State of Wisconsin v. Federal Power Commission

• Decision Date: 30 November 1961
• Docket Number: No. 16175,16180.,16177,16175
• Citation: 112 US App. DC 369,303 F.2d 380
• Parties: STATE OF WISCONSIN and Public Service Commission of Wisconsin, Petitioners, v. FEDERAL POWER COMMISSION, Respondent, Phillips Petroleum Company, Intervenor. LONG ISLAND LIGHTING COMPANY et al., Petitioners, v. FEDERAL POWER COMMISSION, Respondent, Phillips Petroleum Company, Public Service Commission of the State of New York, Intervenors. PEOPLE OF the STATE OF CALIFORNIA and Public Utilities Commission of the State of California, Petitioners, v. FEDERAL POWER COMMISSION, Respondent, Phillips Petroleum Company, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

112 US App. DC 369, 303 F.2d 380 (1961)

STATE OF WISCONSIN and Public Service Commission of Wisconsin, Petitioners, v. FEDERAL POWER COMMISSION, Respondent, Phillips Petroleum Company, Intervenor.

LONG ISLAND LIGHTING COMPANY et al., Petitioners, v. FEDERAL POWER COMMISSION, Respondent, Phillips Petroleum Company, Public Service Commission of the State of New York, Intervenors.

PEOPLE OF the STATE OF CALIFORNIA and Public Utilities Commission of the State of California, Petitioners, v. FEDERAL POWER COMMISSION, Respondent, Phillips Petroleum Company, Intervenor.

Nos. 16175, 16177, 16180.

United States Court of Appeals District of Columbia Circuit.

Argued September 12, 1961.

Decided November 30, 1961.

Certiorari Granted May 14, 1962.

Mr. William E. Torkelson, Madison, Wis., for petitioners in No. 16175.

Mr. J. David Mann, Jr., Washington, D. C., with whom Messrs. John E. Holtzinger, Jr., and William W. Ross, Washington, D. C., and David K. Kadane, Mineola, N. Y., were on the brief, for petitioners in No. 16177.

Mr. William M. Bennett, San Francisco, Cal., for petitioners in No. 16180.

Mr. Arthur H. Fribourg, Atty., F. P. C., with whom Mr. John C. Mason, Gen. Counsel, F. P. C., at the time the brief was filed, and now Deputy Gen. Counsel, and Mr. Howard E. Wahrenbrock, Sol., F. P. C., were on the brief, for respondent.

Mr. Kenneth Heady, of the bar of the Supreme Court of Oklahoma, Bartlesville, Okl., pro hac vice, by special leave of court, with whom Messrs. Charles E. McGee and Lambert McAllister, Washington, D. C., were on the brief, for intervenor Phillips Petroleum Co.

Messrs. Kent H. Brown and George H. Kenny, Albany, N. Y., and Mrs. Barbara M. Suchow, New York City, were on the brief for intervenor Public Service Commission of State of New York in No. 16177.

Before PRETTYMAN, FAHY, and DANAHER, Circuit Judges.

Certiorari Granted May 14, 1962. See 82 S.Ct. 1138.

PRETTYMAN, Circuit Judge.

Some controversies concern major problems of general application. Others concern only a limited set of circumstances. The case at bar is of the former variety. The questions are posed by complicated procedural difficulties. They concern the procedures of the Federal Power Commission in dealing with the rates of natural gas producers.

The Phillips Petroleum Company is a producer of natural gas. It procures gas from several widely separated and widely differing areas. It explores for, develops, produces, purchases, gathers and processes gas and oil. It sells gas to pipeline companies¹ under contracts negotiated by it and these customers. The contracts differ in such terms as delivery conditions, water content, hydrocarbon content, place of delivery, pressure, and price.

Two sections of the Natural Gas Act² are involved. One (Section 4(e)) provides in essence, as to sales subjected to regulation by the Commission, that when a rate or an increased rate is filed the Commission may suspend it for five months, meantime setting it for hearing. When such a rate goes into effect after the period of suspension (the Commission not having concluded its consideration), the funds derived from the newly-filed rates may be impounded and, in so far as the Commission fails to approve them, may be refunded. The burden of proving in such a proceeding that an increased rate is "just and reasonable" rests upon the company. The other section of the statute (5(a)) provides in essence that either upon a complaint or upon its own motion the Commission may inquire into an existing rate. If that rate be found unlawful the Commission must determine what shall thereafter be deemed a just and reasonable rate. Its decision becomes effective from its date. No refund is involved.

In October, 1948, the Commission instituted a proceeding under Section 5(a), the latter of the above sections, concerning Phillips's rates. In that proceeding it decided it had no jurisdiction over the rates of producers of natural gas. This court reversed the Commission,³ and the Supreme Court affirmed our decision.⁴ The Commission reinstated its 5(a) proceeding.

Meantime and thereafter Phillips filed increased rates in respect to many of its contracts. The Commission suspended them and set them for hearing, under Section 4(e) of the statute, the first of the two sections above discussed. Many purchasers, many contracts, many rate schedules, and many filings were involved. Thus many 4(e) proceedings, under different docket numbers, were instituted. As time went on, Phillips filed further proposed increases in some of these same rates. In such event the earlier proposed rate would, if approved, cover a limited period, i. e., until the succeeding increase in that same contract rate was filed. A period thus limited is called a "locked-in period" in the jargon of the industry. These later increases were also suspended by the Commission. Thus many proceedings under Section 4(e) involving rates of Phillips became pending.

The Commission consolidated the 5(a) proceeding and twelve of the 4(e) proceedings for hearing. These twelve 4(e) proceedings involved an aggregate of about five and a half million dollars in proposed increased rates. The proposed rates ranged from 5½ cents per Mcf to 13½ cents per Mcf. The proceeding was long, detailed, and resulted in a voluminous record of testimony and exhibits. The Examiner rendered a long (174 printed pages), careful and complete initial decision. He approached the problem from the standpoint of cost-of-service⁵ and rate base. Many perplexing problems were presented. He examined them all and decided them. Among them were different approaches to cost-of-service, the allocation of production costs, the allocation of exploration costs, the problem of natural gas liquids, the rate base, adjustment to the test year, the computation of the income tax component, the proper rate of return, working capital, allocations between jurisdictional and non-jurisdictional sales, field prices, a discussion of system-wide as compared with area rates. Upon all these the Examiner made detailed findings and conclusions, displaying commendable patience and grasp of the subject matter. He adopted a system-wide approach and found that Phillips's total jurisdictional cost of service, properly computed, was $57,280,218 for the test year,⁶ or an average unit cost of 11.662 cents per Mcf. He recommended that Phillips be ordered to calculate a maximum rate for gas with certain described qualities at such level that, when applied to the sales volume for all jurisdictional contracts, adjusted for approved delivery condition differentials, would produce revenues roughly equal to the system-wide cost of service. He recommended that Phillips be ordered to file, with full explanations, a list of rates so calculated. These calculated rates would be subject to approval by the Commission. He recommended that the rates thus calculated and approved be applied in both the 4(e) and the 5(a) proceedings, i. e., to both suspended and future rates.

The Commission reversed the Examiner. Its decision and findings were also extended and exhaustive (82 printed pages, plus exhibits). One Commissioner dissented in respect to the computation of the cost of service; otherwise he concurred. Basically, the Commission concluded "beyond any doubt, that the traditional original cost, prudent investment rate base method of regulating utilities is not a sensible, or even a workable method of fixing the rates of independent producers of natural gas." It pointed out critical differences between pipeline operations and producer operations, quoting from opinions by Mr. Justice Harlan and Mr. Justice Jackson, and saying that in regulating producers it is faced with problems entirely different from those of an ordinary public utility. It pointed out that simply to allow producers a return on investment would penalize the efficient or fortunate and reward the inefficient or unfortunate. Only where a producer purchases a fully developed acreage at a fair price does his investment have a real relationship to his return. The producer who first takes the risk in an area and proves it productive pays less for his rights than those who come later. But he must invest his funds before he knows whether he will have anything to sell or not. Mr. Justice Jackson once wrote that "there is little more relation between the investment and the result than in a game of poker."

The Commission pointed out that a producer of natural gas also produces oil, the price of which is unregulated, makes sales (intrastate, etc.) not subject to Commission jurisdiction, and sells products also excluded. Thus "extremely difficult" problems of allocating costs are involved. It commented that none of the experts proposed allocations acceptable to other experts. "Ridiculous results will be reached among the great number of producers and owners of interests if costs should be the only basis for regulation." It referred to the fact that much of Phillips's gas is purchased from thousands of independent producers whose rates are under percentage-type casinghead contracts, dependent on Phillips's rates. The interests of the many royalty owners must also be considered. Another problem is the administrative burden of full cost rate cases for each of thousands of independent producers. Adherence to cost rate-base methods results in necessity for a full-scale company-wide cost study to determine the proper price in any one contract. At the time of this Commission decision 3372 independent producers had rates on file. Five hundred seventy producers were involved in 3278 proposed rate increases under suspension and awaiting hearing. Of eleven rate increase cases in which full hearings had been had and decisions rendered, ten showed the increases justified. A special problem prevented decision in the other. In the three 5(a) cases theretofore completed, the producers' prices were found justified. Rigid adherence to the rate-base method...