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decided*fn*: May 20, 1963.



Warren, Black, Douglas, Clark, Harlan, Brennan, Stewart, White, Goldberg

Author: Harlan

[ 373 U.S. Page 295]

 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

[ 373 U.S. Page 296]

     the same independent producer, Phillips Petroleum (Phillips),*fn1 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.


Following the remand in the Phillips case, the Commission, proceeding under § 5 (a) of the Natural Gas Act,*fn2 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 Act*fn3

[ 373 U.S. Page 297]

     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 With one minor exception, each of these increases had been superseded by a subsequent increase,*fn4 all of which were

[ 373 U.S. Page 298]

     in turn suspended and are the subject of separate § 4 (e) proceedings not now before us.*fn5

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,*fn6 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

[ 373 U.S. Page 299]

     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.*fn7 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 calculating

[ 373 U.S. Page 300]

     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.*fn8

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

[ 373 U.S. Page 301]

     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,*fn9 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

[ 373 U.S. Page 302]

     (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 initiated, 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 in excess 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 test year determination.

On review, the Court of Appeals, in a thorough and informative opinion, affirmed the decision of the Commission. 112 U. S. App. D.C. 369, 303 F.2d 380. Judge Fahy, dissenting in part, argued that whether or not the area rate method of rate regulation was the ultimate solution, the Commission having gone so far in this proceeding should have finished it by deciding on a cost-of-service basis the justness and reasonableness of Phillips' past increases and of its present rates. To have failed to do so, he believed, was a clear abuse of discretion. We granted certiorari because of the importance of this case

[ 373 U.S. Page 303]

     in the administration and future operation of the Natural Gas Act. 369 U.S. 870.

The arguments of the parties, both in their briefs and at the bench, have covered a broad range of subjects, including a number of other administrative actions and proceedings -- past, present, and future -- that are not before us today. We lay these collateral subjects to one side and focus on the three precise questions that have been brought here for review: whether the Commission erred (1) in refusing to reject certain increased rates because they were based on spiral escalation clauses; (2) in terminating the 10 consolidated § 4 (e) proceedings involving increases now superseded and in leaving two such proceedings open only for a limited purpose; or (3) in discontinuing the § 5 (a) investigation of the lawfulness of Phillips' current rates. Of these three questions, which will be considered in the order stated, the third is the only one vigorously pressed by all petitioners and is clearly the principal issue in the case.


California, alone among the petitioners, challenges the Commission's refusal to declare void ab initio the spiral escalation clauses in Phillips' contracts on which rate increases in three of the 12 § 4 (e) dockets were based.*fn10 Such clauses, California contends, are manifestly inconsistent with the public interest, because they constitute a price mechanism by which "consumers of natural gas are caught in a maelstrom."

But we have at least grave doubts that this question may be raised by California at this time. As to two of the three dockets, the claim would appear premature, since the dockets are still pending, and the increases there involved may eventually be disallowed if the pipeline increases on which they depend are themselves disallowed

[ 373 U.S. Page 304]

     by the Commission. As to the third docket, the particular increase has been made fully effective by termination of the § 4 (e) proceeding, but since the sale in question is to the Michigan-Wisconsin pipeline and appears to affect no California interests, no one whom California may properly represent is "aggrieved" (§ 19 (b))*fn11 by the Commission's order.

Further, we see no merit in California's contention. It is true that the Commission has announced prospectively that it would not accept for filing contracts containing such clauses,*fn12 but it would have been quite a different matter for the Commission to have declared that past rate increases were ineffective simply because they were based on spiral provisions. The effect of a contract clause of this type, of course, is only to permit the producer to resort to the filing provisions of § 4 (d) of the Act. If the increase is challenged, the producer must still establish its lawfulness wholly apart from the terms of the contract. Thus we have sustained the right of a seller to file an increase under a contract which, in effect, authorized him to do so at any time. United Gas Pipe Line Co. v. Memphis Light, Gas and Water Division, 358 U.S. 103. The spiral clauses here are far more limited in scope, depending as they do on the occurrence of external events.


The claim that the Commission erred in terminating 10 § 4 (e) dockets, and leaving two others open only for a limited purpose, is pressed primarily by Wisconsin and New York. In considering their contentions, it should

[ 373 U.S. Page 305]

     be noted again that all of the rate increases involved were filed prior to the end of 1956, and have since been superseded or "locked in" by subsequent increases*fn13 which, with one exception, have been ...

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