# Appendix — FPC v. Texaco Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0304%3A01 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1974 - **Citation:** 417 U.S. 380 ## Text 4 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 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0304%3A01. Public record. Not legal advice.