373 U.S. 294 (1963), 72, Wisconsin v. Federal Power Commission

Docket Nº:No. 72
Citation:373 U.S. 294, 83 S.Ct. 1266, 10 L.Ed.2d 357
Party Name:Wisconsin v. Federal Power Commission
Case Date:May 20, 1963
Court:United States Supreme Court
 
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373 U.S. 294 (1963)

83 S.Ct. 1266, 10 L.Ed.2d 357

Wisconsin

v.

Federal Power Commission

No. 72

United States Supreme Court

May 20, 1963

Argued January 9, 1963

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Syllabus

Under § 5(a) of the Natural Gas Act, the Federal Power Commission conducted a general investigation of the lawfulness of the rates charged by the Phillips Petroleum Co., an independent producer, in its sales of natural gas in interstate commerce. Later, the Commission consolidated with that investigation 12 proceedings under § 4(e) of the Act which involved the lawfulness of certain rate increases filed by the Company under § 4(d) prior to the end of 1956. After extensive hearings and the filing of a report by the Examiner, the Commission concluded that the individual company cost of service method of fixing rates was not a workable method of fixing rates of independent producers of natural gas, and that such rates should be established on an area basis, rather than on an individual company basis. As initial steps toward this end, the Commission promulgated area-by-area price levels for initial and increased rate filings by producers; stated that, in the absence of compelling evidence, it would not certificate initial rates, and would suspend increased rates, which exceeded these price levels; and announced that it would begin a series of hearings, each designed to cover a major producing area. It also terminated ten of the pending proceedings under § 4(e); left two others open only for limited purposes; and terminated its investigation under § 5(a).

Held:

1. Although the Commission announced prospectively that it would not accept for filing future contracts containing spiral escalation clauses, it did not err in refusing to reject as void ab initio certain past rate increases because they were based on such clauses. Pp. 303-304.

2. The Commission did not abuse its discretion in terminating ten proceedings under § 4(e) and in leaving two others open only for a limited purpose, since it found, on the basis of substantial

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evidence, that the increases did not bring revenues up to the cost of service and that, therefore, no refund obligation could be imposed, and since these increases had been superseded by subsequent increases which (with one minor exception) had been suspended and made the subject of separate proceedings under § 4(e), which were continuing. Pp. 304-307.

3. The Commission did not abuse its discretion in terminating its investigation under § 5(a) of the lawfulness of the Company's current rates. Pp. 307-314.

112 U.S.App.D.C. 369, 303 F.2d 380, affirmed.

HARLAN, J., lead opinion

MR. JUSTICE HARLAN delivered the opinion of the Court.

Almost nine years have passed since this Court's decision in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, holding that the Federal Power Commission has jurisdiction over the rates charged by an independent producer of natural gas. The present case, involving

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the same independent producer, Phillips Petroleum [83 S.Ct. 1268] (Phillips),1 is a sequel to that earlier decision and strikingly illustrates the unique problems confronting the Commission in its efforts to achieve the goal of effective regulation

I

Following the remand in the Phillips case, the Commission, proceeding under § 5(a) of the Natural Gas Act,2 reinstituted its general investigation of the lawfulness of Phillips' rates with respect to its sales of natural gas in interstate commerce. Later, it consolidated with that investigation 12 proceedings under § 4(e) of the Act3

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which involved the lawfulness of certain specific rate increases filed by Phillips under § 4(d) between June, 1954, and May, 1956. All of these rate increases had been suspended by the Commission for the maximum five-month period permitted by the statute (§ 4(e)) and had subsequently gone into effect subject to refund of any portion [83 S.Ct. 1269] that might ultimately be found excessive (ibid.). With one minor exception, each of these increases had been superseded by a subsequent increase,4 all of which were,

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in turn, suspended, and are the subject of separate § 4(e) proceedings not now before us.5

Hearings in these consolidated proceedings did not begin until June, 1956, and extended over a period of almost 18 months. All parties proceeded on the assumption that the lawfulness of Phillips' rates was to be determined on the basis of its jurisdictional cost of service for the test year 1954,6 and four full-scale cost of service studies were presented. A Commission Examiner in April, 1959, issued a comprehensive decision (24 F.P.C. 590) comprising over 200 pages, in which he found that Phillips' jurisdictional cost of service for the test year was $57,280,218. He then ordered Phillips to calculate a rate which, when applied to 1954 volumes, would produce revenues substantially equal to its test year cost of service. This rate, with appropriate adjustments for quality, pressure, etc., was to be applied to all of the company's rate schedules on file with the Commission at the time of Commission approval.

Over one year later, in September, 1960, the Commission issued the opinion that is the subject of the present litigation. 24 F.P.C. 537. Its basic conclusion was that the individual company cost of service method, based on theories of original cost and prudent investment, was not

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a workable or desirable method for determining the rates of independent producers, and that the "ultimate solution" lay in what has come to be known as the area rate approach: "the determination of fair prices for gas, based on reasonable financial requirements of the industry" for each of the various producing areas of the country. 24 F.P.C. at 547. This means that rates would be established on an area basis, rather than on an individual company basis. As initial steps toward this end, the Commission did two things at the same time it issued the opinion in these proceedings. First, it promulgated a Statement of General Policy (S.G.P. 61-1), since amended on several occasions, in which it set forth area-by-area "price levels" for initial and increased rate filings by producers, and stated that, in the absence of compelling evidence, it would not certificate initial rates, and would suspend increased rates, which exceeded these price levels.7 Second, the Commission announced that it would begin a series of hearings, each designed to cover a major producing area. (At least one of these hearings, involving the Permian Basin, is now well under way.)

[83 S.Ct. 1270] The Commission, in its opinion here, gave several reasons for rejecting as unsuitable the individual company cost of service method. 24 F.P.C. at 542-548. In particular it emphasized that, unlike the business of a typical public utility, the business of producing natural gas involved no fixed, determinable relationship between investment and service to the public. A huge investment might yield only a trickle of gas, while a small investment might lead to a bonanza. Thus, the concept of an individual company's "prudent investment," as a basis for calculating

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rates that would call forth the necessary capital and also protect consumers from excessive charges, seemed wholly out of place. Further, the Commission noted that the individual company cost of service method gave rise to staggering cost allocation problems, could result in such anomalies as widely varying prices for gas coming from a single field and even from a single jointly owned well, and would create an intolerable administrative burden in requiring a separate rate determination for each of the several thousand independent producers.

Returning to the proceedings before it, the Commission decided that, despite its disapproval of the cost of service method, the whole case having been tried on that basis, a final administrative determination of cost of service for the test year should be made. It then proceeded to resolve a number of difficult questions, including those relating to allocation of production and exploration costs, allocation of costs between natural gas and extracted liquids, and rate of return, and arrived at a systemwide jurisdictional cost of service for the test year of $55,548,054 -- a figure which substantially exceeded jurisdictional revenues ($45,568,291) for that year.8

With this determination in hand, the Commission turned to the consolidated § 4(e) proceedings, involving specific rate increases filed through May, 1956, and found that those increases had produced increased revenues of only about $5,250,000 annually, or considerably less than the total deficit for the test year. It also stated that there was nothing in the record to show that any of the increased rates were "unduly discriminatory or preferential." It then concluded that, since it could not order refunds of any portion of these increases, in view of the continuing

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deficit, and since all increases had been superseded, there would be no purpose in continuing the § 4(e) proceedings and, with two exceptions, they were terminated.

The two exceptions concerned rate increases under "spiral escalation" clauses in Phillips' contracts,9 and these two proceedings were kept open because the proper amount of the particular increases depended on the amount of increases, if any, allowed to certain pipeline customers of Phillips in their own rate proceedings then pending before the Commission. The Commission refused to hold such spiral clauses void ab initio, and in fact a rate increase in one of the 10 terminated § 4(e) proceedings had resulted from the operation of a spiral escalation clause.

The Commission recognized that there remained almost 100 other § 4(e) proceedings, involving increases filed by Phillips, that had not been consolidated in this case. It said...

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