WISCONSIN v. FED. POWER COMM'N.
Legal provision: Natural Gas, or Natural Gas Policy Acts
Argument of Kent H. Brown
Mr. Kent H. Brown: Your Honors, may it please the Court.
These cases present for review, a September, 1960 determination by the Federal Power Commission which is affirmed by a divided court below upon the basis of several fundamental misconceptions of its import and of its ramifications.
By its determination, the Commission for the second time in a decade, declined to apply the heart of the Natural Gas Act to Phillips Petroleum Corp -- Company, the largest independent producer of natural gas, supplying over 10% of the interstate market and to fix just and reasonable rates for its sales.
In a 1951 determination, the Commission had declined to do so under the erroneous impression that it lacked jurisdiction over sales by producers to interstate pipelines.
That was reversed by the court below in 1953 with a remand order which specifically directed the Commission to proceed to fix just and reasonable rates for all of Phillips interstate sales.
In June of 1954, this Court affirmed.
With that, the Commission’s responsibility was twofold.
First, it was duty bound to proceed with this batch to carry out the mandate of the courts.
Secondly and equally importantly, it was duty bound to take steps promptly to stabilize producer rates and charges in the interim, pending the completion of its first task.
As will be shown for six years owing 1954, it did neither and those charges soared.
Belatedly, following six successive Court of Appeals adjournments that this Court meant what it said in 1959 in the CATCO case about the Commission’s duty to stabilize and to hold the price line, pending the determination in the instant Phillip rate case.
The Commission did, in 1960, give a form of lip service to the duty to stabilize, at, I point out immediately, 1959 and 1960 levels, not 1954 levels.
It flatly refused however in the instant determination to perform its foremost function and that is why we, who have put on the penalty for the Commission’s procrastination and will continue to do so for the foreseeable future, are here today again as a last resort.
Upon receipt of the remand order in 1954, the Commission entered an order vacating its prior determination of the investigative proceedings it had instituted in 1948 against Phillips.
It did nothing, however, by way of scheduling the matter for hearing and two years elapsed during which time, Phillips exercising its prerogative under Section 4 of the Natural Gas Act filed successively 12 increases in particular sales which under Section 4 may be suspended for a maximum of five months after which they go into effect virtually automatically.
Finally, in 1956, the Commission entered an order consolidating those 12 rate increase proceedings with the pending Section 5 investigative future ratemaking proceeding and scheduled both as consolidated for hearing beginning June of 1956.
The hearings proceeded and were terminated in December of 1957.
During the course of the presentation, there were four separate cost-of-service studies presented to the examiner, carefully analyzed, cross-examined by all parties.
All used the 1954 as the test year adjusted to take into account known changes.
15 months later, on April 6, 1959, the examiner rendered a most exhaustive analysis of the record and his recommendations, for futu -- fixing the Phillips future rates.
Before analyzing the examiner's decision, I would digress momentarily to record developments during the interim and the date of this Court's order of remand and 1959, the date of the examiner's initial decision.
First, the period was marked by a multitude of Section 4 rate increase filings by Phillips and by others developing into what has come to be called a pancaking process; namely, a rate increase for one sale is filed, it goes into effect.
It is in effect subject to investigation which is never instituted, settlements included.
Finally, the company will file another increase for that same sale which goes into effect and supersedes the first increase.
This is the pancaking process.
This was done by Phillips and enormous amounts of money were collected by it subject to refund under Section 4 of the Natural Gas Act.
The period was also marked by a study upward spiral of similar nature in the initial prices for gas, new gas dedications.
The Commission's rationale for permitting of this was in those days it would investigate the propriety of those prices in subsequent Section 5 proceedings like this one should be instituted against each major producer.
They were instituted against virtually all of the major producing industry.
The period was also marked initially by a concerted refusal on the part of producers in the Section 4 and Section 5 cases that the Commission instituted to disclose in any way shape or form their costs of operation.
Their representation was that the cost-of-service method of regulating independent producers was impractical, impossible or worse and their theme was hammered to the point of redundancy.
The Commission at this time and the producers were aligned in Congressional pursuits, seeking congressional exemption of the producing industry from the impact of the Natural Gas Act or at minimum, outlawing the use of cost-of-service as a method of evaluating and testing their rates, both efforts failed.
Finally, during the period, there were two several marked decisions by the courts below and the Fifth Circuit holding in substance the cost-of-service was of necessity, at least the starting point, the Commission must use in order to evaluate any rates of any utility subject to its jurisdiction.
Coming back to the examiner's decision, he first noted the criticism of the feasibility of the cost-of-service approach, but noted also that it had been rendered in a vacuum in that up until his decision, there had been no opportunity for applying or endeavor to apply the traditional means of evaluating the rates of an independent producer, his was the first attempt.
During the proceedings, Phillips and all of the party's participants had proceeded upon the assumption that of the course this was the process that would be utilized to evaluate Phillips' rates.
Phillips found no difficulty in the presentation of the case.
Parties who've submitted other cost-of-service found no difficulties in the presentation of the case.
The examiner exhausted -- exhaustively analyzed each of the four cost-of-service matters submitted to him and concluded that Phillips' cost-of-service for the test year 1954 was $57 million which translated in terms of a per unit cost-of-service of 11.6 cents per Mcf of gas sold.
He also found that for 1954, test year revenues apart from any increases subsequently filed were $45 million resulting in a deficit operation on the surface for that particular test year.
He directed Phillips to file calculated rates for all of its 1954 sales for continuing to produce the requisite 11.6 cents per Mcf average revenues for those sales, thus supplying Phillips with the full return of its entire cost-of-service.
And incidentally, cost-of-service as I use it here always includes a fair return upon the actual expenses and the actual operations.
He also directed that Phillips filed similar rates for all of its then current, continuing sales which would have the effect of increasing sum.
Phillips' sales at that time ranged from one cent per Mcf to as high as 23 cents per Mcf depending on a particular sale.
His direction would have produced a schedule of rates ranging from say 10 to 15 cents per Mcf for all of those sales.
Hence, some would have forced -- have been increased many, a great bulk of this rate increase filing subsequent to 1956.
Iis range as I've indicated, the 23 cents would have been reduced.
Phillips submitted after the examiner's decision was rendered a schedule of rates which as I've indicated started with a maximum of 15 cents and tapered down, indicative that the direction was quite feasible.
Justice Hugo L. Black: What year was that?
Mr. Kent H. Brown: In 1959 sir.
A year and a half later, in September 1960, the Commission issued its opinion in this long awaited initial determination of just and reasonable rates for producers.
Its opinion like the examiner starts off with an analysis of the theory of regulation of independent producers and unlike the examiner, however, deals with the numerous representations of impracticality, endorses the representations wholeheartedly and finds the system of cost-of-service analysis for independent producers not a feasible means of fixing their rates.
Preferring to adopt and test such rates on an entirely new process of evaluation of the operations of producers in specified areas of the country and fixation of an even level of rates for all gas served or sold in that area, it's called by all producers, area ratemaking process.
Simultaneously with that pronouncement of preferred process which as I've pointed out was an entirely noble one, the Commission issued its statement of General Policy Number 61-1 in which it defined and prescribed 23 separate areas of the country and pulling them out of the thin blue air, if you please, this promulgation was without notice, without hearing, without evidence, prescribed two levels of rates for each of the 23 areas with decimal precision.
The first group was to be a guide to the Commission in the certification of new gas dedications under Section 7 and an indication to the applicant of whether he might anticipate receiving an unconditional certification if his price was below that for the area fixed in the statement, or a conditioned certificate confining him to the area of initial price level, absent a demonstration of why he should have more.
The second group of prices was prescribed for guidelines in evaluating rate increase files.
By that, a rate increase filed under Section 4 below the prescribed level would according to the Commission not be suspended or subjected to an investigative proceeding.
If it was above the prescribed rate increase level, it would be suspended and subjected to a Section 4 process.
Now, the evolution of those prices was a complete enigma initially, but since the Commission has made it perfectly plain that they were in substance for initial prices, the then going line for new gas dedications in 1959 and 1960.
For the Section 4 line was in effect a weighted average of the gas, price of all gas being delivered, at that time, in that particular area of the country.
These were to be the guides that the Commission would use in evaluating Section 7 and Section 4 applications.
It made it perfectly plain also, however, that it had no intention of denominating them as just and reasonable or that they were to be used for evaluating anything that under that standard in the Section 4 or Section 5 cases.
It was to provide a guideline per the mandate of this Court in CATCO to hold the line, to stabilize the price level while they evolved just and reasonable rates in the pending Section 5 cases which have been instituted against major producer.
The Commission went on, however, to here say that this case have been presented to it on a cost-of-service basis and with the only means by which it could evaluate it and proceeded to do so in precisely the same manner as had the examiner, and if you please, emerge to the cost-of-service less than that.
The examiner had described and found nearly $54 million for the 1954 test year which average is 11.1 cents per Mcf reach of Phillips 1954 sale.
However, having done so, it then refused and declined to adopt the examiner's recommendation and to proceed in the manner in which everyone had anticipated that it would i.e. the exercise of Section 5 duties and fixed prescribed just and reasonable rates for Phillips then pending and future sales.
It said first that it knew that Phillips' costs had increased between 1954 and 1960.
And that the 1954 test year was presumably stale and it would be a result without reason to fix -- purport to fix Phillips' future rates in 1960 on the basis of a 1954 test year.
It refused, however, to its -- it so felt, remand the matter to the examiner for an updating of the test year, saying that instead of doing so, it would dismiss and terminate the Section 5 investigative proceeding entirely and await the evolution of area rates and area ratemaking proceedings to be instituted later and fix Phillips and all other independent producers' just and reasonable rates.
At the conclusion of those investigative proceedings which were anticipated to consume or require at least another decade.
The Section 4, proceedings, the rate increase proceedings which had been superseded as to which the interest was primarily involving the necessity for Phillips to affect refunds of any excess over the just and reasonable rates for the period, the Commission pointed to the deficiency that it found for 1954 and presumed that that deficit status continued through 1958, the year in which these particular 12 Section 4 cases were superseded by even higher ones and hence, dismissed that -- those proceedings as well.
The Commission knew, it indicated in its opinion that it was cognizant that there were pending before it at that time, some 95 to 100 separate rate increase filings made by Phillips through the period 1956 through 1960 that were not technically encompassed and consolidated in the pending proceeding from which it knew that in 1960, Phillips was deriving revenues of approximately $90 million of which -- and of these it took pride purportedly of which the Commission said 82% or $70 to $74 million of Phillips' total revenues, jurisdictional revenues, were being collected under Section 4 suspension cases subject to refund.
This was the means by which the Commission said, “We are able to protect the public as to these tremendous increases pending the evolution of area rates to emerge from proceedings we will start subsequent, just the fact that they're being collected subject to refund, $70 million of the $90 million for revenues of that year.
Yet the Commissioner refused to remand to the examiner for consideration of those rates and the analysis of them in the light of the standards of Section 5 and Section 4, i.e. are they just and reasonable, unjust or discriminatory and as to the latter, I repeat, Phillips' rates ranged from 1 cent per Mcf for some sales to 23.5 cents per Mcf for many others.
The Commission said that there was no evidence of discrimination in this record, hence there was no basis for activity under that aspect of Section 4 and Section 5 and dismissed the whole kit and caboodle.
The court below upon review of the determination sustained the Commission by a two-to-one vote.
It first analyzed the situation in terms of the 1954 to 1959 period during which the particular rates, Section 4 rates subject to review were analyzed -- were in fact and concurred with the Commission in its surmise that the deficit operation continued through 1958, at least.
It then analyzed the period after the forthcoming area rate proceedings and made some remarks about privy of that endeavor which was of course were wholly premature in that we do not know yet and we will not know or as the court below said, “At least four to 14 years.”
What if anything will emerge from any of the pending area ratemaking endeavors?
Justice Potter Stewart: What -- where do this 14 year figure come from, that's used throughout the briefs, I wondered who does -- what that was or what's the significance of the 14 years?
Mr. Kent H. Brown: It is taken from the words of Judge Prettyman below writing for the majority, where he found it, I do not know sir.
The Court returned to the most important aspect of the case, however, i.e. what it called the present rates, meaning, the rates that were now in effect in 1960, were in effect in 1960 and those that will continue to be in effect as increased by Phillips' first contractual obligation to do so anytime for this period of four to 14 years or whatever it is that we await the evolution of the area rates.
Although the Commission itself contemplated no control during this period, the court below recognized that some form of interim regulation was requisite and said that the Commission could use the SGP, the Statement of General Policy price levels for not only testing the validity or propriety of service propriety of applications under Section 47 for new sales and Section 4 rate increase purposes but in testing the propriety of existing rates in Section 5 proceedings, in that the Court was in error.
First, the Commission did not so intend those figures.
Secondly, it will be entirely impossible for so to utilize them because they were nothing but products of fiat.
How can you direct a producer to reduce his rates in the basis of the comparison with the figure of that nature?
So finally, the use of those figures would produce nothing but fair field price basis for testing.
Judge Fay, he dissented in which he pointed out that the area ratemaking process was only in the offing that in the interim, a regulation of some nature was required and he felt that on this record, the Commission could adequately do so, as it had itself demonstrated by the exercise of the individual company cost-of-service process and fixed rates.
If there were any deficiencies in the process and we are not here advocating that there are not, there are imperfections, ratemaking is not a precise science, but it has been done for 50 years.
It has the process that is only that is known to the law at this juncture as being entirely legal and lawful.
It is the one the Commission, I submit, was required to proceed under and apply unless and until it evolved in adequate substitute.
It could not dump the ship in the middle of the stream and let us all float out to the ocean.
Our principal legal contentions on that subject are to precisely that effect, namely the Commission we feel was duty bound and obligated to proceed with this batch in 1954 to carry out the mandate of this Court to fix just and reasonable rates and its high time, it was done.
Thank you very much Your Honors.
Argument of William M. Bennett
Mr. William M. Bennett: Mr. Chief Justice and members of the Court.
This is a case of national importance.
It can be demonstrated by the fact that a mere one cent increase in the price of the volumes of gas delivered in interstate commerce amounts to $80 million increase annually across the nation.
So far as California is concerned, our gas bill exceeds $300 million a year.
We are dependent primarily, almost totally upon the El Paso Natural Gas Company for our gas which we obtain from out of state sources and in turn El Paso is the largest single customer of the Phillips Petroleum Company.
This case has a long and almost a discouraging history to it.
The Court of Appeals below, following the mandate of this Court, in the Phillips decision specifically directed that the Commission should fix the rates for Phillips and it hasn't been done.
A proceeding was opened pursuant to that mandate and pursuant to Sections 4 and 5 among others of the Natural Gas Act.
And this is not that type of case in which the Commission has discretion to open.
This case was opened because it was directed to be opened by this Court and by the Court of Appeals below to find out the way to regulate producers for the protection of the consumers of the United States of America and so, when we come to the question of whether they had the power to dismiss, this has great bearing upon that.
Section 4 for example, under which this case was conducted, specifically provides in plain language that the Commission shall fix just and reasonable rates, Section 5 directs that they shall fix rates -- just and reasonable rates and it simply was not done here.
Coming to the examiner's decision, it was a first effort, it was a pioneer effort, it took 82 days and there were four major cost-of-service studies presented.
One by Phillips itself which insisted that this case be tried upon the cost method and that is very important as I shall hereinafter demonstrate.
The examiner said, in the record before this Court, it may be noted at the outset that Phillips itself has taken the position throughout this proceeding that its just and reasonable rates should be determined under the cost-of-service method rather than under a field price method.
The Swerdling decision grasped the producer problem, it applied a rate base to it.
It settled the very difficult problem of allocation as between oil and gas.
It fixed the rate of return and in that rate of return, it used it for the vehicle that it is to give compensation for the admitted risk which is in this business which makes it somewhat different from other utilities, but there was a compensation given for the risk and it went on in short to apply the rate based method to Phillips as a producer.
The examiner pointed out that this being the first case, there were problems which were encountered for the first time, but the fact that he did it demonstrates that it can be done and that it was done on a cost-of-service method.
The examiner went on to point out that this task of regulating producers could be made simple by self-help upon the part of the Commission and he referred to the fact that when they first commenced to regulate pipelines, they did not have a system of uniform accounts nor did they then, nor do they now have such for producers and he suggested that that might be adopted.
And California incidentally has also asked the Commission to do that very thing and so he must realize that some of the difficulties which are stated are not being cured simply because there is no uniformity of accounting being prescribed which the Commission has the full power under the Natural Gas Act to do.
The examiner's decision after completion and after demonstrating that that which could not be done was done then went to the Federal Power Commission itself.
And at that time, the Commission consisted of Commissioners Kuykendall, Commissioner Stuppe and Commissioner Klein.
There were only three votes on Opinion Number 338 which took over and modified the opinion of Examiner Swerdling.
The important thing to note in the Opinion Number 338 by those three Commissioners, not the present Commission, is that they described the Swerdling cost-of-service method as being unworkable, impractical, ineffective and that it would lead to absurd results.
It is somewhat as though I were to say, this building could not be built, literally.
Mr. Swerdling did it and the Commission after saying it was unworkable, applied it to Phillips in this very case.
Justice Arthur J. Goldberg: [Inaudible]
Mr. William M. Bennett: There is not Your Honor by the words which are employed in the briefs, but I shall demonstrate when I come to it.
There is a startling inconsistency between the action of the new Commission and the action of the old Commission and the words of the new Commission in its position before this Court and I shall come to that momentarily.
Now, I would point out to this Court that the previous Commission discarded for the producing industry the cost basis for regulation.
And you must bear in mind that it could not have been done based upon any evidence in the Phillips case before Examiner Swerdling because he found, quite to the contrary and as I pointed out, the Phillips Petroleum Company itself said that it could be done and wanted it done that way.
So, where then comes this experience which is not in this record from which they could conclude that it was not workable.
I suggest that it comes from some history which we find in the statement of Chairman Kuykendall to the House Committee on Interstate and Foreign Commerce wherein after the decision of this Court in 1954 saying that producers were subject to regulation, the Commissioner in a letter to that Committee said, “The question remains however, whether the Supreme Court's decision in the Phillips case reflects the true public interest or whether legislation amendatory to the Natural Gas Act is needed for that purpose.”
And he concluded in this letter which he read to the Committee by saying, “Consequently, we believe that the Federal Government should not undertake the control or the regulation of rates of those engaged in the production, gathering, processing and so on and so forth of the selling of natural gas.”
That was one piece of the experience I think which went into that conclusion that it wasn't workable.
It was more of an attitude than experience because they had had no experience.
Then when the attempt to exempt failed, the Commission in 1938, in its 38th Annual Report suggested to the Congress that there should not be the cost basis, but rather a standard for pricing or evaluating natural gas as a commodity, not regulation but simply market price.
So, I would suggest that an attitude, if not a biased, accounts for this language, that they were determined not to regulate in the first instance and after they were told to regulate, they tell the Congress it's still not in the public interest and after the exemption attempt didn't work, then they said, “Well, let's regulate upon a commodity basis.”
I suggest that's the basis for the experience.
Now, I also point out that --
Justice John M. Harlan: [Inaudible]
Mr. William M. Bennett: Yes, they do, Your Honor but the majority of course ruled otherwise.
Now, let me point out some other experience which is the basis for this most unorthodox finding if we're supposed to find upon records.
In its brief at page 7, which is filed before this Court, this Commission says, “It was not until the receipt of the examiner's report that the Commission had the opportunity to examine this major case.”
In the Commission's view, the most important question was whether cost-of-service should be applied.
The Commission concluded in the light of its experience in this and other cases and bear in mind the experience in this case proved that it could done, but the Commission concluded in the light of the experience in this and other cases during the recent five years that the cost method would not work and in the footnote it listed the experience in the other cases and listen to what the government recites.
A number of minor cases involving slender records relatively few sales and little or no attempt to face the basic problems raised here are cited in Footnotes 8 and 9 of the Commission's opinion.
That those minor cases involving slender records, few sales and no experience and no attempt to face up to the problem constitute the experience of the Commission leading to the language here that it is not workable.
Justice Arthur J. Goldberg: [Inaudible]
Mr. William M. Bennett: Yes, Mr. Justice Goldberg, it did.
Justice Arthur J. Goldberg: [Inaudible]
Mr. William M. Bennett: Yes, it is the Commission's function to make the determination, but the Commission is bound to make determinations based upon records before it or in the alternative upon some other expertise or experience and I hope that I have demonstrated to the Court that there was no experience.
There was an attitude contrary to regulation of producers as this Court knows and as the Congress was told and I don't submit that that is tantamount to evidence upon which a judgment so important as this could or should've been made.
Justice Arthur J. Goldberg: [Inaudible]
Mr. William M. Bennett: Yes, Your Honor and the --
Justice Arthur J. Goldberg: [Inaudible]
Mr. William M. Bennett: Yes, it is their job and I will come shortly in this case to the point from experience where they have gone back to cost-of-service which casts I think, even greater doubt upon this language and certainly, it seems to me, would reinforce my position that they do not accept that premise of cost-of-services is unworkable.
They do not accept it by what they do.
Now, following Opinion 338, there were promulgated these price lists and in passing, let me point out that prices are not rates.
Nowhere in the Natural Gas Act do you find that the duty or even the authority of the Commission to promulgate prices, that's usually the function of the marketplace.
The Commission failed to find a lawful rate in this case.
It terminated, even though it was directed by the Court of Appeals pursuant to what this Court said to fix the just and reasonable rates of Phillips.
We don't know what those just and reasonable rates are as I'm standing here and as I say, the prices were then promulgated without notice, without hearing.
Now, if they mean nothing, of course, there is no harm.
But if they mean something, there's great harm and whether legally they mean something or nothing, imagine the great example to the industry that these prices coming from this great agency set and are having and that cannot be minimized.
I propose not to talk about cost because as I conclude, I will place to the Court that in my judgment, the choice here is between regulation which means cost and no regulation which means no cost as they propose it.
Justice Potter Stewart: Your position that the Commission is required to consider rates on a cost basis exclusively?
Mr. William M. Bennett: No, Your Honor, it isn't -- that is not completely my position and I shall develop it in this discussion which I am about to begin, but let me begin this way, why cost?
Why should we use cost?
Well, it's quite simple in the beginning.
Congress in enacting the Natural Gas Act intended cost.
This Hope -- this Court in the Hope case pointed out that the Act provided for regulation upon recognized and more or less standardized lines and regulation means costs and in the Hope case, you proved the cost method involving Natural Gas Company as is Phillips.
Pipelines, how are they regulated?
Costs, no other way, traditional rate based method.
Producers, how are they regulated, costs.
The City of Detroit case involved the production activities of a pipeline operation and in that case, the Court of Appeals pointed out that it was the duty of the Federal Power Commission in fixing the return upon production property to do it upon a cost basis.
And what did the Federal Power Commission do with the language from the City of Detroit case, in the Union Oil case cited in all the briefs, they concurred, they accepted it and they said, “This is the law” and they proceeded to regulate producers upon a cost basis in name only, not in fact but at least they utilized the right words consistent with the directions of all of the Courts of Appeal in the United States without exception as to cost.
What does the staff of the Power Commission do?
Since 1938, it, interpreting that Act has always used cost.
Before the Phillips case it used it.
The examiner of the Commission, Mr. Swerdling used it in the Phillips case.
The Commission itself in the Phillips case even though it said it wasn't workable, did utilize it.
Now, this Court itself, in opinions written by Mr. Justice Douglas has said upon three occasions and those opinions have not been modified in anywise, whatsoever that in fixing a return upon production properties, the rate base method as it were used by the Commission is quite lawful and acceptable and I'm referring to the Hope case where Hope had production properties.
I'm referring to the Colorado Interstate Gas case where they had production properties and I'm referring to the Panhandle case where they had production properties.
And in each and every one of those cases, the Commission used the cost method to fix the return upon the natural gas producing properties and this Court said, “That is the way to do it.”
Unknown Speaker: [Inaudible]
Mr. William M. Bennett: No.
Unknown Speaker: [Inaudible]
Mr. William M. Bennett: That is correct, Your Honor.
They did not say it was the exclusive way, I concede that.
Now, let me point out that since the Phillips case, there is the case known as the Glassell case cited in the briefs and the Commission there used the cost-of-service method.
Let me point out that in the Hunt case, the Hunt Oil case which is cited in the briefs, on October 17th, 1962, the present Commission remanded the Hunt proceedings and directed in this language that cost-of-service evidence be received.
Cost-of-service which was the method used in this proceeding and others pending before the Commission prior to the commencement of the area rate proceedings and as we have previously indicated, we intend to continue to process and decide such proceedings as promptly as the record in each case permits.
Then on November 30th, 1962, in the Hunt case, this present Commission said and I'm quoting, “In summary, the basic defect in all of Hunt's cost-of-service presentations is a utilization of allocation methods rejected in Phillips, this Phillips case and a failure to provide information with which a proper cost-of-service for Hunt could be determined.”
And so, I would now say to the Court in answer to the question that this present Commission, despite what it says in its briefs in defending the language from the past that cost-of-service is unworkable as to producers is utilizing it in the two cases I've cited to this Court and I've said that it intends to utilize it in other producer cases, not that there are many because they're in a state of limbo, the pending area rate determinations, but when they do have producer cases which somehow get to them over and above area rate proceedings, they're going to use cost-of-service and that must mean Mr. Justice Goldberg that it's workable.
Now, a few observations coming from common sense would seem to be an order here about cost.
How does American industry or the financial community conduct its affairs except upon a cost basis?
Phillips is no different, it happens to be subject to regulation.
Its books are kept upon a cost basis, its return is measured upon a cost basis, and costs in the regulatory field are simply the measurement whereby we properly can limit return.
In unregulated sectors of the economy it's a measurement but there's no limit upon the return at least in theory, but it is inevitable.
It is impossible to regulate an industry without cost as the tool to do it.
Unknown Speaker: [Inaudible]
Mr. William M. Bennett: My answer runs this way, if Your Honor please.
The Commission may state and the Supreme Court may agree that there is no single way to regulate as the Hope case did.
It's the end result that counts, but that presumes that there is some other acceptable, practical and lawful method at hand.
Now, why do I say at hand because the Natural Gas Act does not speak in futuro.
It demands consumer protection now and this Court in your Phillips decision demanded consumer rate protection through the regulation of producers now, not in 1970 or not in 1980, but now.
And I don't quarrel with the right to experiment, none of us quarrel with that right, but we quarrel with the laying down, with the laying down, with the placing upon the shelf of the mandate of this Court of the only tool, of the only weapon which is available to regulate this industry.
That is the vice of this case and when I come to the relief, I asked, I will spell out what I think they should do in the meantime and I would suggest now that in terms of whether or not they have the right to depart from cost, if the reasons they gave, one of them was, it was not workable.
And if the previous Commission found it -- in all of its experience, say Phillips to be workable and even used it in Phillips.
If the present Commission is using it in the Hunt case and in the Glassell case, if the examiners of the Commission are using it in their Section 4 and 5 investigations of producers as they are, then I would say that the premise from which we leaped off into the area experiment is not a sound premise.
If it's more than the premise, if they considered it a compelling reason to experiment, haven't I demonstrated that that is not a reason?
Doesn't the Commission itself through the utilization of cost-of-service tell this Court in reality, regardless of its briefs that it is workable?
Now, if something is unworkable, we abandon it, fine, but if something is workable, does it still follow that we abandon it when area rates is nothing more to date but a grand experiment.
Judge Prettyman said, we make it, the answer to it in four to 14 years.
Unknown Speaker: [Inaudible]
Mr. William M. Bennett: I think I --
Unknown Speaker: [Inaudible]
Mr. William M. Bennett: Yes Your Honor, I'm pushing it hard but obviously I'm taking advantage of what he said and I hope the Court will [Laughter] receive it in that light but --
Unknown Speaker: [Inaudible]
Mr. William M. Bennett: Well, but --
Unknown Speaker: [Inaudible]
Mr. William M. Bennett: I don't know how long it will take.
I think it will not take 14 years, but let me read what the Government says as to how long it will take.
This is on page 29 of the Government's brief.
“The experience of the first six years of producer regulation led the Commission at that point to estimate that nearly 13 years would be required in order to dispose of the cases pending.”
Pardon me, I'm in error on that that -- I didn't mean that the way it came out, that 13 years referred to the number of cases pending, I was mistaken, I misspoke myself.
And I thought that was a source of Judge Prettyman's 14 years but it is not, but in any event, I think we all agree it is going to take a great deal of time.
Now, what I am saying here is that cost-of-service was prematurely abandoned.
It was abandoned for the wrong reason.
And remember now, we're abandoning a method which the staff demonstrates and which the Commission itself both past and present by its use, shows it's workable and we don't have to quarrel about whether it's lawful or has to pass test of constitutionality, it is.
Let me examine area rates then by way of comparison and contrast.
As I say, it started in what I consider to be an erroneous premise.
It started by rejecting a known and an effective and a practical method.
It starts with a description that it may take from four to 14 years.
It is supposed to result in stability, it hasn't yet.
And I would point out that under the Natural Gas Act, if after we get through these massive hearings with all of these producers, Section 4 of the Act as the Hunt case in the Fifth Circuit points out that a single producer may arise and file for an increase despite this grand experiment and even more than a single producer, it may be all of them and where then is this stability coming out of this master production?
I would point out that many lawyers have grave doubts as to the constitutionality of the area method because the Natural Gas Act seems to say that rate should be fixed upon an individual basis.
I would point out that the Commission is being less than correct in saying that they measure their workload by all the dockets, you measure the workload by the number of producers and there are only 295 producers who account for 91% of the production of this country.
And if they were regulated, the rest would fall in line because it is not economic sense that pipelines are going to rush to small uneconomic producers to pay them high prices for gas when they can get it from the larger producers at a lower rate.
I would point out that the leveling off which is talked about in the Government's brief comes not from area prices, it comes from the fact that there happens to be on overabundance of natural gas in this country at this time.
Now, let me conclude by saying that the protection we're getting from the price list is nothing but a myth, no protection at all.
Commissioner Morgan of the present Commission has described these as simply fair field prices and that's what they are.
And in the very Phillips case itself, in which the Commission said, “In the meantime, we're getting the protection of the price list.”
There are five dockets in that Phillips case, which were permitted to go into effect, the rates, schedules and the prices of which are above the agency's own price ceilings.
It's obviously in error but that's what happened.
Now, Judge Prettyman says if the area experiment turns out to be a failure, we have our remedy then.
We don't have a remedy then, we need it now.
And so, I say in conclusion that in the meantime, they should take up the processing of the producers on a cost-of-service basis, select the largest one first, the largest ones first, get the job done, set some examples, set some principles and the problem will go away, I predict.
All regulation has this difficulty in the beginning, only you've got to make a beginning.
I am claiming, from the statement of Chairman Kuykendall, that here was a man who was opposed sincerely but philosophically from personal conviction to regulation of producers.
He did not believe it could or should have been done and he wrote Opinion 338, and I say, if that represents bias or less than an open mind, then so be it.
I don't question his right to have that point of view, but I happen to disagree with it strongly and I happen to think that this Court and the Congress have settled the question a long time ago.
Unknown Speaker: [Inaudible]
Mr. William M. Bennett: The present Commission has an intolerable heritage, great difficulties.
The present Commission has come out with a good decision for my state involving our pipeline company, but the present Commission in adopting the unworkable premise as to cost-of-service made an error in my opinion and I think that what they've done subsequently indicates that they themselves know it.
They were not bound to wet themselves to this concept of regulation and all of the difficulties, Your Honor, that they pose as to why cost-of-service method won't work are just as applicable to the area experiment because unless this Court says that costs are not necessary, are they permitted to dispense with costs in the area rate experiment?
For example, they say in the brief before you that cost-of-service method is not appropriate or it's difficult because of grave problems of allocation.
Well, in area rates, are we not going to allocate between oil and gas?
In area rates, are we going to abandon cost-of-service?
I don't know nor does anybody unless you can tell them and I would like to talk about this now because this is the real tragedy of this case.
Unless, they can have some idea that where they're going is going to be practical and effective and if that going takes time, and if it's fraught with failure at the end and ends that way, what happens to consumers in the meantime when they are not going through this list of the dominant producers in the country and regulating them one by one.
Do you know for example that in the area rate experiment, there are only two areas thus far selected, hearings are going forward in one?
Now, both of these areas combined only cover 35% of the system of Phillips, what about the balance of it?
To me frankly, this is nothing more than turning your back upon that which has been pioneered and worked out by people before us and by this Court and deciding from commendable motives, no doubt, to do it another way, another unknown way.
And so, it's difficult, I know to say an agency abuses its discretion, but remember your mandate which says regulate, remember the Natural Gas Act.
And the gravity of the harm that will follow if this thing ends up in failure will then certainly be able to be called an abuse of discretion.
And what I'm asking is, do we have to wait to find out that long that it's a mistake to come here and seek our remedy and if we do, and if we're right that it's all for naught, we will never, ever make up, not my money, not the money of this Court but the money the consumers and Congress has spoken for their interest as has this Court.
Thank you, Your Honors.
Chief Justice Earl Warren: Mr. Mann.
Argument of J. David Mann
Mr. J. David Mann: Mr. Chief Justice, may it please the Court.
The petitioners for whom I appear here in No. 74, the Long Island Lighting Company, Philadelphia Electric Company and the United Gas Improvement Company have participated actively in this case, commencing with the first day of its trial.
They have this position in this proceeding at this point.
First of all, they do not contend that the Federal Power Commission must regulate only on a company by company cost-of-service basis or for that matter indeed, on any other specific basis.
They do believe, however, that the Commission's choice among methods does not include the method to do nothing in the way of fixing lawful just and reasonable rates under the Act and at this point, I would direct my thought to Mr. Justice Harlan's question to Mr. Bennett.
It seems to me that the problem we have here is not Your Honor, whether ultimately the Commission's area rate approach is going to prove to be workable and if so, to what extent?
The problem we have here is that we need something which is workable, which is lawful and which can positively be applied during the time when the Commission with our help, I trust, can workout a more useful, workable method such as that which it now proposes under its area rate approach.
So that as far as the companies for whom I speak here are concerned, we simply contend that this case should be remanded to the Commission because the Commission did abuse its discretion and that it acted irresponsibly and in utter disregard of the Court's mandate, that it fixed just and reasonable rates for Phillips.
This is an important landmark case.
I will remember that when Mr. Heady and others and I were working on this case in 1957, we looked upon it as a case in which we were hopefully helping the Commission to establish truly workable methods of regulation.
The industry looked to this case as a solution to many of its longstanding problems.
They looked to the Commission to come up with a just and reasonable rate and a method for finding just and reasonable rates for Phillips.
The Commission did not do this.
It did not comply with this Court's mandate.
As Judge Fahy put it and as other counsel had pointed out, Judge Fahy said, “It came so close to doing what it said it should not do as to demonstrate that it is able to do what it has failed to do.”
Now, this inaction, we contend on the part of the Commission, is in error for two reasons.
One, on a general policy industry important point of view, it has left the industry and the public, including the consumers most especially in the lurch.
It has left us to regulation under what is little more than a fair field price standard.
With respect to the error of the Commission as it regards Phillips itself, as Mr. Brown pointed out initially, the Commission disregarded entirely some $22 million being collected annually by Phillips in some 95 Section 4 (e) cases that were pending before it but which were not consolidated with its proceedings.
It ignored also the fact that even if it took only Phillips 1954 sales but priced them on a 1960 basis, the result would have indicated revenues some $6.5 million in excess of a cost-of-service.
This is to say nothing of the new sales of gas which Phillips by that time was making.
Another thing, this Court will recall as presented to it in numerous proceedings including the CATCO case and as was before it in the Transco-Seaboard proceeding which was sent back to the Commission under per curiam remand that at the time of this case, we were confronted with numerous 23.5 cent gas prices in South Louisiana.
In one of its orders involving the Transco-Seaboard proceeding, the Commission assured us with respect that one of Phillips sales that is made from the so-called Tigre Lagoon Field in South Louisiana that it -- although it resulted from two triggering of favored-nation increases, starting with 8.5 cents, going up to 23.5 cents, the Commission assured us in its order that we would be protected against this kind of thing.
This too, the Commission ignored when it dismissed Phillips' Section 5 and finally, as I have said before and this other counsel has pointed out, the Commission did ignore this Court's mandate.
It also disregarded its own order.
When a Commission set this proceeding down for rehearing, when it reinstituted its Section 5 investigation, its orders specifically said that it was going to determine whether any of Phillips' rates was unjust and unreasonable and accordingly, it was going to fix Phillips rates.
I suggest to you that it was not possible for the Commission to comply if it did not look at all of Phillips rates, how could it possibly have determined whether any of them was unjust or unreasonable.
It simply looked at the 12 consolidated Section 4 (e)'s before it and then terminated the Section 5.
The court below, when it reviewed this matter, treated the case as it has been outlined by Mr. Bennett.
And then importantly, it seems to me from the standpoint of where we find it today, recognized that the Commission had to carry out some sort of an interim regulatory program.
Justice Prettyman admitted that interim protection while the Commission is in the process of carrying out its area experiment has got to be brought about.
He said, however, and this it seems to me is the fatal error of the decision.
He said that the Commission's General Policy Statement rate levels were themselves just and reasonable.
Now, the respondent, the Federal Power Commission has never itself contended that this is so.
The Commission has never contended that the General Policy Level which it has prescribed are just and reasonable rates.
They're simply guideline rates and yet, by holding them as just and reasonable and holding that because he believed them just and reasonable, they were sufficient as standards under which the Commission could operate.
Judge Prettyman and the court below erred.
The respondent's position since the time of the argument in the court below has changed most substantially.
As Mr. Bennett has pointed out, its decision in the Hunt case, Opinion 365 which appears as the appendix to our reply brief, really amounts to a confession of error on the part of the Commission which we also discuss in our reply.
In paraphrasing the Opinion 365 in Hunt, and this appears at page 12 of our reply brief, the respondent has concluded that the use of individual company cost as a method for determining whether an independent producer's increased rates are just and reasonable appears to be necessary, if it is to pass upon such rates at all prior to the establishment of area rates.
I say also accordingly it's necessary under the Gas Act to determine the justness and reasonableness of Hunt's increased rates by its individual cost, updating them if necessary to do the job.
They say it is necessary under the Act to determine whether Hunt's increased rates are unduly discriminatory or preferential, regardless of whether or not its overall revenues are supported by overall cost.
And finally, they say, it may prove necessary under the Act to test the lawfulness of Hunt's non-refundable rates in the course of passing on its increase rates and for that reason they hold open Hunt's Section 5.
Despite these admissions and departure from its previous position as set forth before the Court of Appeals and is contained in its papers in opposition to our petition for writ of certiorari, the respondent still contends that its Opinion 338 should be affirmed and they set forth several reasons for this which I would like to discuss.
First, they say that they are really doing a creditable job of protecting the consumers through the application of their General Policy Statement price level through settlements and through the use of their Section 4 suspension and refund powers.
Let's consider these reasons.
First, as to the suspension and refunds, Phillips in 1960, still was collecting some $22 million annually subject to refund.
They were collecting $3 million annually over the old gas ceiling which had been -- have been imposed by the Commission in the several areas.
Nationally, some $158 million annually is being collected with accruals to date of about three quarters of a billion dollars.
This, it seems to me, reflects a position completely inconsistent with the position taken by the Commission in its brief in the Tennessee case and which was reflected by agreement of this Court in its order and opinion in Number 48 handed down in which it pointed out that refunds certainly afford the consumer no protection.
Secondly, the General Policy Statement levels which the Commission is using as has been pointed out, these are nothing more than field price levels.
The new gas ceilings are the highest prices which prevailed in 1960.
The old gas levels are simply the average of all prices which prevailed at the end of 1959.
Now, we do not have data on the nation as a whole but with respect to South Louisiana which is so important in the gas supply particularly of the Eastern Seaboard, the gas coming from South Louisiana and this is discussed in our reply brief at page 6 and also in our appendix to our reply brief at page 28.
Some 94% of the gas moving in interstate commerce out of South Louisiana in 1960 exceeded the old gas ceiling, 70% of it was over the inline price ceiling which was suggested by this Court in its CATCO opinion and 55% is even over the new gas ceiling of 21 and a quarter cents in South Louisiana.
We submit that this not protection for the consumers.
Finally, as to the third vehicle the Commission is using namely the settlements.
It points with some pride to the fact that they have resulted in refunds of $5.8 million in annual reductions and $3 million in future rates.
And it seems to me that this is rather shocking for the reason that all of the cases, out of which to the $5.8 million and the $3 million spring are cases which were sent back to the Commission by remands from this Court in CATCO and Transco-Seaboard by the D.C. Circuit in the Hope case and by the Fifth, Ninth and Tenth Circuits.
It is out of the remands, if you please, of cases in which the Commission originally certificated a 23.5 cent price, which because of the pressure of the Courts have been reduced and it is those cases which result in the refund.
As for as settlements of rate cases, there have been only a few and significantly, they have been brought about because of the fact that in those cases examiner's findings or staff evidence of cost-of-service have been submitted.
These three reasons, I submit, are not sufficient to justify the Commission's going forward with its area rate experiment without any interim providing the consumer with some sort of lawful protection.
We suggest that the method it used in this case itself in deciding to dismiss the Section 4, the method it has used in Hunt and the method which its examiners have used is, while perhaps not the very best method in the world, certainly a lawful method and a method which it can and should use until such time as we all know whether the area experiment is going to bear fruit.
Chief Justice Earl Warren: Mr. Solomon.
Argument of Richard A. Solomon
Mr. Richard A. Solomon: May it please the Court.
There have been a considerable amount of discussion here today as to what happened before the Commission decided this case and considerable amount of discussion as to what happened since the Commission decided this case.
And I think it might be of some value to examine a little bit, beginning of my argument what the case was about and what we did decide in this case.
Now basically, this Phillips case consisted of two parts.
The first part and the part which I won't discuss very much here because I don't really think that it is the crux of my friends' argument discussed in the brief with respect to eight increase rates of Phillips which had been packaged together with its overall rate system, which were in effect between sometime between 1954 and 1956 in which all but one minor one had terminated as of 1958 or 1959.
Now, with respect to these eight rates, the Commission did use the cost-of-service which had been derived by the examiner after a great and laborious effort and which have been modified by the Commission after a great and laborious effort and using that cost-of-service as a test decided that since costs during the test year, a test year which nobody suggested to the Commission was stale for this purpose, that costs during this test year were at least some $9 million higher -- lower than -- higher than revenues.
And since all of these increases put together only amounted to about $5.5 million that it could reach a reasonable judgment without going ahead and determining the exact just and reasonable rate that each one of these things should've been set at during the period several years earlier when it was in effect that it could reach a reasonable judgment and the only question left as far as that part of the case was concerned, i.e. that there was no basis to order Phillips to make refunds with respect to those eight rates.
Justice Potter Stewart: That was a Section 4?
Mr. Richard A. Solomon: That's the Section 4 point.
Justice Potter Stewart: And these were so-called locked-in base?
Mr. Richard A. Solomon: They were locked-in a sense that as of the time of the Commission's decision with one, very minor one, none of them had any present existence.
Justice Potter Stewart: They had been superseded by --
Mr. Richard A. Solomon: They'd been superseded by others.
Justice Potter Stewart: By filing the higher rate.
Mr. Richard A. Solomon: Right.
Now, the other part of the case and a part of the case which I will want to spend my time on because it's obviously an important thing is with respect to the general hearing looking into the determination of all of Phillips' rates.
Under Section 5 of the Act which by its very terms necessarily is a determination of Phillips' rates for the future.
Now, with respect to this aspect of the case, the Commission at the end of its decision here terminated the proceeding because it believed that the record made on the basis of 1954 cost information was out of date stale for purposes of fixing rates for the future as of the end of 1960 and I should imagine even clearer as of 1963.
And equally important because having gone through this difficult process for the first time in a major rate case, the Commission as of that date and the Commission as of this date also was convinced that individual company cost-of-service pricing were independent producers of natural gas who are selling a commodity, gas, to the pipelines was not a feasible, workable, meaningful way of regulating this profit.
The Commission instead said that what we are going to do and what we have done is to work to establish not Phillips' rates and then California Company's rates and then the Texaco Company's rates and then Gulf's rates and of course I don't mean to say that it could all be seriatim, we would do our best to do them at the same time, but we're not going to attempt to fix individual companies, company by company.
We're going to attempt to fix the rates at which gas are sold and each of the major production areas of the country for all of the companies who are producing and selling gas in those areas.
Justice Potter Stewart: Many areas, are there, as determined?
Mr. Richard A. Solomon: The Commission's Statement of Policy which appears in the record at 348 has about 23 of them.
I think that this can lead to a misconception however.
For example, of those 23 or 4 areas, three of them are involved in the so-called Permian Basin case which is the first of the Commission's cases and I'm sure that in having area hearings, there will be other packaging that will come along.
Justice William J. Brennan: Does it appear on what basis the lines of an area were established?
Mr. Richard A. Solomon: The lines of the areas were adopted on the basis of the Commission's best judgment in 1960 subject to future change as either its information or record information in the area hearings were demonstrated.
Justice William J. Brennan: Because I would suppose, the geography of an area would be then important, would it not?
Mr. Richard A. Solomon: Pardon?
Justice William J. Brennan: The geography which comprises an area would be quite important, wouldn't it?
Mr. Richard A. Solomon: Well, this is exactly why, for example, in the Permian Basin case which happens to involve one of the largest production areas in the country in which three of these pricing areas touched rather that attempting to try the case area by area.
We packaged the three pricing areas which involved this one production area together.
So that we weren't treating this separately and similarly, I'm sure when we get to the so-called Texas Gulf Coast production area which is Texas Railroad Districts one, two and three, I think it's quite possible that -- if not probable, that these cases will be tried together so that this can -- problems of adjacency can be threshed out and (Voice Overlap) --
Justice William J. Brennan: Were the parties in those proceedings, are they heard on the definition of the merit?
Mr. Richard A. Solomon: As far as I know, the Commission -- I'm not sure.
But I should imagine that this is a problem which at least some stage of the game, somebody claims that they are not in the area, they're obviously would be entitled to a hearing.
Now, whether this is an issue in the area hearing, I don't really know.
I have I recollection that the Commission said, at least at the outset, let us try it on these areas and we can see whether these are correct areas at a subsequent date.
The point I wish to make is that my opponent's objection to what the Commission is doing, why is not so much with either of our determinations not to decide, to dismiss the Section 4 proceeding or not to decide the Section 5 proceeding on this record, but rather on our failure while we were moving to area rates to continue to use in the Phillips case and all other cases of the major producers, at least, this difficult individual company cost-of-service technique which the Commission had found was an inadequate and inappropriate technique.
And the real question involved in this case is whether the Commission must go down two streets at the same time or can in the exercise of its discretion as to how to best and quickest do the difficult job of fixing just and reasonable rates for gas throughout the United States, can use its resources as it has determined is the best method of doing it.
My opponents argue that area rates at best will take years to formulate, although I think it's perfectly clear that this 14-year figure is an estimate Justice Prettyman got from one of our colleagues in explaining how long it would take.
Unknown Speaker: [Inaudible]
Mr. Richard A. Solomon: We have estimated in our brief here that the first area proceeding involving Permian Basin which of course is a key one can be decided by the Commission by the middle of 1964.
The Permian Basin case is already in being, if not merely in being evidences in as I speak today, as far as I know, the Commission's exhibits which were put in, in November are in process of cross-examination.
We believe --
Justice William O. Douglas: [Inaudible]
Mr. Richard A. Solomon: What --
Justice William O. Douglas: How long would it take for the Commission to have not dismissed these two proceedings?
Mr. Richard A. Solomon: How long would it have taken the Commission to have decided the Phillips case?
Justice William O. Douglas: Yes.
Mr. Richard A. Solomon: Well, we have estimated that if this Court was to remand the Phillips case with constructions to proceed to it, that it would take approximately the same amount of time to decide the Phillips case.
Justice William O. Douglas: Middle of 1964?
Mr. Richard A. Solomon: Middle of 1964.
Now, these are estimates and it may very well be that with cooperation and with speed that we might be able to decide a reopened Phillips case somewhat earlier than the -- we can complete the Permian Basin or it may work the other way.
Justice Tom C. Clark: When did you start the Permian Basin area proceedings?
Mr. Richard A. Solomon: The hearing was instituted on December 20th, 1960, two months after decision in this case.
Justice Tom C. Clark: That'd be about four years?
Mr. Richard A. Solomon: It will be about four years, yes sir.
Justice Tom C. Clark: Do you have 23 areas?
Mr. Richard A. Solomon: Well, as I said, we do not have 23 areas because the Permian Case involves three of the areas and there will be further packaging.
As a matter of fact, -- oh, in the second area, the South Louisiana area, there's a considerable amount of work that's been done in the case, we've got a lot of information as to producers and other people have submitted to us.
But I think it is no secret that one of the reasons why it has not advanced as far as Permian; one reason of course is that you use one pile of case at a time.
But another is that there are discussions which have been going on with representatives of both the producers, including Phillips and the distributors including Mr. Mann's clients, looking towards the possibility of speeding up all these other areas by maybe getting the national information for these area hearings in all or one time rather than trying to treat them seriatim.
Justice Tom C. Clark: But there are more producers in the Louisiana area, they go to the area than they are in the Permian?
Mr. Richard A. Solomon: More producers?
Justice Tom C. Clark: [Inaudible]
Mr. Richard A. Solomon: There are an awful lot of producers in the Permian Basin area.
Most of the big producers are in the Permian Basin area.
My understanding was there are only two or three producers with over $10 million worth of sales annually that were not in the Permian Basin.
Permian Basin is 10% of the sales of the nation.
It's a big established gas filed by no means is smaller.
Justice Tom C. Clark: What's the percent of the other one?
Mr. Richard A. Solomon: Southern Louisiana is about 20%.
Justice Tom C. Clark: It's a newer field, isn't it?
Mr. Richard A. Solomon: It's the newer field, yes.
Justice Tom C. Clark: Its potential is much greater, isn't it?
Mr. Richard A. Solomon: I should imagine it's potentially much greater.
It also has certain difficulties that the others don't have at which might have been one of the reasons why it was not used as a pilot case and that it involves the offshore (Voice Overlap) --
Justice Tom C. Clark: Submerged drilling.
Mr. Richard A. Solomon: What?
Justice Tom C. Clark: Submerged drilling.
Mr. Richard A. Solomon: That's right, yes.
It has cost problems, I'm afraid, which we don't have in the Permian case.
Justice Arthur J. Goldberg: [Inaudible]
Mr. Richard A. Solomon: Well, let me answer your question this way.
First of all, there is no change on the attitude of the Commission that the best way to do this job is by area pricing.
The new Commission is pushing if anything harder and faster than the old Commission to establish area pricing.
Now, this is -- I'll take this out of term because I think it is important.
The old Commission at the time it dismissed the Phillips case, on the theory that it was not good planning from its standpoint to start this case over to get the material which would be needed to get a new decision in Phillips had about 9 or 10, maybe a little bit more other cases which were fairly far advanced they thought at that time on an individual cost-of-service basis which -- the one Hunt which you heard about was one of them.
The question came up is to -- in view of the Phillips decision whether to dismiss this out of hand and the Commission in a series of orders in 1960 and 1961 refused.
It was reluctant, obviously, having spent a great deal of time and effort in these cases to dismiss them out of hand without seeing whether there wasn't something that could be salvaged from these proceedings and it has allowed these cases to go on.
I don't think the record in -- what's happened with respect to these other cases is very much hope that if we really just put our mind to it, we could easily and quickly decide Phillips on a cost-of-service basis as well as the other nine or ten big people because the fact is that although we've refused to terminate this and allowed this to go on, of the nine cases, I used this figure, there were three others which were settled without any examiner's opinion, of these nine cases, three of them haven't been decided by the examiners yet over two and a quarter years after the Phillips decision, although they were presumably in advanced stages then.
Two others have been decided within the last three months, two years thereafter and the decisions of the examiners in these cases to the extent that they attempt to follow the Phillips principles as they do on cost-of-service, do not indicate as our friends assume that if only we'd proceed with cost-of-service we would get the type of results of a huge rollback that they're talking about.
Because of these six examiner's decisions, four of them and these six examiner's decisions used not 1954 test years but 1957 and 1958 test years and with these test years, four of the six examiner's decisions come up with the result that we had in Phillips that there was a deficiency, less revenues as contrasted with cost as of these later years.
Now, were said -- it said that we confessed error because we remanded this Hunt case.
We didn't decide that case.
The Commission didn't decide this Glassell case say Mr. Bennett cited.
The Commission hasn't decided on 5 (a) basis any of these new cases and I don't know whether we're ever going to be able to but we are not throwing them out the window, we're going to see what can be done but in the Hunt case which is the first one that came before the Commission on the examiner's decision, what the Commission found was that it was impossible to decide it even if we try to apply the Phillips' techniques.
And as I will indicate a little later in my argument, the basic assumption that is made here that because a cost-of-service was derived in the Phillips case that that shows that the Commission has there or could have there if they've only gone ahead and made the final “dotting the i and crossing the t”, worked out cost-of-service, individual company cost-of-service pricing just isn't correct because there's a very major problem perhaps as major certainly as difficult as the deriving of a cost-of-service which the Commission -- because of the way it decided Phillips never faced up to those.
And that is the problem of rate design and by that what I mean is this.
It's one thing to find after a great deal of work and effort in making allocations and everything like that, it's one thing to find what the cost-of-service is and match it up against the revenues in the test year but that doesn't answer the question that you're fixing just and reasonable rates under Section 5.
That doesn't answer the question of how the individual rates of a company like Phillips which has over 350 rate schedules scattered throughout the United States and ranging, as my friends have indicated, from very low to very high.
Now, the individual rates are going to be worked into this schedule, you have a serious, difficult rate design problem.
Now, the examiner in the Phillips case proposed a rate design.
He proposed a rate design which was a uniform rate for Phillips, a uniformed standard rate for Phillips throughout the country.
It would vary only with respect to the grades and types of gas, but generally speaking, it's a tariff system, one rate; one company.
Of course, there'd be different rates for different companies in any given area, but one rate; one country throughout the country and this is a feasible rate design, I guess.
There are difficulties with it.
It involve serious problems under this Court's Sea Arrow case because it requires making findings that contract rates with contract provisions which wouldn't prevent raising the lower ones must be set aside because this is necessary in the public interest.
I'm not saying that this type of rate design is illegal or improper.
I do say that it was a rate design which nobody else with the possible exception of Phillips in this Phillips case wanted, liked or was pushing the staff of the Commission joined by most of the interveners including – especially the State of Wisconsin which is one of the petitioners here was arguing that this type of rate design would so upset the entire balance of sales of gas which have been growing up over the 20 years that it was a hark.
And they said, the only thing you can really do is after you got this one cost-of-service for the whole company then break it down by individual areas and have separate cost-of-service for each of the areas.
The Eastern Seaboard interveners which is the term we use for Mr. Mann's clients in case Number 74 didn't suggest that, but they had a -- still a separate rate design which was also calculated to prevent the general dislocation that the examiner's rate design would have required.
And the Commission, as I say, although it didn't decide it, did indicate and as petition for -- in its decision on rehearing that it didn't agree with the basic theory of the examiners rate design because that rate design, as I indicated, was based on the assumption that we should have level rates because different rates for Phillips throughout the country was discriminatory.
And the Commission found in this case that the fact that you have different rates in the Hugoton field of Kansas where gas was discovered 50 years ago and is very close to the surface as contrasted with higher rates in the offshore lands off Southern Louisiana did not in and of itself show any discrimination.
All of which to get back I guess in my point, merely goes for the proposition that this idea that we had done everything but decide in Phillips and that we could go ahead with Phillips and within a month or two, or three or four months, come out with a new, complete decision establishing Phillips' just and reasonable rates or as many sales throughout the country just isn't true.
As I said I'm not saying to this Court that we cannot decide an individual cost-of-service for Phillips within the next two or three years, I won't even say that we couldn't decide it before we'll decide the Permian Basin case, but the suggestion that follows as night and day is really a foolish suggestion.
Now, let me get back to why the Commission abandoned individual company cost-of-service.
First, let me state that it's a misnomer to talk in terms of individual company cost-of-service as the established method for fixing the price just and reasonable prices of producers of natural gas which the Commission junked because it wants to experiment with an area pricing method, this just isn't so.
Whatever the reasons why -- whatever the history between 1948 and 1960 may indicate to a historian, the fact is that as of 1960, September 1960 and as of January 1963, there is no established individual company cost-of-service method for fixing the rates of gas producers, independent gas producers.
It can be done, I'm sure.
Justice Tom C. Clark: Do they have a posted price like they do in oil or gas?
Mr. Richard A. Solomon: No sir, no sir.
They have instead contract prices which are submitted to the Commission and the contract price -- you see, gas is sold generally on 20-year contracts.
You will have a contract to sell gas at a fixed price.
It might be with provisions to raise it at various times.
This contract price will be submitted to the Commission and either approved in the certificate or can -- or not approved.
And if they want to raise it at some time, if the contract permits them, they come to the Commission with an increased price and the prices at the present moment vary from producer to producer within a field and of course they vary from field to field.
Justice Tom C. Clark: I thought perhaps your company might like it does in oil, post a price at which it might buy from those it did not contract with.
Mr. Richard A. Solomon: The pipelines in buying gas from the producers, I think approximate the post pricing but the price that a pipeline will be buying gas today will not make up all of the prices because since you have a 20-year continuum, you have prices which are gas halfway through this period, half quarter way through, etcetera.
Justice Tom C. Clark: Escalated price, I wanted -- if you'd tell me just how the Commission then goes down, we'll say into the Permian Basin and how do they arrive at area price on the Permian Basin that are in those three cases, we'll take just one case. Did they get all the contracts there and see what the medium is or just (Voice Overlap) --
Mr. Richard A. Solomon: We've got all the contracts there.
We've got all the information from all the producers there, cost information as well as economic information of their nationwide exploration and development activities and their nationwide production activities.
We have got all the information there as to their operations in Permian Basin itself.
And we are attempting by looking at the cost and economic information coordination because part of this problem is a nationwide problem and for the specific area to determine a price of gas to be solved from there which will, as low as possible because that of course is our statutory obligation, but still be sufficiently high to bring gas to the interstate market which of course being specific high -- specifically high to pay for the exploration and development activities of the gas company and bring this gas to the existing market.
Justice Tom C. Clark: (Voice Overlap)
Mr. Richard A. Solomon: But I do want to make clear here Justice Clark that the suggestion that going to area pricing is junking cost considerations is completely untrue.
Justice Tom C. Clark: What weight do they give the going price?
Every field I suppose has a -- or every contract has a going price, isn't it?
So what weight do they give that?
You say they take the cost of development, and everything?
Mr. Richard A. Solomon: The extent, if any, to which the so-called area price, field price, existing field price will be given to -- by the Commission in the Permian Basin case or the other area cases still has to be determined.
But if there's one thing that is clear, it is that the Commission has no intention of fixing area prices merely on the basis of field prices, the prices actually being bargained for in here.
Justice Tom C. Clark: That depends on the cost of exploration, production, everything?
Mr. Richard A. Solomon: Yes, sir.
Well, we -- but -- we're attempting to find -- now, exploration of course is a problem which is not limited to any particular field.
With respect to Permian Basin and all other areas, the exploration expenses have to be on a national basis because people are exploring all over, you don't want them to limit them to the fields that they're in.
We have attempted, we are driving average exploration cost for all producers throughout the United States, applying this to the other Permian Basin cost.
Justice Tom C. Clark: Of course, some exploration must -- most expensive as you indicated like in the Gulf?
Mr. Richard A. Solomon: That's right and that is averaged in.
Justice Tom C. Clark: It goes in with the --
Mr. Richard A. Solomon: That's right.
Justice Tom C. Clark: -- shallow areas --
Mr. Richard A. Solomon: We're not trying to fix a price for Permian Basin which will only have the exploration cost for Permian Basin or a cost for Southern Louisiana which will only have the exploration cost for Southern Louisiana.
Exploration cost at least that's the way the staff has been producing -- putting this case on so far is based on the assumption that exploration for gas is a nationwide activity and that the area parts of the case are not exploration expenses.
They are development and operational and expensive.
The question of how deep you have to drill on a particular basin to get gas is a particular basin or area of problem, but exploration throughout the United States is a diff -- very different problem.
Justice Hugo L. Black: You said you.
Justice Arthur J. Goldberg: [Inaudible]
Justice Hugo L. Black: Excuse me.
Justice Arthur J. Goldberg: [Inaudible]
Mr. Richard A. Solomon: Well, I want to be very clear with my answer to you.
The Commission, although it hasn't resolved these problems and there will be arguments I'm sure made that we have to fix area prices at a level which will allow each individual producer in that area to make its cost-of-service which is indicated here includes a reasonable return.
Everything the Commission had said so far indicates that that is not what it intends to do, that it is not intending to fix area prices to guarantee everybody a full return because as this Court has made clear even in cases dealing with the genuine utilities as contrasted with people selling a commodity, as Justice Douglas made clear in Colorado Interstate and some of those other cases, public utility regulation does not guarantee people upfront and is particularly true here when we're dealing with the production of natural gas, a mining type activity, we're inevitable.
Some people are lucky and some people are unlucky, some people go out and drill ten holes and finally get some gas on the eleventh, somebody else will come along and drill on the first shot and get gas.
The same amount of gas, same quality gas, the Commission is not going to fix a just and reasonable price for the first man's gas ten times as high as for the second man's gas.
And that has been made clear in our brief as -- that is the -- one of the major reasons why we have gotten away for them -- this individual company pricing system because in an area like Permian Basin or Southern Louisiana, it doesn't make any sense.
You're not really performing an economic function to talk in terms of setting just and reasonable prices for two well, side by side, coming from the same field, one at five cents and one at 15 cents, depending upon the peculiarities of an individual company that happens to own that or as we point out in our brief even one want because many of these areas you have joint efforts and if you follow the individual company cost of system, cost-of-service of pricing method to its logical conclusion, you'd have different prices for different -- same gas from the same well.
The fact is that the techniques of ratemaking which were developed by this, in this country over the last 75 years, with respect to the semi-monopolistic activities of a public utility or a pipeline, gas pipeline, or a telephone company just have very little relationship to the very different problem we're dealing with here and this has been recognized I think carefully by this Court which is always refrained from imposing on the Commission any one type of method because they recognize that this problem was in the background.
Justice Hugo L. Black: Suppose you picked the rates for an area of 15 per units, whatever your unit is, 15 cents per unit?
One company comes in and says, that's alright for all of them -- most of them, I can't operate without losing my business.
This is confiscation to me.
What happens then?
What would the Court have to do?
Mr. Richard A. Solomon: Well, first of all, the Commission would have to look into this problem.
Obviously, we are going to have to set up a procedure whereby the man who believes that there is confiscation can bring his claim to the Commission initially and then presumably to the Court.
Justice Hugo L. Black: Suppose he chose --
Mr. Richard A. Solomon: But I'm not suggesting --
Justice Hugo L. Black: Suppose he chose it.
Mr. Richard A. Solomon: What?
Justice Hugo L. Black: Suppose he chose it, you picked an average rate, you -- as I have understood it --
Mr. Richard A. Solomon: Well --
Justice Hugo L. Black: -- different companies have different costs and make different amounts of profits.
Suppose one of them chose that the rate you fixed on the average confiscates his property, let's assume that he's proven it, what happens then?
Mr. Richard A. Solomon: Well, of course he --
Justice Hugo L. Black: Does he have to follow those rates?
Mr. Richard A. Solomon: No.
Of course, you're asking me to move ahead of the Commission in deciding this problem --
Justice Hugo L. Black: Well, I'm sort of thinking about your problem that you are -- of the difficulties of fixing individual rates and I understood you to say, maybe I'm wrong that the -- if you fix them altogether, that wouldn't necessarily raise them to the highest cost then, how could you keep from doing it, raising it to the highest cost then?
Mr. Richard A. Solomon: As this -- Your Honor, will undoubtedly remember this problem is not a new one in price fixing ratemaking activities of the various governmental agencies.
In the Tagg Brothers and Moorhead case decided by this Court I think in 280, a problem came up under the Agricultural Packers and Stockyards Act very similar statute, very, very similar to the Natural Gas Act where the Secretary of Agriculture in fixing the prices for a certain merchandising man in Denver Stockyard I think fixed a level price based upon his analysis of the entire economics of the thing and somebody came up and said that this price is too low for me and this Court and that case said that that part of the -- you're not guaranteed a profit, you don't have it --
Justice Hugo L. Black: I understand that.
Your answer to me then, as I understand it is, that even though the rates you fixed would be confiscatory to the Phillips for instance because of its higher cost than others, it will have to sell at that price that you think.
As I understand that's your answer?
Mr. Richard A. Solomon: Or get out of the interstate market.
Justice Hugo L. Black: Or get out of the business?
Mr. Richard A. Solomon: Interstate market.
Justice Hugo L. Black: Interstate market.
Justice Byron R. White: But isn't there some doubt Mr. Solomon, that there is still gas in there, [Inaudible]
Mr. Richard A. Solomon: Well, I think this is right.
I think that it is more of a theoretical problem than anything else that the -- at least and certainly, the very high cost producer is not going to be able to get his cost anyway.
This is not surprising Justice White because in this business particularly, you will have lots of people who at least at varying times are not making a full return.
They may be spending all their money in investment at that time.
Justice Hugo L. Black: I started to quit that for lunch, but l asked you that because I thought about the fact that the basic rates are fixed originally according by the company and rather difficult to unfix those rates and they vary according to what they think, they ought to get or what they can give.
Argument of Richard A. Solomon
Chief Justice Earl Warren: Mr. Solomon.
Mr. Richard A. Solomon: May it please the Court.
Just before the recess, we were discussing what we're attempting to do in our area of proceedings and the question that would come up: What about the man whose cost of service is substantially higher than the price that the Commission will fix in any given area?
And I was indicating that this is a problem which the Commission will have to face up to.
I want to make it clear, Justice Black, that there's a very wide distinction at a minimum between a cost-of-service price and a confiscation price.
Obviously, in a cost of service, there are many, many things which go into it which no Court would consider in determining what is a confiscation, for example as a rate of return.
It's hardly confiscatory if a man selling gas doesn't make a 9%, 10% or 11% return on his investments, and yet, a rate of return would go into a cost of service price.
But there will undoubtedly, and let me stress again because I want to make it perfectly clear, whatever the old Commission -- Commission that decided the Phillips case might have thought about area pricing, and I would agree there are certain ambiguities, if you read the Commission's decision in Phillips and a statement of policy, both of which were on the record here, certain ambiguities about the language there exactly as to what they intended by area pricing.
It could be argued that maybe they were talking about contract price, field price.
This Commission is basing its pricing on cost considerations.
But assuming that an individual producer could show that an area price which has been set is confiscatory within the narrow limitations of what is confiscatory, and it could show that this was not because of carelessness or inefficiency or what have you on his part, but because he just hadn't been successful in this business, this mining business.
He had gone around and attempted to get gas and the only thing he'd gotten finally after 15 or 20 or 30 drilling of wells was a little trickle of gas.
I think there are grave doubts as to whether this Court would say because a man on his 15th attempt to drill for a well has gotten a little trickle of gas that he has to be allowed to sell that gas at a price which would allow him in and there to recover all the costs he's put into that.
That isn't the nature of this business.
Justice Hugo L. Black: I presume when the Commission was acting --
Justice William J. Brennan: Ambiguity.
Justice Hugo L. Black: -- however, it would be a very natural inclination for them to -- if they're going to take a whole group together by the sea that they didn't hurt any -- anyone particular a company, only six or seven so that you would tend to have as a fixed price, not a maximum price, as a just and reasonable price, the price that might give some people what they considered a reasonable profit and give the others five times as much.
Mr. Richard A. Solomon: Well, the theory of area pricing does concede that some people who are fortunate or efficient will get more than on a cost of -- individual cost-of-service prices.
If Phillips turns out to be an efficient producer, it is possible that when we get through with area pricing, the prices that Phillips gets would be somewhat higher than Company X would get -- no, the prices will be the same, but they will be getting more than they would be getting on a cost-of-service basis, whereas Company X which we can assume is an inefficient producer or unlucky producer would be getting less than they would be getting on a cost-of-service basis.
Justice Hugo L. Black: I would also assume maybe -- maybe I could be wrong, is when they start to kind of fix some kind of an average price, these contract prices that had been fixed when there was no regulation of any kind and which are pretty well fixed subject to certain procedures whereby they might be held unjust and unreasonable, maybe the average would be figured according to the average of these contract prices.
Mr. Richard A. Solomon: The Commission, I can only reiterate, has not suggested by any of its activities in the area of proceeding that it intends to fix prices by the field prices at which gas is being sold in that area.
I cannot tell you that it will give no consideration to these field prices, what the prices at which gas is being sold in that area, but the basic intent of the Commission is to fix a price for the gas based upon the cost and economic necessities of producing and bringing gas to the market in sufficient quantities so that it will serve the needs of the consumers at the cheapest possible prices to do so.
Justice William J. Brennan: Probably if an area, the price is possibly around these figures or maybe some higher or some lower, but they cluster around some particular figure.
You just suggested that this will not be conclusive upon the Commission.
But how -- how the Commission is going to ignore that in the area of pricing business?
Mr. Richard A. Solomon: The prices for example in a given field -- when you say price is hovering, of course, you recognize that --
Justice William J. Brennan: Well, I'm thinking of the old techniques that the Wage Stabilization Board and the OPA follow when they, for very different reasons, had to determine going prices for a given job in a given area or going prices for a particular commodity.
That's the old cluster technique as I recall --
Mr. Richard A. Solomon: Yes, and that is not we're starting out to do.
Justice William J. Brennan: Well, I --
Mr. Richard A. Solomon: We're starting out to get the --
Justice William J. Brennan: -- I'm not saying that.
Mr. Richard A. Solomon: -- underlying cost and to apply these underlying costs to the problem of fixing the fair price here.
Justice William J. Brennan: I heard you say that but you haven't told me how you're going to do it?
Mr. Richard A. Solomon: We have for example in the Permian Basin case -- now, I can only talk about the staff presentation because other people have different ideas.
We've put in to the Permian Basin case what the staff has determined on the basis of extensive questionnaires and information that's received.
What is a cost for exploration and development?
This, I indicated, is a national cost.
I don't know what this figure is.
Let's say it is 3 cents.
A cost which the experience in the industry shows that they're spending per Mcf, whatever that means, of gas, to do sufficient exploration to find new gas; well, that's one basic cost.
There are other costs; the operating costs of lifting gas and then drilling this particular area.
We have derived, in effect, a composite cost of service for the Permian Basin.
Justice William J. Brennan: And this involves no consideration of actual field pricing?
Mr. Richard A. Solomon: This involves no consideration of actual field pricing.
Now, to what extent in determining the final area price, the Commission will give consideration to the actual field prices, whatever that means, because in any area at the present moment, there are all sorts of prices.
There's the price of the new gas and the price of gas sold five years ago and the price of gas sold 10 years ago.
I cannot assure this Court.
I can only say that everything the present Commission has done since it took over this business and has been pushing to get these cases decided indicates that their primary interest is setting a reasonable price based upon cost and economic considerations of how to get the gas produced and into the interstate market and not upon contract considerations 20 years ago, 10 years ago or even today.
Justice Potter Stewart: It is going to be on averaging operation, an averaging process though, isn't it?
Mr. Richard A. Solomon: Yes.
Now, there may be different prices for different types of gas.
Justice Potter Stewart: Yes.
Mr. Richard A. Solomon: There are some -- one of the great problems that we have, which is an issue now, is to whether you should have the same price for what's known as gas well gas, which is gas produced by itself and a casinghead gas, which is gas --
Justice Potter Stewart: Comes up with oil.
Mr. Richard A. Solomon: -- that comes up with oil, and there may be all sorts of different economic indicia as a result.
It may be that exploration costs and needs for looking for gas well gas are entirely different from dealing with gas which is really a byproduct of oil.
These variations may exist but we're looking to set a price for a type of gas in an area.
Justice Potter Stewart: In their field.
Justice John M. Harlan: Can you at some point be able to summarize your statement in summary form the factors that led the Commission to dismiss the Section 5 proceedings?
I'd like to hear that.
I understand before you --
Mr. Richard A. Solomon: The Section 5 proceeding as to Phillips was dismissed because one, the Commission determined that it could not determine a reasonable price for the future using the individual company cost-of-service basis as of 1960 on the basis of a test year of 1954.
Justice Arthur J. Goldberg: Could it not have reopened that's referred --
Mr. Richard A. Solomon: That's -- that's two.
It determined -- it -- it determined in its discretion as of 1960, and I say that because I think its discretion as of 1960 is a priori as of 1963, but it determined that it would not reopen the record to bring it up to date and to then try to figure out a proper rate design for the 350 Phillips rights.
Because it believed that this would be a time-consuming, difficult job which would produce results which you didn't think were very useful and that it could better focus its time and attention on doing what it did think was useful, and that is putting its people, people who are experienced in the Commission on this type of problem to work as hard as possible to get the area rate determinations made.
Now, in so doing, it recognized that there was an interim period and it did establish an interim program which had been described here this morning which consisted of establishing ex parte, no hearing, there is no question about that on the basis of expertise, two rates in each area, a new gas rate and an old gas rate; the old gas rate was for increases and in almost all cases is substantially lower than the gas rate, which are basically holding the line devices because it recognized there was an interim period and we're told that there's a holding of line device that's been completely ineffectual.
Well, I don't think that's true.
We pointed out in our brief that the fact is that just this period, September 20, 1960, does constitute a watershed in which prices which had been going up on a curve which were all too high have not -- have gone down.
And prices have more or less been stabilized in one or two areas.
We've pointed it out in our brief that the price for October of 1962 indicated that things were still stabilized.
Our information now is that the price for November 1962 was identical with October 1962, but it isn't merely a stabilization matter because in this last 18-month period, there had been no less than $30 million of refund ordered from the producers to the pipelines.
This is hard cash going back to the pipelines and we're all going back further.
Justice Hugo L. Black: From what basis --
Mr. Richard A. Solomon: What?
Justice Hugo L. Black: -- those refunds ordered for what year?
You say $30 million?
Mr. Richard A. Solomon: Yes, sir.
Justice Hugo L. Black: What basis -- what year; that I don't quite understand?
Mr. Richard A. Solomon: These were of two types, one that was described by Mr. Mann as a result of Section 7 proceedings because it is in -- untrue, Your Honor, that our initial price line is the price line which is the CATCO price line.
It is the price line that the Commission will act but anybody who wants a hearing has got a right to a hearing and in a hearing, these prices may come down.
In the Skelly hearing mentioned in our brief, the prices came down as much as 2 or 3 cents.
In the CATCO case itself they came down.
That's one way refunds come back.
The other way --
Justice Tom C. Clark: Are those based on bonds?
Have they given bonds for refunds?
Mr. Richard A. Solomon: Yes, yes, yes.
Justice Tom C. Clark: Has there been any bond for refunds in Phillips?
Mr. Richard A. Solomon: Well, I don't know whether there's been a bond for refunds in Phillips.
Mr. Heady I'm sure will know, but they are -- there's -- either bonds are corporate undertaking, I understand.
Justice Hugo L. Black: But if you can't -- if you can't decide Phillips on the basis, what good is the bond or anything else with reference to the refund?
If you can't --
Mr. Richard A. Solomon: First of all --
Justice Hugo L. Black: -- decide it now as of 1954 or whenever it was.
Mr. Richard A. Solomon: First of all, leaving out these eight rates, we are deciding those.
We're moving to decide Phillips as fast as we can but we're doing it in the area of proceeding.
Now, this isn't quite as silly as it sounds --
Justice Hugo L. Black: As of 1954, the reasonable value as of 1954?
Mr. Richard A. Solomon: All these rates which are subject to refund, they're not 1954 rates.
All these rates which are subject to refund are in the various areas of proceedings or held for the various area of proceedings and when we decided Permian Basin for example, that involves 35% of Phillips' rates.
Of all companies -- of all companies in the United States of America, Phillips is probably the last company to start now to try individual company rate basis because it so happens -- and this may be luck, I don't know, it so happens that 35% of Phillips' rates are going to be decided as to refunds and as to the future in this Permian Basin case.
I also want to indicate in addition to $30 million refunds, in addition to the actual price line, this business that we haven't had any effect is not true for another reason.
We point out in our brief the initial price line, which I deny was the highest prices in each area, and that's perfectly clearly proved by the Eastern Seaboard brief itself which is complaining about a whole bunch of prices in Southern Louisiana higher than this price line.
Since we put those price lines into effect and as we point out in our brief in over 600 cases, people have come to us to certificate sales of gas at a price which we said we will not certificate this gas at this price.
If you want to come down in price to this ceiling, we'll consider certificating it, but unless you come down, no so.
Now, that is not non-regulation.
That may not be the most perfect regulation.
We will be perfect only when we can decide the area of prices, but we have not gross mistake to say that the Commission has abdicated its responsibilities during this interim period.
Justice Potter Stewart: Upon what -- upon what foundations were the two sets of prices in the Statement of General Policy based?
Mr. Richard A. Solomon: The Commission stated that they were based upon consideration of the existing prices in the area plus their knowledge of costs and other economic information at the time.
I think with all due respect to the Commission at that time that it is true that serious consideration was given both to the -- certainly to the initial prices to what was the going price -- the field price at that time.
But it was not the highest field price.
The initial price in Southern Louisiana was set at about 21.5 cents.
Subsequently, we have reduced that by two cents, but the initial price that the Commission set in Southern Louisiana was about 21.5 cents.
And yet, as Mr. Mann points out in his brief, there were a lot of sales in Southern Louisiana at 23 cents.
Similarly, the initial price in the Texas District 4 was set at 18 cents.
There were some 20-cent sales in that thing but we didn't use them, and that price was subsequently cut down to 16 cents.
The Commission --
Justice Potter Stewart: Under what procedure is that price been cut down to 16 cents?
Mr. Richard A. Solomon: The Commission had a hearing which determined what the prices were pursuant to the CATCO inline rule after hearing in Texas District 4 as of September 28, 1960.
The hearing showed that the prices that the old Commission had set at 18 cents were too high, so the Commission reduced the price for the future as well as reducing those rates which were involved in that case.
Justice Potter Stewart: Now, as to -- as to new filings of prices in that field, the -- the -- the price will be different from -- from that in the Statement of General Policy and the Commission's opinion on this case.
Mr. Richard A. Solomon: That's right.
There's a Fifth Amendment to the Statement of General Policy.
Justice Potter Stewart: There's a what?
Mr. Richard A. Solomon: There's a Fifth Amendment which happens to be [Laughter] -- I think my friend from Phillips would agree that I am not taking the Fifth Amendment that he is taking.
We have amended this thing as time to time goes on as circumstances have indicated.
But this is an interim program.
Justice Potter Stewart: With respect --
Mr. Richard A. Solomon: The final program is not what we can do to hold the line.
The final program is the area rate program, the cost-based area rate program to fix uniform rates for the same type of gas for all producers in the various areas of the country.
Justice John M. Harlan: Why did the Commission justify the proceedings instead of merely suspending them?
Mr. Richard A. Solomon: I don't know.
Justice John M. Harlan: Is there any --
Mr. Richard A. Solomon: I think maybe it would have been wiser, as you will note in the recent Hunt case where we similarly we're not able to make any decision but we're sending the case back, we sent it back only for further evidence on the Section 4 increased rates there, but we didn't dismiss the Section 5 proceeding and of course, one of the reasons for that was, that we were well aware that this case is going to be argued at this time and that it would be foolhardy to dismiss a proceeding which this Court, we hope not but might order us to go ahead with.
I don't know why the Court dismissed the Section 5 proceeding rather than holding it in advance.
What I think -- well, I just want to say I don't really think it makes too much difference because --
Justice John M. Harlan: I suppose I'm --
Mr. Richard A. Solomon: -- I don't really think -- excuse me.
Justice John M. Harlan: Well, my point is simply this.
In this estimated three to 14 years, whatever that figure is --
Mr. Richard A. Solomon: Not our estimate.
Justice John M. Harlan: No, I understand that that's out of the blue or it's Judge Prettyman's not out of the blue.
Mr. Richard A. Solomon: No, it's not Judge Prettyman's estimate either.
Justice John M. Harlan: Well, alright.
It's in Judge Prettyman's opinion.
Mr. Richard A. Solomon: Right.
Justice John M. Harlan: What would happen -- is there any method supposing this delay goes on for 10 years or whatever it is?
Is there any method by which any consumer interest can come in and say to the Commission that the ad hoc protection, as you've described, interim protections are not adequate and getting a hearing on them?
Mr. Richard A. Solomon: Yes.
We can --
Justice John M. Harlan: On this proposal?
Mr. Richard A. Solomon: -- reinstitute -- we can reinstitute the 5 (a) proceeding tomorrow.
Justice John M. Harlan: To get the reviving --
Mr. Richard A. Solomon: Yes.
Justice John M. Harlan: You could lift it out of the --
Mr. Richard A. Solomon: Yes, we can -- we can reinstitute the Section 5 proceeding and I really don't think it makes too much difference whether a 5 (a) proceeding, which is a proceeding for future is suspended or --
Justice John M. Harlan: It might be not.
I was just --
Mr. Richard A. Solomon: We can reinstitute it and if the Commission really felt that we could reach meaningful decisions on an individual cost-of-service basis for these major companies, including Phillips, we really felt that there was much likelihood of doing so without disrupting our continuing efforts to do what we think make sense, I'm sure we would.
Basically, what you're being asked to decide is that the Commission's judgment as to how it can best use its mind power and spend its time in attempting as quickly as possible to get nationwide area pricing, whether it can be done best by deciding the Phillips case and the Pan American, which is the second biggest producer and hasn't been started yet, and the Humble, which is the third biggest producer and hasn't been started yet, those cases on an individual basis or whether we can do it best by the area basis, and we have decided, the old Commission decided and the new Commission still believes that we can perform this difficult task best by the procedure we have adopted.
Justice Arthur J. Goldberg: Mr. Solomon, to put it down, if you started to say that [Inaudible] adopting to the area [Inaudible].
Am I quoting you correctly and if I am what is the [Inaudible]?
Mr. Richard A. Solomon: Well, I don't think you're quoting me correctly but I think you're right.
What I said was that we have made clear that in area pricing, we are considering costs, but I want to go on and say that the question came up during the course of the Permian Basin case.
What did we mean by saying we're considering costs and the Commission changed its mind on this, to be perfectly frank.
At first, the question came up by some of the producers I think or maybe with some of the interveners, can we introduce cost-of-service type presentations?
And at first, the Commission said, “No, we don't want any cost-of-service type presentations.
We just want cost information generally,” but the present Commission has changed this and it has said, “We don't want individual company cost-of-services, but if you think it is useful in showing us how an area price can be done to introduce composite cost-of-service of analogous type companies, come ahead and do so” and to that extent, the cost-of-service principles, but considered on an area basis are involved.
Justice Hugo L. Black: Mr. Solomon, I want to ask, and yet I'm unable to understand precisely the reasoning by which you reconcile what was done in Hunt and the later cases and the dismissal of the five proceedings against Phillips, unless it's simply be by reason of change in the Commission.
Mr. Richard A. Solomon: No, sir.
The Hunt case was one of the six cases -- seven cases which I mentioned before.
It's the time it dismissed Phillips.
The Commission thought maybe it could make some decisions.
First of all, it has made a decision on Phillips, remember, with respect to the Section 4 aspects of the case.
There were Section 4 aspects, increased rate problems of past periods involved in Hunt.
Also, the Hunt case had a much lighter cost test year.
So the Commission in Hunt and in Gulf and a number of these other cases refused to terminate the case at that time.
It was an examiner's decision in Hunt.
The examiner filed that Hunt's cost-of-service was way above its revenues -- pardon me, above its revenues that we should dismiss the Section 4 increased rates without refunds and that we should dismiss the Section 5 proceeding along line of Phillips.
When this came before the Commission, the Commission found it was unable to make any determination as to Hunt's cost-of-service on an individual company basis because the record was inadequate.
The Commission might have dismissed it on that ground.
It simply said to Hunt, “You haven't shouldered your burden or proof of showing these increased rates were justified.”
The Commission didn't feel that that was appropriate in view of the fact that, one, this record had been made prior to Phillips when there were no guidelines, and two, the Commission had refused to terminate this proceeding, but it forced Hunt and everybody else to go ahead with it.
Under these circumstances, the Commission has remanded this case to give Hunt an opportunity to show, if it can, what its cost-of-service was.
And if this --
Justice Hugo L. Black: That means that that case is being decided on the cost-of-service.
Mr. Richard A. Solomon: That means that that case may be decided on the cost-of-service, and so may a number of the other cases.
Justice Hugo L. Black: And in this case, however, it was thought impossible to do it and suit was dismissed.
Mr. Richard A. Solomon: No sir, it was not thought impossible to do it.
It was thought unwise to do it because they would -- because of the fact that they would have to start over again and because of the fact they thought it would take unnecessary time and effort to do so away from moving to the area pricing in that way.
Justice Potter Stewart: On the Hunt case, I'm looking at your brief on the top of page 42.
It said that -- I read that as implying that the hearing examiner is just supposed to sit on the 5 (a) aspect of the Hunt case pending this area pricing --
Mr. Richard A. Solomon: The Hunt remand directs the examiner to allow Hunt to make a record with respect to the Section 4 proceeding.
Justice Potter Stewart: Yes, yes.
Mr. Richard A. Solomon: It doesn't terminate the Section 5 proceedings --
Justice Potter Stewart: No.
Mr. Richard A. Solomon: -- but it holds them in suspended animation.
Justice Potter Stewart: Well, it remands them --
Mr. Richard A. Solomon: Is that right?
Justice Potter Stewart: Technically, it remanded that, as I suppose to the hearing examiner too, but --
Mr. Richard A. Solomon: Well technically, I'm not sure about that.
But I think there are grave doubts as to whether the hearing examiner is supposed to go ahead with the Section 5 aspect of the case at all.
Justice Potter Stewart: Well, that's -- that was my interpretation reading that -- that little portion of the opinion on the top of your -- of page 42 of your brief.
Mr. Richard A. Solomon: Well, I'm sure -- I've really taken too much of my colleague's time, but I suggest that whether I'm right or not, it's set out in full in the Eastern Seaboard's reply brief and I think they're just holding this case in the case and not attempting to go ahead with the Section 5 proceeding at this time, in Hunt at least.
Chief Justice Earl Warren: Mr. Heady.
Argument of Kenneth Heady
Mr. Kenneth Heady: Mr. Chief Justice, may it please the Court.
I represent Phillips Petroleum Company.
At one time I believe Phillips was the principal subject to these proceedings.
We have heard considerable discussion today regarding the general approach of the Commission to the regulation of independent producers.
I would like to turn from that subject, if I may, and to direct the attention of the Court to the specific findings which the Commission made in this proceeding on the basis of the record before it and to the disposition of this case which the Commission made on the basis of those findings.
In particular, I want to address myself to the question of Mr. Justice Harlan with respect to why did the Commission dismiss the Section 5 (a) proceeding and to the second question raised by Mr. Justice Goldberg as to why did the Commission dismiss the proceeding rather than to reopen the proceeding.
Justice Hugo L. Black: What page of the record did you refer to this?
Mr. Kenneth Heady: I will reach that, Your Honor.
Justice Hugo L. Black: I thought you said that's part of the record.
Mr. Kenneth Heady: I intend to discuss the record pretty much in its entirety, Mr. Justice Black.
Justice Hugo L. Black: I -- I just thought you had referred to a particular page.
Mr. Kenneth Heady: No.
I -- I will in a few moments.
On the basis of this record, the Commission made four basic findings.
These basic findings apply both to the Section 5 (a) proceeding and to the consolidated Section 4 (e) proceeding.
These basic findings were at first that 1954 where the adjustments for known changes through 1956 constituted an appropriate test year for the purposes of these proceedings.
Secondly, the Commission determined that for that test year, the cost-of-service determined by the Commission was almost $9 million higher than the revenues provided by the contract rates including these consolidated Section 4 (e) increases.
Thirdly, the Commission determined that there was no evidence to show that any of the individual contract rates were under the discriminatory or preferential.
And fourth, the Commission determined that this record was inappropriate for the purpose of determining rates for the future.
Now, each of these basic findings is supported by substantial evidence.
None of them were challenged in the various applications for rehearing.
The first three of these -- I mean or three of these findings have never been questioned.
The only finding which has been questioned at all is the finding relating to the subject of discrimination and that issue was raised for the first time after this Court had granted certiorari.
For the moment, let me deal with the finding that this record was inappropriate for fixing rates for the future.
To do that, I think it would be helpful to go back and contrast the situation of this case as it was presented to the examiner and as it was presented to the Commission.
It became obvious relatively early in these proceedings that cost-of-service, however determined, was going to be in excess of the contract revenue.
Now, contrary to the statements of Mr. Bennett and Mr. Brown, Phillips was not advocating cost-of-service.
We had gone into this proceeding.
We knew that we were going to be met with a cost-of-service and we intended to deal with that subject as best we could by meeting them on common ground.
Certainly, it was not our position that cost-of-service was the only way in which this case would be decided.
Now, at the -- on the basis of the cost-of-service determined by the Commission, it was apparent as I say, that that cost was going to exceed the revenue.
Phillips took the position before the examiner that if cost-of-service was to be the sole criterion, then under those circumstances, Phillips was entitled to contract rates which would return that cost-of-service.
Consequently, Phillips proposed that the Commission set aside its contract rates and permit it to charge rates higher than were provided by its contracts.
That contention raised serious objections on the part of many of the interveners.
The examiner touched on -- or did more than touch upon that question.
If you will turn to page 75 of the record, you will see there the beginning of a rather extensive discussion by the examiners under the heading, Phillips' right to Section 5 (a) increases under the Mobile-Sierra Pacific arguments.
The examiner determined that the Commission was entitled to and should set aside Phillips' contracts and permitted to charge rates higher than were provided by its contract.
But in the sum -- that finding then was the basis for vigorous exceptions on the part of many, but not all, of the interveners in that proceeding.
Some two years and nine months elapsed between the time of the close of the record and the decision of this case by the Commission.
During that interval of time, many of the contract prices provided for higher rates, many of the contracts were renegotiated to provide for higher rates.
Consequently, by the time this case was decided by the Commission, the issue of whether the Commission should raise Phillips' rates above its contract level was in a sense moot because of the fact that by that time, the contract price is already provided for higher rates.
And this was the significance, I think, of the Commission's statement at page 324 and 325 of the record in which the Commission said that this record was not appropriate for fixing rates for the future.
The Commission says that, “We do not deem inappropriate or require that Phillips file rates for the future based upon the present record.”
The significance of that statement was that it made little sense to the Commission to undertake -- to set aside contracts so that it could raise rates above the level of the contracts only to find that the levels to which it had raised above the contract were then below what the contracts were providing.
Consequently, the Commission said that on the basis of this record, it makes no sense in reason or justice to attempt to fix rates for the future on the basis of this record.
Now, we come to the question as to whether the Commission should have dismissed or should have reopened this proceeding.
With regard to that question, this particular proceeding was first instituted in 1948.
There were already two separate and lengthy hearings in this record.
It seems to me that it was well within the discretion of the Commission to say that we are not going to continue this already bulky proceeding and reopen it for the receipt of new evidence instead we will set this proceeding down for a new proceeding.
Now, I make no argument as to whether or not the new proceeding ordered by the Commission was or was not the proper type of proceeding.
That I leave to the Commission, but I do make the point that on the basis of the record before it, the Commission was entitled to terminate this proceeding and go forward to some other proceeding and that the findings made by the Commission did support that decision.
Now, with respect to the 4 (e) proceedings, the Commission did use this record to turn -- to determine that these particular Section 4 (e) increases, had determined rates less and provided revenues less than the cost-of-service while they were in effect and that there was nothing to show that these individual rates were unduly discriminatory or preferential.
Now, I want to emphasize --
Justice Potter Stewart: The question that you've just stated is the only question really before us, isn't it?
The validity of the new proceeding is not really before us.
Mr. Kenneth Heady: It seems to me that that is correct, Your Honor, that the only question which is actually before this Court was, whether or not, the Commission was entitled to terminate the Section 4 (e) proceedings, and I emphasize that that question is not really before this Court because of the fact that in the applications for a rehearing, none of the interveners, none of the present petitioners, attacked and challenged the Commission's finding that there should be no refunds involved.
Now, there was one exception to that, that one exception was the State of Wisconsin.
Wisconsin in its application for rehearing did contend that there should have been, perhaps, refunds for those rates which are in excess of the average cost-of-service, but that contention was urged only mildly in the Court of Appeals and it has been abandoned here.
Consequently, I question whether we have even the disposition of the 4 (e) proceedings properly before this Court.
That -- but in substance, I agree with -- with Your Honor that that is the only basic issue which is involved if it is properly here.
Now, I want to emphasize that these basic findings of the Commission and the dismissal of this proceeding based on those findings do not directly affect any future proceeding involving Phillips or any other producer.
Under Section 5 of the Natural Gas Act, as Mr. Solomon has pointed out, the Commission is free at any time to institute a Section 5 investigation.
The dismissal of these proceedings did not and has not affected that power.
Similarly, with respect to the unconsolidated Section 4 (e) proceedings, those proceedings remain pending as a part of other proceedings, not a part of this proceeding.
The Commission has in fact exercised its power to set 5 (a) proceedings by ordering a 5 (a) proceeding with respect to Phillips' rates in the Permian Basin area and the South Louisiana area.
It could this afternoon, so far as Phillips is concerned, institute an order with respect to an investigation of Phillips' rate in their entirety.
It seems to me that the only question for review by this Court now is whether these basic findings of the Commission authorized the Commission to dismiss these particular proceedings.
The future proceedings and how the Commission should conduct itself in these future proceedings is to me not properly before this Court.
It is simply asking this Court to exercise advisory administrative powers which admittedly this Court does not have.
Now, with respect to the Section 5 (a) proceedings and the dismissal of those proceedings, the Commission's power to fix rates for the future is dependent upon the finding that the existing rates are unjust and unreasonable or unduly discriminatory or preferential.
The language of the act specifically makes that finding a condition precedent to the fixing of rates for the future by the Commission.
Historically, in pipeline rate cases, it did not pose any particular problem because of the fact that the Commission has generally found that the existing rates were too high.
The Commission has then declared those existing rates to be unjust and unreasonable.
It has then proceeded to prescribe lower rates or require the pipeline company to file lower rates, but here, the Commission was -- was faced with the opposite of the usual historical situation.
It was faced with a situation in which revenues were less than costs.
No one now contends that that finding which is unchallenged obligated the Commission to hold that the existing contract rates were unjust and unreasonable.
The Commission expressly found that there was nothing to show that they were discriminatory.
Under these circumstances, no one challenged the Commission's finding that the record in this proceeding was not appropriate for the purpose of fixing rates for the future.
All that these petitioners did in substance was to urge an application for rehearing, that the Commission reopen the record if it thought that this present record was inadequate.
But that objection was not that the Commission had failed to fix rates upon this rate, but that the Commission had failed to provide for obtaining a new record in which new evidence might be obtained and that that new proceeding was precisely the kind which these petitioners would desire to have.
It resulted, -- so far as the Section 5 proceedings are concerned, the Commission did not find and it was not required to find that Phillips' existing rates were unjust or unreasonable.
The Commission did not find and it was not required to find that Phillips' existing rates were unduly discriminatory or preferential.
But without those findings, the Commission had no power over these proceedings to fix rates for the future.
The fact that the Commission permitted the existing rates to stand without expressly determining that these existing rates were just and reasonable is not a matter of any significance.
This Court made it clear in the Mobil case that the power of the Commission is simply the authority to review rates established in the first instance by the natural gas companies being regulated and to set aside or modify only those rates which it determines to be unjust or discriminatory.
A rate once having been reviewed by the Commission and not having been found to be unlawful, stands on its own and is not dependent upon any affirmative finding of the Commission that that rate is just and reasonable.
Now, the Court also made it clear in the Mobil case that to this extent, there is no difference between Section 4 and Section 5.
This principle applies to both of those sections.
In actuality, the petitioner's contentions that the Commission should have reopened this record are -- are nothing but pleased to the discretion of the Commission.
As a matter of fact, I think it's clear that the Eastern Seaboard's contentions are just that.
I don't think they have ever gone further than -- than to contend that this was a matter of discretion.
In their view, it was an abuse of discretion, but nevertheless they have treated it as a matter of discretion.
As I pointed out, so far as the -- as the Section 4 (e) proceedings are concerned, it seemed to me that the Commission's findings, its basic findings are as applicable to those as to the 5 (a) proceedings with this one difference.
The Commission there did decide that -- and specifically the question of refunds.
It determined that in view of the fact that the cost-of-service was in excess of the revenues and the fact that the existing rates were not shown to be discriminatory, that there was no basis on which to attempt to order refunds of those Section 4 (e) increases.
Now, the Commission did point out that since those increases have been superseded by later increases and therefore were no longer in effect and that the later superseding increases were the subject of other and separate pending Section 4 (e) proceedings that this record was not an appropriate place in which to attempt to establish future rates for these Section 4 (e) proceedings.
It seems to me that on -- on the basis of its finding in this proceeding that the Commission did precisely the only thing it could do with respect to this Section 4 (e) proceeding and that was to hold that no refunds were required and that these particular Section 4 (e) proceedings should be dismissed.
With regard to the Hunt case, which has been discussed here to some extent, one contention made by the petitioners here is that that case holds that the mere fact that total cost-of-service exceeds total revenue may not always be relied upon to sustain individual rate increases.
That finding, of course, was based upon the record in the Hunt case.
Whatever findings and whatever decisions the Commission may have made on the basis of the Hunt case so far as this record is concerned, the Commission did hold that the mere fact that an overall cost-of-service exceeded the total revenue did justify these particular increases because of one, the fact that cost exceeded revenues and secondly, the fact that there was nothing to show that the individual rates were discriminatory.
The Commission was not required to make any further inquiry so far as Phillips was concerned.
Perhaps for Hunt, I don't know what the record showed in that proceeding.
There's one other matter regarding these Section 4 (e) increases that might bear some slight discussion.
One other attack was made upon these -- on three of these Section 4 (e) increases by California.
These contract provisions provided that the -- whenever the wholesale commodity index had increased by a prescribed number of points and the purchaser from Phillips had obtained a general increase in its rates, then Phillips was entitled to a proportionate increase in its rates, proportionate, that is to the increase received by the pipeline company.
These are the clauses which California designates as the so-called Spiral Escalation Clause.
California nowhere contends that these increases were not justified by Phillips' cost.
As a matter of fact, the three increases involved were to levels which were less even than the average unit cost-of-service determined by the Commission.
California's contention is simply that the mere existence of these contract provisions in some way violated some unstated public policy and that the Commission should have rejected these increases without even considering the question of whether the increases were required or justified.
California never states precisely why it is that the mere existence of these contract provisions should violate some public policy, especially in view of the fact that any increase provided by them must be justified on other grounds.
Now, California in its brief seems to be attempting to create the impression that the Commission allowed these increases merely because of the contract provisions.
But quite to the contrary, all that the Commission did was to consider these contract provisions authorized Phillips to utilize the rate filing procedures of Section 4.
That's all that the Commission considered that these provisions did.
Phillips was required to justify these contract provisions on other grounds.
To that extent, the Commission treated these contract provisions no differently than any other contract provisions.
In this instance, the Commission determined that these particular increases were justified on the basis of Phillips' cost and California has never contended otherwise.
Certainly, there is no public policy which would require or even permit the Commission to ignore these contract provisions.
In fact, California seeks a retroactive amendment which would deny Phillips the right to file an increase to which it is admittedly entitled.
These particular provisions have been upheld by the Court of Appeals for the Tenth Circuit.
Similar or -- provisions providing for indefinite increases at indefinite times had been upheld by other circuits and in fact by this Court.
It would have been obviously a clear error under those circumstances for the Commission to have rejected these increases.
In summary, let me say that --
Justice Hugo L. Black: Why do you say admittedly right?
Mr. Kenneth Heady: Because of the fact that the Commission found that the total contract revenues, including these particular increases provided revenues less than the cost-of-service and the fact that there was nothing to show that any individual contract rate was discriminatory.
Now, California has not challenged either of those findings.
It seems to me that none of those circumstances, Calor had -- Calor -- oh California has admitted the findings of the Commission that those rate increases were justified.
The position of California --
Justice Hugo L. Black: In California, the gentleman has argued here awhile ago, they admit that your rates were valid.
Mr. Kenneth Heady: California has never challenged and did not, in its application for rehearing, challenged the Commission's finding that cost-of-service exceeded revenues for the test year nor did it challenge the position that the rates were not shown to be discriminatory.
Let me say one thing further with respect to the test year.
The argument is made that the test year doesn't establish anything with regard to later year, but that finding overlooked -- that contention overlooks the fact that the Commission found that the 1954 test year with adjustments was representative for the purposes of this proceeding.
And that effect and by that finding, the Commission has in effect found that the 1954 test year was representative of all of the periods that these particular contract increases were in effect --
Justice Arthur J. Goldberg: [Inaudible]
Mr. Kenneth Heady: Those increases in revenues are subject to later Section 4 (e) proceedings, which were not a part of this proceeding, no evidence was introduced with respect to -- they could -- there could have been no decision in this record with respect to those increases.
That matter of course occurs in any time, even with a pipeline company.
Justice Arthur J. Goldberg: [Inaudible]
Mr. Kenneth Heady: That this proceeding --
Justice Arthur J. Goldberg: Was inappropriate.
Mr. Kenneth Heady: Was inappropriate?
Justice Arthur J. Goldberg: [Inaudible]
Mr. Kenneth Heady: The Commission very carefully states that the 1954 test year was appropriate for the purposes of this decision.
Justice Arthur J. Goldberg: But they haven't been appropriate, have they?
Mr. Kenneth Heady: They -- they -- they have used it to the extent of the 4 (e) proceedings.
And in fact, the Commission has said that the 1954 test year was appropriate for the purpose of testing the 4 (e) increases.
They did go on and say that the 1954 test year was not appropriate for the purpose of fixing rates for the future either in the Section 5 (a) proceeding or the Section 4 proceeding.
Justice Arthur J. Goldberg: From this deal?
Mr. Kenneth Heady: That and the fact that the contract provision has changed in the meantime and the issues presented to the Commission were different than those presented to the examiner.
Yes, that's right.
Justice Hugo L. Black: There's one thing I didn't understand and I understood you to say that no increase has occurred by reason of the dismissal of the 4 (e) proceedings.
Does that mean that the attack could still be made with reference to those rates at that time?
Mr. Kenneth Heady: No, Your Honor.
The Commission -- as I read the Commission's decision, specifically decided that the 4 (e) increases were justified and that no -- no refunds were required.
Justice Hugo L. Black: So that it's nothing they could do so far as this refund -- this ends the refund chances if they're -- if they have a word.
Mr. Kenneth Heady: It ends the refund chances with respect to the 12 particular Section 4 (e) increases which were consolidated with this proceeding.
The balance of the increases which were filed during and after this hearing and this proceeding remained the subject of pending proceedings there will be perhaps an opportunity for refund in those proceedings.
Justice Hugo L. Black: That's for future?
Mr. Kenneth Heady: That's for future.
Well, that's for future proceedings for determination --
Justice Hugo L. Black: What I understand then from you is that -- it hasn't been perfectly clear but does it make any difference now -- what could be shown that the Commission by dismissing this on the ground that it couldn't decide it at this time on the basis where the method which it asked has permanently cut off the chance to get a refund if these rates were invalid?
Mr. Kenneth Heady: No, Your Honor.
Your -- your question assumes that the Commission terminated the 4 (e) proceedings because it could not decide it.
The Commission did decide --
Justice Hugo L. Black: Alright.
Mr. Kenneth Heady: -- the Section 4 (e) --
Justice Hugo L. Black: -- if they did -- if whatever the reason, it has cut off by determination any chance to get a refund later.
Mr. Kenneth Heady: It has cut off that chance to get a refund because of the Commission's findings that the increases were justified.
Justice Hugo L. Black: So you're standing on the basis that they actually have decided the case on its merits.
Mr. Kenneth Heady: That is correct, Your Honor.
Justice Hugo L. Black: I didn't so understand from the government.
I'm -- I'm -- it's evident I misunderstood it.
Chief Justice Earl Warren: Mr. Mann.
Argument of J. David Mann, Jr.
Mr. J. David Mann, Jr.: Mr. Mann, may it please the Court.
I would respond first to Mr. Solomon's suggestion that the real question here is whether the Commission should be compelled to go down two roads simultaneously.
I suggest to this Court that the question is whether the Commission may refuse to go down any road during the time while its area rate experiment is in progress, whether it can in fact abandon a known road simply because it's rocky in favor of an unknown road which has not even been chartered.
While this experiment goes forward, and I would remind the Court again that the companies for whom I speak are not opposed to the Commission's going forward with its area rate experiment.
They are actively engaged and presumably will continue to assist the Commission in its efforts in this regard, but while the experiment is in progress, while it is going forward, refundable, bonded dollars are being collected at the rate of $158 million annually, $ 22 million of those dollars are Phillips'.
Now, Mr. Solomon suggests that the Commission is basing regulation on a cost-of-service basis and indeed, it is in part as is reflected by its own evaluation of the examiner's decision here and its own opinion 338 in this case, as it has reflected in the Hunt decisions, which are before you, opinions 365 and 369, as it is already going forward, at least it's -- did in the Permian Basin procedure.
The Commission does indeed recognize the need for some relationship between the revenues of a company and its income or -- and it's -- and it's requirements in terms of revenue.
The Commission recognizes the need for cost.
The problem is not that.
It's that the Commission refuses to go forward on a company by company basis.
And in accordance therewith is unable, we contend, and I think properly so to give us any kind of interim protection while its experiment is going forward.
Justice Arthur J. Goldberg: Mr. Mann, [Inaudible] examiner of the Commission [Inaudible]?
Mr. J. David Mann, Jr.: Mr. Justice Goldberg, I think that we – to answer the question in several ways, first of all recognize that Phillips Petroleum Company itself, this single company, represents 10% of the jurisdiction of gas being sold in this country today.
It represents alone as much gas as being considered in the entire Permian Basin proceeding, so it is important.
Now secondly, as far as time is concerned, indeed it did take time to try this case.
We started back in 1957 and the record was long, and there were many false starts.
The parties who participated in this proceeding had many suggestions to make as to how to proceed.
The examiner sit through the week [Inaudible] in -- in a -- in an extraordinarily patient and capable way.
The Commission then considered this and the Commission resolved many of these issues so that in consequence, a great deal of ground had been plowed in this proceeding.
And indeed, the -- the -- the ground plowing that has been done here by the examiner has been followed by other examiners and they have learned their lessons from this.
The Commission has in consequence in the -- in the proceedings in which the company by company approach has been used and we list them incidentally, some of them in our Appendix A, a great deal of progress has been made and much, much less time, in my opinion, would be required.
And third and finally, if this is a relative matter, if it's a matter of relating how much time is going to be required to finish this case at long last on the one hand as compared with going forward on the area approach and conceivably by mid-1964 finding the rates for the Permian Basin procedure -- producers, 35% of Phillips' gas being there.
If it's a relative thing, I would point out that many of the legal issues which are going to be involved in the Commission's decision of the first area price proceeding are going to be long and complex and complicated.
Now, this is not necessarily to condemn it, but simply to say that it is that kind of question which it seems to me we will not get if the Commission here decides the Phillips case on a company by company basis.
The discrimination, confiscation argument which Mr. Justice Black discussed with Mr. Solomon this morning, one of the -- one of the virtues of a -- of a company by company approach is that at least it enables the Commission the examining authority to weigh and evaluate all of the costs of the company on the one hand and all of its revenues on the other.
Then by prescribing or first letting the company come in with a schedule of rates to return that cost-of-service, there may be some positive assurance that the company is at least recovering its cost-of-service.
That is -- that is one of the very important major benefits and advantages of the company by company approach, which incidentally poses a very serious problem in the area price proceeding.
Justice Hugo L. Black: This case seems to leave considerable questions to whether it's part to conduct proceedings and to regulate a big industry like this in the time enough so that you can never get a final judgment before the figures are obsolete.
Mr. J. David Mann, Jr.: Well, certainly Mr. Justice Black, the record in this case would indicate that it takes a good while and I think that there is no doubt that in the major cases, it will take some time.
But again, it's a relative matter.
I cannot say to you in complete honesty that it's going to take any less time to do it on an area basis.
In fact, it's my own personal judgment it may well take more time to reach the Commission decision level following which we will have a many unknown legal questions that are going to have to be resolved.
Secondly, Your Honor --
Justice Hugo L. Black: But in passing on the price, does the Commission have a problem?
It recently appeared with reference to the condemnation of the land when the government buys some property that the prices vary according to the hopes of the prices that the Commission will make?
Mr. J. David Mann, Jr.: Well, I find that question rather difficult to answer.
I would say that it has been my experience that the pricing of gas in the field has been based pretty much on -- on what the market will bear.
Now, at the moment of January 1963, and this --
Justice Hugo L. Black: (Voice Overlap) very, very varying -- it's been very, very varying -- here from a very short time.
Mr. J. David Mann, Jr.: I beg your pardon, sir?
Justice Hugo L. Black: We've had many cases which indicates a skyrocket up pretty high in a very, very short period of time.
Mr. J. David Mann, Jr.: That is -- that is right, sir.
The pipelines have had a tremendous demand for gas.
They have gone in to the field and each time they seek either to construct a new line or to expand an existing pipeline, they require a substantial major block of gas.
They go into the field, they find its gas.
And it has been their experience in the past that each time they do, and this by the way is in your CATCO decision.
I think this is fully discussed there, each time they do, the gas price simply reaches a new higher plateau.
So that in sum, I would say that the experience in the marketplace and the field has been that gas seeks to be sold in a seller's market and any pipeline which seeks to buy it is going to have to pay or even buy a major block of gas.
You're going to have to pay at least as much as or slightly more than the last highest price in the area.
I would respond incidentally to Mr. Justice Goldberg with respect to the producer cases which are listed in our Appendix A of the brief which are a number of the major cases on which substantial work has been completed and would respond to Mr. Solomon by saying with respect to Humble and Pan American, which are I believe number two and three or three and two in the list following Phillips in size.
It is indicated very clearly there that the field investigation of these producers has been completed.
And if the lessons which have been learned in this case could be applied to those cases and the other cases listed in that appendix, it seems to me there certainly could be very rapid progress to be made and more importantly still, the results which would be obtained could be used by the Commission and applied in fixing prices by areas.
What is needed most, if the Court please, is a just and reasonable rate.
The Commission has yet to fix a just and reasonable rate for any major producer in the country and that is where we have to start.
That is what is needed and we trust that the Commission will be asked to come to grips with this matter in this case and decide it so that we may have at long last a just and reasonable rate.
Justice Hugo L. Black: Is there any difference between you and the counsel for Phillips as to the reason why the Commission dismissed both 4 (e) and 5 (a) terminated the proceedings?
Mr. J. David Mann, Jr.: I think, Mr. Justice Black, there may be no difference between us as to why the Commission did it.
The difference we have is in -- is in the extent of its propriety.
Justice Hugo L. Black: Do you think that they did it on the merits of the plans of increase?
Mr. J. David Mann, Jr.: The Commission did it on the merits as applied only to the cost of service for 1954 related to the 12 Section 4 (e) cases that were then before it.
It did not come to grips with the real problem that it had.
It did not come to grips with the problem which this Court told that it had and told it to grapple with namely to fix Phillips' rates, with all of them.
It in effect did nothing more than put in action, let the -- actually, it's 10 of the 12 Section 4 (e) rate stand.
It did not fix Phillips' rates and so there is a difference between the two.
Justice Potter Stewart: As I understand it, you -- you would concede that it couldn't have -- have made a decision on the merits in the 5 (a) proceeding on the present record, don't you?
Mr. J. David Mann, Jr.: I would concede Mr. Justice Stewart that the record was stated to the extent that --
Justice Potter Stewart: Inadequate -- inadequate final foundation for any decision on the merits 5 (a).
Mr. J. David Mann, Jr.: I think -- I think --
Justice Potter Stewart: I understood you to say that.
I want to be sure --
Mr. J. David Mann, Jr.: I think that it -- it is true that whatever the Commission did with that record, it did have to update it.
I think the record -- the record was so long in the making that it did have to be updated, and we urged the Commission to update it and in our application for rehearing, for example.
We -- we call to the Commission's attention facts which it did know and which were before it to point out precisely why it had to be updated.
But if it didn't update it, it was simply closing its eyes to the reality of Phillips' gas prices and also was ignoring the Court's mandate to fix Phillips' rates.
Justice William J. Brennan: [Inaudible]
Mr. J. David Mann, Jr.: That is right, Your Honor.
Justice Tom C. Clark: [Inaudible]
Mr. J. David Mann, Jr.: I beg your pardon, sir?
Justice Tom C. Clark: That would not be necessary in the 4 (e) cases that they -- the 12 that they dismissed, would it, that they were superseded by later filings?
Mr. J. David Mann, Jr.: They -- they were all superseded by later filings, Mr. Justice Clark, but I believe the one I mentioned to you this morning points up the kind of thing that could happen and did happen and might well have happened in connection with the other Section 4 (e) then pending but not consolidated, namely that even though the particular proceeding before the Commission represented an increase which let us say fell below the cost level line, they were -- and accordingly was locked in, if you will, there were subsequent increases in the case I cited this morning, the one to 23.5 cents, which clearly was above and beyond all reason and above the CATCO inline level --
Justice Tom C. Clark: That couldn't have set that though on the lock-in, could they?
I'm asking for information, I don't know about that.
Mr. J. David Mann, Jr.: They -- they could have disposed this one and all the others had it update the new record.
Justice Tom C. Clark: Like you said, the one that -- that superseded it is too high or too low even with the same --
Mr. J. David Mann, Jr.: I think what would have happened, and again, perhaps I'm speculating, but it seems to me that what would have happened and what we suggested would be an appropriate approach would be for Phillips.
Once it knew the cost-of-service which it was entitled to collect for Phillips to submit to the Commission for its initial examination a schedule of rates covering all of its sales designed to return that cost-of-service, our position being that Phillips first of all is in the best position to do this because of its knowledge of its contractual relationships.
And secondly that it is a convenient starting point and does the least amount of damage to existing market relationships as among the producers on the one hand and the pipelines on the other.
And I think that in the process of this, prices like this, 23.5 cent price would have sorted out very nicely.
Justice Tom C. Clark: The remaining 4 (e)'s, I understood Mr. Bennett you to say there are about a hundred filings during this period?
Mr. J. David Mann, Jr.: There -- there were -- they were pending before the Commission on September 28, 1960 I believe, Your Honor, 95 --
Justice Tom C. Clark: What happened to the 87 -- I mean, on the about 83, wasn't it?
Mr. J. David Mann, Jr.: Well, many -- many of those, Mr. Justice Clark, are still pending.
In addition, there have been others which have been filed and of course, there are also before the Commission, and I don't know how many of these, there are several so-called initial price rates, which have been filed which are at high levels above the Commission's area prices or inline levels.
Justice Tom C. Clark: Those are all pending, you think?
Most of those are pending?
Mr. J. David Mann, Jr.: Yes, sir.
They're -- they're pending and to a certain extent are susceptible to the kind of protection that is available under the -- under the refund and bonding provisions of the Act, which as this Court pointed out in -- in this Number 48 this term just gives the consumer no protection at all because of the transitory nation of the population.
Justice Tom C. Clark: They wouldn't be able to determine those, would they, under the area pricing plan, the 4 (e)'s, wouldn't it?
Mr. J. David Mann, Jr.: I -- as I understand it, it would be the Commission's hope that it could do this.
It's -- it's -- it's hoped that it can be done.
Justice Tom C. Clark: And to see that they do that for their future under the 5 (a) but I was wondering how they'd do it under 4 (e).
Mr. J. David Mann, Jr.: The difficulty -- the difficulty would be that -- let us say they do find a -- a just and reasonable rate, now assuming the -- the lawfulness of it, assuming they find a just and reasonable rate for the Permian Basin, this represents only a portion of Phillips' sales.
Now, that would mean that until they had made similar determinations of “just and reasonable” rates in other areas, they would not be able to fix the total just and reasonable rates for Phillips.
Justice Tom C. Clark: How many areas does Phillips have?
Mr. J. David Mann, Jr.: I suppose most all -- all areas would be my --
Justice Tom C. Clark: Would you participate in the area of determination geographically?
Mr. J. David Mann, Jr.: Did I participate?
No, sir, Mr. Justice Clark, those were -- those were done simply by the Commission.
Justice Tom C. Clark: To his body?
Mr. J. David Mann, Jr.: That is right.
There was no -- there was no hearing.
I think that this was done, as I understand it, upon the Commission's understanding and appraisal of the various geological structures, as well as geographic areas and upon the experience reflected by the data in his file.
Justice Tom C. Clark: Thank you.
Justice Arthur J. Goldberg: [Inaudible]
Mr. J. David Mann, Jr.: The answer to the second part of the question, Mr. Justice Goldberg, is no, it does not tell the -- it did not tell the Commission how to exercise it, but I would invite your attention to pages 405 and those following of the record, and I would quote from the opinion commencing at the bottom of page 405, “Therefore…” -- and this goes to the jurisdiction at point -- “Therefore, Phillips is a natural gas company within the meaning of the Natural Gas Act and the Commission should fix the rates at which these sales are made.”
And then if you were to look also at the Commission's order reinstituting the investigation --
Justice Arthur J. Goldberg: Court of Appeals.
Mr. J. David Mann, Jr.: That is -- that is right.
Yes, sir and this -- this Court of Appeals decision was affirmed by the -- by this -- by this Court on June 7, 1954.
Justice Arthur J. Goldberg: [Inaudible]
Mr. J. David Mann, Jr.: Particularly, Your Honor, during the time between now and such time in the future, as the Commission's area experiment may -- and we hope prove to be successful, but we just do now know and nor do we know whether it will be two, four or 14 years, but it certainly is going to be a protracted period and it is for this period that we are especially concerned.