Wisconsin v. Federal Power Commission California v. Federal Power Commission Long Island Lighting Co v. Federal Power Commission

• Decision Date: 20 May 1963
• Docket Number: Nos. 72,73 and 74,s. 72
• Citation: 373 U.S. 294,10 L.Ed.2d 357,83 S.Ct. 1266
• Parties: WISCONSIN et al., Petitioners, v. FEDERAL POWER COMMISSION et al. CALIFORNIA et al., Petitioners, v. FEDERAL POWER COMMISSION et al. LONG ISLAND LIGHTING CO. et al., Petitioners, v. FEDERAL POWER COMMISSION et al
• Court: U.S. Supreme Court

373 U.S. 294

83 S.Ct. 1266

10 L.Ed.2d 357

WISCONSIN et al., Petitioners,

v FEDERAL POWER COMMISSION et al.

CALIFORNIA et al., Petitioners,

v. FEDERAL POWER COMMISSION et al.

LONG ISLAND LIGHTING CO. et al., Petitioners,

v. FEDERAL POWER COMMISSION et al.

Nos. 72, 73 and 74.

Argued Jan. 9, 1963.

Decided May 20, 1963.

Kent H. Brown, Albany, N.Y., for petitioners in No. 72.

William M. Bennett, Chief Counsel, California Public Utilities Commission, for petitioners in No. 73.

J. David Mann, Jr., Washington, D.C., for petitioners in No. 74.

Richard A. Solomon, Washington, D.C., for respondent Federal Power Commission in all three cases.

Kenneth Heady for respondent Phillips Petroleum Company in all three cases.

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, 74 S.Ct. 794, 98 L.Ed. 1035, holding that the Federal Power Commission has jurisdiction over the rates charged by an independent producer of natural gas. The present case, involving the same independent producer, Phillips Petroleum (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 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 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 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 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.)

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 calculat- ing 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 system-wide 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 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 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 that since the present record indicated that Phillips' costs exceeded revenues at least through 1958 it was inviting Phillips to file motions to terminate all § 4(e) proceedings relating to increases filed prior to 1959, thus limiting future consideration of Phillips' rates to 1959 and after. Whether this invitation has been accepted by Phillips is not disclosed, but in any event none of these other § 4(e) proceedings is before us now.

Turning to the § 5(a) investigation of the lawfulness of Phillips' existing rates, the Commission first noted that there was considerable disagreement over how these rates should be set whether they should be approximately uniform throughout the country or should vary from area to area. It then said that it was aware that both costs and prices had greatly increased since 1954 (and especially after 1958) and it therefore did not 'deem it appropriate to prescribe or require that Phillips file rates for the future based upon the present record.' 24 F.P.C., at 575—576. Concluding that the public would be adequately protected by Phillips' potential refund obligations under § 4(e), by the area pricing standards announced in the Statement of General Policy, and by the area rate proceedings to be intiated, the Commission ordered the termination of the present § 5(a) investigation.

On application for rehearing, the Commission rejected the suggestion that it should reopen the case for submission of 1959 cost data. 24 F.P.C. 1008. It said that the 'interest of consumers and the exigencies of regulation will be better served in rate proceedings brought on an area basis rather than on an individual company basis,' and that the area method would lead to 'more effective and expeditious regulation of the producer sales.' 24 F.P.C., at 1009. It also rejected the claim that it had erred in terminating the § 4(e) proceedings because some of the increased rates were inexcess of the average unit cost of service, reiterating that there had been no showing of undue discrimination or preference and that the total revenue resulting from the increases did not make up the deficit shown by the...