdens of complying with Commission regulatory require-
ments, and it would also relieve the Commission, its Staff and
the jurisdictional purchasers of many of these burdens and
expenses. Considering the great number and usually routine
nature of the filings now being made by small producers and the
relatively small amounts of gas involved with respect to each
such filing, the purpose of the proposed regulation is highly
salutary and should be achieved.
The proposed regulation goes further than is necessary to
achieve the commendable purpose referred to and conceivably
could prove to be unnecessarily expensive to gas consumers, in
view of the nation’s current critical gas supply situation. The
Commission’s Notice herein suggests that the impact of
exempting small producers from regulation should be minimal
because they account for a relatively small share of the natural
gas produced nationally, and, as a practical matter, small
producers are normally not,in a position to obtain more for
their sales than the large producers whose sales are subject to
FPC ceilings in each area. Although this may be true for the
country in large part, it is doubtful that
[281]
such assumed economic and competitive restrictions prevail, at
this time, in the Appalachian Area. As the Commission has
pointed out in its Notice Of Proposed Rulemaking in Docket
No. R-371, a preponderance of nonpipeline-produced gas in the
Appalachian Area is produced by small producers, and the vast
majority of sales in that area is made by small producers. In
normal circumstances—with ample supplies available—the
alternate cost of purchasing Southwest gas at delivery points in
the Appalachian Area could act as an effective upper limit for
prices for gas produced in that area. This alternative, and its
restraining effect upon prices, does not now exist because gas to
meet the increased market requirements in the Northeast is
simply not available from the pipeline companies serving that
*
(281)
area from the Southwest. Since neither the prices obtainable by
the few major independent producers in the Appalachian Area
nor the rates at which new supplies of gas are not now available
from the long pipelines serving that area set any kind of
effective economic limit to the rates obtainable by the smal
producers, the continued imposition of ceiling prices by the
Commission upon small producer prices in the Appalachian
Area, or any other areas of the nation which are vitally
dependent upon local small producer sales, is essential if the
consumer is to be protected against imposition of increased
prices greater than those necessary to elicit additional supplies.
In areas of the nation where small producer sales are in the
minority, and thus where small producers cannot obtain con
tracts for prices higher than those obtained by the regulated
major producers,
[282]
imposition of a requirement that small producers must file with
your Commission for authorization to make sales in excess of
ceiling rates would impose no burden.
Certainly, the existing applicable producer rate ceilings in
the Appalachian Area are too low to provide necessary addi
tional supplies, and Consolidated Supply has urged and will
continue to urge that they be raised promptly and substantially
in both Docket Nos. R-371 and R-389A.
With respect to abandonment authorizations for small
producers, the vast majority of these are routine matters
occurring because of depletion of production or circumstances
which have made continuance of the sale to the pipeline pur
chaser uneconomical. The pipeline purchasers in these situations
routinely consent to the abandonment of the sale, and Com
solidated Supply sees no necessity under the Natural Gas Act
for the Commission to be involved with the processing of these
routine and uncontroverted abandonments. Only in the rare
92
_ ,
(283)
situation in which there might be a dispute as to whether a
gmail producer sale should be discontinued should there be
some procedure whereby a Commission determination can be
had as to whether the abandonment is permitted by the present
or future public convenience or necessity.
The additional data suggested for inclusion in the annual
statement form to be filed by producers holding small producer
exemptions would impose very little, if any, burden and, at the
same time, would provide information that would be useful to
both the Commission and the public.
[283]
Waiver Of Commission Regulations To Permit
Tracking Of Rate Increases Resulting From
Exemption Of Small Producers
The Notice herein also states that the Commission pro-
poses to waive the provisions of Section 154.63 of the Regula-
tions solely to permit the tracking of the rate increases resulting
from the exemption of small producers, provided that (1) where
present orders governing tracking by the pipeline purchasers are
not imvolved, the supporting schedules required by Section
154.63 shall be filed within four months, and (2) the rates as
revised by such tracking shall be subject to reduction and
refund from their effective date. Apparently this is an
ammouncement of a policy which the Commission proposes to
adopt, but it is not proposed that this policy be embodied or
the mechanics of its application set forth in the proposed
regulations.
It should be noted that, if the Commission’s proposal to
exempt small producers from rate regulation be modified as
suggested by Consolidated Supply herein to permit such
exemption only where the rates charged are not in excess of
applicable ceiling rates, then questions concerning the tracking
of imcreased costs resulting from the exemption of small
producers should be moot.
(283)
However, assuming that the Commission exempts anal
producers from rate regulation without the quaificee:
suggested by Consolidated Supply, @ seems Miely hx ne
increases resulting from the exemption of small prodecers wa
form only a small part of the imcreases im cost of gx; whch
purchasers are virtually required
[234]
to track under the Commission’s decmion m Texas Extn
Transmission Corporation." Further, pipelines purchasing fron
pipeline purchasers are also confronted with the mecemity of
tracking general rate increases, inciading bat mot ieitd &
producers’ price increases, filed by the pipeliee purchases: k
would appear to be administratively chaotic both for é&
Commission and for the pipelines if ome set of mies & & kk
applied to the tracking of that portion of sappher cost imcczxs
which is due to rate increases caused by exemption of sual
producers, and another set of rules is to be applied with respect
to the rest of the jurisdictional increased supplier costs whch
pipelines must track.
For these reasons, Consolidated Supply urees that ths &
not an appropriate proceeding im which to determm: reks
conditions and procedures for the tracking of rate morczxs
resulting from the exemption of small prodecers If é&
Commission believes it appropriate to establish rales comccming
tracking of supplier cost changes im a relemaking proceeding,
rather than considering the problems of cach pipcheec company
on an ad hoc basis, then Consolidated Supply uxecs that 2
separate proceeding be imstituted to comssder procedescs for
tracking the net effect of all changes m gas supply costs whxh
must be tracked. The attention and the commacats of &
industry and others affected could then be focesed
'Texas Eastern Trangnission Cosposation, 39 FYC 638 (9S).
y. FPC, 414 F.2d 344 (Sth Cie. 1969), cert. denied za.
26 LEd.2d 89 (1970).
94 f
(286)
[285]
on tracking problems in a proceeding concerned primarily with
feat subject rather than in this proceeding, in which only a
minor portion of the tracking problems are involved
maden tall > y-
If, however, small producers are to be permitted to charge
tagher rates than large producers, and the problems of tracking
gesultant cost increases are to be considered in this proceeding,
then Consolidated Supply takes serious exception to the pro-
posed policy as announced in the Commission’s Notice herein.
First, in the Appalachian Area and other areas where
escalation clauses in producer contracts are not common, the
jmcreased cost effect from exempting small producers will not
le primarily in rate increases, which is all that it is proposed in
the Notice to permit pipeline purchasers to track; rather, the
substantial cost effect will result from the replacement of con-
tiawally-diminishing supplies under existing contracts with new
contracts covering new supplies at higher, unregulated prices. It
is the increase in the average cost of gas which needs to be
tracked in some fashion, rather than price increases only.
Second, schedules and such supporting data as may be
required to support tracking increase calculations can and
should be furnished very promptly, in much less than four
months. These are relatively simple and minor compared to the
schedules required by Section 154.63, even if limited to State-
ments L through N. The latter require compilation of
voluminous data, most of which have nothing to do with a
tracking increase and should not be required.
Third, as to the requirement that the rates as revised by
the tracking filings shall be subject to reduction and refund, it
may
. [286]
first be noted that this requirement does not state that only the
imcreased portion of the revised rates shall be thus conditioned.
95
(286)
Rather, the Notice seems to say that once a pipeline tracks
rate increase imposed on it by the Commission by exemption of
small producers, the pipeline’s entire revenues become subject
to refund retroactively to the date of the increased rates. The
unfairness of this proposal, even if limited to the increased
portion of the revised rates, need not be belabored here, partio-
ularly in view of the fact that the small producer increases to be
tracked would be firm rate increases under the Commission’s
proposed policy.
Communications in regard to this proceeding should be
addressed, in addition to the undersigned, to Henry P. Sullivan,
General Counsel, Consolidated Natural Gas Company, 4
Gateway Center, Pittsburgh, Pennsylvania 15222, and David E.
Weatherwax, General Counsel, Consolidated Gas Supply Corpo-.
ration, 445 West Main Street, Clarksburg, West Virginia 26301
Consolidated Supply does not request a conference to
discuss the proposals involved herein; however, it does desire to
participate if a conference is convened by the Commission in
this ii
Respectfully submitted,
CONSOLIDATED GAS SUPPLY
CORPORATION
By /s/ Norman A. Flaningam
NORMAN A. FLANINGAM
Its Attorney
96
<a
(T-1)
(T-1]
FEDERAL POWER COMMISSION
In the Matter of:
Docket No. R-393
Exemptions of Small Producers
from Regulation
GAO Building,
Room 2043,
Washington, D.C.
Tuesday, December 8, 1970
A conference on the above-entitled matter was convened
at 10:00 o’clock, a.m., pursuant to notice.
PRESENT:
FRANCIS J. GILMORE (Presiding)
JOHN F. JOSEPH, Federal Power Commission
Staff
RICHARD F. GENERELLY, Callery
Properties, Inc., and Eason Oil Company
S. BLICKMAN,
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