THE NATURAL GAS INDUSTRY
HEARING
BEFORE THE
SUBCOMMITTEE ON ANTITKUST AND MONOPOLY
OF THE
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
NINETY-THIKD CONGKESS
FIRST SESSION
PART I
COMPETITION AND CONCENTRATION IN THE NATURAL
GAS INDUSTRY
JUNE 26, 27, AND 28, 1973
Printed for the use of the Committee on the Judiciary
(Pursuant to S. Res. 56. Sec. 4)
KRANKLIN P!F^-CE LAW CENTER
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ON DEPOSIT APR 2 2*974
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jrary
THE NATURAL GAS INDUSTRY
HEARING
BEFORE THE
SUBCOMMITTEE ON ANTITEUST AND MONOPOLY
OF THE
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
NINETY-THIED CONGRESS
FIRST SESSION
PART I
COMPETITION AND CONCENTRATION IN THE NATURAL
GAS INDUSTRY
JUNE 26, 27, AND 28, 1973
Printed for the use of the Committee on the Judiciary
(Pursuant to S. Res. 56, Sec. 4)
U.S. GOVERNMENT PRINTING OFFICE
27-647 WASHINGTON : 1973
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20102 - Price $5.45
COMMITTEE ON THE JUDICIARY
JAMES O. EASTLAND. Mississippi, Chairman
JOHN L. McCLELLAN, Arkansas
SAM J. ERVIN, JR., North Carolina
PHILIP A. HART, Michigan
EDWARD M. KENNEDY, Massachusetts
BIRCH BAYH, Indiana
QUENTIN N. BURDICK, North Dakota
ROBERT C. BYRD, West Virginia
JOHN TUNNEY, California
ROMAN L. HRUSKA, Nebraska
HIRAM L. FONG, Hawaii
HUGH SCOTT, Pennsylvania
STROM THURMOND, South Carolina
MARLOW W. COOK, Kentucky
CHARLES McC. MATHIAS, Jr., Maryland
EDWARD J. GURNEY, Florida
Subcommittee on Aniitbust and Monopoly
PHILIP A. HART, Michisran, Chairman
JOHN L. McCLELLAN, Arkansas ROMAN L. HRUSKA, Nebraska
SAM J. ERVIN, Je., North Carolina HIRAM L. FONG, Hawaii
EDWARD M. KENNEDY, Massachusetts STROM THURMOND, South Carolina
JOHN TUNNEY, California EDWARD J. GURNEY, Florida
HowAKU E. O'Leary, Staff Director and Chief Counsel
(II)
CONTENTS
Oral Statements
Brown, Hon. George E., Jr., a L.S. Representative from the State of Page
California IS
Canfield, Monte, Jr., deput}^ director. Ford Foundation Energy Policy
Project, Washington, D.C.; accompanied by Charles Eddy, staff mem-
ber 505
Engman, Hon. Lewis A., Chairman, FTC 197
Frazier, Charles H., independent pul)Uc utility consultant 550
Halverson, James T., Director, Bureau of Competition, FTC 22S
Hart, Hon. Philip A., chairman, Subcommittee on Anitrust and Monopoly,
opening statement 1
Mann, Dr. H. Michael, Director, Bureau of Economics, FTC; accompanied
by John Mulholland and Doug Webbink, staff members 275>
Nassikas, Hon. John N., Chairman, FPC; accompanied by Rush Moody,
Jr., Albert B. Brooke, Jr., William P. Diener, Webster P., Maxson,
Emmett J. Gavin, Roy Fausset, Thomas J. Joyce, Leo E. Forquer,
Gordon K. Zixreski, Paul J. Root, Warren Morrison, and Haskell P.
Wald 41
Pifer, Howard W., Ill, professor. Graduate School of Business Administra-
tion, Harvard Tjniversity •- 15i>
Roth, Alan J., executive assistant to the chairman. New York State Public
Service Commission (on behalf of Chairman Joseph C. Swidler) ; ac-
companied bv George Bonner, gas division 18:J
Schwartz, Dr. David, Assistant Chief, OfKce of Economics, FPC 41»
Ture, Dr. Norman B., on behalf of the Gas Supply Committee 335, 348
Wilson, Dr. John W., Chief, Division of Elconomic Studies, Office of Eco-
nomics, FPC; accompanied by George Donkin, staff member 455
White, Lee C, chairman. Energy Policy Task Force, Consumer Federa-
tion of America 520
Material Received for the Record
Letter to Kenneth F. Plumb, Secretary, FPC, from Senator Philip A.
Hart, re FPC proposal for approving prices for natural gas at the well-
head 3
Letter to Kenneth F. Plumb, secretary, FPC, from members of the Joint
Economic Committee, U.S. Congress, re procedure for certificating
new producer sales of natural gas 11
Bartlett, Hon. Dewey, a U.S. Senator from the State of Oklahoma, speech
on the floor of the'U.S. Senate re the energy crisis 14
Brown, Hon. George E., Jr., a U.S. Representative from the State of
Cnlifornia, prepared statement 29
Letter to Hon. John N. Nassikas, Chairman, FPC, from Senator Philip A.
Hart, chairman of the subcommittee, re Washington Post article con-
cerning attempted destruction of FPC documents 38
Correspondence between Senator Philip A. Hart, chairman of the subcom-
mittee, and John N. Nassika*, Chairman, FPC, confirming FPC staff
members appearance before the subcommittee on June 26, 1973 39
(III)
IV
Nassikas, John N. (and panel), Chairman, FPC, material relating to the
testimony of: Page
Prepared statement, with attachments 43
Table 1: U.S. Uncommittee Reserves 65
Table 2A: Sales to pipeline companies in 1971 66
Table '2B: Pipeline companies purchases, 1971 66
Table 3A: Concentration ratios on 3 major regions 67
Table 3B: Concentration ratios, southern Louisiana 67
Table 4: 1970, 1971 domestic gas reserves (pipelines) 68
Table 5: Listing of 4-firm concentration ratios exceeding 60
percent in 1966 68
Table 6A: Turnover of top eight sellers to pipelines, 1964-69,
southern Louisiana 69
Table 6B: Turnover of top eight sellers to pipelines, 1964-69,
Permian Basin 70
Table 6C : Turnover of top eight sellers to pipelines, 1964-69, Texas
Gulf Coast 71
FPC Staff Releases, dated June 25, 1973 101
Table: Proved reserves for sale 101
Table : L'ncommitted nonassociated reserves 102
Memo: Revised staff report, large producer reserves available
for sale 102
Proved reserves 104
Proved nonassociated reserves 105
Proved associated dissolved reserves 106
Letter to Chairman Engman, FTC, from Chairman Nassikas, FPC,
transmitting reply of Paul J. Root, FPC, to Theodore Lytle, FTC,
re request of FTC to FPC for data concerning gas reserve estimates
for fields in offshore Louisiana 123
FPC order directing stndv of natural gas reserves and procedures for
Natural Gas Survey (issued Dec. 21, 1971) 127
FPC order amending above order (issued Mar. 9, 1972) 133
Letter from Senator Hart, chairman of the subcommittee, to Chairman
Nassikas, FPC, re Feb. 22, 1973, release of FPC reporting decline
of natural gas reserves 134
Memo from William P. Diener, FPC, to Owen Johnson, FPC, re
recommendation to close file No. 711-0042 (AG A South Louisiana
Area Subcominittee) 135
Letter from William P. Diener, FPC, to Senator Hart, chairman of
the subcommittee, re Mr. Diener's supplemental response to discus-
sion of above memo at hearings of June 26, 1973 137
Letter from Paul J. Root, FPC, to Senator Hart, chairman of the
subcommittee, transmitting information requested during the
hearings 138
Pifer, Howard W., Ill, professor, Graduate School of Business Adminis-
tration, Harvard University, material relating to the testimony:
Prepared statement 165
Exhibit 1 : Supplv Committee membership 174
Exhibit 2: Supply Committee 1973 work schedule 174
Exhibit 3 : Distribution of gas reserve estimates 174
Exhibit 4: Ratio of FPC to AG A reserves estimates 175
Exhibit 5: Estimates of proved recoverable gas reserve 175
Letter to Paul J. Root, FPC, re comments concerning Technical
Supply Committee meetina; and summary report 175
Letter to Paul J. Root, FPC, from David S. Schwart, FPC,
transmitting minority report to Supply- Technical Advisory
Task Force report 178
Roth, Alan J., executive assistant to the chairman, New York State Public
Service Commission (on behalf of Chairman Joseph C. Swidler,) material
relating to the testimony of:
Exhibit 1: Prepared statement of Mr. Swidler 185
Exliibit 2: "Energv and the Environment" by Jospeh Swidler, dated
May 1, 1973___1 192
Engman, Hon. Lewis A., Chairman, FTC, material relating to the testimony
of:
Exhibit 1 : FTC response to Senator Hart's request for reports 208
Investigation of reporting of natural gas reserves 209
Energj' industry structure study 215
Investigation of gasoline marketing practices and competition in
petroleum industry 218
Exhibit 2: Excerpt from Washington Post entitled "FTC Report Page
Near— Oil Firms Probed" 222
See also exhibits 3, 5, 6, and 9 to testimony of James T. Halverson.
Halverson, James T., Director, Bureau of Competition, FTC, material
relating to the testimony of:
Exhibit 1 : Correspondence relating to FTC's attempt to get informa-
tion from FPC on natural gas reserves 233
Exhibit 2 : Response of Gulf Oil Corp., to testimony of Mr. Halverson. _ 239
Exhibit 3: Letter to Claude C. Wilde, Jr., from Chairman Engman,
FTC, in response to views of Gulf Oil Corp. on testimony of Mr.
Halverson 256
Exhibit 4: Response of James T. Halverson to Gulf Oil Corp. re-
sponse to his testimony of June 27, 1973 257
Exhibit 5 : Response of Continental Oil Co. to testimony of Chairman
Engman and James T. Halverson, FTC 260
Exhibit 6 : Response of Chairman Engman to response of Continental
Oil Co. response to testimony of James T. Halverson and Chairman
Engman 262
Exhibit 7: Response of James T. Halverson to Continental Oil Co.
letter of July 6, 1973 264
Exhibit 8: Response of Continental Oil Co., to letter of James T.
Halverson dated Feb. 1, 1974 267
Exhibit 9: Letter transmitting information requested of Chairman
Engman and James T. Halverson during testimony before the
subcommittee 268
Exhibit 10 : Response of William E. Simon to testimony of James T.
Halverson 269
Exhibit 11: Response of Robert E. Lewis, FTC, to response of William
E. Simon to testimony of James T. Halverson 270
Exhibit 12: Response of Frank C. Allen to testimony of James T.
Halverson 271
Exhi1:)it 13: Response of James T. Halverson to letter of Frank C.
Allen re testimony of Mr. Halverson 272
Mann, Dr. H. Michael, Director, Bureau of Economics, FTC, accompanied
by John MulhoUand and Doug Webbink, staff members, material relat-
ing to the testimony of:
Exhibit 1: Prepared statement of Dr. Mann 278
Exhibit 2: Dr. Mann's response to Senator Hart's request concerning
the conglomerate merger study and the concentrated industries
studies 282
Exhibit 3: FTC memo of April 22, 1971, re Commission study alterna-
tives in the energy sector (with attachments) 283
Attachment 1 : Possible dimensions of Commission energy study-- 290
Table 1: Electric utihty gross consumption of energy re-
sources 309
Table 2: Household and commercial gross consumption of
energy resources 309
Table 3: Industrial gross consumption of energy resources — 310
Table 4 : Capacity of selected uranium milling companies and
plants 310
Table 5: Ownership, reserve patterns of 15 largest coal pro-
ducers 310
Table 6: Coal land ownership and assessed value in Ken-
tucky -- 311
Table 7: Coal land ownership, acreage, assessed value in
West Virginia 311
Table 8: Nonproductive coal permits, leases of coal and oil
companies, 1970 312
Talile 9: Oil and conglomerate company acquisitions, coal
and nuclear 312
Table 10: Average rate of return on invested capital, inde-
pendent coal firms 312
Table 11: Percent return on common stock, various industry
groups 313
Table 12: Net profit, ranking, firms making large coal acqui-
sitions 313
Table 13: Commercial capability to process and fabricate
nuclear fuels 313
Table 14: Bituminous coal exports 314
VI
Page
Attachment 2: Proposed Study Protocol 314
Table 1: Energy consumption by major consumer group 328
Table 2: Energy consumption per ca])ita-per dollar of GNP.. 328
Table 3: Energy sources as percentage of total consumption. 329
Table 4: Bituminous coal prices, 1959-69 329
Table 5: Ownership of 10 largest coal groups 329
Table 6: Estimated coal production, 1967-70 330
Table 7: Oil company involvement in coal industry 330
Table 8: Leading firms by sales to interstate pipelines 330
Table 9: Sales by producers to interstate pipelines 331
Table 10: Purchases of gas by interstate pipelines 331
Table 11: Number, size, degree of seller concentration,
nuclear power supply industry 331
Table 12: Diversification in energy industrj' by 25 largest
petroleiun companies '. _-l 332
Table 13: Indicated present or future capability of oil com-
panies in the nuclear fuel cycle 332
Table 14: Public land coal leases held by oil companies 332
Table 15: Impact of changing market boundaries on concen-
tration levels 333
Table 16: Leading firms by sales to interstate pipelines. 1965. 333
Table 17: Leading firms by sales to interstate pipelines, 1968 . 333
Exhibit 4: Letter from Commissioner Larson, AEC, re availability of
uranium production and reserves 333
Ture, Dr. Norman B., on behalf of the Gas Supply Committee, material
relating to the testimony of:
Table 1: Number of natural gas producers 336
Table 2: Growth of sales by small producers to interstate pipelines,
1961-71 338
Table 3: Interstate and intrastate gas prices, 1966-69 343
Table 4: Dispersion of gas costs and prices, 1969 344
Exhibit 1: vStudy entitled "Competition in Natural Gas Production". 353
Exhibit 2: Additional testimony of Dr. Norman B. Ture 381
Table: Estimates (annual) of reserves and production, 1962-72.. 385
Exhibit 3: Response of W. O. Senter, executive vice president. Gas
Supply Committee, to certain matters raised during the hearing. _ 398
Tal)le: Weighted average, range of rates for intrastate sales after
July ], 1970 408
Table: Weighted average, range of rates for intrastate sales
after Sept. 15, 1971 .... 410
Exhibit 4: Response of James T. Halverson to comments of W. O.
Senter (exhibit 3) 412
Exhibit 5: Response of W. O. Senter to comments of James T. Halver-
son (exhibit 4) 417
Exhibit 6: Response of Joseph C. Swidler, New York Public Service
Commission, to comments of W. O. Senter (exhibit 3) 418
Schwartz, Dr. David, Assistant Chief, Office of Economics, FPC, material
relating to the testimony of:
Table I : Total wells drilled for hydrocarbons, gas and gas condensate,
gas and gas condensate exploratory, and development wells, 1963-
72 447
Table II: Gas reserve production and price data, 1963-72 447
Table III: Weighted average initial prices, long term producers
contracts, by area, year of authorization 448
Table IV: Offshore Louisiana Federal oil and gas lease sales, 1962,
1970 449
Table V: Cost of incremental gas supplies under varying supply-price
elasticity assumptions 449
Table VI: Summary of contracts of major producers, expiring by own
terms, 1973-80,' by year, for south Louisiana, Permian Basin
Hugoton-Anadarko, Texas Gulf Coast areas 450
Table VII: Top 5 producers with highest 1971 volume sales under
contracts expiring 1973-80, by year 452
VIT
"Wilson, Dr. John D., Chief, Division of Economic Studies, Office of Page
Economics, FPC, prepared statement 469
Table 1: Ranking of 14 largest firms in petroleum industry, 1970 472
Table 2 : Profit record of major oil companies 473
Table 3 : Concentration of new gas contract volumes sold to interstate
pipelines, 1965-70 474
Table 4: Concentration of new gas supplies as of Dec. 31, 1971,
June 30, 1972 475
Table 5: Concentration ratios of offshore lease acquisition 476
Table 6 : Recent petroleum industry mergers 477
Table 7: Major bidding combines in Federal offshore lease sales 479
Table 8: Joint bidding, Federal offshore lease sales, 1970-72 481
Table 9 : U.S. potential resources of petroleum 482
Table 10: Bank director interlocks in petroleum industry, 1968 483
Table 1 1 : Joint ventures in oil pipeline industry 485
Table 12: Joint ownership. Federal offshore producing leases -_ 486
Table 13: Joint ownership of Louisiana petroleum leases by major
producers 490
Table 13 A: Joint ownership of Louisiana leases by largest integrated
petroleum companies and other producers 491
Table 14: Joint production in Permian Basin, Tex.— joint utilization
agreements 493
Table 15: International joint ventures of large integrated petroleum
companies 494
Table 16: Reported foreign joint ventures in exploration and develop-
ment, 1960-70 496
Table 17: Major interstate gas pipelines and producing affiliates 498
Table 18: Intrastate buyers identified in 1972 FPC survey of intra-
state natural gas prices 501
White, Lee C, chairman. Energy Policy Task Force, Consumer Federation
of America, material relating to the testimony of:
Exhibit 1: Excerpt from hearings before Subcommittee on Minerals,
Materials, and Fuels, Nov. 13, 14, 1969-__. 539
Exhibit 2: Prepared statement of Mr. White 541
Frazier, Charles H., independent public utility consultant, prepared
statement 562
Tables: Ea=!tern States adjusted gas requirements 573, 574
Table 1: Forecast balance between U.S. adjusted gas requirements
through 1980 and estimated supply of gas from domestic production
and supplemental sources 579
Table 2: U.S. adjusted gas requirements '.-- 580
Table 3: Derivation of eastern States share of national gas supply 580
Appendix
Summary of Remarks of Haskell P. Wald, FPC, at the AMR Oil and Gas
Seminar, Jan. 31, 1973 - 593
FPC order updating nationwide investigation. Reliability of Electric and
Gas Service, docket No. R-405, issued Aug. 1, 1973_-_"- 598
Table: Proved Natural Gas Reserves Available for Sale 607
FPC Order to Show Cause (July 31, 1973) concerning confidentiality of gas
reserve data 608
Petition for review of FPC order (docket No. R-393), decided Dec. 12,
1972, U.S. Court of Appeals, District of Columbia Circuit 611
Subcommittee on Antitrust and Monopoly press release of Sept. 3, 1970, re
Senator Hart's request for delay of proposed natural gas price increase,
with letter of Sept. 1, 1970, to A. Everett Maclntvre, FTC, and letter to
John Nassikas, FPC 1 619
Response of FTC to Senator Hart's letter of Sept. 1, 1970, re natural gas
and related energy matters 622
Letter of May 14, 1971, from Miles Kirkpatrick, FTC, concerning reporting,
estimation, and deplo3mient of reserves by natural gas industry 623
Xetter of June 23, 1971, from Senator Hart to Miles Kirkpatrick, FTC, re
Jack .\nderson articles and reliability of AGA estimates of natural gas
reserves 624
Subcommittee on Antitrust and Monopoly press release of Oct. 18, 1972, re
status of FTC investigations of gasoline, auto parts distribution, natural
gas, and pro-strip mining ads, with letter of Oct. 11, 1972, to Miles Kirk-
patrick, FTC 625
VIII
Letter dated Nov. 15, 1972, from Miles Ivirkpatrick, FTC, to Senator
Hart briefly summarizing the status of Commission investigations in the
gasoline industr}?, auto parts distribution, natural gas, and pro-strip Page
mining ads 627
Letter dated May 14, 1973, from Alan Ward, FTC, re further response of
FTC on status of investigations into gasoline industry, auto parts dis-
tribution, and natural gas 627
Petition for an Order requiring O. N. MiUer and Standard Oil Co. of Cali-
fornia to appear and produce documentary evidence in an investigation
being conducted by the FTC 629
Subpena duces tecum requiring O. N. Miller, Standard Oil Co. of California,
to appear before FTC 632
FTC resolution directing use of compulsory process in nonpubhc in-
vestigation 635
FTC opinion on motion of 11 companies to quash subpena duces tecum 636
Letter from 0MB to FTC re clearance of subpena duces tecum 647
Letter to O. N. Miller, Standard Oil of California, re Commission's denial
to quash subpena duces tecum 647
Letter from Lee Loevinger to FTC", re Standard Oil Co. of California in-
tention not to complv with subpena dated November 2, 1971 647
Affidavit of Donald K. tunney re FTC v. O. N. Miller and Standard Oil Co.
of California 648
Deposition of R. R. Gibbs, AGA, before FTC on Aug. 5, 1971 _. 649
Testimony of John C. Jacobs, AGA, before FPC, re docket No. AR69-1__. 654
Organization, Procedures and Definitions of AGA 655
Table: Estimate of total proved recoverable gas reserves in the United
States 657
FPC order requiring reporting of specified reserves data and proscribing
procedures, docket AR 69-1, issued March 17, 1970 661
Testimony of Lawrence R. Mangen before FPC, re docket No. AR69-1, et
al 662
FPC order authorizing establishment of natural gas survey advisory com-
mittees and prescribing procedures, issued February 23, 1971 664
FPC order establishing technical advisory and coordinating committee task
forces and designating membership, issued December 21, 1971 665
Supply-Technical Advisory Committee Task Force member's 667
FPC guidelines for Natural Gas Reserves Study 668
Table: Annual estimates of gas reserves in the United States, 1945-68
Memorandum in support of petition for compliance with subpena duces 672
tecum, FTC versus O. N. Miller and Standard Oil Co. of Cahfornia 673
Order to Show Cause, re subpena duces tecum, FTC versus O. N. Miller
and Standard Oil Co. of California 689
Order for compUance with subjiena duces tecum, FTC versus O. N. Miller
and Standard Oil Co. of Cahfornia 690
FPC memo re analysis of Jack Anderson articles 690
FPC Order Concerning Ex-Parte Communications and Authorizing Re-
lease of Intra- Agency Documents, July 2, 1971 699
Jack Anderson articles of June 1971 appearing in Washington Post re
reliability of natural gas reserve estimates 700
FPC document of July 2, 1971, ordering release of intra-agency docu-
ments, in Area Rate Proceedings (Southern Louisiana), dockets Nos.
AR61-2 et al., and AR69-1) 706
Memorandum to Messrs. Gooch and Joyce from David Schwartz
transmitting alternatives A, B, and C to errata of reply brief 707
Memorandum to Richard Mattingly from David Schwartz forwarding
comments concerning AR69-1 reply briefs 709
Memorandum from Richard Mattingly to Chief, Office of Economics,
re Southern Louisiana brief 710
Memorandum from Richard Mattingly to Phylhs Kline re the econo-
metric model 711
Memorandum from Phyllis KUne to Richard Mattingly concerning
objections to econometric model 712
Memorandum from Haskell Wald to Richard Mattingly re comments
on initial staff brief 712
Memorandum to Messrs. Schwartz and Nierenberg from Richard
Mattingly concerning staff brief in AR69-1 and AR61-2 713
Memorandum from David Schwartz to Richard Mattingly re review
of draft brief in ARG9-1 713
IX
Alemorandum to Mr. Gooch from Haskell Wald regaiding Mr. Gooch's Pa&e
memo of Mar. 26, 1971 716
^Memorandum from Gordon Gooch to Haskell Wald concerning staff
briefs in AR69-1 and AR61-2 716
Memorandum from Haskell Wald to Gordon Gooch concerning staff
briefs 716
^Memorandum from Haskell Wald, Gordon Gooch, and Thomas Joyce
re comparison of offshore southern Louisiana reserve estimates 717
Additional comments of Haskell Wald to above memo 718
JNIemorandum from Gordon Gooch to John Nassikas re testimony on
reserve estimates in AR69-1 718
Memorandum from Thomas Joyce to John Nassikas re comparison of
offshore reserves in exhibit No. 31-A and as estimated by AGA 719
Memorandum from Haskell Wald to John Nassikas concerning con-
flict in estimates of gas reserves for offshore Louisiana 721
IMemorandum from Ralph Johnson to Chief, Office of Economics, re
comparison of 1969 staff reserve data and AGA reserve estimates
of south Louisiana 721
Memorandum from Gordon Gooch to Haskell Waid re propriety of
prehearing, off-the-record meeting of AGA witnesses in AR69-1-- 722
Memorandum from Haskell Wald to Gordon Gooch concerning
propriety of prehearing, off-the-record meeting with AGA wit-
nesses in AR69-1 722
^Memorandum from Haskell Wald to Gordon Gooch, re observations
on arrangements for AGA witness on reserve estimates 724
^Memorandum from Haskell Wald to Gordon Gooch re groundwork
for helpful testimony from AGA witnesses 724
Memorandum from Gordon Gooch to Haskell Wald re efforts to obtain
testimony from AGA witnesses by submission of written questions. 725
Memorandum from David Schwartz to Richard Mattingly con-
cerning questions for Mr. Jacobs of AGA 726
IMemorandum from F. W. Lawrence to R,ichard Mattingly re ques-
tions for Mr. Jacobs of AGA 727
Memorandum from Haskell Wald to R,ichard Mattingly concerning
questions for AGA 727
Memorandum from Gordon Gooch to Commission re meeting between
Mr. Joyce and Mr. Jacobs on gas reserve estimation methods 727
Memorandum from Haskell W^ald to Chief, Bureau of Natural Gas,
re meeting with AGA reserves committee 728
Memorandum from HaskeU Wald to Gordon Gooch, re questions
concerning AGA reserves data 728
IMemorandum from J. Daniel Kazzoom to Commission re issue in gas
rate determination 729
IMemorandum from J. Daniel Khazzoom to the Commission re nature
of gas suppl.v data 729
Memorandum from Thomas Joyce to Commission re meeting on gas
reserves estimation methods 731
^Memorandum from Edward McNanus to the Chairman on the re-
liability of proven reserve estimates 731
Memorandum from HaskeU Wald to John Nassikas on comparison of
form 15 and AGA statistics for gas reserves 733
Sample reply to congressional inquiries concerning Jack Anderson articles
about natural gas estimates, signed by John Nassikas, Chairman, FPC. 734
Sample replj^ to congressional inquiries concerning Jack Anderson inquiries,
signed by Gordon Gooch, General Counsel, FPC, with attachments 735
Errata to staff reply brief, FPC, docket Nos. AR61-2 et al., and AR69-1_. 748
FPC order granting motion for omission of intermediate decision procedure,
issued March 1.5, 1971 748
"Area Price Regulation in the Natural Gas Industry of Southern Louisi-
ana," article by William P. Diener 749
"The Natural Energy Crisis — Revisited," speech by John Nassikas 766
FPC Opinion and order issuing certificates of public convenience and
necessity and determining just and reasonable rates, issued May 30,
1971, re Belco Petroleum Corp., agent, et al., docket Nos. C173-293,
etal' .. . . 786
THE NATURAL GAS INDUSTRY
(Competition and Concentration)
TUESDAY, JUNE 26, 1973
United States Senate,
Subcommittee on Antitrust and Monopoly
OF the Committee on the Judiciary,
Washington., D.C.
The siibconimittee met at 10 a.m., in room 1202, Dirksen Senate
Office Building-, Hon. Philip A. Hart (chairman of the subcommittee)
presiding.
Staif present : Charles Bangert, general coimsel ; Bernard Nash,
assistant counsel; Janice Williams, chief clerk; Patricia Bario, edi-
torial director ; Peter Churnbris, minority chief counsel ; and Charles
Kern II. minority counsel.
Senator Hart. The committee will be in order. Permit me a brief
opening statement and then we will want to welcome Cong-ressman
Brown. These hearings will be characterized in many ways. They are
a look at competition and concentration in the natural gas industry.
They are an effort of Congress to apply antitrust principles to a signifi-
cant segment of our economy. But during these next 3 days, it also will
become clear that we are basically in the process of evaluating the
impact governmental regulations, as practiced by the Federal Power
Commission, have had on the natural gas market. Because I have been
ci'itical of the FPC over the past 3 or 4 years on many occasions, it
would be impossible for me noAv to assume a role of total impartiality.
Senator Kefanver, my predecessor as chairman, a strong critic of
regulatory agencies, pointed out that too often the regulators became
regulated by those they were supposed to regulate. In recent weeks,
the Senate has spent a great deal of time on this question as it relates
to the Power Commission. The upshot was that the Senate refused to
add to the Commission another member whose ties to industry were
evident from h.is previous employment. The integrity of that nominee
was never questioned, nor could it have been doubted. Xor is the integ-
rity of any member of the PoAver Commission doubted. But, I believe,
regulators, and perhaps it is in the nature of the business, tend to see
things much as the industry does.
This impression has been reinforced in recent days because of pre-
liminary I'eports from staff on the ongoing investigation of the at-
tempts to destroy Power Commission documents which the subcom-
mittee had requested. One point in that report has been particularly
upsetting : That over and over members of the Power Commission staff
have cited their duty as "to get the price high enough so there is nat-
ural gas in the pipeline*' without any expressed interest in determin-
(1)
ing whether the shortage is real or contrived or whether the gas is
being deliberately withlield to force the granting of higher prices.
Ironically, the Natural Gas Act, which assigned duties to the Com-
mission, took exactly the opposite approach. The language there is
that the Commission is responsible for getting the "lowest reasonable
prices*' for consimiers. Also spelled out firmly in that act is the require-
ment that the Power Commission go to great lengths to determine the
available supply of natural gas.
Yet, for years the basic information the Commission had on the nat-
ural gas supply was that compiled by an industry trade group. In re-
cent months two "reports" have been released by the Commission
which seem to indicate the industiy figures overestimated the supply
and the situation is far worse.
The subcommittee has supenaed the basic data for one of these re-
ports, and that information is due here today. The disposition of treat-
ment of the subpenaed documents is a decision to be made later. The
other report, called the National Gas Reserves Study, done as part of
the National Gas Survey, will be the topic of considerable testimony.
Initial interviews with these witnesses have raised serious questions
about the value of these studies as a means of verifying the reliability
of the industry figures.
We will receive other information from the Trade Commission
about its preliminary conclusions as to the validity of the industry's
estimates of gas reserves. This mformation comes from documents sub-
penaed as part of an investigation undertaken about 30 months ago
at the request of the subcommittee. Testimony about the amount of
gas reserves is particularly significant, for the shortage is the keystone
of recent actions the Power Commission has taken which ultimately
will raise prices to consumers by hundreds of billions of dollars by the
early 1980's.
The Commission apparently has made three basic policy decisions.
There is a shortage. It is not contrived. This is a competitive industry
so prices can be set by free market forces, regardless of costs.
This quadrupling of prices will increase supply, the Commission
argues. The Commission may indeed be right on all three, but informa-
tion we have seems to point in the other direction. As I have said, we
will probe the shortage question. We also — as is our specific responsibil-
ity^— will probe the structure of this industry.
And the answer to the third promise will be determined largely from
the first two conclusions. There certainly is evidence, including some
from a table supplied by the Commission, that this is far from a com-
petitive industry.
That table shows that in southern Louisiana, for example, an area
which produces one-third of the country's natural gas, four companies
hold 96.9 percent of all uncommitted reserves. It must be remembered
that in discussing this industry, national concentration figures are not
relevant.
The buyer in the natural gas market is the pipeline. And pipeline
companies, obviously, can only buy product from areas in which they
have lines. That there are 20 companies controlling 94 percent of the
product nationwide is irrelevant if there are only 4 or 5 possible sellers
where the pipeline is buying.
Similarly, aggregate concentration figures for all flowing gas are
largely irrelevant. In discussing whether this is an industry where
competitors are out beating the bushes for customers, tAvo things must
be kept in mind. When you are talking about natural gas producers you
are talking in effect about the petroleum industry, for they are vir-
tually one and the same. Second, one must remember the mutuality of
interest these companies have. Concentration figures really inay over-
state the amount of head-to-head competition to be expected, for they
do not measure the intermingling and interdependence of producers
because of consortiums, joint operating and marketing arrangements,
joint bidding and substantial trading of j)roducts and large tracts of
land.
Indeed, the industry is very much like a family, and could well be
expected to behave as individuals so as to protect the interests of all.
So, it would seem, to allow prices to be set on the premise that free
market forces are at work in this industry is to ignore reality.
These hearings will seek fuller understanding on this and related
concerns. These hearings will not detail the circumstances surrounding
the attempted destruction by Power Commission persomiel of micom-
mitted reserv^e data filed b}^ major producers and other material re-
quested by the subcommittee.
The staff has interviewed seven Power Commission employees and
has received a small amount of documentary evidence. The subcom-
mittee sub^^ena, returnable today, should pro^dde the bulk of the docu-
mentary evidence needed from within the Federal Power Commission.
Staff informs me thp.t many more persons will be inteiwiewed, and that
completion of their investigation will take considerably more time. At
that time, the subcommittee will decide what further action may be
needed.
[The following letters, in relation to Senator Hart's opening state-
ment, were received for the record. Testimony resumes on p. 14.]
United States Senate,
Subcommittee on Antitrust and Monopolt,
Committee on the Ju^diciaky,
Washington, D.C., April 27, 1972.
Hon. Kenneth F. Plumb,
Secretary, Federal Power Commission,
Washington, D.C.
Dear Mr. Secretary : Rarely do I feel compelled to adopt the role of "in-
terested persons" invited to file comments on proposed Commission rules. How-
ever, because the FPC proposal for an "optional procedure" in approving prices
for new natural gas at the wellhead threatens such economic harm for con-
sumers, these views are being filed.
I have read the proposed rule, reread it, and consistently come to the same
conclusion : if the rule were adopted, the FPC would be abolishing regulation
of wellhead prices for new gas. It would do so at a cost of billions of dollars
to consumers from this year forward. It wiould be a step taken before sufficient
information is available for a decision. It would be a decision which is not
only expensive but impotent for its chosen work — to get a greater supply of
gas. And — it is a step beyond the authority of the Commission.
It is true that the "optional procedure" does provide that the FPC will con-
sider contract prices arrived at by the producers and the purchasers — primarily
pipeline companies — and could reject them. However, it seems that about 100
times out of 100, the Commission would approve the agreed-upon contract price
irrespective of costs and area rate ceilings because of the real fear of losing
the gas for the interstate market.
lu its effects, the rule seems to parallel the "file and use" rules which gome-
states have adopted for auto insurance. To my knowledge, under this systeut
no pi'emium filed has been rejected.
So, adoption of this rule would approach telling producers that the sky's
tlie limit for prices. The only possible downhold on prices would be the pipe-
line companies. Because they pass all costs on to consumers, it is unlikely pipe-
lines can be counted on to be the tough protector of family budgets consumers
thought they had in the FPC. There are two other flaws ia the iide, as drafted.
First, it does not provide for a rebate if later we learn tliat the natural gas
shortage used as a defense of higher prices is more imagination that reality.
In fact, the language specifically forbids a refund if the Commission itself
should at a later date disallow the agreed-upon higher prices.
Worse, this rule binds all future Commissions to uphold the prices. This is
preei.-ely what the "sanctity of contract" bills — which have not been approved
by Congress — seek to give the FPC authority to do.
Let me explain why this proposed rule is too costly to consumers, ineffective,
untimely and beyond the authority of the Commission.
Costs to Consumers
We can project the future under this rule, in a way, by looking to the past.
In 1954 ^ the Supreme Court spelled out the need for producers to be under
price regulation because of the inability and failure of the market as structured
to provide competitive prices for interstate gas supplies. A review of contract
prices for the eight years before the decision (1945-53) show:, an overall in-
crease of 300 percent with an average annual price increase of more than 18
percent. ^
It is the safest of assumptions to say that prices are not going to stay at
their present levels if this proposed rule is adopted. Consumers can expect
more price increases — piled on the many they have had in the past three years.
According to FPC figures, the price paid for gas in interstate commerce at the
vsiellhead (approximately three-fourths of all gas used) has increased from
17.75 cents per 1,000 cubic feet in 1969 to 19.75 cents in 1971. Even more
meaningful to consumers is the price local distributors i)Qy pipeline companies.
In two years, those have increased on the average from 3G cents to 43 cents —
or 20 percent. If you go back three years, the increase has been more than 25
percent.
Only pennies some might say. But a homeowner with a bill in 1969 which ran
in the $30 range in the winter months can tell you that pennies count up as he
now receives bills more in the $40 range.
And nationwide, those pennies add up to a lot of money. For example, the total
U.S. maiketed production in 1971 was approximately 22 trillion cubic feet. As-
suming that the same price factors applied to intrastate gas (and it is a .sound
assumption because intrastate prices are higher), consumers pay more than $200
million annually for each penny of increase. Thus, using again the total marketed
I)roduetion, tlie 7 cent increase for pipeline sales from 19G9 to 1971 cost consumers
about $11/^ billion while at the same time the volume of gross additions of gas
have continued to decline.
It should be noted that while higher prices are making consumers poorer for
years to come, they are making the companies richer — and not all of it comes
from s;iles.
T))ere are vast reserves not yet committed to tlie interstate market and tlius
without a price yet put on them. Any increase in rates automatically increases
the reserves' value. If we estimate the uncommitted reserves at a very conserva-
tive 1.000 trillion cubic feet, a one-cent increase lifts their value by $10 billion.
The industry has made no secret of the fact that they feel natural gas prices
must go up. In fact, the Independent Petroleum Association of America has sug-
gested that wellhead prices of new gas should, under optional pricing, be equal
to prices of alternative supplies — such as liquified natural gas.
To reac]i that goal, the industry would be asking consumers to pay increased
costsof $7.50I»illion.
That deregulation of wellhead prices for new gas would force prices tip is
evident from the fact that the market simply cannot function as a regulator. The
1 Phillips Petroleum Company v. Wixconxin. .147 U.S. ()72 (19.54).
* The Natural Gas Industry, 19G1, Edward J. Neuner.
infirmities of relying upon contract price as a regulatory proxy has been noted
both by the Supreme Court and the Commission itself over the years.
My views favoring freely competitive market forces and supply and demand
to set price as contrasted with economic regulation need not be reiterated here.
But we are not dealing with a sector of the economy that by any stretch of the
imagination can be said to be responsive to market forces. Al)sent a restructuring
and deconcentration of oil and gas producers and of pipeline companies, it is
sheer hypocrisy to suggest that the disciplines of the marketplace will produce
price and other behavior in the public interest. Even assuming such a restruc-
turing, complex interactions must be carefully analyzed before firm conclusions
can be reached. Deregulation would still then be manifestly a legislative pre-
rogative ; not administrative rulemarking.
In the Commission's Permian Opinion (Docket No. AR61-1), the issue was
validati(m of contract prices as a basis for regulation — which the Commission
held '"would amount to an abdication of our regulatory responsibility." '^ And the
Commis.sicm noted that the marketplace was not capable of being a regulator:
"The essential difficulty with the contract price argument is that there is
nothing in this record which would justify a conclusion that reliance on
contract prices unrelated to cost will 'afford consumers a complete, permanent
and effective bond of protection from excessive rates and charges,' which is
the purpose of the Act in prescribing that the rates and charges to consumers
of natural gas shoidd be just and reasonable. . . . There are admittedly
many producers selling gas to the interstate pipelines both in the nation as
a whole and the Permian Basin in particular, but nothing in this record
suggests that any competition among them in making sales to the pipelines
is in any way adequate to assure that the public will secure gas at just and
reasonable prices in the al)sence of regulation."
The Commission went on to note the weak bargaining position of the pipe-
lines— as well as their lack of incentive to do so because they pass on costs —
including gas costs — to the consumer.
But there is a point of tlie Permian ease far more significant as we face this
proposed rule — which would return us to contract prices rather than costs as the
price determinant. This is that the Commission and the Supreme Court held in
Permian that this method of establishing prices was not effective regulation. The
Commission relied upon an earlier case to indicate that the evidence of unreg-
ulated price in the field was not sufficient to warrant a finding that the price
cou'd he construed as just and reasonable within the meaning of the Natural Gas
Act.*
In another court case relied upon by the Commission in Permian, they said :
. . . that the supply of gas controlled by the producers is so restricted in
relation to demand that they have economic power to bargain for prices that
will be injurious to the public. The Court held that the Commission in exer-
cising its authority may not act merely upon proof that the prices in question
were arrived at as a result of arm's-length negotiation, but must look behind
the negotiated price."
The Commission concluded with an unqualified rejection of the use of contract
prices as a basis for regulation as follows :
It is thus clear that our examination of the contract prices of the gas
producers is only the beginning and not the end of our ta.sk in establishing
the proper criteria for determining just and reasonable rates.
In the Supreme Court's affirmance of the Permian decision the lack of a rea-
.sonably competitive market wns recognized :
The field price of natural gas produced in the Permian Basin has in recent
years steadily and significantly increased. These increases are in part the
products of a relatively inelastic supply and steeply rising demand ; but they
are also svmptomatic of the deficiencies of the market mechanism in the
Permian Basin.
. . . the price leadership of a few large producers, and with the inability
or unwillingness of interstate pipelines to ))argain vigorously for reduced
prices, have created circumstances in which price increases unconnected
with changes in cost may readily be obtained."
3 Ot)inion No. 40S. issued August .5, 196.5.
* Piihlir ^errtre Com^fii-tfiion of Xew York v. FPC. 2S7 F. 2d 146 (CADC. 1901). United
Gf-' Jmvrovcment Co. v. FPC. 287 F. 2d 159 (CAIO. 19R0).
"T'nifr'! Crns Trnprorptnent Co. v. FPC, 290 F. 2d 13.3, 135 (CA5, 1961). certlorlarl
dpn'od or-.R T'.S. R2;-! n9fii ).
« Permian Basin Area Rate Cases, .390 U.S. 747 (1968).
The unreliability of contract prices was reiterated in the 1968 South Louisiana
Opinion when the Commission said :
Based upon this analysis we must conclude that there are serious market
imperfections which preclude us from relying upon the free operation of the
market, as evidenced by arm's-length bargaining, to protect the ultimate
consumer from unreasonable purchased gas rates/
The Opinion held that the conclusion on the unreliability of contract prices for
regulation was consistent with a long line of judicial determination.*
Obviously the proposed rule would switch us back to a method other than
costs and area rate ceilings — a method which was once discarded as unworkable,
too costlv and not effective regulation.
Moreover, it would do so without gaining the benefit for consumers it seeks— a
greater supply of natural gas for interstate sale.
Ineffectiveness of the Rule
The argument for eroding consumer protection — in this case price protection —
is that it is necessary to protect the consumer in another way. That is, by enabling
him to continue to heat or cool his home, cook his food and generally make good
use of the dependable servant natural gas has become.
The carrot of price increases — it is argued — must be held out before producers
will be enticed into looking for more gas.
This theory has been tried — although in smaller doses — and has thus far
failed.
The step-by-step erosion of consumer protection can be exemplified by the
following recent Commission action :
(a) Even though the Permian Basin Opinion was decided in 1965, the Com-
mission has granted El Paso pipeline continuous extensions of time postponing
any flow-through of Permian producer refunds to consumers.* Thus, consumers
have not yet and will probably never receive the refunds due them for overcharges.
In the second South Louisiana area proceeding (Opinion No. 598) and in the
Texas Gulf Coast proceeding, the Commission rescinded prior Commission orders
that consumers be refunded more than .$375 million for overcharges.
(b) In Opinion No. 567 (issued October 3, 1969), the Commission revised its
area rate policy so as to include underlying acreage already committed to the
interstate market under its new price definition rather than the lower old price
category. These higher rates will result in greater costs to the consumer because
the Commission has abandoned the life of reserve concept.
(c) in Opinion No. 568 (issued October 7, 1969), the Commission abandoned
the cost of service approach to new gas which was to be produced by pipeline
companies. While the D.C. Circuit afiirmed area pricing for pipeline production
from newly acquired leases, they had reservations concerning whether the
pipeline should earn the same rate of return as gas producers, as well as the
treatment of the Federal income tax component of area rates to be applied to pipe-
line production. Here again, the Commission resolved the issues without ade-
quate consideration of the cost to the consiimer.
(d) In Order No. 394 (R-374) issued .January 6, 1970. the Commission amended
its regulations to permit small natural gas producers in the Permian Basin to
file above-ceiling rate increases. Under the earlier Permian Opinion small pro-
ducers operating under small producer certificates had been proscribed from
filing contractually authorized above-ceiling rate increases. When the Commission
increases the Permian rates, this will permit the producers to collect a higher
rate for the period prior to that determination.
(e) In order No. 413 (R-394), issued October 27, 1970, the Commission termi-
nated the moratorium on rate increases in South Louisiana which was imposed
by Opinion Nos. 546 and 546-A. They did this despite the urging of the Wisconsin
Public Service Commission and the Municipal Distributor Group that the
Commission should not lift the moratorium on the basis of industry supplied
T Sojith Louisiana Area Rate Proceedings, 40 FPC 530 (1968).
sSee. Bel Oil Corp. v. FPC, 255 F. 2cl 548 (CA5. 1958), cert, denied 358 U.S. 804: CifJ/
of Detroit v. FPC. 230 F. 2cl 810 (CADC. 1955) : Forest Oil Corp. v. FPC, 263 F. 2d 622
(CA5, 1959) ; Atlantic Refining Co. v. P8C of New York (CATO), 360 U.S. 378 (1959) ;
UOT V. FPC, 283 F.2d 817 (CA9, 1960) : P8C of New York v. FPC, 287 F. 2d 146 (CADC,
1960) : VGI Y. FPC. 287 F. 2d 159 (CAIO, 1961) : UCI y. FPC. 290 F. 2d 133 (CA5. 1961),
cert, denied 368 U.S. 823 : UGI v. C cillery Properties, Inc. 282 U.S. 223. For the most
recent opinion of the Supreme Court on the subject see FPC v. Sunray DX Oil Co., et al.
391 U.S. 9, 25-26 (1968).
•44 FPC 1215 (1970).
data which had not been tested in an evidentiary hearing. In a later order (issued
December 24, 1970), the Commission modified Order No. 413 to limit the r'ate
increase filings to the settlement proposal. This despite the fact that the
settlement proposal had not been adopted and was the subject of controversy
among the various parties.
(f) In Order No. 423 (R-407), issued February 18, 1971, the Commission
adopted a general policy of suspending producers rate increases for one day
rather than for a full statutory five-month period provided in the Natural Gas Act.
The New York Public Service Commission petitioned for a court review on the
basis that the order was inconsistent with the statutory scheme of the Natural Gas
Act and protested that the order modified outstanding suspension orders without
any consideration of the increased rate, conti'act vintage, or other factors
involved in the particular cases. In addition, they objected to the granting of a
blanket waiver of conditions in temporary certificates prohibiting the filing
of rate increases to contractually authorized levels. On April 11, 1972, the U.S.
Court of Appeals remanded Order 423 to the Commission for the purposes of
clarification.
(g) On March 18, 1971, the Commission issued Order No. 428 (R-393) amend-
ing its regulations so as largely to exempt small producer sales from regulation.
This applies to jurisdictional sales which do not exceed 10 million Mcf in a
calendar year. The Commission provided that small producers, after obtaining
a blanket certificate covering all existing and future sales nationwide, there-
after will be relieved of all filings under the Natural Gas Act. The only obliga-
tion was for them to file an annual statement providing total jurisdictional sales
and applications to abandon under Section 7(b),
(h) Under an emergency purchase procedure, the Commission issued Order
Nos. 402 and 402-A, dated May 6, 1970 and June 30, 1970, respectively, in which
FPC regulations were amended to permit interstate pipelines to make emer-
gency purchases of gas from intrastate pipelines for 60 days or longer without
affecting the exempt status of the seller companies. Order No. 418, issued Decem-
ber 10, 1970, amended the regulations to permit independent producers without
certificate authorization to make emergency sales to pipelines for periods limited
to 60 days where serious curtailment problems existed. These emergency pur-
chases were made at rates substantially above ceiling and as high as 35 cents
per Mcf.
Yet today — after all these plums for the industry — we find ourselves not with
an increase of reported resei"ves but with steadily dwindling reported reserves.
During the past two years, as a result of FPC decisions, total gas prices have
increased markedly ; and during that time decreasing quantities of proved re-
serves have been reported and a decreasing proportion of gas has been made
available to the interstate market.
Indeed, we find no evidence of any substantial increase in private investments
in exploration and development during this period of increasing rates by the
FPC. The logical explanation for the increasing prices and declining commit-
ment of reserves is simply that the producers are banking on decontrol and still
higher prices or, in the alternative, higher prices in the future under the guise
of regulation.
In his letter of April 14, 1972, to me Chairman Nassikas said in reference to
these actions :
The actions taken by the Commission over the last two and one-half years
cannot immediately reverse the downward trends of more than a decade
because of the lead time required for exiiloration and development prior to
the flow of significant quantities of gas to the interstate market.
Yet. without permitting time to see whether the hoped for effect of these
actions work, we are now ready to embark upon a new round of price increases.
_ It is also hard to imagine that deregulation would result in greater explora-
tion and development, hence greater reserves, than would otherwise exist under
firm and fair area rate pricing. FPC's area rate proceedings, as explicated in
its most recent Southern Louisiana decision, provides for a costing to recover
all expenditures associated with the cost of exploration, development and pro-
duction of natural gas, including a return. Thus, whatever costs must be in-
curred to find and produce an adequate supply of natural gas will be recovered
from the consumer. In South Louisiana, the return afforded the producers by
FPC amounted to 15 percent. It Is difficult to believe that all costs plus a 15
percent return is not an adequate incentive to bring forth necessary supplies.
It can only be concluded that other reasons associated with natural gas market
27-.547— 74 2
8
imperfections exist for tlie sliortage. Moreover, given tlie area rate costing
procedure and the 15 percent incentive return, it is impossible to perceive liovv
deregulation will result in any increased supplies. To the contrary, only increased
l)rices are perceived from deregulation.
There is nothing inherent nor specific within the Commission's proposal to
assure that additional gas will be made available for the consumers of the coun-
try which would not have been committed under its area rates. No guidelines
or mechanisms are even discussed to show the relationship between the proposed
rule and greater supply.
It should be clear that we have been applying the wrong medicine. Instead
of deciding to give it one last shot — in a massive dose — we should find another
medicine.
TJNTIMELINESS OF THE RULE
I recognize — as does the Commission — that natural gas is presently unavailable
in sufficient quantities to meet requirements.
We all know that this is creating problems for consumers. And the Commis-
sion does have the responsibility to do all in its power to see that consumers
have sufficient natural gas.
However, I am convinced that with this rule, the Commission is regulating
in the dark. It does not have sufficient information to evaluate if there is a true^
or a contrived — gas shortage. Nor does it have solid evidence that increasing
prices is the way to correct that shortage. In fact, as has been outlined, past
steps in that direction have been dismal failures.
The only information available to the Commission as to the shortage of ga."*
comes from the industry — which would benefit enormously by price increases,
Attempts are being made to evaluate the validity of these industry figures.
As you know, the PYderal Trade Commission is conducting an investigation
of the validity of the American Gas Association reserve estimates. The National
Gas Survey, being conducted by the FPC and the industry, is also reviewing re-
serve estimates. And. S. 2405 is designed to require an independent FPC reserve
study. Only recently has any governmental authority had access to AGA field by
field' reserve evaluations, and this was in connection with the present FTC in-
vestigation.
The available evidence indicates that reserves may well be adequate; but if
producers wish to, thev may make the picture far more dismal than it truly is.
It is imperative for the Commission to focus on independently obtaining more
reliable and objective information which will permit it to quantify costs of
producing gas in the various areas and strengthen the area rate approach in
order to balance consumer protection with industry equity. Indenpndent reserve
estimates are essential not just as a measure of resource availability, but be-
cause it is an essential ingredient in costing new gas. If the consumer is to be
afforded the protection against excessive costs which translate to excessive
prices — even in area rate proceedings — then reliable reserve d.nta untainted by
industry self-interest i.s vital for the costing calculation used in area rate pro-
ceedings.
Tlie staff study cited in Docket No. R-441 as a basis for contending a serious
shortage exists indicates the resource basis which could effectively overcome the
present unavailability.^" The potential volumes available as estimated by the
U.S. Geological Survey (adjusted for discoveries) is 2,0fil tcf (trillions of cubic
feet) and by the Potential Gas Committee, 1.17S tcf. Some of the important char-
acteristics of the natural gas producer market which provides potential insta-
bility are :
A. The producers have complete flexibility to determine when to offer their
reserves for sale as well as whether to offer the gas interstate or intrastate.
B. A very «mall price change has major revenue implicaticms on the value of
reserves in place.
C. A relatively small increase in consiuner deninnd has a magnified effect
on the demand for new gas reserves because only a small fraction of each
year's supply becomes available to new buyers, and the major portion of
the reserves is already committed under contract.
D. Given the present demands by pijielines for gas, which has been
significantly affected by air pollution considerations, there would be a tend-
ency for them to preempt reserves well in advance of their immediate
^''Natural Gas Supply and Demand, 1971-1990, Bureau of Natural Gas, FPC, Feb-
ruary 1972, page 13.
9
needs, particularly because they can include take or pay obligations in their
rate base, not to mention their ability immediately to pass the cost on to
the consumer because of tracking provisions allowed by the Commission.
Additions to domestic reserves to be anticipated from present and future
technology are far from insubstantial as exemplitied in just one producing area :
As the evidence disclosed a drastic decrease in the ability of domestic
supplies and reserves to meet increasing demands in the short time since
the 1967-68 hearings, so also does the evidence disclose ihe possibilities
of a very substantial increase in domestic supplies and reserves.
The evidence reveals that the domestic areas which have traditionally
served to supply the Western United States have a gas supply potential
of 180.5 trillion cubic feet (TCF), almost four times their present proved
reserves. The Bureau of Mines has estimated that 317 TCF are contained
in formations along the Rocky Mountains which may be susceptible to
recovery by nuclear stimulation. It is estimated that recoverable coal
reserves in the United States contain a potential of 12.000 TCF of syn-
thetic pipeline gas and that the processing of oil shale reserves in Colorado
alone would yield about 6.000 TCF of pipeline gas (FPC staff Exhibits
1000 and 1006). In addition to the potential domestic gas supplies and
reserves. Western Canada and the Arctic Islands have a potential of over
530 TCF, (El Paso Exhil)it 120 Page 17) and Alaska's estimated iwtential
is about 420 TCF. (Staff Exhibit 1000 Page 3). United States v. El Paso
Natural Gas Company, U.S.D.C. Denver. (June 25, 1971).
Imposition of deregulated prices on the consumer for future reserves of this
magnitude would be a national scandal.
The Commission Is Acting Outside Its Authority
Much of my feeling on this point already has been developed. It is clear from
the Natural Gas Act as interpreted, that the Commission does have the responsi-
bility to regulate prices on a cost basis in this industry. The Commission— and
tlie Courts— long ago decreed that agreed-upon contract pricing, which this rule
reestablishes, is not effective regulation.
Congress has previously considered deregulation but the Natural Gas Act
has not been amended. Other legislative solutions to the present problem are
now being considered. It seems clear to me that the proposed Commission action
is nn ill-advised incursion ujion the legislative function.
Further, while the Chairman and Commissioner Brooke have petitioned Con-
gress for the authority to grant sanctity of contract and the Commission has en-
dorsed other sanctity of contract bills, it now proposes with this rule to act as if
it already had such authority.
Conclusions and Recommendations
Even if the Commission should decide that deregulation of price is a proper
steii — and that it has the authority to take this step without legislative ap-
proval— R^l is not the appropriate vehicle.
The Commission's own brief to the Court, indicates the present curtailment
prol)lems interstate pipelines now face.'^ Apparently 7 pipelines are now in cur-
tailment with applications pending before the Commission from 26 more.
Given this shortage — and the fact that it would take one to five years to get
new product on the market no matter what the price — a sudden and total dereg-
ulation of new gas price without more could only raise havoc.
Actually, the one to five year lag for adequate supply to hit the market is
optimistic. For once deregulation is effected, companies would be in a position
much like a stockholder in a bulli.s'h market. Knowing that a contract commit-
ment will be for 20 years, they will be tempted to hold out supply until the price
has peaked. Of course, since they control supply, the longer they hold out the
greater the price level which can be anticipated.
Pii;elines would bid against one another — skyrocketing prices even higher
than the point they would eventually level out at with adequate supply. The
result would be adequate supply for som.e consumers — at totally unrealistic
prices — and even a greater reduced supply for other consumers.
If and when deregulation of price seems the pro]ier step, it seems wisest to
takp that step gradually — with built-in assurances that the available supply
will be parcelled out fairly to all consiuuers.
^^ Michigan Power Company v. FPC, C.4DC, No. 71-1752, April 10, 1972.
10
The road to getting more gas for consumers is not barred if the FPC should —
as I urge they do — reject this proposed rule. There are alternative steps.
For openers, the Commission should insist that the 46 natural gas producers
that agreed to the South Louisiana settlement (who produce 80 percent of the
gas flowing from that area) live up to their obligation.
Section 11 of that settlement relating to future exploration and development
in the Southern Louisiana area states :
Each producer individually represents to the Commission that the ceiling
prices and other provisions contained herein provide incentive for the
exploration for and development of gas reserves in the Southern Louisiana
Area.
The settlement continues :
... it is believed that the ceiling prices and other provisions contained
herein will make funds available to the producing industry and create
a regulatory atmosphere which should provide an incentive for a substan-
tial increase in exploratory and developmental activities and mal^e a major
contribution to bringing forth additional supplies of gas from the Southern
Louisiana Area to meet the demands of all consumers supplied by this orea.^^
Presently, there are pending several Congressional studies on the cause of and
possible remedies for the present shortage of natural gas. Because I believe that
action of the liind taken in the proposed rulemaking is the function of the legisla-
tive process — and not administrative rulemaking — I urge full support for this
work underway in Congress.
Further, i-ejection of this rule may have a salutory effect on the industry. As the
recitation of the plums granted the industry in the past three years indicated,
companies understandably have gotten glorious expectations that prices will
continue to go up and up. Essentially, they are not convinced that current ceil-
ing prices will hold, and R-441 is additional evidence that this expectation is
realistic. With that impression, they have had little incentive to be quick about
committing reserves, little incentive to hold down costs and little incentive to
make the necessary commitment to substantial gas exploration and development.
Positively stated, producers have an incentive to withhold new supplies partic-
ularly if they can foresee that the Commission will raise ceiling prices. It is to
their benefit to exaggerate the shortage, and sellers have an incentive to distort
or withhold information for tactical reasons.
A firm stand at this time on prices by the Commission may turn this situation
around considerably.
In short, I petition the Commission to withdraw this proposed rule on the
grounds that it will be too costly to consumers, will not do the job of upping
supplies, and is not well-founded in the facts as we now have them.
Instead, the Commission should reafiirm its reliance on the area rate approach
and inform the industry that no longer will it be party to violation of that cost-
based area pricing framework.
This philosophy should be stated not only with the turndown of the rule but
reiterated continuously by the Commission.
Meanwhile, efforts to determine exactly how we stand on natural gas reserves
should be continued ; and we should explore alternative methods of increasing
the supply- — if need be.
In cooperation with the Department of the Interior, the Commission could
seek new policies to accelerate gas production from federal offshore leases with
appropriate environmental safeguards.
Also worthy of serious consideration is establishing a government corporation
to explore and develop some of the oil and gas deposits on public lands. Another
is to eliminate the jurisdictional distinction between gas sold in the interstate
and intrastate markets.
All of these, it seems to me, are reasonable possibilities which could well serve
the public — something R-441 definitely would not do.
Sincerely,
Philip A. Hart, Chairman.
" Opinion No. 598, Issued July 16, 1971.
11
Congress of the United States,
Joint Economic Committee,
Washington, D.C., May 12, 1972.
Re Optional Procedure for Certificating New Producer Sales of Natural Gas,
Docket No. R-441.
Hon. Kenneth F. Plumb,
Secretary, Federal Power Commission,
Washington, D.C.
Dear Me. Secretakt : On April 6, 1972, the Federal Power Commission issued
a notice of proposed rulemaking preparing an "optional procedure" for fixing
wellhead prices of natural gas. Interested persons were initially afforded until
May 1. 1972, to file comments. This was subsequently extended to May 15, 1972.
Essentially, the optional pricing procedure provides that whatever contract'
price for gas is arrived at between the producer and the purchaser (primarily
pipeline companies who pass the cost of gas on to the consumer as a cost of
service) will be considered for i)ermanent certification by the FPC and pre-
sumably adopted irrespective of costs and area ceiling rates. This is tantamount
to administrative deregulation of wellhead prices for new gas in clear defiance
of the Congressional intent underlying enactment of the Natural Gas Act of
1938.
Additionally, under the terms of R-441, once a contract is approved it would
be binding for all time. Future commissions would be powerless to change the
prices regardless of then existing regulatory needs and irrespective of then exist-
ing circumstances ; i.e., monopoly or excessive profits, new found natural gas
reserves or additional reserves from new technology. The latter provision pro-
vides administratively for what has been termed "sanctity of contract" in several
bills now pending before the Congress. To our knowledge, Congress has not yet
acted on the pending "sanctity of contract" legislation.
We feel compelled to file comments and put the Commission on notice because
the Commission's action is such a blatant and arrogant usurpation of the legisla-
tive function by administrative rulemaking. It is manifestly anticonsumer and
pro-industry. Shamefully, it is not predicated on any independent Government
verification of natural gas reserves which are reported exclusively by the indus-
try. Nor is there any structural or operational analysis of the industry to inde-
pendently explore and determine why producers are not producing what the rela-
tionship between price and exploration and development is, and why recovery of
all costs plus a 15 percent return is an inadequate incentive for producers to
produce.
Is a 15 percent return Inadequate because by failing to produce, producers can
force a return of 30 percent, 40 percent or 50 percent? Is the return inadequate
because FPC has held out hopes of higher prices as long as producers do not
produce? Is the return inadequate because our tax laws are such that an equiva-
lent amount of overseas payments, investments and expenditures results in a
greater profit? Is It inadequate because a greater return can be achieved from
diversified activities? Would not one solution be a TVA-tyi)e entity to explore
for and develop natural gas reserves on federal lands?
All of these questions are being explored right now in the Congress. And,
after due deliberation, Congress will take action. We welcome discussion with
and guidance from the Commission — but we cannot accept administrative action
resulting in basic amendments to the Natural Gas Act.
I. Proposed Rule Would Effect an Administrativ-e Deregulation of Wellhead
Sales of Natural Gas
As the Supreme Court has often reminded, the organic statute under which
the Federal Power Commission operates — the Natural Gas Act of 1938 — was
designed to protect this Nation's consumers against excessive rates and charges
for natural gas service. To this end, the Act mandated that all gas sold for resale
in interstate commerce be sold at just and reasonable rates and specifically
directed the Commission to fix interstate rates at the just and reasonable level.
The Act thus mandated a fundamental change in the standard of pricing
12
natural gas moving in interstate commerce — instead of an unregulated, what
the-traflic-will-bear standard, the statute required a regulated price permitting^
sellers to recover their costs and a fair return but eliminating the possibility
of excessive profits. This change was premised on a Congressional finding that,
absent regulation, the market structure of the interstate natural gas industry
would not assure fair prices for the consumer but would, on the contrary,
permit sellers of natural gas to exploit their position and charge prices far in
excess of the true economic costs of making the sale.
In one form or another deregulation legislation has been introduced in the
Congress since 1955. Yet the Natural Gas Act has not been amended.
It is against this background, then, that the standards embodied in the Com-
mission's proposed new rule must be evaluated. What the Commission is now
suggesting is that because tliere is a current shortage of natural gas, the cost-
plus-fair-return standard which the Commission has heretofore followed in
fixing just and reasonable rates under the Natural Gas Act should be discarded
in favor of what the market will bear.
The basic defect in the Commission's proposed approach is immediately
api>arent, however : the new approach Is simply not the regulation mandated by
Congress in the Natural Gas Act. Although retaining the form of regulation,
the proposed I'ule adopts a substantive standard for evaluating new prices that
is nothing more than tlie unregulated market price. But if that is to be the
standard, it can only be achieved througli Congressional repeal of the Natural
Gas Act. As sugge.sted above, if Congress had been satisfied that the unregulated
market price provided adequate protection for natural gas consumers, it would
not have pas.sed the Natural Gas Act — or it would have amended it.
II. Proposed Rule Would Impose Staggering Rate Increases on the Ameri-
can Consumer and Would Permit Grossly Excessive Profits for the Petro-
leum Industry
Since the industry is, under the Commission's present rules, entitled to rates
which cover all costs plus a fair return,^ it is apparent that for the proposed
rule to have any effect at all, it must allow prices that include more than a
fair return. While the Commission's notice provides no indication of how much
more is involved, estimates already submitted in this docket indicate that the
potential cost to the consumer (and the potential windfall to the industry)
could range up to one trillion dollars over the life of the reserves.
Based on the present U.S. consumption of natural gas, each penny of increase
in price at the wellhead means $200 million flowing from the pocketbooks of
American consumers to the income statements of the producers annually.
Considering that the "optional pricing" in R-441 evolved from the recent
Independent Petroleum Association of America proposal that FPC approve con-
tract prices as long as they do not exceed prices of alternative supplies such as
imported LNG. which is estimated to cost between .$1.00 and $1.25 per mcf,
at the present rate of consumption we are talking about higher annual costs ia
the neighborhood of $15 billion.
Surely before adopting any rule having such far-reaching con.sequences. the
Commission is under a heavy obligation to make the best estimate it can of the
potential impact and to advise the public of that estimate. More importantly^
the magnitude of the estimates already submitted, wliich are based on readily
understandable assumptions, demonstrates that the proposed policy is simply too-
costly to the consumer and too generous to the industry to merit serious con-
sideration under a statute designed to protect the consumer. At the very lea-t,
consideration of other, less costly methods of achieving the same goal should bo
undertaken by the Commission and recommended to the Congress.^
III. There Is no Evidence To Suggest That the Proposed Rule Will
Generate Additional Gas Reserves
Legally and cost aside, there is no credible evidence that the radically higher
prices allowable under the proposed rule will result in the dedication of addi-
tional gas reserve to the interstate market. To the contrary, the Commission's
past efforts to increase the rate of interstate dedications through the grant of
1 The Commission currently allows producers a return of 15 percent after taxes.
2 One such alternative would he for the Federal Government to explore for and develop
jras on federally owned lands, where the bulk of new reserves are expected to be found.
Such an alternative would meet thp Nation's needs for natural gas, with no possibility
for esceesive prices or excessive profits.
13
higher prices have been wholly unsuccessful, if not counterproductive. Less thaa
a year ago, the Commission, at the industry's urging, approved an industry-spon-
sored rate proposal, predicated upon the natural gas shortage, increasing
price ceilings for the crucial Southern Louisiana area by some 30 percent-40'
percent, or about $4.75 billion. Although the Commission's action was taken
largely on the basis of the industry's repre.sentation that the higher prices
would in fact provide the necessary incentive for exploration, the result has
been higher prices, but a decline in the rate of reserve additions.
It is shocking that at the same time consumers are absorbing price increases
in the billions because of the gas shortage, and are being asked to absorb
billions more for the same reason, the major oil and gas producers refuse to
allow independent Government verification of their reserve estimates. Permit
us to quote extracts from three recent I'ederal Trade Commission communica-
tions on this point (the full texts are annexed hereto ns Exhibits 1. 2 and 3) :
"The Federal Power Commission recently granted producers of natural gas
in South Louisiana substantial increases in the rates they may charge pipeline
companies. South Louisiana is the principal gas producing area in the coun-
try, and the rate increase sets a precedent for other producers. In reaching its
decision, the Federal Power Commission relied principally on national reserve
estimates published by the American Gas Association (AGA). At the present
time the AGA is the only source of estimates of total United States proved
natural gas reserves. AGA figures indicated a recent trend of signiificantly
lower gas reserves in the face of increased demand. The Federal Power Com-
mission reasoned that the higher rates were necessary to spur exploration which
would result in the discovery of additional reserves.
"The Federal Trade Commission is currently investigating the accuracy
of the AGA figures relied upon by the Federal Power Commission. It has not
yet been determined whether the AGA figures are accurate. It has been determined
that, for the most part, AGA figures are compiled by employees of major oil
companies, and that their estimates are based upon company data w^hich here-
tofore has been unavailable to outsiders, including Government officials.
"The increased rates granted South Louisiana producers involve billions
of dollars of revenues. It does not appear unreasonable to require the agency
responsible for granting such increases to review and evaluate the source data
for the statistics underlying its rate decision.
"In late November, 1971, do<-umentary subpoenas requiring the production of
all evaluations of reserves during 1962-1970 for any portion of Offshore South
Louisiana, including backup data and well exploration data, were issued tO'
eleven gas producers (most of whom are also major oil producers). These pro-
dvicers account for the bulk of natural gas production in South Louisiana ; and
employees of nine of these producei-s constitute the membership of the AGA
Subcommittee which evaluates and reports reserves for South Louisiana. All
eleven producers have filed motions to set aside the subpoenas on a number of
grounds, including lack of jurisdiction to investigate, burdensomeness, and the
commercial value of the documents being subpoenaed. One of the eleven, how-
ever, has made a partial return and has promised additional cooperation de-
spite its pending motion."
*******
"At the outset I wish to reemphaslze that my support for S. 2405 or similar
legislation is premised on my conclusion that there are reasonable grounds for
questioning the reliability of the only existing system for reporting proved
natural gas reserves in this country. The facts underpinning that conclusion are
simply stated, and I believe they are indisputable."
*******
Since the Commission's proposed regulatory approach, as indicated by its
notice, is predicated exclusively on the current gas shortage and on means tO'
solve that shortage, it seems clear that, prior to adoption of its proposed policy,
the Commission should undertake a far more thorough study of the gas reserve
situation than it has to date. Rather than merely accepting industry estimates,,
the Commission should independently determine the extent and location of
presently recoverable reserves, the extent and location of probable reserves, and
review and determine the factors, particularly non-price factors, that would
influence early dedication of probable reserves to the interstate market. At a.
minimum, the questions rai.sed in the forepart of these comments should be the
subject of a public hearing.
14
Conclusion
Continual Commission statements on the need for higher prices only encourage
the holding back of reserves and the curtailment of exploration and develop-
ment activities until the industry believes it has obtained the highest possible
prices.
The proposed nile cannot lawfully be adopted and should be promptly
abandoned. Any Commission recommendations for resolution of these matters
.should be transmitted to the Congress for action.
In the event the Commission intends to implement R-441 in whole or in part,
a public hearing is requested prior to such action. If the Commission takes such
action, it must also file the required statement of environmental impact and
alternatives under the National Environmental Policy Act, 42 U.S.C. 4321 et. seq.
The proposed action clearly has a major environmental impact, and such a state-
ment is accordingly required by 42 U.S.C. 4332 (2) (c) .
Sincerely,
William Proxmire, Frank E. Moss, Gaylord Nelson. Fred R. Harris,
Lee Metcalf, Vance Hartke, Walter F. Mondale, Harold E. Hughes,
Thomas J. Mclntyre, Robert T. Stafford, George D. Aiken, John
V. Tunney, Edward M. Kennedy, Birch Bayh.
Senator Hart. Mr. Chumbris for Senator Hruska.
Mr. Chtjivibris. Thank you, Mr. Chairman. The LEAA issue is on
the floor today which precludes Senator Hruska from being here this
morning. On June 8 when we opened the gasoline shortage hearings
I gave a brief or rather long, depending upon how you look at it, open-
ing statement which dealt primarily with the natural gas shortage
in the United States.
Being a part of this hearing there is no need in repeating it at this
time. Senator Bartlett, on June 12, 1973, made a speech on the Senate
floor dealing with the energy crisis. And I will just read one quote and
have the complete speech put in the record, Mr. Chairman.
The time has come for political considerations, regional preferences and per-
sonal antagonisms to be set aside. The valuable time and effort being wasted try-
ing to find a scapegoat must cease, and we must be directed toward an all-
encompassing effort to improve our domestic energy posture.
He points out that the consumers in his State are paying 60 cents
per thousand cubic feet at the wellhead while people in interstate com-
merce are taking that Oklahoma gas, and are paying only I9I/2 and 20
cents per thousand cubic feet. He commented that the people of
Oklahoma don't mind doing that, if an increase in the price of gas
will help exploration and development. With that, Mr. Chairman,
Senator Brock had a similar statement in relation to cooperation by
the people of the United States— that the States which are consumers
should help out by permitting refineries which they are not doing now
because of ecological concerns.
Thus, everybody works together toward solving the problem. He
pointed out that there is plenty of blame for everybody to pass around.
Thank you, Mr. Chairman.
[The speech referred to follows :]
[From the Congressional Record, June 12, 1973]
The Energy Crises
Mr. Bartlett. Mr. President, the energy crisis in America will not be resolved
in the near future. For the next 15 years, and possibly longer, the people of
the United States must work together with a new awareness of the gravity
of this crisis.
15
The time has come for political considerations, regional preferences and per-
sonal antagonisms to be set aside. The valuable time and effort being wasted
trying to find a scapegoat must cease and must be directed toward an all en-
compassing effort to improve our domestic energy posture.
Natural gas produced in Oklahoma in new long-term contracts costs Oklaho-
mans 60 cents per 1,000 cubic feet at the wellhead. Yet the same gas sold out of
State would cost the out-of-State consumer only 20 cents per 1,000 cubic feet
at the wellhead. Oklahomans pay three times more for Oklahoma gas than do
out-of-State buyers. The reason for this is that the Federal Power Commission
regulates the price of interstate gas, but intrastate prices in the free market-
place have been bid up in Oklahoma to a price that is competitive with other
fuels. Oklahoma wants to share its gas resources, but it also wishes to share its
price based on thousands of transactions in the marketplace.
The Oklahoma intrastate gas buyers have an advantage over out-of-State buy-
ers because they can bid higher for gas for Oklahoma consumers.
Yet, when I inquired of Mr. C. C. Ingram, the chairman of the board of Okla-
homa Natural Gas Co., as to the effects of interstate deregulation of prices
upon this wholly intrastate company, he said :
"We are well aware that decontrol of the wellhead price for natural gas that
will be sold into interstate commerce will reduce our competitive edge in ac-
quiring new gas supplies. However, we are even more aware of the need to in-
crease the price for gas at the wellhead in order to stimulate the exploration ac-
tivities that will be required to develop the gas reserves that are needed to offset
the energy shortage. Although decontrol will increase our competition's effective-
ness, we believe we will have no great difficulty in obtaining gas supplies to serve
our customers through both our continued aggressiveness in gas purchase ac-
tivities and our significant expansion in our own exploration efforts."
This is the kind of unselfish attitude that must continue to spread across the
Nation. Mr. Ingram knows that our country needs price decontrol and looks
forward to the increased competition because it will also mean increased re-
serves of natural gas, oil, coal, and atomic energy. He knows the United States
needs a stronger domestic energy industry.
Consumer States must assume a new role. States that heretofore have refused
to site refineries, and to explore for oil and gas on their outer continental
shelves and to locate deepwater ports must reconsider and move forward with
determination to help solve this national crisis.
Consumer States must work with producer States and industry to plan for the
onslaught of imports that is inevitable. They must establish facilities to refine
these crude imports.
We must start constructing a pipeline to market domestic oil from Alaska in
the 48 States.
We must deregiilate the price of gas in order to increase the supply of gas,
oil, coal, and atomic energy.
We are all in this together. Our outlook must be constructive and objective.
We cannot afford to waste time casting the blame. We must roll up our sleeves —
there is a job to be done — in the best interest of the United States. We need
a strong domestic energy industry.
Senator Hart. The committee now welcomes as its first witness
the able ]\Iember of Congrress from California, Mr. George E. Brown.
STATEMENT OF HON. GEORGE E. BROWN, JR., A U.S. REPRESENTA-
TIVE FROM THE STATE OF CALIFORNIA
Representative Brow^ist. Thank you very much, Mr. Chairman, for
the opportunity to be liere this morning. I want to commend the
subcommittee for undei-taking this series of hearings. I personally feel
that there is nothing more important to the political and economic
future of this country than a thorough investigation of the effectiveness
of our institutional system for regulating great economic enterprises,
particularh' the enterprises that are engaged in the energy field today.
16
I am sure tliat the results of your hearings will have substantial
impact on that. I am going to read my statement, but omitting certain
poT'tions of it, in order to expedite these hearings.
Senator Hart. It is so ordered that the statement will be entered
in the record in full.
[The statement referred to appears at the end of Congressman
Brown's testimony.]
Representative Brown. Thank you. Mr. Chairman. I testify before
you today about my experience with the petroleum industry and the
Federal Power Commission. As a member of the Ener.Qy Subcommittee
of tlie Science and Astronautics Committee of the House of Repre-
sentatives, I have become painfully aware that we face a great energy
crisis. What I am most concerned about in this regard is the vacuum of
leadership and responsibility which has led to an unprecedented
energy shortage in this country.
In my judgment this shortage has occurred because leaders in Gov-
ernment and industry have acted to maximize their own short-term
interests at the expense of the consuming public. Industry has at-
tempted to maximize its profit, certain public officials have been more
intei'ested in serving private interests ratlier than public needs, and
our institutions and agencies have laid prostrate accomplishing little
or nothing in our greatest hour of need.
One of the major questions that I want to explore in this testimony
is w^hy the Federal Government, and in particular the Federal Power
Commission, has failed to act decisively and effectively as our energy
crisis has mounted.
For example, the petroleum industrv has over the last several years
repeatedly aslved for and received substantial increases in the well-
liead price of natural gas. Tliese price increases have been approved
by the Federal Power Commission on the ground that if the price of
natural gas is allowed to increase more exploration for natural gas
will occur, and the shortage of natural gas will be allcAnated.
Tliis arirument has proved to be false. The Federal Power Commis-
sion has gone along with the petroleum industry permittting the price
of natural gas to nearly triple in the last 3 years, and yet if one be-
lieves the figures offei-ed by the petroleum industry, the shortage of
natural gas has only worsened.
"We have been repeatedly warned by both scholars and practical
politicians that independent regulatorA^ agencies are in constant dan-
ger of being taken over and controlled by the very industries that they
are charged with regulating.
I submit to you that I'ecent events and the facts uncovered by both
my staff and diligent investigative reporters indicate that this has
happened to the Federal Power Commission.
This demise of the Federal Power Commission as an independent
and vigorous regulator and planner has permitted the energy short-
age to deepen in severity with untold cost to the American consumer.
Recent startling developments have focused attention on the Fed-
eral Power Commission and its actions. For example, earlier this
month both the Washinofon Post and the Los Angeles Times reported
that certain important documents had been ordered destroyed by of-
ficials at the Federal Power Commission after this committee had re-
quested them.
17
These documents, I am informed, indicate that the shortage of
natural gas reserves may not be as severe as the Federal Power Com-
mission and the oil companies claim, and that, incredibly, as much as
80 percent or more of oui- available uncommitted gas reserves may be
controlled by four or five oil companies.
The situEition would indicate the existence of classic monopoly
power. What has happened that could lead to such extreme conduct
by public officials that they would order critical documents destroyed
rto keep them out of the hands of a congressional committee?
I have been brought to the deeply disturbing conclusion that it is
a "Watergate" mentality and that this mentality strikes into the very
heart of the regulatory' and administrative bodies that deal with the
energy crisis.
In an article in the Washington Post of May 13 of this year, en-
titled "Watergate Eeveals Gamey Election ^Money," Morton JSIintz, a
widely respected financial reporter, described in detail the penetration
of the Federal Power Commission by the oil industry, through what
is now a classical political weapon: massive campaign contributions
that are difficult, if not impossil)le. to trace. This article pointed out
how William Liedtke, president of Pennzoil United, owner of United
Gas Pipeline and gas-producing affiliates, all regulated by the Federal
Power Commission, raised $700,000 for the Committer To Ee-Elect
the President from his friends in the petroleum industry, and had the
money flown to Washington 2 days before the Federal disclosure law
took effect, thus keeping the contribution secret.
Subsequent to these and other contributions from oil interests.
President Nixon appointed two nominees to the Federal Power Com-
mission, and I say here, who favored deregulation of natural gas.
Actually, only one of the two is on record as favoring deregulation.
Such deregulation would result in massive windfall profits to the oil
industry and substantial price increases for the American consumer.
These nominees, one of whom has now been rejected by the Senate,
would have joined three other sitting Commissioners who also advocate
deregulation.
Hence, we have a regulatory commission made up of Commissioners
•so industry oriented that they publicly advocate that the Commission
should give up its function. Instead of enforcing statutes enacted by
the Congress, and providing consumer protection against monopoly
ex]:)loitation, they have chosen to use their high office to undermine
public surveillance of the industry, and to serve private oil and gas
interests.
Following the ]Morton Mintz article of May 13, 1973. focusing on the
role of William Liedtke, president of Pennzoil United, my staff and I
■conducted a private investigation of major oil industrv connections in
the Federal Government. Among our significant findings are the
following:
None of these are secret, Mr. Chairman. We merely surveyed the
public record. The same William Liedtke of Pennzoil who funnelled
$700,000 to the Nixon reelection committee, is reported to have inter-
viewed and offered the Federal Power Commission post to present
■Commissioner Rush ]\Ioody, Jr., prior to his appointment by Presi-
dent Nixon.
18
Commissioner Moody has now authored the astonishing Federal
Power Commission opinion in the widely reported Belco case which
sets the stage for gas price increases of at least 73 percent at the well-
head and in effect deregulates the price of natural gas by administra-
tive fiat through a procedure termed "optional pricing."
Two, Commissioner Moody, before his Liedtke-Nixon appointment
to the Federal Power Commission, was associated with a Midland,
Tex., law firm — Stubbeman, McEae, Sealy, Laughlin & Browder—
which represents the interests of some of the largest petroleum com-
panies, including but not limited to Texaco, Inc., a party in the Belco
case, and Mobil Oil Co.
It is astonishing that Commissioner Moody did not disqualify him-
self from deciding a judicial matter concerning a client of his former
law firm. Prior to that he was with a Houston law firm, Baker, Botts,
Shepherd & Coates, whose senior partner served as Pennzoil's general
counsel.
Three, it was that same Houston law firm. Baker, Botts, Shepherd
& Coates, that sent Mr. Gordon Gooch to be general counsel of the
Federal Power Commission. Mr. Gooch brought Steven Wakefield,
also of the same Houston law firm, to the Federal Power Commission
as his chief assistant.
Mr. Gooch was general counsel at the Federal Power Commission
from November 1969 to July 1972, when he 'oecame a full-time coordi-
nator and fund raiser with the Committee to Re-Elect the President.
^'\^iile Mr. Gooch is now in private practice, representing his
Houston law firm's Washington interests, one of his most trusted
ex-lieutenants, Mr. Frank Allen, is now Commissioner Moody's chief
assistant.
In addition, Mr. Gooch's chief lieutenant, Steven Wakefield, is cur-
rently the Nixon administration's assistant secretary for energy and
minerals in the Department of the Interior. In that capacity he super-
vises the operations and policies of the Nixon administration's Office
of Oil and Gas, the Bureau of Mines, and U.S. Geological Survey.
In his high Government office Mr. Wakefield has constantly ad-
vanced the petroleum industry's cause, including opposing the imposi-
tion of mandatory controls over gasoline allocation and supporting
gas price deregulation.
While at the Federal Power Commission, Gooch and Wakefield
worked closely, not only with Commissioner Moody, but also with
Commissioner Pinkney Walker, the first Nixon Federal Power Com-
mission appointee to pulilicly advocate gas deregulation, and with
Walker's chief assistant, Kennetli Lay.
Walker, who has since retired from the Commission, is the brother
of Charls Walker, and that is spelled C-h-a-r-1-s, no "E," who was
President Nixon's Under Secretary of the Treasury under John Con-
nally. Secretary Connally has, of course, recently returned to the
"Wliite House staff, at least temporarily, from his Texas law firm, one
of the largest practices representing the oil industry.
And Cliarls Walker is now a registered lobbyist for the oil and gas
industry, with the specific responsibility to pressure for price deregu-
lation. Before becoming a petroleum industry lobbyist, Secretary
Walker was most instrumental in getting his brother's chief lieutenant,
Kenneth Lay, a new job as Deputy Under Secretary of the Interior.
19
Secretary Lay is now also the executive director of the new energy
board. No doubt Mr. Walker as a lobbyist for the oil companies is now
well pleased with Mr. Lay's efforts on behalf of deregulation.
These efforts culminated in April, when Interior Under Secretary
Whitaker transmitted the administration's gas deregulation bill to
Congress. That, of course, is not to say that Secretary Lay's views are
merely the result of his association with Mr. Walker. Undoubtedly,
his strong pleading for deregulation may in part be related to his past
affiliation with the Hmnble Oil & Refining Co., now Exxon, his em-
ployer from 1965 to 1968.
I have a chart on page 6-A, which I will not read, which delineates
some of the points that I have just made. Finally, while my investiga-
tion indicates that the Federal Power Commission's chairman, Mr.
John Nassikas, is not among the inner circle of the petroleum indus-
try's favorite insiders, it should not be forgotten that less than 2 months
after taking office the New York Times quoted Mm as saying: "We
had the Kennedy round of tariff negotiations. What we need is a
Nassikas' round of gas rate increases." This was from the issue of Sep-
tember 21, 1969.
I would submit, Mr. Chairman, that statements like this must bear
a great deal of the responsibility for our present energy shortage. "What
sensible, self-interested gas producer, having heard that the chairman
of the Federal Power Commission intends to push for substantially
escalated gas prices, or who Imows that all of the members of the Fed-
eral Power Commission favor deregulation, would sell his gas today,
rather than hold it off the market and get two or three times as much as
soon as Chairman Nassikas and his colleagues are able to implement
their plans ?
If, as these gentlemen advocate, we deal with the gas shortage by
inflating petroleum industry profits to record levels, are we not cre-
ating an incentive for permanent shortages? As I will explain in a
moment, the Federal Power Commissioners have made good on their
promises to the industry.
As long as they continue to promise higher prices, to ignore the anti-
competitive market structure of the oil industry, and to sanction staff
action that would destroy relevant documents, our energy problems
will not improve. They will become even more burdensome.
Let me hasten to say that the solution to our gas shortage is not de-
regulation. A^^iat is needed is effective consumer-oriented regulation,
regulation that requires oil companies to produce gas rather than sit
on it ; regulation that results in reasonable prices, proper allocation of
reserves to the public and that avoids massive profit windfalls. That is
the only obvious solution to the oil industry's monopolistic excesses.
At this point, I believe it would be helpful to review for the record
recent Federal Power Commission actions which demonstrate that the
Commission has abandoned its historic role as the consuming public's
regulatory guardian.
Mr. Chairman, I am not going to read this into the record here, since
you have put the entire statement in. In the most part it is a rehash of
your own work, so it's a little bit redundant. I am going to skip over to
page 11, at the top of the page.
State commissions have understandably taken a dim view of this
latest price- juggling act. Most notably, the State of New York has re-
20
quested blanket intervention and a f onnal hearing if flowing gas prices
are escalated by the oil companies. As I understand it, the Federal
Power Commission has refused the New York request. What is in-
volved, substantively, in all of these repricing cases, is that the Nixon
commission is anxious to permit higher prices even after the con-
sumer has already paid for all of the investments associated with the
exploration and development of producing wells.
This makes absolutely no sense and is totally unfair. Since all of the
capital has been repaid, the renegotiated price should be lower, not
higher. That, however, would not result in the kind of profits coveted
by the petroleum industi-y.
This list of windfalls, impressive as it is, is not the full extent of the-
benefits bestowed on the oil industry by the Xixon commission. The
Federal Power Commission, through anothei- new gimmick known as
"advance payments procedures," is now in the process of burdening-
consumers with over $200 million per year in additional overcharges..
This procedure, adopted in Commission No. 465, issued December-
2, 1972, provides for interest-free loans to producers, funded by the-
]iipeline customers. It is even possible for an interstate carrier like
Tennessee Gas Pipeline to make such a loan to its own affiliate, the
Tenneco Oil Co., or for United Gas Pipeline to make a loan to its par-
ent, Pennzoil.
Finally, Mr. Chaii-man, permit me to share with you and this com-
mittee some of the knowledge I obtained several months ago when I
personally intervened in the Commission's historic Beleo case which
set the stage for a minimum 73-percent gas price increase. I speak
here from intimate, individual experience as I ))ersonally attendecF
the Belco hearings and cross-examined industry witnesses.
I came away from that experience with several strong impressions.
In marked contrast to the Commissioners themselves, t:he judge who-
heard the case and tlie Commission staff members who participated in
developing the evidentiary record demonstrated commendable dedica-
tion to serving the public interest.
Unfortunately, but as one might have anticipated, the Commission
precluded the judge from rendering an opinion. Even though none-
of the Commissioners was present at any of the hearings which I at-
tended, and therefore liad to work from a written ti-anscript, they
chose to render the initial opinion themselves, rather than follow the
customary procedure of allowing the presiding administrative law
judcfe to render an initial recommendation.
This action establishes a basis for believing that the Commissioners
were afraid of what the administrative law judge would recommend.
In addition to this astonishing action, they totally dismissed the^
critical evidence submitted by their own staff.
In what I consider to be an inept and biased opinion, thev actually
engaged in a collateral attack upon their own staff, berating them
for having attempted to present a strong factually supported case-
concerned with consumer interests. Given this proindustry posture-
which Commissioner Moody and his followers have assumed, it is no
wonder, Mr. Chairman, that some misguided, ambitious staff mem-
bers made "judgment errors," and the week after President Nixon's
energy message, attempted to destroy documents which have been
requested by this committee and which could prove embarrassing to-
the Nixon administration.
21
The Commission staff's factual presentation in the Belco case es-
tablished that the petroleum industry is not structurally competitive.
"We cannot rely upon the existing market structure in this industry
to produce economic results that are in the public interest.
Because of the tight control exerted by the major integrated oil
companies, and because of the closely knit partnership arrangements
which you have so Avell referred to as a family-style arrangement
which binds virtually all oil and gas producers to a common unity
of purpose, the result of President Nixon's deregulation and free>
market proposals will be massive price increases in all petroleiun,
products, as well as the further demise of small independent busi-
nesses.
In order to illustrate for you the type of structural situation whicli
I have described — and I goon to give some examples from the Belco
case, Mr. Chairman, which again I will not take the time of the com-
mittee to read, they are based upon the submissions in Belco and are
available there, also. I will skip over to page 16 for my summary.
In summary, let me say that I cite the Texaco case only as an exam-
ple. These and other partnei'ship arrangements pertain to virtually
all of the major oil companies. In short, this industry is fully inte-
grated in almost all respects.
I might say in addition to being fully integrated it is totally co-
ordinated in a snarled web of mutually interlocking joint interests.
Some may argue that there are certain legitimate economic reasons for
some of these close economic interrelationships of oil and gas pro-
ducers. I. for one. however, believe that a thorough and a vigorous
Justice Department investigation of possible antitrust violations is
long overdue.
The problem is that these substantial joint interests in production,
exploration, and marketing, even if some of them are fully legitimate,
create an atmosphere of close cooperation rather than competition.
The structure of this industry is, in fact, that of a cartel.
We have hei-e an economic svstem of companies acting together^
in their mutual self-interest. Since this is what exists, and since
the Nixon administration and its Federal Power Commission ap-
pointees have failed to regulate or to break up this cartel, Congress is
obligated to act.
Congress is the only branch of Government left that can msure that
the gas and oil producers do not seize upon our present energy short-
age as their vehicle for extracting the maximum possible tribute from
the American people,
I must also comment that in many cases the effects of the cartel-
like structure of the petroleum industry extend beyond the limits.
of that industry. Because most major oil and gas producere are not
only involved in other aspects of the petroleum business, such as
refineries, pipelines, retail distribution, and so forth, but in other
industries as well. Their production profits are camouflaged in their
aggregate corporation reports.
For example, Tenneco, Inc., one of the largest corporate enterprises
in the United States, is, in addition to oil and gas production, en-
gaged in the production of farm machinery, J. K. Case Co. ; agricul--
ture and food processing, Heggleblade-Marguleas Co.; agriculture-
and real estate development, Kern County Land Co.; chemical pro-
22
duction, Tenneco Chemical Co.; banking, Houston National Co.;
oceanographic research, Deep Sea Ventures, Inc. ; and shipbuilding,
Newport News Shipbuilding & Dry Dock Co.
In situations like this it is not only next to impossible to determine
petroleum profits from public sources, it is also unknown whether
these profits are used to subsidize other corporate business activities,
thereby giving Tenneco subsidiaries an upper hand in businesses
where they do face potential market competition. This is a particu-
larly serious problem in agriculture, where the vertically integrated
conglomerate can manipulate prices and profits to freeze out smaller
producers, and be fuianced with millions of dollars in farm subsidies
while it is doing it.
These subsidies are, of course, in addition to the subsidies which
the petroleum producers already enjoy through the oil depletion al-
lowance, oil import quotas, and other forms of corporate welfare paid
for by the ordinary taxpayer.
In closing, I do have some policy recommendations for this com-
mittee and the Congress to consider.
Number one: Amend the Natural Gas Act to require the Federal
Power Commission to set prices based solely upon costs plus a fair
rate of return, and to require production at those rates, and outlaw
the notorious optional pricing procedure.
Two : Roll back the recent massive price increases to the level
prevailing as of January 1 of this year. If we wish to discourage
consumption of our limited supply of natural gas, put a public excise
tax on it. We don't need private tax collectors, and we should not
give the producers a 30- to 60-percent j^rofit windfall which really
belongs to the people.
Three : Eliminate the intrastate exemption for gas producers, thereby
permitting effective regulation of all the gas produced by this highly
noncompetitive industry.
Four: Create a public corporation to explore and develop our off-
shore oil and gas reserves, which, after all, are our Nation's energy
legacy and belong to all our people. Such a public corporation would
act as a pricing yardstick for the private corporations to compete
against; and
Five: Require that the energj^ corporations have consumer repre-
sentatives on their boards of directors. Such an extreme step may be
the only way to prevent collusive action between the energy corpora-
tions, among themselves, and with such regulatory agencies as the
Federal Power Commission.
Mr. Chairman, I appreciate this opportunity to appear before you
on this important matter, and I commend the committee again for its
diligence in pursuing this subject.
Senator Hart. Congressman, thank you very much for the detailed
testimony that you have given. Your dedication and concern for the
consumers of this countrj^ are well known. I perhaps should have ex-
pected— but truthfully I didn't^the kind of thought and work that
went into the testimony that you offered.
Too often those of us in the Congress who appear at these hearings
sort of drift by, leaving no mark. You most certainly have not, and we
are grateful to you for it.
23
Representative Browx. Your statements are very kind, Mr.
Chairman.
Senator Hart. In the Bclco case, to the extent that you were able to
observe it, what was the strength in terms of economists and lawyer*?
and so forth, of the Commission, as contrasted with the staff strength
of those economic interests that the Commission was supposed to be
reirulating?
How does that batting order look to you as a third-party observer?
Representative Broavx. This is obviously a subjective opinion. This
was my first a]opearance before the Federal Power Commission, and
I gathered the first time that any Congressman had appeared over
thei-e. I was, frankly, a little amazed to see the extremely large battery
of very able attorneys, and I am sure very well paid attorneys, that
appeared on behalf of the proi:)onents of the rate increase.
There was always present a minimum of a dozen or more of what I
quickh' came to recognize were the best attorneys in the country, repre-
senting the aggrieved applicants. The staff of the Commission was gen-
erally represented by — I am not sure I am aware of all of the staff
that was there, but at the staff table there were possibly two. three, or
four members of the FPC staff. Then, in addition, of course, there were
the representatives of the interested consumer groups or State agencies,
such as the New York commission, which would seem to be represented
there, seeking to protect the interest of the consumers of their own
State or the agency that they represent.
But there is no question that the FPC staff was badly outgunned,
if you just count the bodies.
Senator Hart. We heard about that. But you are right. I don't think
any of us has ever gone to one of those hearings, much less become a
party in the proceedings. I am hopeful that in addition to criticizing
what we believe to be mistakes on the part of these regulatory agen-
cies, we will be willing to come up with the kind of budget money that
will enable — in most cases I am sure there is very dedicated personnel —
enable the personnel to have the strength adequate to meet the opposi-
tion.
Re])resentative Browx. I hope you won't try to match the petroleum
ir.dustry. I think that would bankrupt the Federal Government.
SenatoT" PTart. I am suggesting two figures at tlip moment for the
Federal Trade Commission. It is, I think, $2.2 million — $2.6 million —
nn increase in tliat amount. I am glad to report tiiat the Appropriations
Subcommittee did accept that figure and added it as an amenduient to
the bill.
I made the request of the Appropriations Connnittee to increase it
by $2..') million. The figure to be made available to the Department of
Justire Antitrust Division, where the total sum annually is in the
order of $12 to $15 million — $12. (> million is what we give the Depart-
ment of Justice.
That could be expended quickly just in pretrial skirmishes if they
did engage in a major controversy.
Re]iresentative Browx. I recall, Mr. Chairman, all too vividly that
Avc- had indicated puljlicly tliat the FPC is unable, because of the staff',
to handle its regulatory responsibilities in important cases.
I know tliat the Antitrust Division has faced considerable diffi-
culties in having major cases, such as IBM. and frankly, to go into a
27-r,47— 74 3
24
thorougli investigation of the petroleum business exceeds in magnitude
the IBJM problems b}' at least a factor of 10.
Senator Hart. You say it would be 10 times the resource burden
to do a thorough investigation of the petroleum industry ?
Eepresentative Brown. Yes, sir. At least 10 times.
Senator Hart. That does give us an idea of how grossly inadequate
is the funding of the agencies that we look to to protect us from the
evolution of giants. Now, when you became a party to the Belco pro-
ceedings.were you able to obtain from the companies specific cost
information, S])ecific reserve data ?
Eepresentative Browx. No, sir. Every attempt to go beyond a
certain prescribed line was met by the objections of the attorneys of
the companies. In the bulk of these situations, of course, the decision
was up to the administrative law judge as to whether to require the
companies to answer or not.
In most of the situations he would accept the contention of the in-
dustry that the matei-ial, for one reason or another, was not pertinent
and would not order the Government action. I might say this was not
only my own experience, but that of other interveners who sought to
get behind the surface, to get detailed cost data.
The important thing unexamined in these proceedings, of course,
is any relationship of the price sought for the gas to the cost of pro-
ducing it. The cost data was never available.
Sena,tor Hart. As far as you know it is not in the record ?
Representative Browx. No. sir. It is not.
Senator Hart. The interrelationships of some of the Power Commis-
sion personnel and the industry, that you detailed, convinces one more
than ever of the value and the desirability of having on the Commis-
sion itself, in the one vacancy that now exists, a voice that has no such
relationship — and preferably one that has an identification in the
minds of the general public as a consumer advocate.
The connections that one brings with him to a regulatory agency
need not, and I am willing to believe do not, affect one's judgment. But
the public's opinion of us is full of suspicion, and when a regulatory
agency has to enter an order which will please nobody, the order of a
balanced agency is much more likely to be accepted, at least as an
honest eflort, bj? the displeased public.
When looking at the regulatory agency, they should see persons who
are free of any of the relationships and associations with industr3\
That, really, when you get down to it, is the basis of my argument
against Mr. Morris. That he was a gifted lawyer, there was no doubt.
That he was an honorable man, nobody questioned. But if he was
on the Commission and a tug of war arose, the people would look to
it and say, ""What would you expect from a man who had been with
Standard of California for so many years."
That's the dilemma.
Eepresentative Browx. ]\Ir. Chairman, it was doubly unfortunate, in
his case, and I have the highest regard for the gentleman, that he
suffered not only from his identification with the industry, but also
from not favoring deregulation of gas, which is contrary to the
industry position.
This, of course, was an unfortunate situation for an able gentleman.
Nothing that I have said is intended to reflect on the parties in-
25
volvGcl. I am sure tliey are all able and lioiiorable gentlemen. What
has happened here probably was paralleled in previous administrations.
Government figures were figui'es from law firms representing indus-
try, and moved in and out of high administrative positions, commis-
sions, Cabinet positions and so forth, moving into them to represent
the public interest, and then back to their law firm where they
resumed their private interest. You have a very real question of
whether or not the S3^stem serves the public welfare, not whether these
individual gentlemen are dishonorable.
Senator Hart. 1 am glad that you made that point. Certainly, Com-
missioner ]Moody will have a chance to respond, and if any of the
others that you have named want to add a statement to the record,
we will permit that to be done.
One of the further complications in the public's reactions to Power
Commission orders, and actions in omissions, is the traditional high
level of j)olitical activity on the part of the oil industry. This activity
principally is undertaken by the bookkeeping department.
And it does have its eftect around here, I am sure. I couldn't identify
it, but I do know that it tends to poison the public's opinion of the
regulatory agency. Your description of the rush delivery, 2 days ahead
of time, of cash- — I take it it was cash, wasn't it ?
Representative BroW' x. I think that it was both cash and checks, but.
it was unrecorded.
Senator Hart. In any event, to beat the recording deadline is the
kind of thing that leaves all politicians looking lousy, and sometimes
unfairly. But it reminds us, too, that Congress has responded to a
jDoint of enacting the new reporting and disclosure law, the 1971
Campaign Reform Act — that helps some.
I am one of those who believes that until we outlaw pi-ivate money in
political campaigns we will always have this distrust. Limiting the
amounts that an individual can give and requiring them to be reported
is good. But I heard one witness say tliat that's like treating an
alcoholic by cutting down on the size of the shot glass and requiring
him to record his intake. The poison still gets in his system.
Representative Brown. I agree thoroughly with you, Mr. Chairman.
I support the same view.
Senator Hart. JMr. Chumbris ?
Mr. Ciifmbris. Thank you, ]Mr. Chairman. Congressman Brown, the
time is short because the chairman lias to go to an executive session
of tlie Judiciary Committee, but there are a couple of points that I
wanted to bring up.
Our Senators are necessarily in other subcommittees and sonie of
them are preparing for the big bill on the floor. As you well know, there
are many of your colleagues in the House and in the Senate, on both
sides of the aisle, who disagree with some of the comments that you
have made, and I will leave it to them to handle it in their particular
forum.
But there is one point that you make in the last paragraph of your
first page, regarding the substantial increases in the wellliead price of
natural gas, and we question whether that argument is false, that
there is a shortage due to the fact of the price of gas.
The Washington Post, in an editorial on June 21, 1973, referring
to the price of gas, states as follows :
26
We have shortages because of the present artificially low price of natural gas,
and to relieve the shortages we are already beginning to import extremely expen-
sive gas from overseas.
The average price at the wellhead of our domestic natural ga« is 20 cents
per thousand cubic feet. Algerian gas, delivered to the east coast, costs about
$1.25 per thousand cubic feet. Although the price has not yet been disclosed, the
Soviet gas promised to the west coast will doubtless be in the same range.
Natural gas competes with two other fuels, coal and oil, both of which are
unregulated. The FPC has held the price of natural gas down to about half the
price of the next cheapest industrial residual oil.
Mr. Swidler, a former clmirman of the Federal Power Commission,
who is going to testify later today, makes this comment on page 12
of his paper : "To the extent the price increases induce commensurate
increases in gas findings, the price increases serve a valid economic
function." Just one further j^oint, and that is in the hearings held on
November 13 and 14, 1969, on the natural gas supply study, chaired by
Senator Frank Moss of Utah of that particular subcommittee, there
was a colloquy Senator Moss had with Mr. McGuire, the president of
a small oil company in Dallas, Tex.
They were pointing out that for over 10 years ]Mr. McGuire was try-
ing to raise the price of his gas from I314 cents to 161^ cents, but it was
tied up in the Commission, et cetera. Then Senator ^loss said, ''Well,
the consumers were saving 3 cents per thousand cubic feet during the
10 years."
But Mr. McGuire countered, "That isn't so, because while I wasn't
getting that extra money, it was difficult for me to explore for iiew
gas, and that applied to producers all over the country." So what
happened was that they had to start using oil at GO cents for a com-
mensurate amount.
They had to use Algerian liquefiod natural gas and synthetic gas,
which runs from $1.25 to $1.50 per tliousand cubic feet. And the con-
sumers were paying for that ; as an April Business "Week article pointed
out, tlie pipelines are already contracting for this liquefied natural gas
at $1.50 per thousand cubic feet because they can't afTord to leave those
pipelines empty.
As that pipeline hits Detroit, Mich., and ]Milwaukee, Wis., two of
the key States in the PhUUps case back in 1951-5-1, they are going to
have to pay for the liquefied natural gas.
So that is an issue which must be examined during the course of these
hearings. Have we really impeded exploration as the Post seems to
indicate that we have? I will let ]\[r. Swidler speak for himself in the
rest of his paper.
Chairman of the Commission, Mr. Xassikas, is going to testify on
that point, and I think it is a key issue that we have pretty much
avoided. That is, yes, let's keep the price of natural gas down, but if
in doing so you are making the consumer pay three or maybe four
times as much for 50 percent of the gas h.e is Q-etting from these other
sources, then the consumer is paying througli the nose.
And everybody admits that natural gas is one of the best sources of
fuel supply because it's clean and we don't linve any problem with
ecology. We don't have a problem with transj^oi-tation as we do with
other sources such as coal, oil, liquefied natural a-as and synthetic gas.
Also, we had testimony in another hearing before the Iiiterior Com-
mittee last Thursday and Friday, where there was talk about getting
sas and enerev from the solar svstem. and from other new sources that
27
they hope in the future will &ven replace some of the natural gas that
we cannot get today.
So the issue is not just whether the consumer is going to pay if the
price of natural gas goes up a little higher. The question is: If we
don't get more natural gas, will the consumer pay two — three times
two — $1.25 to $1.50 — six times the current price of natural gas.
So that is something that we ought to look into. I know it sounds
good in the paper to say we are helping the consumer by stopping this
from going into effect, but if you look at it in the long run, the con-
sumer is paying for some other things that the consumer advocate
presses so strongly.
Representative Brown. May I respond to that ?
Mr. Chumbris. Yes, sir.
Eepresentative Brow^x. First, I agree with Mr. Swidler to the extent
that an increase in natural gas prices which would encourage explora-
tion for additional gas supplies is justified. But record does not bear
out the fact that increased prices have produced increased exploration.
In fact, there is ample evidence to indicate that just the opposite is
true : tliat increased prices, over a given period of years, have not pro-
duced additional exploration or additional reserves. The fundamental
fallacy in the argionent is that it assumes that the industry operates
under the conditions of tlie market — in otlier words, that it i?, in fact,
competitive, and motivated by the normal, competitive market incen-
tives. This is not the case. The industry is semicartel like, semimonop-
olistic and you will have ample testimony on that, in addition to the
few points I have produced.
Under those conditions you can't ]".e sure an increased price will do
anything except increase the windfall profits. In effect, they allow this
industry to lay a tax on the American consumer, which if they were to
use it as the Government would, to engage in additional exploration
or even to do E. & D. in new sources of energy, I would be perfectly
willing to support.
Because energy is underpriced in our society, it does need an in-
creased price to discoui'age the wasteful use we now engage in. But
that increased price should not go merely to windfall profits in the in-
dustry, which is what is happening at the present time.
Let me give you one example of a comparable situatioii. I come from
Los Angeles. We have a clironic water shortage out tliere. ^Ye pump
water from a local water table, and we get it at, say- — and I am making
tliese figures up — 10 cents per thousand cubic feet, but there is only a
third as much as wo need. We have to import the rest from, as much as
300 miles away. It costs a dollar, not 10 cents per thousand cubic feet,
for that imported water. If the petroleum industry owned that vrater
supply they would say to the consumers in Los Angeles, "It costs us
a dollar per thousand cubic feet to import this water so we are going to
charge you a dollar per thousand cubic feet for this water we pump
f I'om the local ground table, which only costs us 10 cents per thousand
cubic feet, and you are going to pay because it's only reasonable.
''The alternative supply which you have to have costs a dollar. It's
only reasonable that 3'ou should pay a dollar for that which costs us 10
cents to pump."
]Mr. Chumbris. Congressman, I don't want to get into a debate with
you because I read your statement, and the points that you have just
28
stated you have in your paper, with the exception of this water issue.
But the two points'that another witness makes will bear on this.
One is the leadtime you need from the time that you would ^et this
increased price that you can therefore go out and discover, explore, de-
velop and then pump. It is the leadtime you need. That leadtmiehas
not been ]uit into eflect, because the price increases that have been given
are very few so far.
All existing contracts are still under the old price. So that is one
point. As for the second point, I went out and saw the chairman of
the Oklahoma State Corporation Commission that has jurisdiction
over oil.
We were trying to find out— this goes back about 2 years— how we
could improve our supplv of gas. We discussed the question of price.
He pointed out that right now in eastern Oklahoma we have been
getting gas from 3,000 to 6.000 feet.
He said, "We have plenty of gas in another part, of the State, but
thev have to dig throudi rock at 22.000 to 30,000 feet." Now that's an
increased cost, and if this price had been held down to (30, or even less
than 60 as some people desired, while everything else in our economy
ha s ri=en, such as the prices of meat, bread, milk and rent.
If that price is still back there at ISi/o cents per thousand cubic feet,
as this mnn stated, then he is not going to go to the western part of that
State to dig 30.000 feet when 13 Vg cents isn't enough to meet his addi-
tional costs in the eastern pa rt of the State.
So I say I shouldn't be^ debating this with you, but since yoii bring
tliese points out, I think these qiiestions should be borne in mind by
the succeeding witnesses. I know we look like a bunch of ogres up here,
sitting around trying to defend the oil industry, but _as_ far as I am
concerned, we haven't the slightest concern about the oil industry. We
are concerned whetlier we are going to get good gas and good oil and
all of the products that we need. We want no more brown outs in
Florida, as Senator Guerney stated a few weeks ago, no more loss of
power in New York or shutting down plants in Cleveland for 9 to 10
days, puttinsT people out of work.
That is what we have to resolve. These Senators, good colleagiies
of yours, probably some from your State and some from neighbornig
States, look like they are supporting the oil induftry when they are
fighting for, probably, the biggest industry in their specific States.
'^For example. Senator Nelson and Senator Proxmire fight for th.e
dairy industry in Wisconsin, and Senator Muskie fio;hts very strono-ly
for the shoe industry in Maine. You can't say, "He is interested in
industry and not in the consumer," just because he is fighting for the
shoe industry in Maine.
Representative Browx. If I may respond again, I will speak only
about the point that you made on leadtime. I gather that it was m re-
buttal to my statement tliat increased prices have not broudit about
increased investment in drillino-. In my intervention in the Bdco case
I repeatedly asked the representatives of the industry if they would
make any commitment whatsoever to an increase in their exploration
foro;as.
They refused to do so. Tliey are not willing to make a commitment
to increase the amount of exploration, and they would be crazy to do
it. All they have to do is sit. The gas doesn't go away. People are
29
pressuring for higher prices. Keep the supply short. The longer they
sit the more the price goes up. Even the Russian and Algerian gas
will go up to $'2 and $3 before long.
By using this diminishing supply of gas -vrhich will still cost them
15 cents per thousand cubic feet to produce, they can argue for $3
per thousand cubic feet. And if I was a prudent businessman in their
position, I would do exactly the same thing.
]Mr. CiiuMBRis. Yes. But everybody — of the 400 or 500 independent
producers in the United States, all are not Standard Oil companies,
and they can't afford to sit there. They have to be able to get so much
money to keep their opei-ation going.
A Nebraska man who called the other day pointed out that because
of the price freeze — and he is in an entirely different business — he has
had to shut down. He laid off all of his employees, because with that
freezing of price he can no longer maintain his business. This m.eans
that eve rj'body can't just sit on their product and hope that in 2 or 3
years from now it is going to draw a better price than it does now.
There are a lot of people who have to have that income coming in all
the time to be able to meet their financial obligations or they will have
to shut down as this man did.
Eepi'esentative Browx. And there will be many others shutting
down. The chairman himself indicated that four owners hold 95 per-
cent of the reserves in southern Louisiana. The other umpteen owners
you mentioned have the other 5 percent, and they will go broke — but
not the four who own the 05 percent.
Mr. CiiuiiBRis. According to testimony on the oil import quota,
over 75 percent of the new discoveries of oil — and I am not so sure
that applies to natural gas— are made by the independent producers,
and not by the major companies.
And other testimony in the oil import quota hearings in 1969 and
19T0 in this subcommittee and also in the House Interior Committee
confirms this.
Senator Hart. Congressman, thank you very much.
Representative Browx. It has been a pleasure appearing before you,
Senator.
Senator Hart. As Mr. Chumbris indicated, the full Committee on
the Judiciary has a call in executive meeting. I am held under the
rules to suspend until that meeting is concluded. We will recess. I
would hope to resume by noon.
[Whereupon, at 11 :05 a.m., the subcommittee recessed, to reconvene
at 12 ilO p.m. this same day.]
[Congressmnn Brown's prepared statement follows. Testimony re-
sumes on p. 36.]
Pbepaked Statement of Hox. Georoe E. Browt^t. .Jr., a U.S. Representative From
THE State of California
Mr. Ckairmax and Members op This Committee : I testify before you today
about my experience with the r<^troleum industry and the Federal Power Com-
mission. As a member of the Energry Subcommittee of the Science and Astvo-
nautics Committee of the House of Representatives, I have become painfully
aware that we face a grave energy crisis. What I am most concerned about in
thi.q regard is the vacuum of leadership and responsibility which has led to an
unprecedented energy shortage in this country. In my judgment this shortage
has occurred because leaders in government and industry have acted to maximize
their own short term interests at the expense of the consuming public. Industry
has attempted to maximize its profit, certain public officials have been more in-
30
terestecl in serving private interests ratlier than public needs, and our institu-
tions and agencies liave laid prostrate, accomplishing little or nothing in out
greatest hour of need.
One of the major questions that I want to explore in this testimony is why
the Federal Government and, in particular the Federal Power Commission, has
failed to act decisively and effectively as our energy crisis has mounted.
For example, the i>etroleum industry has over the last several years repeatedly
asked for and received substantial increases in the well head price of natural
gas. These price increases have been approved by the Federal Power Commis-
sion on the ground that if the price of natural gas is allowed to increase more
exploration for natural gas will occur and the shortage of natural gas will be
alleviated. This argument has proven to be false. The Federal Power Commission
has gone along with the petroleum industry, permitting the price of natural gas
to nearly triple in the last 3 years and yet, if one believes the figures offered
by the petroleum industry, the shortage of natural gas has only wor.sened.
We have been repeatedly warned by both scholars and practical politicians that
independent regulatory agencies are in constant danger of being taken over and
controlled by the very industries that they are charged with regulating. I sub-
mit to you that recent events and the facts uncovered by both my staff and dili-
gent investigative reporters indicate that this has happened to the Federal
Power Commission. This demise of the Federal Power Commission as an inde-
pendent and vigorous regulator and planner has permitted the energy shortage
to deepen in severity with untold cost to the American consumer.
Recent startling developments have focused attention on the Federal Power
Commission and its actions. For example, earlier this month both the Washing-
ton Post and the Los Angeles Times reported that certain important documents
had been ordered destroyed by officials at the Federal Power Commission after
this Committee had requested them. These documents, I am informed, indicate
that the shortage of natural gas reserves may not be as severe as the Federal
Power Commission and the oil companies claim and that, incredibly, as much as
SO percent or more of our available uncommitted gas reserves may be controlled
by four or five oil companies, a situation which would indicate the existence of
classic monopoly power.
What has happened that could lead to such extreme conduct by public officials
that they would order critical documents destroyed to keep them out of the
hands of a Congressional committee? I have been brought to the deeply disturb-
ing conclusion that it is a "Watergate" mentality and that this mentality strikes
into the very heart of the regulatory and administrative bodies that deal with
the energy crisis.
In an article in the Washington Post, May 13. 1973. entitled "Watergate Re-
veals Gamey Election Money," Morton Mintz, a widely respected financial re-
porter, described in detail the penetration of the Federal Power Commission
by the oil industry, through what is now a classic political weapon : Massive
campaign contributions that are difficult, if not impossible, to trace. This article
pointed out how William Liedtke, President of Pennzoil United (owner of
United Gas Pipeline and gas producing affiliates all regulated by the Federal
Power Commission) raised ,$700,000 for the Committee to Re-elect the President
from his friends in the petroleum industry and had the money flown to Wash-
ington two days before the Federal disclosure law took effect, thus keeping the
contribution secret.
Subsequent to these and other contributions from oil interests. President
Nixon appointed two nominees to the Federal Power Commission who favored
deregulation of natural gas. Such deregulation would result in massive windfall
profits to the oil industry and substantial price increases for the American con-
sumer. These nominees, one of whom has now been rejected by the Senate, would
have joined three other sitting Commissioners who also advocate deregulation.
Hence, we have a regulatory Commission made up of commissioners so industry
oriented that they publicly advocate that the Commission should give up its
function. Instead of enforcing statutes enacted by the Congress, and providing
consumer protection against monopoly exploitation, they have chosen to use
their high office to undermine public surveillance of the industry, and to serve
private oil and gas interests.
Following the Morton Mintz article of May 13. 1973, focusing on the role of
William Liedtke (President of Pennzoil United) my staff and I have conducted
a private investigation of major oil industry connections in the Federal Gov-
ernment. Among our significant findings are the following :
31
1. The same William Liedtke of Pennzoil, who funnelled $700,000 to the Nixon
Re-election Committee, is reported to have interviewed and offered the Federal
Power Commission post to present Commissioner Rush Moody, Jr., prior to his
appointment by President Nixon. Commissioner Moody has now authored the
astonishing Federal Power Commission opinion in the widely-reported Belco case,
which sets the stage for gas price increases of at least 73 percent at the wellhead
and in effect deregulates the price of natural gas by administrative fiat through
a procedure termed "optional pricing."
2. Commissioner Moody, before his Liedtke-Nixon appointment to the Federal
Power Commission, was associated with a Midland, Texas law firm, Stubbeman,
McRae, Sealy, Laughlin and Browder, which represents the interests of some
of the largest petroleum companies, including but not limited to Texaco, Inc.
(a party to the Belco case) and Mobil Oil Company. It is astonishing that
Commissioner Moody did not disqualify himself from deciding a judicial matter
concerning a client of his former law firm. Prior to that, he was with a Houston
law firm, Baker, Botts. Shepherd and Coates, whose senior partner served as
Pennzoil's General Counsel.
3. It was that same Houston law firm, Baker, Botts, Shepherd and Coates,
that sent Mr. Gordon Gooch to be General Counsel of the Federal Power Commis-
sion. Mr. Gooch brought Steven Wakefield, also of the same Houston law firm,
to the Federal Power Commission as his chief assistant.
Mr. Gooch was General Counsel at the Federal Power Commission from
November, 1969 until July, 1972, when he became a full-time coordinator and
"fund raiser" with the Committee to Re-elect the Pre.sident.
4. While Mr. Gooch is now in private practice, representing his Houston law
firm's Washington interests, one of his most trusted ex-lieutenants, Mr. Frank
Allen, is now Commissioner Moody's chief assistant. In addition, Mr. Gooch's
chief lieutenant, Steven Wakefield, is currently the Nixon Administration's As-
sistant Secretary for Energy and Minerals in the Department of Interior. In
that capacity he supervises the operations and policies of the Nixon Administra-
tion's Office "of Oil and Gas, Bureau of Mines and U.S. Geological Survey. In his
high government office, Mr. Wakefield has constantly advanced the petroleum
industry's cause including opposing the imposition of mandatory controls over
gasoline allocation and supporting gas price deregulation. While at the Federal
Power Commission, Gooch and Wakefield worked closely, not only with Commis-
sioner Moody, but also with Commissioner Pinkney Walker, the first Nixon
Federal Power Commission appointee to publicly advocate gas deregulation, and
with Walker's chief assistant, Kenneth Lay. Walker, who has since retired from
the Commission, is the brother of Charles Walker, who was President Nixon's
Under-Secretary of the Treasury under John Connally. Secretary Connally has,
of course, recently returned to the White House staff from his Texas law firm
(.one of the largest practices representing the oil industry), and Charles Walker
is now a registered lobbyist for the oil and gas industry with the specific respon-
sibility to pre.ssure for price deregulation. Before becoming a petroleum industry
lobbyist. Secretary Walker was most instrumental in getting his brother's chief
lieutenant, Kenneth Lay, a new job as Deputy Underseci-etary of Interior. Secre-
tary Lay is now also the Executive Director of the New Energy Board. No doubt
Mr. Walker as a lobbyist for the oil companies is now well pleased with Mr.
Lay's eft'orts in behalf of deregulation. These efforts culminated in April, when
Interior Undersecretary Whitaker transmitted the Administration's Gas De-
resiulation Bill to Congress. That, of course, is not to say that Secretary Lay's
views are merely the result of his association with Mr. Walker. Undoubtedly his
strong pleading for deregulation may in part be related to his past affiliation
with l^he Humble Oil and Refining Company (now EXXON), his employer from
1965 to 1968.
Nixon Gas Deregulation Team
1. John Connally, Presidential Assistant, formerly Secretary of the Treasury.
His Texas law firm represents many oil company interests.
2. Rush Moody, Jr.. Federal Power Commissioner, formerly a Texas oil indus-
try lawyer ; an ex-Gooch lieutenant (Mr. Frank Allen) is now his chief assistant.
3. R. Gordon Gooch, former Federal Power Commission General Counsel, now
with the Washington office of a major Houston law firm. A long history of repre-
senting Texas oil interests.
4. Charles Walker, a native Texan, formerly LTndersecretary of the Treasury,
now a principal oil industry lobbyist. His brother was the Federal Power Com-
missioner to advocate deregulation.
32
5. Stephen Wakefield, now Assistant Secretary of Interior, formerly assistant to
Federal Power Commission General Counsel Gooch, and an associate in Gooch's
Texas law firm.
6. Kenneth Lay, now Deputy Undersecretary of Interior, formerly assistant to
Federal Power Commissioner Walker, and an economist with the Exxon Corpora-
tion in Texas. , . . ,
Finally, while my investigation indicates that the Federal Power Commission s
Chairman, Mr. John Nassikas, is not among the inner circle of the petroleum
industry's favorite insiders, it should not be forgotten that less than two months
after taking otRce the Xcw York Times quoted him as saying, "We had the Ken-
nedy round of tariff negotiations. What we need is a Nassikas' round of gas
rate increases." (9/21/69)
I would submit, Mr. Chairman, that statements like this must bear a great
deal of the responsibility for our present energy shortage. What sensible, self-
interested gas producer, 'having heard tiiat the Chairman of the Federal Power
Commission intends to push for substantially escalated gas prices, or who knows
that all of the members of the Federal Power Commission favor deregulation,
would sell his gas today, rather than holding it off the market and getting two
or three times as much as soon as Chairman Nassikas and his colleagues are able
to implement their plans? If, as these gentlemen adocate, we deal with the gas
shortage by inflating petroleum industry profits to record levels, are we not
creating an incentive for permanent shortages?
As I will explain in a moment, the Federal Power Commissioners have made
good on their promises to the industry. As long as they continue to promise
higher prices, to ignore the anti-competitive market structure of the oil industry
and to sanction staff action that would destroy relevant documents, our energy
problems will not improve. They will become even more burdensome.
Let me hasten to say that the solution to our gas shortage is not deregulation.
What is needed is effective consumer-oriented regulation ; regulation that re-
quires oil companies to produce gas rather than sitting on it; regulation that
results in reasonable prices, proper allocation of reserves to the public and that
avoids massive profit windfalls. That is the only obvious solution to the oil
industry's monopolistic excesses.
At this point, I believe it would be helpful to review for the record recent
Federal Power Commission actions which demonstrate that the Commission
has abandoned its historic role as the consuming public's regulatory guardian.
It is a record that you, Mr. Chairman, will recall only too well. It appeared in
your submission to the Commission on April 27. 1972, in opposition to the adop-
tion of the optional pricing procedure by the Federal Power Commission.
You showed in that submission that the Nixon Commission has arbitrarily
decided that the oil companies do not have to make refunds of millions of
dollars that are due consumers for overcharges that occurred prior to the es-
tablishment of area rate ceilings. You showed that the Commission has cavalier-
ly terminated a moratorium on further rate increases which the industry itself
agreed to less than two years ago when they obtained a major 35 percent area
rate increase. You pointed out that this same Commission changed the rules
recently by abandoning cost of service regulation for pipeline-])roduced gas. and
you showed how the Commission engaged in sleight of hand by redefining un-
derlying acreage, so that the petroleum industry could obtain higher prices on
gas which otherwise would have been considered "old gas."
In addition, a number of other notable, though hardly commendable Com-
mission actions have taken place recently. Since your submission to the Federal
Povrer Commission on April 27. 1972. the D. C. Circuit Court reversed the Com-
mission's exemption of small producers from regulatory controls. The Commis-
sion had maintained that this "exemption" is not really deregulation since they
intended to hold these producers to price levels no higher than the highest con-
tract prices awarded the large producers, or the prevailing intra-state market
price. Such a criteria is absurd. Since intra-state prices are not regulated, using
such a price as a yardstick is nothing short of dereguhition. IMoreover, we know
very little about who these intrastate dealers are and. therefore, we have no way
of assessing their motivations. As the D.C. Circuit Court said in reversing this
outrageous decision: "Indirect deregulation by such novel standards is worse
than an outright exemption. Such an appi-oach retains the false illusion that a
government agency is keeping watch over rates pursuant to the statute's man-
date, when it is in fact doing no such thing."
33
This illustration of de facto deregulation is not unique Since the Moody-
Walker faction at the Federal Power Commission seized policy control over gas
matters (over token or at least weak opposition from the other members ot the
ComSLion who have since joined them), there has ^een a vu'tual avalanche
of such "novel," if deceptive, regxilatory arrangements, bince April lo. IJd,
^^en the Commission ordered their now famous Order No. 431 for short term
purchases, contract prices have escalated regularly. Prices as high as 4o cents
per mcf are now approved routinely, and until this month there had never been
a formal evidentiary hearing on these limited term rate increases. Now, a.ter
more than two years of approving these steadily escalating contract prices with-
out once setting a hearing, the Commission finally on June 4th ot this year
scheduled its first hearing on an application which would establish a new thresh-
old rate of 60 cents per mcf. , . , . . J.-U-
Apparently they feel that there may be some political risks m approving this
price (which is 133 percent above the Southern Louisiana rate, established in
July, 1971, and more than 70 percent above the unprecedented rate increase
recommended by the Commission's ov^-n staff in March of this year), without
going throuiJ^h the motions of a hearing.
What makes the hearing a farce is the fact that they refused to provide more
than one week for their own staff to prepare and present a case. As a result,
the staff was effectively precluded from representing the public interest. It is a
shocking fact that the full record of this formal proceeding (Cotton Petroleum
Corpora'tion, Docket No. C173-536) consists solely of oil industry testimony.
In addition to these efforts to inflate the price of new gas sales to unprecedented
levels, which means billions of dollars to the oil and gas producers, the Nixon
Commission has also embarked upon a course of repricing flowing gas. That, as
everyone in the oil industry knows, is where the really big money lies, and
the beauty of the scheme is that the oil companies don't have to lift a finger or
provide one more drop of energy. It's just a matter of raking off (or ripping off)
higher profits on gas volumes which have already been committed to consumers
at lower prices. It makes absolutely no sense from the standpoint of solving the
energy shortage in this country.
The first step taken was in the Mitchell case (Opinion No. 6-'9, issued February
21, 1973) where the Commission approved an increase in flowing gas rates from
IS 86 cents per mcf to 30.25 cents. This resulted in an increase of three-and-one-
half million dollars annually on this one sale alone.
In all due fairness to Chairman Nassikas, it should be noted that he filed a
dissent in this matter. However, it was of no avail against the Moody-led major-
ity, recently strengthened by the newly confirmed FPC Commissioner William
Springer.
Another significant action taken by the Commission to escalate flowing gas
prices came to light in a unanimous Commission opinion issued on December 12,
1972. In that case (Opinion No. 639) the Commission launched an attack on
the concept known as "vintaging." Under vintaging, the Commission has con-
sistently required that old flowing gas be sold at the originally approved contract
prices. Now, however, the Nixon Commission will allow even already developed
and flowing gas to be recontracted at current market prices, which will add bil-
lions of dollars to the consumer's energy bill.
State commissions have understandably taken a dim view of this latest price-
juggling act. Most notably, the State of New York has requested blanket inter-
vention and a formal hearing if fiowing gas prices are escalated by the oil com-
panies. As I understand it, the Federal Power Commission has refused the New
York request.
What is involved, substantively, in all of these repricing cases, is that the Nixon
Commission is anxious to permit higher prices even after the consumer has al-
ready paid for all of the investments associated with the exploration and devel-
opment of producing wells. This makes absolutely no sense and is totally unfair.
Since all the capital has been repaid, the renegotiated price should be lower, not
higher. That, however, would not result in the kind of profits coveted by the
petroleum industry.
This list of windfalls, impressive as it is, is not the full extent of the benefits
bestowed on the oil industry by the Nixon Commission. The Federal Power Com-
mission, through another new gimmick known as "advance payments xirocedures,"
is now in the process of burdening consumers with over $200,000,000 per year in
additional overcharges. This procedure (adopted in Commission No. 465, issued
12/2/72) provides for interest-free loans to producers, funded by the pipeline
customers. It is even possible for an interstate carrier like Tennessee Gas Pipe-
34
line to make such a loan to its own affiliate the Tenneco Oil Company or for
United Gas Pipeline to make a loan to its parent Pennzoil.
Finally, Mr. Chairman, permit me to share with you and this Conmiittee some
of the knowledge I obtained several months ago when I personally intervened in
the Commission's historic Belco case which set the stage for a minimum 73 per-
cent gas price increase. I speak here from intimate individual experience as I
personally attended the Belco hearings and cross-examined industry witnesses.
I came away from that experience with several strong impressions. In marked
contrast to the Commissioners themselves, the judge who lieard the case and the
Commission staff members who participated in developing the evidentiary record
demonstrated commendable dedication to serving the public interest. Unfortu-
nately, but as one might have anticipated, the Commission precluded the Judge
from rendering an opinion. Even though none of the Commissioners was present
at any of the hearings which I attended, and therefore had to work from a writ-
ten transcript, they chose to render the initial opinion themselves rather than
following the customary procedure of allowing the presiding administrative law
judge to render an initial recommendation. This action establishes a basis for
believing that the Commissioners were afraid of what the administrative law
judge would recommend.
In addition to this astonishing action, they totally dismissed the critical evi-
dence submitted by their own staff. In what I consider to be an inept and biased
opinion, they actually engaged in a collateral attack upon their own staff, berat-
ing them for having attempted to present a strong, factually-supported case
concerned with consumer interests.
Given this pro-industry posture which Com.missioner Moody and his followers
have assumed, it is no wonder, Mr. Chairman, that some misguided, amlutious
staff memliers made "judgment errors" and the week after President Nixon's
energy message attempted to destroy documents which have been requested l)y
this Committee and which could prove embarrassing to the Nixon Administration.
Tlie Commission staff's factual presentation in the Bcico ease established
that the petroleum industry is not structurally competitive. We cannot rely
upon the existing market structure in this industry to produce economic re-
sults that are in the public interest. Because of the tight control exerted Ity
the major integrated oil companies and because of the closely knit partnership
arrangements which bind virtually all oil and gas producers to a common
unity of purpose, the result of President Nixon's deregulation and free market
proposals will be massive price increases in all petroleum products as well as
as tlie further demise of small independent businesses. In order to illustrate for
you thf type of structural situation which I have described, let me take a single
example from the record produced in the Belco case. The example which T have
selected pertains to Texaco, Inc., one of the parties to that case. One of the most
interesting facts to emerge was the "bidding partnership'' that exists l)etween
Texaco. Inc. and Tenneco Oil Company (Tennessee Pipeline, a Tenneco affiliate,
was the so-called "competitive" l)uyer of the gas.) The staff's evidence showed
that during the period 1970^1972. Texaco bid jointly nnhj with Tenneco and that
it did so twice as often as it bid independently. This long-term exclusive bidding
partnership constitutes a substantial economic incentive for these two producers
to "cooperate" with each other in all sorts of production and marketing activities
and constitutes a substantial disincentive for them to compete against each other.
This joint bidding partnership is only the first of many important partnerships
and interties which Texaco has with other oil and gas producers.
For example, it was shown that Texaco or its subsidaries own leases in the
State of Louisiana jointly with the following: Exxon, Amoco, Shell, Mobil,
Atlantic, Chevron, Getty and Union. Texaco also jointly owns leases in the
State of Louisiana with a number of smaller firms, inclndina: the following.
C&K Petroleum, Consolidated Gas, Ocean Drilling. Placid Oil, Signal Oil, New-
mont Oil and Louisiana Land and Exploration Company.
Another intertie is the joint ownership of offshore producing lenses. The record
in the Belco case demonstrated that Texaco holds an ownership interest in Ti',
Federal offshore producing leases. In 29 of the 55 leases, Texaco holds a joint
interest with Amoco.
It is important to know that Texaco also has substantial partership arrange-
ments with oil and gas producers in foreign joint ventures. For eTfmnle. these
foreign joint ventures include: Arabian American Oil Company, iointly owned
by Texaco, Exxon, Chevron and Mobil (1071 production was 1.5 b'llion barrels of
oil) : Caltex, jointly owned by Texaco and Chevron (1971 operational income was
$2.3 billion) ; Iranian Oil Participants. Inc., jointly owned by Texaco. Mobil,
35
Exxnn, Chevron, Gulf, British Petrolenm, Shell, Atlantic, Signal and Getty
(1971 production was 1.3 billion barrels of crude oil).
It is interesting to note that in all these ventures, Texaco's favorite major
partners where consistently Exxon, Chevron and Shell. It was also shown that
Texaco has a substantial interest in major interstate pipelines with other oil
and gas producers. Texaco owns a 22 percent interest in Badger Pipeline along
with Atlantic-Richfield, Cities Service and Union Oil. Texaco has a 5 percent
ownership of Dixie Pipeline; other owners include, Amoco, Alantic, Cities Serv-
ice, continental, Exxon, Mobil, Phillips, Shell. Gulf, Transco and Allied chemical.
Texaco has a 34 percent ownership in Laurel Pipeline along with Gulf and
Sohio. Texaco has a 14 percent ownership in Colonial Pipeline; its partners tiiere
are Atlantic, Amoco, Cities Service, Continental, Phillips, Gulf, Sohio, Mobil,
and I'nion. Texaco has a 27 percent interest in Olympic Pipeline ; other owners
are Shell and Mobil. Texaco has a 17 percent ownership of Wolverine Pipeline
along with Union, Mobil. Clark, Marathon, Cities and Shell. Texaco has a 9
percent interest in West Shore Pipeline along with Shell, Amoco, ^Marathon,
CJark. Continental, Union and Exxon. Texaco owns a 40 percent interest in
Wyco Pipeline, which is also owned by Amoco and Mobil. Texaco owns a 45
percent interest in the Texas-New Mexico Piiieline, also owned by Atlantic, Cities
Service and Getty. In addition, Texaco owns foreign pipelines with Continental,
Gulf, :\L\rathon, Mobil, Chevron, Exxon, Sohio and Shell.
Finally, the Belco record indicated that Texaco has joined forces with other
major lirms in "producing units' in the Permian Basin. For example, Texaco
joined with Atlantic-Richfield Company in 42 producing miits, with Cities
Service in 23 producing units, with Continental in 19 producing units, with Gett.*
in 2.") producing units, with Gulf in 23 producing units, with Mol'il in 19 i>rodncing
units, with Shell in 18 producing units, with Phillips in 22 producing units, with
Amoco in 30 producing units, with Exxon in 22 producing units, with Sohio in
10 producing units, with Sun in 23 producing units and with Union in 11 pro-
ducing units. In summary, it was shown that Texaco has the following relation-
ships with Chevron : joint pipeline ownership, joint foreign exploration and
development, joint ownersliip of Louisiana leases and joint refinery and proces-
sing plant operations ; with Shell : joint producing in the Permian Basin, joint
foreign exploration and development, joint pipeline ownership, joint refinery
and processing plant ownership, joint ownership of Louisiana leases and crude
oil exchanges ; with Amoco : joint production in the Permian Basin, joint for-
eigTi exploration and development, joint pipeline ownership, joint refinery and
processing plant ownership, joint ownership of Federal leases, joint ownership
of Louisiana leases and joint crude oil exchanges.
In summary, let me say that I cite the Texaco case only as an example. These
and other partnership arrangements pertain to virtually all of the major oil
eomi)anies. In short, this industry in fully integrated in almost all respects.
Some may argue that there are certain legitimate economic reasons for some
of those close economic inter-relationships of oil and gas producers. I, fin- one,
however, believe that a thorough and a vigorous Justice Department investiga-
tion Oi possible anti-trust violations is long overdue. The problem is that these
substantial joint interests in production, exploration and marketing, even if
some of them are fully legitimate, create an atmosphere of close cooperation
rather than competition. The .structure of this industry is, in fact, that of a
cartel. We have here an economic system of companies acting together in their
munial self interest. Since this is what exists, and since the Nixon Administra-
tion and its Federal Power Commission appointees have failed to regulate or
to break up this cartel, Congress is obligated to act. Congre.ss is the only branch
of government left that can insure that the gas and oil producers do not seize
upon our present energy shortages as their vehicle for extracting the maximum
pos-^iiile tribute from the American people.
I must also comment that in many cases the effects of the cartel-like struc-
ture of the i-etroleum industry extend beyond the limits of that industry. Be-
cause most major oil and gas producers are not only involved in other aspects
of the petroleum business, such as refineries, pipelines, retail distribution, etc.,
but in other industries as well, their production profits are camouflaged in thtnr
aggregate corporation reports. For example, Tenneco, Inc., one of the largest
orporate enterprise in tlie United States is, in addition to oil and gas produc-
tion, engaged in the production of farm machinery (J. I. Case Co.), agriculture
nnd f(K)d processing (Heggleblade-Marguleas Co.), agriculture and real estate
development (Kern County Land Co.), chemical production (Tenneco Chemical
Co.), banking (Houston National Co.). oceanographic research (Deep Sea Yen-
36
tures. Inc.), and shipbuilding (Newport News Sliipbiiilding and Dry Dock Co.).
In situations lilce tliis, it is not only next to impossible to determine petroleum
profits from public sources, it is also unknown whether these profits are used
to subsidize other corporate business activities, thereby giving Tenneco subsidi-
aries an upper hand in biisinesses where they do face potential market competi-
tion. This is a particularly serious problem in agriculture, where the vertically
integrated conglomerate can manipulate prices and profits to freeze out smaller
producers, and be financed with millions of dollars in farm subsidies while it is
doing it. These subsidies are, of course, in addition to the subsidies which the
petroleum producers already enjoy through the oil depletion allowance, oil import
quotas (now coming to an end) and other forms of corporate welfare paid for by
the ordinary taxpayer.
In closing I do have some policy recommendations for this Committee and
the Congress to consider :
1. Amend the Natural Gas Act to require the Federal Power Commission to set
prices based solely upon the costs plus a fair rate of return, and to require
production at those rates, and outlaw the notorious optional pricing procedure ;
2. Roll back the recent massive price increases to the level prevailing as of
January 1 of this year. If we wish to discourage consumption of our limited
supply of natural gas, put a public excise tax on it. We don't need private tax
collectors, and we should not give the producers a 30 to 60 percent profit windfall
which really belongs to the people ;
8. Eliminate the intra-state exemption for gas producers, thereby permitting
effective regulation of all the gas produced by this highly non-competitive
industry ;
4. Create a public corporation to explore and develop our offshore oil and gas
Yeseiwes. which, after all, are our Nation's energy legacy and belongs to all our
people. Such a public corporation would act as a pricing yardstick for the private
corporations to compete against ; and
5. Require that the energy corporations have consumer representatives on
their boards of directors. Such an extreme step may be the only way to prevent
collusive action between the energy corporations, among themselves, and with
such regulatory agencies as the Federal Power Commission.
Mr. Chairman, I appreciate this opportunity to appear before you on this im-
portant matter, and I commend the Committee for its diligence in pursuing this
subject.
AFTERXOON SESSIOIST
Senator Hart. The committee will be in order. May I apologize par-
ticularly to the chairman and the Commission members, for a delay
that was unavoidable,, but I know enormously inconvenient. The ex-
ecutive committee meeting required us to suspend, and we expected
two votes to occur back-to-back but only one materialized.
Let me begin by addressing myself to the problem of the subpenas.
a problem which I laiow caused the Commission great concern. This is
reflected in the order which the Commission has published and which
I tliink, for the record, we should order printed.
Senator Hart. My responses are more in the nature of a formal
com.mittee position than of personal reactions.
The committee, on June 21, by a vote of 6 to 0, issued a subpena
duces tecum addressed to the chairman of the Federal Power Commis-
sion. It is my understanding that it was served at about 6 :40 p.m. on
the day the committee took its action, and the subpena is returnable.
I shall not list in full the documents that the subpena called for,
but my statement will show, as will the Commission's order, that the
subject matter is essentially threefold : The responses from the 79
reporting companies, worksheets, deposits, and the like, from the date
37
received ; all other writings referring to or relating to the rulemaking
procedure; and those relating to the use and disposition of the data.
The legislative purpose of the subpena, we believe, is clear.
Before this subcommittee is Senate bill 1167, the Industrial Keorga-
nization Act, a bill that would deconcentrate and restructure the pe-
troleum and six other industries. Since 1970 the subcommittee has been
investigating the validity of national gas reserves as reportecl, as well
as the nature and extent of competition and concentration within the
natural gas industry.
These investigations seek to determine what, if any, additional anti-
trust legislation is needed.
Finally, the subcommittee is now investigating the treatment and
handling of the data that is requested. Originally, tlie subcommittee
requested from the chairman of the Power Commission a substantial
amount of this material. Our letters were dated May 7 and May 15,
and oral requests were made by the subcommittee staff.
We were advised that imder the Freedom of Information Act and
the Xatural Gas Act this information could not or should not be made
available to us.
The Conmiission was on notice since ISIarch 7 that the subcommittee
required — sought — the data, and hence, the June 22 order suggesting
inadequate notice, as well as deprivation of rights, taking property
without compensation and so on, appeared to me as not appropriate.
The references, in order 69 of the Commission and the correspond-
ence, to widespread public dissemination by the subcommittee of the
data wo sought are confusing, because the subcommittpe has not made
a determination as to whether the material should be released — made
public — at all.
Now the subcommittee had no doubt of its authority to subpena
relevant and material information from an independent agency. On
this occasion we described it as an arm of the Congress, or at least
something that the Congress itself had created. We did not doubt the
soundness of our requests. That the information which we sought, or
a portion of it, was directed to be destroyed after our request was
made compounds the matter.
From our point of view, we made every effort to accommodate the
Commission as we, together, sought to obtain this information. We
refrained from use of subpena }x>wer until we were convinced there
was a clear likelihood that important information was being withheld
and was indeed in jeopardy of being destroyed — at least some of it.
The Commission's final answer declining to supply the requested in-
formation did not come until June 18.
With respect to the law, as it relates to the subcommittee's propriety
in seeking and obtaining the information, the Commsson's order cites
the Freeclom of Information Act and the Xatural Gas Act as the basis
for its belief that the material ought not be delivered. But the Free-
dom of Information Act, in section 552(B) 7, explicitly states that this
section is not authority to withhold information from Congress. There
is in both the Senate and the House report accompanying that legisla-
tion further clarifying language.
In the Senate report dealing with the Freedom of Information Act,
we find the following: "It is made clear that because this section only
refers to the public's right to know, it cannot therefore be backliand-
38
edly constructed as authorizing the withholding of information from
the Congress, the collecti^•e representative of the people."
Similarl}', the House report states that the act is a law controlling
public access to Government information and has absolutely no ef-
fect on congressional access to information. Members of Congress
have all the rights of access guaranteed to any person, and the Con-
gress has additional rights of access to all Government information
which it deems necessary to carry out its functions.
As to the Natural Gas Act, there is a basis for withholding the in-
formation. Section SB provides that "No member, officer or employee
of the Commission shall divulge any facts or information which may
co'ne to his knowledge during the course of examination of books,
records, data or accounts, except insofar as may be directed by the
Commission or a court."
Rather than section 8B precluding the dissemination of information
by the Commission, I think we have a situation where the Commission
is specifically empowered to aufhoiize disclosure of confidential in-
formation, hence the subcommittee's action, the issuance of the sub-
pena, that is unconditional and the receipt of the documents,
uriconditional. '
Af!:er I'eviewiug the material, tlie subcommittee Avill determine
whether the public interest i-equires the release of any or all of the
documents and in what form, giving due consideration to wliat may
be very valid claims of the companies and the Commission that the
specific detail data should not be released intact to the public at large.
This, I suggest, is the form of the committee's reaction and response
to the order and correspondence of the Commission, and all of it will
be made a part of the record at this point.
[The documents referred to may be found in the appendixes (see
contents, pts 1 and •2). Th.e following correspondence was received for
the record.. Testimony resumes on p. 41.]
U.S. Senate, Si bcommittee on Antitrust and Monopoly,
June 11. 1073.
Hon. .7(!iiN N. Nassikas,
CJiairDi'in.
Federal Power Commission.
Washinr/ton, B.C.
Dear Mr. CiiAiRifAx : The Sunday edition of tlie "Washington Post reported
thp attenipted destruction apparently by liigh ranking Commission personnel of
company-hy-conipany data provided by 70 large natural gas prodncer.s respecting
total uncommitted natural gas reserves available for sale in mid-1972.
Yon will recall that on ]March 7, 1973, you were requested to provide a sub-
stantial amount of such data to the Subcommittee in connection with its investi-
gation of the natiu'e and extent of competition and concentriition of control of
natural gas reserves within the natural gas producing industry. Tl-af le*'ter nlso
retiuestt'd you to make such material available to the Federal Trade Commission
in connection with its investigation of the accuracy and reliability of aggregated
natvr:!l gas reserves as reported by the American Gas Association.
Mr. Thomas .Toyce of your staff responded, declining to jirovide the requested
information and citing for support the Freedom of Inffsrmation Act and the con-
Jidentiality section of the Natural Gas Act. You were then reciuested by the Sub-
con)mittee to appear with such material at hearings scheduled for June 6 and 7,
later postponed to June 26.
If the newspaper report is correct, the attempted destruction of sucli material
alone raises serioiis questions respecting propriety, motivation, as well as efficacy
of FPC regulation. The on-again-off-again nature of the attempted destruction
which aiTparently prevented use of such data by the Commission's Office of Eco-
nomics in testimony opposing a 73 percent increase in natural gas prices at the
wellhead (which the Conunission approved last week), raises even more serious
questions. The report of the attempted incineration in light of two requests out-
39
staiuliug by this Subcommittee for the material dictates the need for a full ex-
ploration and explanation of all events relating to the use and disposition of this
data and a full public accounting by all responsible.
Therefore, I have instructed the staff of the Subcommittee to commence an
immediate investigation, to interview privately all FPC personnel and members.
and to examine all documents and tiles necessary or appropriate to ascertain all
facts bearing on this question.
Your cooperation and your full assistance to the staff will be greatly appre-
ciated.
Sincerely,
Philip A. Hart, Chairman.
Federal Power Commissiox,
Washinyton, D.V., June IS, 1973.
Hon. Philip A. Hart,
Chairman, Subcommittee on Antitrust and Monopoly, Committee on the Judi-
ciary, U.S. Senate, Washington, B.C.
Dear Mr. Chairman : This will respond to your letter of May IS, 1973, as
supplemented by your May 22, 1973 letter, concerning hearings before the Senate
Antitrust and Monopoly Subcommittee on June 26 and 27, 1973.
The Federal Power Commission members will be present, as you requested, at
10 :U0 a.m. on June 26, 1973.
As part of your May IS, 1973 letter, you requested that the Commission furnish
your Subcommittee ar the June 26 hearing "with detailed iuioimanoii piixiiUt-i^s
gave the Commission which showed the concentration of certain reserves and the
amounts controlled by the major producers." To comply with the request of your
Subcommittee and to serve its legislative purposes, the staff has prepared and
the Commission has determined tbis day to release to your Suhcommittee, par-
tially composited, uncommitted reserve data to identify the concentration ratios
for the top four, eight and twenty producers by production area, without identi-
fying the individual producer. Such data is reproduced in the Table enclosed
herein, entitled. United States Uncommitted Reserves Percent by Areas by Largest
Producers.
We regret that we cannot disclose the detailed information submitted by in-
dividual producers pursuant to our order issued September 12, 1972, updating
the nationwide investigation of proved natural gas reserves available for sale
in Docket No. R-lO.j. The Commission's order of September 12, 1972. stated that:
••2. For the purposes of this investigation no responses submitted in com-
pliance herewith shall be made available for inspection or copying by the pulilic ;
individual company information received as a result of this continued investiga-
tion will be maintained in confidental status in accordance witli the provisions
of Section S(b) of the Natural Gas Act, 1.5 U.S.C. 717g(b). and the Freedom
of Information Act, 5 U.S.C. 552(b) (4) and (9). * * * "
Tlie results of that investigation were released to the public l>y the staff of the
Federal Power Commission on February 22. 1973 ( FPC Press Release No. 19013).
and signed by tlie Chief of the Bureau of Natural Gas. The staff report iden-
rilied the total uncommitted natural gas reserves available for sale by the 79
large producers as of December 31, 1971 and June ,H0. 1072. which data was fnrthi-r»
identified by producing area and segregated by non-associated and associated-
dissolved natiiral gas volumes.
Upon review, the Commission has determined that its September 12, 1972.
o-der assuring confidentiality of this information cannot be abrogated by the
Commission. We l)plieve it is our obligation to assure that the {-onfidentiality of
this data is maintained at this time and consequently shoub.l not be provided
for public release as you have requested. Our conclusion is liast'd upon our view
of the obligations undertaken in the September 12, 1972 ord^r, the authority of
Section S(i)) of the Natural Gas Act and tlie Freedom of Information Act. par-
ticularly Sections .5.")2(b) (4) and 552(b)(9). and finally upon review of the
matter I)y tlie Office of General Counsel.
Section S ( b) of the Natural Gas Act provides :
"The Commission shall at all times have access to and the right to inspect
and examine all accounts, records, and memoranda of natural-gas companies : and
it sliall be the duty of such natural-gas companies to furnish to tlie Commission,
within such reasonable time as the Commission may order, any information
with respect thereto which the Commission may by order require, including
27-.54-— 74 4
40
copies of maps, contracts, reports of engineers, and other data, records, and
papers, and to grant to all agents of the Commission free access to its property
and its accounts, records, and memoranda when requested so to do. No member,
officer, or employee of the Commission shall (livulge any faet or information
ichich may come to his knowledge dnriyig the course of examination of books,
records, data, or accounts, except insofar as he m,ay be directed by the Com-
mission or by a court." [Emphasis supplied.]
The Freedom of Information Act. Title 5 of the United States Code, pro-
vides in Sei'tion 552(b) exceptions to the public disclosure requirements in
terms as follows :
"Tliis section does not apply to matters that are — -
"(4) trade secrets and commercial or iinancial information obtained from a
per.son and privileged or confidential :
* t * * * * *
"(9) geological and geophysical information and data, including maps, con-
cerning wells."
The necessity for maintenance of the confidentiality of this proprietary in-
formation, as provided in our order dated September 12, 1972, assuring con-
fidentiality, is grounded upon several public policy considerations. There would
be an inhibiting effect upon future exploration for natural gas reserves since
speculators and competitors could equally benefit with those companies willing
to make geological and geophysical expenditures. A competitor would particu-
larly benefit from knowledge of another producer's uncommitted reserves for
particular locations, especially in highly competitive areas. Nor is it fair to
sellers of gas to disclose such trade secrets to potential buyers with v,'hom they
may negotiate for the sale of gas. Disclosure of this data at this time on an indi-
vidual company basis would deprive the producers involved of a valuable prop-
erty right without due process and just compen.sation. It would also have an
impact upon our ability to obtain similar information voluntarily from industry
in the future if our orders securing information on a confidential basis are
counteiTnanded by Congressional committee action.
Similar reasons for maintaining confidentiality were also recognized by Con-
gress in enacting the Freedom of Information Act. In reference to the exemption
under Section (b) (4), House Report No. 125, DOth Cong., 1st Sess., at page 10
stated :
'•It would also include information which is given to an agency in confidence,
since a citizen must be able to confide in his government. Moreover, where the
government has obligated itself in good faith not to disclose documents or infor-
mation which it receives, it should be able to honor such obligations."
The House Report also referred to Section (b) (9) and noted the contentions
of witnesses that disclosure of exploratory findings of oil companies would give
speculators an unfair advantage over companies which spent millions of dollars
for exploration. Tlie Senate Report, No. 248, 90th Cong., 1st Sess.. page 2, said :
"The purpose of clause (9) is to protect from disclosure certain information
which is highly valuable to several important industries and which should be
kept confidential when it is contained in Government records."
Sincerely,
John N. Nassikas, Chai?-man.
Enclosure: Table entitled "United States Uncommitted Reserves Percent by
Areas by Largest Producers."
[For the above enclosure, see table 1 to Mr. Nassikas' prepared
statement.]
Subcommittee on Antitrust and IMonopoly,
June 19, 1973.
Hon. John N. Nassikas,
Chairman, Federal Poiver Commission,
Washington, D.G.
Dear Ms. Chairman : This will confirm your appearance at hearings before
the Subcommittee on June 26, 1973. at 10:00 a.m.. Room 1202 New Sennt-e Office
Building. Because of the complexity of the matters under review and the need
for adequate preparation, it is essential that your testimony and accompanying
submissions and responses be received no later than Friday. June 22.
With respect to the Commission's notice of proposed rulemaking to establish
nationwide rates for natural gas produced from wells commenced before Jan-
41
tiary 1. 1973 (Docket Xo. R-47S). it would be most helpful for the Subcommittee
to receive at the time of your appearance, a scheduled sliowing :
a. Using 1972 interstate pipeline sales of approximately 13.4 trillion cubic
feet, state the proportion of such volumes that would be aliected by nationwide
rates under R-478.
h. State the volumes of natural gas now under contract that would be affected
by this rulemaking.
e. State the weighted average price and range of prices of gas now flowing
that would be affected by R— i7S.
d. State the number of contracts and the number of firms that would be af-
fected by R-47S.
Your cooperation will be appreciated.
Sincerely,
Philip A. Hart, Chairman,
Senator Hart. 'Mv. Chairman, irontlemen, Tre welcome you, seem-
incfly on a harsh note, but ^Ye nonetheless welcome you.
;Mr. Chairman, are you prex^ared to comply with the subcommit-
tee's subpena ?
STATEMENT OP HON. JOHN N. NASSIKAS, CHAIBMAN, PEDESAL
POWEPv COMMISSION, ACCOMPANIED BY RUSH MOODY, JR., AL-
BERT B. BROOKE, JR., WILLIAM P. DIENER, WEBSTER P. MAX-
SON, EMMETT J. GAVIN, ROY FAUSSET, THOMAS J. JOYCE. LEO
E. FORGUER, GORDON K. ZARESKI, PAUL J. ROOT, WARREN
MORRISON, AND HASKELL P. WALD
Mr. Nassikas. Yes, Mr. Chairman, in fact, I have brought with me
a letter and a memorandum addressed to you as chairmian of the
subcommittee which I would like to read for the record. I have the
information you requested in your subpena duces tecum with me in
these files, I will turn tliose over to you momentarily. The letter
reads :
Dear Mr. Chairman, pursuant to the provisions of the order of the Federal
Power Commission issued June 22, 1973, Docket Number R-405, authorizing
compliance with a subpena issued by the Subcommittee on Antitrust and Monop-
oly of the Committee on the .Judiciary, June 21, 1973, the following data and
documents are hereby transmitted :
1. Listing of volumes of gas with reported actual volumes of uncommitted
reserves reported by two companies, whicti are identified by name.
2. One complete set of files from company respondents to the September 12,
1972 order in docket Xo. R— 10.5.
3. Oue set of v\-ork papers extracting data from the files.
The covering letter is enclosed in this volume. There are three sep-
arate files and the covering letter is attached to the file, as well as a
memorandum from Mr. "Webster Maxson who is our executive director,
as a matter of administration.
In response to your subpena, I wanted to be certain that all data
'and documents were supplied to the subcommittee so I have issued
appropriate memoranda to all of our chiefs of bureaus to be sure
that there was compliance with the scope of the subpena, I also dis-
cussed the matter with my colleagues to be certain that we supplied
any relevant data in response to the subjicna,
Theie is a second letter that I also would like to read. It is dated
June 26 :
Dear Mr. Chairman, I am transmitting herewith a report of investigation
conducted by the Federal Power Commission's executive director, Webster P,
42
Maxson, of the handling and disposition of classified data collected from pro-
ducers, pursuant to the Commission's Septemher 12. 1972 order in R-4U5, ui)dat-
ing the nationwide investigation of uncommitted gas reserves. This report of
investigation has been made public. It was made pul)lic this morning when it
was comjjleted.
I also transmit for your information a memorandum from Mr.
]Maxson listino^ all public documents relatino; to the staff study of
imcommitted natural <ias reserves conducted pursuant to the Com-
mission's Septer.iher 12. 1972, ordei".
Finally, there is transmitted herewith a further memorandum from
Mr. Maxson listino- all intei'nal correspondence and memoi-anda relat-
ing to this unconimitted I'eserve study \yhich are pri^•ile<2:ed from public
disclosure under the Fr^^cdom of Information Act, but not priveleged,
in my opinion, as to this committee. So that the second list is con-
tained in this file where I place this paper and I tender this informa-
tion to the committee in compliance with the siibpena and also in
response to various letters of the committee relatino- to the most unfor-
tunate and reorettable incident wherein one of our employees, imau-
thorized by the Commission, attempted to have this data destroyed.
Fortunately, Ave have the data and it has all been restored. The proxi-
mate cause of saving these documents from destruction was my action
as chairman of the Commission, responding to your letter of May 18,
1973.
Senator Hart. Thank you, ]\Ii'. Chairman. 'We will receive all of
the docmnents which you have described as responding fully to the
subpena. We will receive the investigative report which, as I recall,
you said Mr. Maxson had prepared. And I am sure that will be of
assistance to us as the staff of the subconunittce continues its
investigation.
Today we are not going to get into the business of 'Svho shot Joh'i""
on the documents at all. But I do feel that it is unfortunate, from the
standpoint of both the Commission and the subcommittee, tliat the
events that I described and which are referred to in your Commission
order had to happen as tliey did.
I am not talking abou.t the document desti'uction. There should
be a means tliat vroidd avoid tlie necessity for -the kind of — and I n.se
tlie vrord advisedly — "liarsh" confrontation betvreeu Congre'^-s and
an independent regulatoiy agency that is reflected in the. setting at
the moment.
I guess that I will conclude by suggesting that this ought not be a
precedent for a committee's relations with agencies, or agencies' rela-
tions v:ith Congi'ess.
Mr. X • s^TKAS. Thank you, ]Mr. ( 'haii'maii.
I would like to state one or two other matters here, not reading from
my ru'ej^ared statement, that I think are relevant to vour discussion.
]Much of the infoi-mation that has now been sup]:»lied to the co^v.m't-
tee in res])onse to the subpena, was j^reviously supplied bv the Com-
mission's staff as the result of private interrogations of the staff' by
the staff' of your subcommittee, which was authorized by myself as
chairman with the consent of mv colleairues, so that the committee-
43
■could determine as best it can, in its own judgment, as to the events
wliirh trans])ired.
I tliink that ^Mr. Maxson's investifi'ativc report ^Yill be of material
assistance to the subcommittee.
Next, I would like to state that I don't consider this, ^SIi'. Chairman,
as a harsh confrontation. The only reason that I could not respond
to tlic request of your subcommittee, without a subpena, was that I
believed that turning: over documents voluntarily on committee re-
quest Avould \'iolate Commission orders v»']iich would then, of course,
subject me a? cJiairman to violation of statutes enacted by the Congress
of the United States.
However, when a subpena was issued, u])on examining the law, it
vras determined, as our order of June 22, 1973 reads, that the subpena
of the subcommittee should Ije honored and I appreciated particularly
the attitude of niv colleagues in securing a revised order wliich would
make it possible for us to accommodate the committee's purposes.
The final point I would like to make is that I have every faitli and
confidence that your subcommittee will honor and respect the public
iiiterest, as you see it, just as the Federal Power Commission has
honored the ])ublic interest, as we see it, under the regulatory statutes,
as determined by the courts.
I liave one final letter to give you in response to your letter to us.
On June 19. in response to your letter of June 19 concerning the
Commission's pending rulemaking in docket R-478, nationwide rule-
making to establish just and reasonable rates for natural gas produced
from wells commenced before January 1, 1973 — that is old or flowing-
gas — I have attached a stalf memorandum in answer to your inquii-y.
I have it here. If you wish it, I will present it to a member of your
staff at this time.
Senator Hart. We do.
!Mr. Xassikas. Thank you, ^Slr. Cliairman.
Senator Hart. Let me order that your prepared statement be printed
in full in the record.
As you go along, if there is any summation that you want to make,
or if there are any additions, feel free to make them.
[The prepared statement of Mr. Xassikas folloAvs. Testimony' re-
sumes on p. 72.]
Prepared Statement of .John N. Nassikas, Chairman, Federal Power
Commission
Mr. Chairman, as requested in your letter of May 18, 1973, as supplemented
by your letter of May 22, 107.3, I am pleased to sulmiit my statement on the
nature and extent of competition and concentration in the natural gas industry.
commission response to the natural gas crisis
There is a pervasive and deepening gas supply crisis in the United States.
For the last five successive years, we have produced twice as much gas as we
have found and our resei-ves in the lower 48 states have declined by 54.7 Tcf. ^
■Over the last decade the domestic gas reserve-to-production ratio for the lower
48 has been cut in half to a current ratio of about 10.
^ As reported by the American Gas Association.
44
COMPARISON OF AGA AND FORM 15 DATA (LOWER 48 STATES)
[Volumes in trillions of cubic feet]
AGA
Form 15
AGA
Form 15
AGA
Form 15
274. 5
188.5
18.9
20.2
1 2
N/A
279.4
189.2
18.3
18.9
1.3
ill
284. 5
192.1
17.5
18.5
1.3
1.3
286. 4
195.1
16.4
17.5
1.1
1.3
289. 3
198.1
15.7
16.8
1.1
1.2
282. 1
195.0
14.6
15.5
.6
.8
269. 9
187.6
13.1
14.0
.4
.5
259.6
173.6
11.9
12.3
.5
.0
247.4
161.3
11.3
11.4
.4
.1
End of year reserves Reserve to production ratio Finding to production ratio
1963...
1964..
1965
1966
1967...
1963
1969
1970
1971
1972 234.6 (i) 10.4 (i) .4 C)
1 Not available.
Unless we can more than double the ten-year average finding rate of 17 Tcf
experienced during the 1960's ( sharply reversing the average annual finding rate
for 1968-72 of 10 Tcf) the Commission's Bureau of Natural Gas projects an
unsatisfied level of demand for gas of 3.6 trillion cubic feet in 1975, with a
widening supply shortfall in the period beyond 1975 and anticipated supply
deficiencies of 9.5, 13.7 and 17.1 trillion cubic feet in 19S0, 19S5, and 1990,
respectively, despite the addition of supplemental gas sources to domestic pro-
duction of natural gas in the lower 4S states.^
On May 17, 1973, the Federal Power Commission staff issued the first inde-
pendent government appraisal of proven recoverable U. S. gas reserves as of
the end of 1970. The results of this staff study were 261.6 trillion cubic feet of
proven recoverable reserves (including Alaska and the offshore area), compared
to the 286.7 trillion cubic feet reported by the American Gas Association for the
comparable 1970 year-end period. Thus, our iuventoi-y of proven gas reserves is
even less than was originally estimated.
Since 1956, when drilling for oil and gas in this country reached a peak, the
number of wells drilled annually has trended generally downward while the
average depth per well has been increasing." In 1956, a total of 57,170 wells were
drilled, compared to 26,784 in 1970, a decline of about 53 percent. During this
same period, the average depth of all wells increased almost 25 percent, from
4.0S0 feet to 5.076 feet. Total gas well drilling reached a peak in 1961, when
5.459 were completed. Since 1961, there has been a generally declining trend
in the number of gas wells drilled, reaching a low point in 1970 of 3,225 gas
wells drilled or a decline of about 41 percent. Since 1961. the average depth of
gas well completions increased from 5.345 to 6,149 feet. Oil drilling activity has
remained relatively constant over the last three years and substantially below
levels of ten and fifteen years ago, which trends impact upon the level of gas
reserve additions inasmuch as about one-fourth of our gas reserves have his-
torically been found as a result of the directional search for oil. However, there
are encouraging signs on the horizon, even today. There was an increase of 23
percent in the number of gas wells drilled in the fii'st three quarters of 1972,
compared to the same period in 1971, and a 19 percent increase in exploi-atory
gas-well footage. It has been reported that drilling and production bud.srets for
1973 have increased 7 percent compared to 1972. Total wells drilled are still about
one-half the level of 15 years ago, while net gas production over the same period
has approximately doubled.
Interstate pipelines have curtailed and are curtailing both firm and inter-
ruptible gas service with widespread adverse economic, social and environmental
results. Direct industrial sales declined about 12 percent in 1972. For the April
1972-March 1973 period, fifteen major pipelines have reported deficiencies of
about one trillion cubic feet or about 10 percent of the annual sales of those
pipelines representing almost five percent of total annual domestic gas production.
This represents a sharj) increase from reported deficiencies of 453 billion cubic
feet for the April 1971-March 1972 period.
2 Tlip stuff estimate posits net pipeline imports of l.fi Tcf in lOSO InereasinEr to 1.9 In
1990. I>NG imports of 2 Tcf in 19S0 rlouMinsr to 4 Tcf in 1990, gas from coal at a level of
0..T Tcf in 19R0 increasing to 3.3 Tcf in 1990, and gas from Alaska at .7 Tcf in 1980
anfl ?.3 Tcf in 1990.
^National Gas Supphi and Drmand J971-1990, Sfafl Report No. 2, prepared by the
Commission's Bureau of Natural Gas, p. 134, February 1972.
45
Our staff estimates that we have domestic proven potentially recoverable gas
resources adequate to meet future deniand growing at the rate of about oue
and four-tenths percent (I'lio^) annually for 65 years. A recent Potential
Gass Committee report estimates we have 1146 trillion cubic feet of potential
gas resources as of December 31, 1972. about 230 trillion cubic feet (20 percent)
of which are located in the offshore ai'eas and 366 ti'illion cubic feet (31 percent)
in Alaska.
I have summarized in Appendix A the numerous actions taken by the Federal
Power Commission to reverse this gas supply shortfall and to restore adequate
and reliable gas service to the Nation's gas consumers. However, this Subcom-
mittee should be cognizant of the limitations of the Commission's power to
effectuate a reversal of past trends. For instance, about two-thirds of the annual
domestic natural gas production (which is the amount purchased and produced
by interstate pipelines) is subject to Commission regulation. With respect to
independent natural gas producers, the Commission can neither compel a pro-
ducer to explore and develop nor to dedicate discovered gas reserves to the
jurisdictional market.* A producer needs no certificate of public convenience
and necessity to either begin or cease exploratory and developmental activity.
Traditionally cost-of-service regulation is in many respects inapposite to public
utility regulation of independent producers.
Within our jurisdictional re.sponsibilities, the Commission has initiated numer-
ous innovative measures to obtain additional reserves for jurisdictional con-
sumers. Short-term emergency purchases, ranging from 60 days to three years,
at above area ceiling rates have been authorized under our Order No. 431 ^
procedures resulting in commitments to interstate consumers of about 1.2 trillion
cubic feet." Under our optional certification procedure.' four long-term commit-
ments have been made of about 285 billion cubic feet and about 35 applications
are now pending with gas volumes aggregating over three trillion cubic feet.
As of May 1, 1973, pipelines had advanced almost $1 billion to producers in
return for drilling commitments and gas dedications under an advance payments
program authorizing recoverj' of advances by pipelines to producers for explora-
tion and development.*
In addition, this Commission has taken significant policy initiatives to stimu-
late competition in the exploration and development of natural gas. Under Order
No. 428,' the Commission exempted over 4000 small producers from area price
ceilings, as an incentive to stimulate greater exploration and development, recog-
nizing the relative higher degree of risk associated with their activities, the
capital needs and accessibility of this group and comparatively greater regula-
tory burdens.^" The Commission adopted a policy of placing pipelines on a parity
with producers, as to sales by pipeline-producing afiiliates, so as to increase
competition and provide incentives for new entrants into the production seg-
ment of the industry."^ In recognition of the particular structure of the purchas-
ing segment of the gas industry in certain areas of the country, this Commission
has prescribed minimum area rates, irrespective of the existing contract levels,"^
so that exploration and development by producers would not be retarded. By our
Order No. 453, we are collecting price and quality data of fossil fuels pur-
chased by the electric utility industry, which data is disclosed to the public and
concerned federal agencies. National Coal Assn. v. F.P.C., D.C. Cir.. No. 72-1919.
While this Commission has acted to foster competition in the gas industry, as
part of its initiatives to alleviate the chronic shortage of deliveral)le and recover-
able gas resources, there are other constraints impacting upon such policies,
including government leasing and tax policies, inadequate capital formation,'
4 See Perminn Ba-iiv Area Rate Cases, 300 U.S. 747, 756-757 (1968)
6 45 FPr 570 (1971).
6 From Tfl71 thronsrh May 197."^, 226 limiterl-term cprt^fic-^ tps wprp is«npd for Tolninps
!? ^/^!^^^''^ ^* prices raneinsr from .'^0-45 epnts ppr Mpf. From 1970 thronsrh M^r 197'>
4-^2 60-rlay emer-pnov purchases were initiated at prices ranging from 35-45 cents per
Met voliimps ot .3'-.T.4 Bcf. '
"^ Apppal docketed John FJ. Moss, et ah v. F.P.C., No 72-1837 D C Cir
sorder No. 410. 44 FPC 1142 (1970). affirmpd P.S:.C. of V.Y.'v F P n 467 F '>d 361
IP"^: P^\ '^^\V\ Ahont .«600 million in advance p.-iyments wpre m.nde' in the lower
o^/i' •^^j!,".'^'^^^''' ^'^""t ^^ trillion cubic feet of reserves mav he attributed
»4fi FPC 4.o4 (1971), reversed Texaco, Inc. v. F.P.C., 474 F.2d 416 (DC Cir 197'>)
petition for certiorari pending. ^ ^•^>-)>
1" E.C-. PermJrjM, s?(/im. 390 U.S at 787
U.R 795'Tr97'^)'^'^ 0/ Chicago v. F.P.c', 458 F.2d 731 (D.C. Cir. 1971). cert, denied 405
—o ^^iS^'""T J^"*,'^^ ^"^^ '"'''" established for the Hugoton-Annrkarko area, 44 FPC at
.<S, affirmed C^hfornia v. F.P.C. 466 F.2d 974 (9th Cir. 1972). the Rockv Mountain
area; Opinion ^lo. 658, April 11, 1973, and the Permian Basin area; Permian surpa.
46
the requisite investment in exploration and development, environmental air,
water and land use standards and regulations, and Economic Stabilization pro-
grams. Government leasing practices are particularly important inasmuch as
about one-half our potential gas and oil resources are located on federal onshore
and offshore lands. The present high bonus bidding plus a fixed royalty erects
comparatively high entry barriers for small producers to obtain leases. I have
advocated on numerous occasions that prompt consideration should be given to
change the present practices to a relatively modest bonus plus royalty bidding
for leasing of government lands. This would increase competition in the leasing
of government lands and ca])ital would be utilized for exploration and develop-
ment, rather than for bonus bidding.
HISTORICAL SUjrMATIOX OF .JUniCIAI, FlXOIXfiS COXCERXIXG PRODUCER REGULATION
AXD IXDLTSTRY COMPETITIOX
Tn the oriccinal proceeding which resulted in FPC regulation of independent
producers, Phillipf: Petroleum Co.. 10 FPC 246 (19.")!)," the Commission princi-
pally addressed the issue of FPC .iurisdiction over independent producers in
light of the language of the Natural Gas Act and related court decisions. In
denying- that it had jurisdiction over independent producers, the Commission
treated the issue of competition only in passing :
"A contention is also advanced that !i failure to find Iurisdiction leaves Phillips
free to charge unreasonable rates, the liurden of wJiich will fall on ultimate
consumers. Since we have failed to find jurisdiction, roe have of course not iv-
qiiired into the renmna'bJene-ts of Phillips' rates. But if it be assumed they are
or will lieeome unreasonable, we can only say to those who would have us find
jurisdiction, what has often been said by the courts, tliat we think the remedy
lies with Congress." f Emjihasis supplied) "
The Court of Appeals for the District of Columbia reversed the decision of the
Commission. ^^ not on an evaluation of competition amcnig natural gas producers
but upon tlH^ construction to be given to the Natural Gas Act :
'•P.ut tlie validity or invalidity of the Commission's conclusion that Phillips
is not a 'natural gas company" does not turn uijon the evaluation of testimony or
upon any facts peculiar to this case. It turns upon the generic question whether
the exemption of 'production or gathering' in § 1 (b) of the Natural Gas Act covers
interstate sales of gas by the corporation that produced and gathered it.""
The Supreme Court affirmed the Court of Appeals decision," and in so doing
brought independent producers of natural gas luider regulatory control of the
FPC. However, the Supreme Court, like the Court of Appeals, was ruling on a
matter of law, rattier than upon a particular fact situation in which the issue
of workable competition might or might not have been a considei'ation.
"In our view, the statutory language, the pertinent legislative history, and the
past decisions of this Court all support the conclusion of the Court of Appeals
that Phillips is a 'natural gas company' within the meaning of that term as de-
fined in the Natural Gas Act, and that its sales in interstate commerce of natural
gas for resale are subject to the jurisdiction of and regulation by the Federal
Power Commission." "
The Commission first attempted to implement the Phillips decision by treat-
ing producers as individual public utilities and thereby to set limits on the field
prices of an individual producer according to his "costs of service." This ap-
proach soon proved so administratively burdensome liecause of the large number
of i^roducers that resort was had to the determination of area-wide ceiling prices.
Individual producers wnthin each gas production area would not be allowed to
charge a rate higher than the prevailing area ceiling.
In the Permian Basin Area Rate Proceeding" certain producers contended
that contract prices negotiated at arms length should be the standard for deter-
mining area prices. The Commission rejected this argument, stating:
"Tliere are admittedly many producers selling gas to the interstate pipelines
both in the nation as a w^iole and the Permian Basin in particular, but nothing
in this record suggests that any competition among them in making sales to
^ Perer-serf .sm?). nam. Wisconsin v. FPC. 205 F.2d TOR (D.C. Cir. 195.3) affirmed sub.
nom. Phillins Petroleum Co. v. Wiscon.^in, 347 U.S. f.72 (1954).
14 TO rpr at 2S0.
M Wisconsin v. FPC. 205 F.2fl TOO (D.C. Clr. 195.3).
^"/rf. nt 711.
1" Phillips Peti-oleiim Co. v. Wisconsin, .347 U.S. 672 (1954).
''^ Tfl. nt 077.
'".34 FPC 159 (1965). nff'd in part and rer'd in part siih. nom. Skelhf Oil Co. v. FPC,
■375 F.2fl 6 (10th Cir. 1967), reversed, In re Permian Basin Area Rate Cases, 390 U.S.
747 (1968).
47
the pipelines is in any way adequate to assure that the public will secure gas
at just and reasonable prices in the absence of regulation." -°
The Commission was particularly concerned with the amount of uncommitted
reserves controlled by the large producers insofar as it related to effective com-
petition in the Permian Basin. The pattern of sales and annual deliveries in the
area suggested to the Commission that a small number of producers controlled
a large percentage of reserves, especially as no evidence to the contrary had
been introduced by the producers themselves."^ The Commission thus concluded :
"If there is a case to be made for effective competition among producers in
establishing just and reasonable rates it has not been made on this record. There
is no evidence of comi)etition between producers to make new sales by offering
lower prices. On the contrary the primary competition revealed by the record
was among the pipelines to secure new gas supplies at higher prices. Whatever
the degree of competition which may exist among producers it has not been
effective to afford gas consumers the protection to which they are entitled under
the Natural Gas Act." ''^
In afiirming the Commission's opinion the Supreme Court stated that "[TJhe
record before the Commission, however, supports its conclusion that competition
cannot be expected to reduce field prices in the Permian Basin to the 'lowest pos-
sible reasonable rate consistent with the maintenance of adequate service in the
public interest.' Atlantic Rfg. Co. v. PuhUo Service ComnVn., 360 U.S. 378, SaS." ^'
However, the Court was careful to avoid any pronouncement that the lack of
competitiveness evidenced in the Permian record was characteristic of the entire
industry. At page TiJo of its decision, the Court said :
"We do not now hold, and the Commission has not suggested, that field prices
are without relevance to the commission's calculation of just and reasonable
rates under § 5(a). The records in subsequent area proceedings may more clearly
establish that the market mechanism will adequately protect consumer interests.
We hold only that, on this record, the Commission was not compelled to adopt
field prices as the basis of its computations of area rates."
In its opinion in the initial Southern Louisiana Area Rate Proceedings.'* the
Commission again rejected a contention similar to that advanced in Permian,.
to wit, that an effectively competitive interstate market for natural gas existed
in the Southern Louisiana production area and that the Commission's statutory
responsibility for establishing just and reasonable rates could be discharged b.r
a validation of the negotiated contract prices. The Commission found the history
of i)rice negotiations, the relative bargaining power of pipeline purcliasers, and
control of uncommitteed reserves in Southern Louisiana to be indicative of
"serious market imperfections which preclude us from relying upon the free op-
eration of the market, as evidenced by arms-length bargaining, to protect the
ultimate consumer from unreasonable purchased gas rates." '^'
The Commission nmde clear that its conclusion of inadequate competition was
assessed "as the facts of that competition in Southern Louisiana are shown in
the record." ^^ Xo intimation was made that structural noncompetitiveness was
characteristic of the producer industry in general.
Indeed, the Fifth Circuit Court of Appeals, in affirming the Commission's de-
cision in the Southern Louisiana rate cases,"' observed :
"At the same time, there seems to be general agreement that the market is
at least structurallv competitive. The Supreme Court in Permian described pro-
ducers as 'intensively competitive'. 390 U.S. at 757, 88 Ct. at 1354." -^
Commission decisions and applicable coiu-t opinions have not determined that
the market structure of the natural gas producing industry is not workal>1y com-
petitive. Nor do prior judicial decisions rebut or undermine the presumption that
the structure of the natural gas producing industry as a whole is workably com-
petitive : a presumption which is proper Vvithout a preponderance of evidence to
-■ii;^4 ppc at ISl.
-^ I woiikl note, parenthetically, that the Commission in Permian shifted the bnrclen
of provins the existence of workable competition to the producers. This was appropriate
in the context of an adjudicatory proceeding, since producers had arjrued that field prices
should be tlie measure of an area ceiling and thus the burden of persuasion shifted to
them to support their contention.
=-.■^4 FPC at 1S.3.
23 Permian Basin Area Rate Cases, .390 U.S. 747, 792 (1968).
24 40 FPC 530 (19fiS). affirmed on review, SLA Rate Class (Austral Oil Co. v. FPC), 428
F.2d 407 (."(th Cir. 1970), on rehearing, 444 r.2d 125 (1970), cert, denied snl). nom., 400
U.S. 950 (1970).
25 40 FPC at 554.
^■4(\ FPC at 552.
"'Southern Louisiana Area Rate Cases (Austral Oil Co. v. F.P.C.) 428 F.2d 407 (oth-
Cir. 1971).
2S7d. at 416 n. 10.
48
tlio contrary. The decision to bring independent producers within the regulatory
ambit of the Federal Power Commission was based on a construction of statutory
language in the Natural Gas Act,'" and not upon an evidentiary showing of anti-
competitive behavior or structural market inperfections within the producer seg-
ment of the industry.
COMPETITION IN THE NATURAL GAS PRODUCING INDUSTRY — ECONOMIC CONSIDERATIONS
A3 the foregoing section has demonstrated, there is no basis in the laio from
whicli one can determine that the absence of workable competition among gas
producers forms a predicate for continued wellhead price regulation under the
Natural Gas Act. Thus, I would like to outline some economic considerations
from which one can reach certain conclusions, albeit not definitive, respecting
competition in the natural gas producing industry.
Perfect competition is an economist's term, the definition of which is irrelevant
to pragniatic economic life. Workable competition, on the other hand, normally
envisions a situation where no one seller or group of sellers acting in concert has
the power to choose its (their) level of profits, either by giving less or charging
more. Under these circumstances, market conditions penalise poor service and
high costs. Prices are determined by supply and demand and not by a seller's
own price or individiial output.
In looking at the "seller rivalry" in any particular market, one must normally
consider that tlie "market" would encompass all firms whose products are in fact
directly available svibstitutes and including, in other industries, alternatives for
the same end use. By the year 2000. the electric utility industry is expected to be
consuming about one-half our primary energy sources." [C]oal, oil, natural gas,
and uranium are sufficiently substitutable in their use by electric utilities to
support the conclusion that they trade in the same economic market." ^° "The
increased substitutability causes an increase in the size of the market, and thereby
tends to reduce concentration levels, erode existing market power, and promote
competition." ^ In my opinion, there is credible evidence that the decisions of
sellers in the natural gas producing industry, in terms of price and output, cannot
be made in isolation fi'orn fuel prices and output in the larger energy market.
While many of these same natural gas sellers likewise participate in other energy
sectors, in quantitative terms, their market power is probably diminished.
The considerations which I outline iiifra are largely limited to natural gas
production. To this extent there are severe limitations in the conclusions which
can be drawn therefrom. However, I view the evidence of increasing fuel sub-
stitution as a positive influence upon workable competition in the gas produc-
tion industry both now and for the longer term.
There are numerous factors which may be considered in analyzing workable
compptition including (1) the number of effective competitive se'lers, (2) ease
of entry, (P>) independence of rivals. (4) industry's rate of growth, (5) excess
capacity, (6) existence of predatory pricing, (7) product differentiation, (8)
meeting rival's prices, and (9) price discrimination.^" Certain of these factors may
be more important than others and certain ones ai'e not particularly germane
to the gas production industry.
With respect to price discrimination (O), meeting rival's prices (8), and
predatory pricing (6), the Commission regulates the wellhead price for about
two-thirds of the annual domestic output, thereby replacing normal market-
determined pricing conditions. Under traditional producer area rate decisions,
maximum ceiling prices T minimum prices in certain producing areas, svpra.)
are established, representing the maximum rate a seller ma.v receive if he is con-
tractually authorized. Since such a ceiling price represents a composite of
average costs, those producers with higher-than- average costs, including
the less efficient firms, as well as those who are forced to drill deeper or
otherwise divert their efforts toward the higher cost-higher-risk leaseholds,
would have a disincentive to explore and develop marginal reserves. Those
producers who are unable to command a rtrice higher than the maxinnun area
ceiling will most likely direct their efforts toward those reserves having
marginal costs less than such prices. There may be uniformity, in at least the
prices of new contract gas volumes, in particular producing areas, but this is in
-^ PhilV;}/! Pefrnlenm. Co. v. Wi/ironRrn, i^-^7 TT.S. d^?, (1^54).
'"'•Intorfiipl Substitntnhility in the Electric Utility Sector of the U.S. Economy",
Economic Rpnort to the Federal Trade Commission, February '1972 at U.S.
31 M. at 119.
32 See Renort of Attirnev Oene'-nrs An+ifrnst rnm!i-""f-toe .S1r;-''-i2 (19.52) and Caves,
American Industry: Structure Conduct, Performance 16-36 (1967).
49
response to governmental price regulation. In other words the marketplace has
not been free to determine the price of gai< with reference to its economic vaine,
marginal costs, or commodity value in relation to substiiutal>le fuels.
In conjunction with these prices considerations, it should be noted that the
industry has not been able to exercise market power so as to exact excessive
profits. While it is speculative to attempt to quantify profit realization of the gas
production functions of an integrated and diversified firm (which the majority
of the large gas producers are), the average rate of profit on stockholder's equity
for petroleum refining and related industries for the 1961-1971 period was
11.4 percent, as compared to an 11 percent rate for all manufacturing indvistries
for the same period.^
The gas industry's rate of growth (4) has likewise not been solely market
determined. Domestic production has remained relatively constant over the last
three years at about 22 trillion cubic feet annually. However, over the longer
term, gas production exhibited al)ove average growth, increasing from 5 trillion
cubic feet annually in 1946, to the current level of 22 trillion cubic feet. Plowever,
the demand, as contrasted with output, for gas has continued to increase. En-
vironmental considerations influence the demand for gas, as well as the ceonomic
accessibility of other fuels. A conservative estimate indicates requirements for
natural gas in 1975 of 28.5 trillion cubic feet ; however, only about 88 percent of
those requirements are expected to be satisfied." In short, while gas demand
continues to increase, the ability to produce sufiicient supplies has decreased,
for a variety of reasons, including price regulation and the decline in domestic
oil exploration and drilling. Because gas is the cleanest burning of all fossile
fuels and therefore meets air quality standards, the greatest increase in require-
ments of natural gas might be expected for power generation by electric utilities
and other large boiler fuel users. However, in order to allocate scarce supplies
to the most efiicient and highest uses, the Commission has sought to discourage
the use of gas for boiler fuel. The success of our end-use policy is largely contin-
gent upon the price and availability of alternate environmentally acceptable fuels.
If we are successful in substantially redneing boiler fuel use, the availability of
gas supplies for more superior uses will be materially augmented.
As for excess capacity (5), there is of course a pervasive shortage of deliver-
able gas resources. There appears to be an absence of excess productive capacity
when compared to current demand requirements. However, in absolute terms,
there are large untapped potential gas resources (see supra.), the accessibility to
which is constrained by numerous factors, including economic and environmental
considerations. Additionally, there are numerous factors which affect the rate at
which reserves are withdrav>-n. including economic constraints on available trans-
portation facilities and applicable conservation regulations. To the extent pro-
duction continues to lag, interstate pipelines may have excess capacity, which
can result in higher unit pipeline costs which will be passed on to consumers as
facilities in service are not fully utilized.
Product differentiation (7) is largely absent inasmuch as gas in a homogeneous
commodity, with only minor differences in quality. The homogeneity of the prod-
uct tends to widen the prospective market.
In sum, the six factors discussed above are either not particularly germane or
exhibit a po-<iitive influence on maintaining and increasing workable competition
in the gas production segment.
Each natural gas producer tends to follow his own personal advantage and
there exists an independence of rivals (3). The extensive capital requirements
for exploration and development have resulted in producers combining together
whether it be for point bidding for offshore leases or unitization for development
of a particular gas field or resevoir. Such concert in action results not from
aticompetitive pursuits, biit from risk-sharing and the substantial bonus bids
required under present leasing practices, regulations concerning compulsory unit-
ization and state conservation regiilations.
Barriers to entry in the exploration and development for natural gas are
relatively low in comparison with other industries (2). Capital requirements
are modest for onshore activities. Current leasing practices may be erecting
entry barriers, as bonus bidding increases, particularly to the small, nonintegrated
producer. Past pricing decisions of the Commission may have deterred the entry
of new firms not engaged in ens exploration and development and retarded the
expansion of existing firm.s. ^Yhile there is a high degree of risk, there are certain
^ Qvnricrhi Financinl Report for Manufacturing Corporation, Securities and Exchange
Comri'ssion-'P^pdoral Trarte Coniniission.
^Future Gas Requirements of the U.S., Vol. 4, October 1971 at 11.
50
offsets from existing tax laws. Finally, the emergence of non-conventional gas:
supplies, largely through backward integration by gas distributors and pipelines,
exerts a positive influence and constrains the market influence of gas producers.
For instance, with very short lead times and modest capital requirements, a
firm may construct an operational synthetic natural gas plant. Imports, whether
pipeline or liquefied natural gas, likewise influence pricing decisions of domestic
gas producers. Coal gasification also has an impact ; however, the capital recpiired
restricts the entry to at least the medium-sized firm.
The number of effective competitive sellers (1) is normally viewed as the
single most important variable in gauging the existence or absence of workable
competition. There is no doubt as to its importance, but any such analysis must
not disregard the individual and cumulative impact of other factors, some of
which I have outlined supra.
There are about 4500 independent natural gas producers in the United States.
Indications are that in absolute terms, this probably represents a decrease com-
pared to ten or twenty years ago. However, the decline could represent the dis-
appearance of the less efficient or consolidation and merger among the smaller
producers so as to obtain access to capital markets. The size and strength of the
individual sellers of natural gas varies, as is the case in virtually all industries.
In order to quantify the relative size and strength, "concentration ratios" are
normally used. I have attached tables which illustrate concentration ratios for
annual sales (Table 2), nesv contract volumes (Tables 3a and 3b), uncommitted-
reserves (Table 1), and pipeline reserves (Table 4) and production (Table 2).
Any judgments to be drawn from such exhibits are conditioned to the assumptions
underlying the calculations. Inasmuch as the relevant product market has many
attributes of fuel substitutability, concentration ratios for natural gas by itself
may be meaningless. The pipeline transportation grid is national, so that regional
markets may be irrelevant. In short, the smaller the market assumed and the
tighter geographic area which is circumscribed, generally the higher the con-
centration ratios. There is, thus, a great deal of "artificiality"' in constructing
such a quantitative presentation and any given economist or group of economists
could spend generations arguing over the appropriate conclusions which decision-
makers should draw therefrom. I know that your Subcommittee will remain
cognizant of these caveats.
In assessing concentration ratios, one source gives some indices for fur-
ther assessment.^ Generally, this theory postulates that the top eight firms
should control about 50 percent of the market before further inquiry is needed
to determine the existence of a structural oligopoly.
Table 2 shows the percent of sales by large producers (over million Mcf
annually) to interstate pipelines for 1971. Information on intrastate producer
sales, representing about one-third of annual domestic production, is unavailable
The top 4 producers accounted for about 25 percent of jurisdictional sales to
interstate pipelines in 1971 ; the top 8 producers, about 43 percent. Ten pro-
ducers made about one-half of the 1971 sales to interstate pipelines and 300
producers accounted for about 95 percent. On the buying side, the top 4 pipelines
accounted for about 3o percent of the purchases and the top 8 pipelines, a!)out
58 percent (Table 2). Within separate producing areas, to the extent they are
geographically relevant, concentration ratios would be somewhat higher. For
instance, in South Louisiana in 19GS, the top 4 producers account for about
35 percent of the sales to interstate pipelines ; the top 8 producers, slightly
over 50 percent. ^^ On the purchasing side, in South Louisiana, the top 4 lupe-
lines purchased about 60 percent of the production ; the top 8 pipelines about 90
percent. On a national basis, there appears to be an absence of structural
imperfections, which in my opinion would indicate that workable competition
does exist, at least among sellers, using concentration ratios of annual pro-
duction. Table 5 illustrates the numerous manufacturing industries with higher
concentration ratios than exist in gas production and such industries are not
subject to direct government price regulation.
Some economists on the Commission's staff have performed analyses of con-
centration ratios based upon new contract volumes, contending this is the relevant
market since it represents the volumes available for sale in any given year.'^
A comparable thesis supports an analysis based upon uncommitted reserves.^
^ Kaysen and Turner, Antitritst Policy (1959).
=" Join,t Economic Committee Hearings, infra, at 125-126.
s" E.g. Joint Economic Committee Hearings, June 8, 1972, Committee Print at 124
and 14S.
ss/d. at 149.
51
However, both these studies have major shortcomings. For instance, as of
June 30, 1972, tlie Commission's staff reported uncommitted reserves available
for sale in the lower 48 states of 3.4 trillion cubic feet.^° Concentration ratios
for the top 4 and top 8 of that 3.4 trillion cubic feet were 48 percent and 68
percent, respectively, on a national basis, and ranged as high as 100 percent
for less than 4 producers in certain specific pricing areas (Table 1). However,
these figures are erratic, representing circumstances as of a single point in
time. Gas exploration and marketing are continuing activities which cannot
be meaningfully analyzed as of a single point in time. Such figures should and
do vary dramatically (e.g.. Tables 6a, b and c), depending upon the selection of
the time for measurement. They are. however, misleading for purj'oses of
analyzing workable competition. On the other hand, if uncommitted reserves
were averaged over a reasonable timeframe, e.g.. three to five years, one would
anticipate concentration ratios which would parallel those for new contract
volumes (Table 3b), which latter ratios are comparable to those for annual
production (Table 2).
T'neommitted reserves represent only a small fraction of total domestic proved
reserves for the lower 48 States, about one and one-half percent. Tlie aggregate
volumes of uncommitted reserves has declined from 4.6 trillion cubic feet as of
December 31, 1969, to 3.8 trillion cubic feet as of December 31, 1971, to 3.4 trillion
culiic feet as of June 30. 1972. The more of these reserves which are contracted
for and dedicated to pipelines, the more the base of uncommitted reseiwes de-
creases with a con.sequential increa.se in the concentration ratios at any point
in time. For instance. Table 1 indicates that fewer than 4 producers accounted for
all tlie uncommitted reserves of about 3.5 billion cubic feet in the Michigan area
as of December 31, 1971. but that as of June 30, 1972, there were no uncommitted
reserves reported for Michigan. It is inconceivable to conclude therefrom that
on December 31, 1971. a seller's monopoly existed in Michigan, when during the
subsequent six months the sale of those reserves was contracted for. Thus, con-
centration ratios of uncommitted reserves are inextricably related to the shortage
deliverable gas reserves, which shortage had been indicated for a decade or
more, and are not a reflection of any market imperfections.
The actual volumes available for .sale may also differ from "uncommitted re-
serves." For instance, in South Louisiana, 2.6 trillion cubic feet was determined
by our statT to be the level of uncommitted reserves as of the end of 1969 : how-
ever, only 1.1 trillion cubic feet was available for sale, after consideration of
voimnes under warranty contracts, for fuel and feedstock and for direct sales.^°
More importantly, utilization of new contract volumes or uncommitted reserves
■does not reflect the volumes actuall.v available for that purpose. There are gas
reserves available for sale, whether through new contracts or renegotiation, from
the expiration of existing flowing gas contracts. A staff estimate is flat gas re-
serves remaining after 1972 from contracts expiring that year approximated 2.5
trillion cubic feet nationally." Thus, adding gas reserves released from contract to
other uncommitted reserves, the gas volumes available for sale as of June 30, 1972,
would be closer to 6 trillion cubic feet, rather than 3.4 trillion cubic feet. While
not mooting any conclusions to be drawn from concentration ratios of the un-
coraniitted reserve volumes, a more credible appraisal of concentration ratios in
relation to market structure should include the volumes of reserves available
upon expiration of flowing gas contracts.
T:ible 3b shows the concentration ratios for new contract volumes in South
Louisiana for the period 1967-1969, indicating the top 4 with 29 percent and the
top 8 with 45 percent. Table 1 shows that the top 4 firms accounted for about
50 percent of the uncommitted reserves in the offshore South Louisiana area as
of June 30, 1972, and the top 8, al)Out 75 percent. On a national basis, the top 4
firms accounted for 50 percent of the June 30, 1972 unconmiitted gas reserves
and the top 8 about two-thirds. A fair conclusion which can be drawn from these
tables, recognizing their limitations as mentioned supra., is that nationally, there
are no structural iuii>erfections as measured b.v either new contract volumes or
uncommitted reserves. As indicated in Tables 6a. b and c. and referring to the
South Louisiana area (Table 6a), a staff turnover analysis indicates that there
"'■' FPr Press Rpfpapo Ni>. 19013, Fi'bninrv 22. 197.3.
*"4(^ FPC .''t 038 (lOTlV
<- .\ssiiiiipt1ons iis(>d ill niakhijr sncli .tii pstlniato are as follows: (1) 1052 contracts
hnvc a 20 year term, thus expiring in 1972. (2) 1071 sales volumes under tiiose 10.32
coutrn^t; eiiiial 2.S4 percent of total recovernhle tras reserves, using the production
curve in tlie Permian proceeding. Docket No. .\R61-1. and (3) gas reserves remaining after
1972 from tlii>se ]9."2 contracts equals 1.5.12 jiercent of total recoverable gas reserves,
Tuslng the same production curve.
52
were no producers who were among the top 8 sellers in all six years, 1964-1969.
Such a high turnover rate also is found in the new contract volumes in otlier
producing areas (Tables 6b and c). These turnover statistics are further evi-
dence of the inability of a few producers to control the new contract volumes of
gas offered for sale and hence the absence of market power. There may be, and
certain data so indicates, that relatively high concentration ratios of either
new contract volumes or uncommitted reserves do exist in certain individual pro-
ducing areas; however, I cannot conclude therefrom that the overall natural gas
producing industry is structurally anticompetitive.
Table 4 shows the reserves dedicated to interstate pipelines which represent
about two-thirds of the total U.S. proved natural gas re.serves as reported by the
American Gas Association. In 1970 and 1971, the top 4 accounted for between 41
and 43 percent of those dedicated reserves ; tlie top S interstate pipelines be-
tween 63 and 65 percent. One must recognize tliat even if there are structural im-
perfections on the producing side of the market, there may be some offset via the
concentration ratios on tlie purchasing side, even in times of a supply shortage.
CONCLUSION
From my analysis, I would conclude that there is credible evidence to support
the thesis that workable competition exists in the natural gas producing industry.
Those who would advocate continued regulation have not sustained the burden
of presenting evidence, that on a national basis, the industry is not workably
competitive. I further find no evidence of anticompetitive conduct by producers
vis-a-vis the structure of the industry. I recognize there is some evidence of
structural imperfections in the industry, but not to the extent that deregulation
of new gas prices, wih appropriate monitoring and safeguards against anticom-
petitive conduct in any market area, shoiild not be tried on an experimental
basis, through legislation by the Congress, in order to establish prices through the
operation of the haws of sujiply and demand in an intercompetitive fuels market.*^
Past Commission producer pricing practices have, in my opinion, been anti-
thetical to the overall public interest. Excessive volumes of gas have been
diverted from jurisdictional consumers to intrastate markets, including the com-
bustion of large volumes to generate electricity, wlien alternate fuels could
have been utilized. More and more ri.«k capital is being committeed to non-
conventional gas sources as prices to the consumer double or triple the price
levels from traditional domestic sources of piiieline gas. Low gas prices have
significantly contributed to artificial demands for this premium fuel, and as
supplies have declined, demand and upward price pressures have shifted to other
fuels. Drilling activity in our continental resource base, both for oil and gas,
has declined, with balance of payments and national security considerations
becoming more important as increasing quantities of oil are imported to meet
consumer needs. I submit that the "costs"' to the Nation s energy consumers
from continued regulation may be far greater than would result from a market-
clearing price for natural gas determined by the impersonal forces of the market-
place aitpropriately monitored by antitrust enforcement by the Justice Depart-
ment and the Federal Trade Commission.
The attainment of the Nation's economic, social and environmental objectives
will not be met by adhering to past energy iiolicies, including unrealistic pric-
ing of wellhead prices of natural gas. Congress should expeditiously consider
legislation which would return to the markeidace the responsibility for setting
wellhead i)rices of new g;is. However, until Congress has amended the Natural
Gas Act. we will continue to regulate within the constraints imposed by the Con-
gress and the judiciary.
APPENDIX A
Actions by the FPC to Increase Exploration and Development and the Dedi-
cation OF New Gas Supplies to the Intjeirstate Market and to Alleviate
Short-Term Gas Shortage Emergencies
On October 3, 1960. in Opinion No. ."67. the Commission revised its area rate
policy to encourage the search for gas in reservoirs which underlie acreage
"- S*'^ TptH'-viPw of Assistant Attorney General Thomas E. Kaupcr, reported at
BNA-ATRR, May S, 1973, No. 612 at AA-4.
53
already committed to the interstate market. Potential gas bearing sedimentary
rocks up to 40,000 feet in thickness occur in the deepest basins. A large portitm
of the sediments below 5,000 feet remain untested. The new policy provides that
under the two-price system, with higher rates for new gas-well-gas to encourage
exploration, production from newly discovered reservoirs on previously dedi-
cated acreage would be allowed the price it would have if the contract had
been dated concident with discovery.
II
On October 7, 1969, in Opinion 568, 42 FPC 738. affirmed sub von. Citu of
Chicago v. F.P.C., 458 F. 2d 731 (D.C. Cir. 1971), cert, denied 405 U. S. 1074
(19i2), the Commission applied the area rate principle to pipeline company pro-
ducers of natural gas. This policy placed pipeline producers on a parity with
independent producers by pricing, in future pipeline rate proceedings, gas
produced by pipelines or by their affiliates from leases acquired after Octoljer 7,
19G9. at the just and reasonable rate applicable to gas of a vintage corresponding
to the date of completion of the first well on the lease. Natural gas reserves
owned by jurisdictional pipelines have declined in recent years when Commis-
sion policy was to price their gas on an individual company cost-of-service basis.
Ill
The Commission has moved to clarify the status of research and development
expenses in an effort to stimulate technological developments in the natural gas
industry. The Commission issued on August 26. 1970, in Docket No. R-3S1. new
regulations which revise and clarify the Commission's accounting treatment of
research and development expenditures. These changes allow the regulated com-
panies to recover legitimate research costs. This rulemaking resulted from the
analysis of responses to the Commission's Order No. 322 which required annual
reporting of research and development expenditures. These responses showed
minimal research and development activity in the natural gas industry at a time
when major supply problems and environmental concerns affect the industry.
The Commission has taken action to provide utility companies with a more
informed basis for planning ways to meet their ever increasing operating and
financial needs by reducing regulatory uncertainty and providing consistency
between accounting and rulemaking wherever possible and by clarifying the
existing policies in these areas. For example, Commission Order No. 420 issued
January 7, 1971 (36 F.R. 507) prescribes accounting treatment of land held for
future use.
To encourage the greatest possible participation in research and development
by electric and gas utilities, the Commission on December 13, 1972, asked for
comments on revisions to its regulations. On April 30, 1973, the Conunission issued
Order No. 483 (Docket No. R— 162) amending its regulations to allow gas pipeline
companies to apply for advance FPC approval to include R&D expenses of
^."O.OOO or more in a project as a rate base item. Companies may also apply for
authority to track R&D expenditures which exceed amounts included in their
rate base. The FPC also amended its accounting system to provide for costs
associated with R&D plants operated in an experimental status. Rate treatment
may be accorded for a company undertaking or its contribution to a joint
project. ITnder the Order, the definition of R&D is broadened to coincide with
todays need for increased energy supplies.
IV
The Commission set just and reasonable rates for production from Southern
Louisiana, our most prolific gas producing area, by Opinions Nos. 546 and 546-A,
issued on September SO, 1968, and March 20, 1969, respectively, in Docket No.
AR61-2, et al. Concurrently with the later opinion, the Commi^'sion initiated in
Docket No. ARfi9-l a limited investigation into future sales of natural gas from
Offshore Southern Louisiana. On December 15, 1969. the Commission enlarged
that proceeding to include all gas regardless of contract date produced both
onshore and offshore in the Southern Louisiana area and called for evidence with
respect to the adequacy of gas supply and adequacy of service to consumers, the
demand for ga.s, and the cause of a gas shortage, if any.
On March 19, 1970, the U.S. Court of Appeals for the Fifth Circuit sustained
the orders of the Commission in Opinion Nos. 545-546-A but explicitly provided
54
that this mandate should not be interpreted to interfere with Commission action
that would change the rates approved. The Court expressed concern over strong
evidence that a supply deticiency is imminent. Snuthern Louisiana Area Rate
Cases V. FPC, 428 F. 2d 407 (5th Cir. 1970), cert, denied. Miiniciijal Distributors
Group et al. v. FPC 400 U.S. 950, 27 L .Ed. 2d 257, 91 S. Ct. 241 (1970). On peti-
tion for rehearing, the Fifth Circuit on June 10, 1970, affirmed its grant of au-
thority to the Conmiission to reopen any part of its orders, including those
affecting revenues from gas already delivered.
In light of theses actions by the Courts, on December 24, 1970, the Commission
reopened the proceedings in Docket Nos. AR61-2, et al. and consolidated them
with the proceedings in Docket No. AR69-1 so that the parties might be given an
opjxirtunity to submit, if they so desired, relevant evidence concerning whether
the rates established in Opinion Nos. 540 and 546-A should be changed in the
light of the Fifth Circuit's decision.
By Opinion Nos. 598 and 59S-A issued July 16, 1972. and September 9, 1971.
the Conuuission set new, higher ceiling rates for the Southern Louisiana area
and provided a system of incentives to promote dedication of gas reserves to
the interstate market. Area Nate Proceedings, {Southern Louisiana Area).
Docket Nos. AR61-2, et al., and AR69-1. The order denying rehearing was issued
on September 9. 1971. and was appealed on the Fifrh Circuit. Placid Oil Co. v.
F.P.C., No. 71-2761. The U.S. Court of Appeals for the Fifth Circuit on April 16.
1973, sustained in full the FPC's Order 598 and 598-A as a decision on the
merits.
V
On January 23, 1970, the Commission gave notice in Docket No. R-380 of a
proposed rulemaking to amend its Regulations to provide for accounting and
rate treatment of advance payments made to suppliers by pipelines for gas to
be delivered at a future date. The receipt of such advance payments by pro-
ducers is intended to encourage acquisition, exploration, and development of
gas producing properties.
Subsequent to receipt of comments, on October 2, 1970, in Order No. 410 the
Commission amended its Uniform System of Accounts to permit unrecovered
advance payments to be included by pipelines in their rate base as part of
working capital. In the Commission's view, it was not at the time in tlie public
interest for pipeline companies to bear the cost of assuring theuLselves and their
customers of a future supply of natural gas.
On .January 8, 1971, in response to applications for rehearing, the Commission
Issued Order No. 410-A and a notice of prop:ised rulemaking in Docket No.
R— 411 to permit further comments on proposed modification, but stressed that
Order No. 410 treatment applied in tlie interim except as to advances made
to affiliates for lease acquisition and exploration costs. Order Nos. 410 and
410-A have been affirmed. Public Service Commission for the f<tnte of 2\>?t)
YorA- v. F.P.C.. 467 F. 2d 361 (D.C. Cir. 1972). The Commission, by Order xNo.
441. issued November 3 0. 1971, in Docket No. R-411, provided that all advances
made pursuant to contractual obligation entered into on or after November 10,
1971, until December 31, 1972, shall l)e subject to its provisions. This order
differed from Order Nos. 410 and 410-A in that it (1) excluded from rate
base treatment advances made for exploration and lease acquisition. (2) pro-
hibited pipeline affiliated producers from acquirine a working or other economic
interest as a result of an advance, (3) provided the advances included in rate
base be repaid by the producer to the pipeline in full, by delivery of natural
gas or other consideration, within five years, or as otherwise authorized by
the Commission, from the date gas deliveries commence or the date it is deter-
mined that recovery will be in other than gas and (4) stated tliat pipeline affil-
iated producers shall be treated equally with independent producers.
VI
On December 29. 1972. the Commission issued Order No. R-4fi5 which: (1)
extended the advances made for exploration within the lower forty-eight states
pursuant to contractual obligations entered into on or after December 29, 1972,
until December 31, 1973, (2) excluded advances for lease acquisition from rate
base treatment- (3) permitted pipeline aflSliated producers to obtain a working
or other economic interest as a result of an advance, (4) deleted the requirement
for pipelines making an advance to recoup the advances from the producers if
55
the pipeline absorbs the cost itself at no cost to its ratepayers, (5) provided for
removal of the advance from rate base treatment at the end of 5 years if no gas
deliveries have been made or no determination has been made that the advance
will be non-recoverable. Also required that advances not be accorded rate base
treatment if gas does not flow to the advancing pipeline and requires revenues
collected to be refunded. The Commission noted that the extension of the
advances program was warranted in that it has in the words of the U.S. Court
of Appeals, "represented a justifiable experiment in the continuing search for
solution to our nation's critical shortage of natural gas."
Simultaneously with the issuance of Order No. 465, the Commission issued a
Notice of Proposed Rulemaking in Docket No. R^66, which would prescribe the
proi>er ratemaking and accounting treatment for advances made outside the
lower forty-eight states within the North American continent where such gas
will be accessible by pipeline to the lower forty-eight states. Comments were
solicited.
VII
On February 25, 1970, in Order No. 395, the Commission revised its regulations
and rules under the Natural Gas Act to allow increased expenditures for budget-
type gas purchase facilities. The purpose of the budget rule is to expedite numer-
ous minor projects. The increase in allowable expenditures gives companies
added flexibility and results in a decrease in the lag in deliverability and results
the discovery of gas and its flow to interstate pipelines. On May 9, 1973, in
Order No. 474, the Commission revised its regulations to permit budget-type
applications for relocation and construction of gas purchase field compression
facilities.
VIII
On June 17, 1970, the Commission in Docket No. R-389 instituted an investiga-
tion and proposed rulemaking to consider the terms and conditions under which
it will issue permanent certificates for, and otherwise regulate, new sales of
natural gas subject to the Commission's jurisdiction in the Permian Base area
of southwestern Texas and southeastern New Mexico. On July 17, 1970, in
Docket No. R-389-A, the Commission expanded the scope of its investigation
and proposed rulemaking to cover certificates for new sales of natural gas subject
to the Commission's jurisdiction nationwide (except Alaska and Hawaii). The
Commission stated it would accept for consideration applications by independent
producers requesting issuance of a certificate for sales of natural gas notwith-
standing that the proposed rates may be in excess of the ceiling or guideline
rates.
Numerous certificates have been issued by the Commission pursuant to this
statement, representing sizeable volumes of natural gas available to interstate
pipelines. In this connection. Order No. 435, issued July 15. 1971, (Docket No.
R-398 and R-398-A) established initial rates in the Rocky Mountain Area.
(Also see Item XXIII). On November 14, 1972, a report on the investigation of
intrastate sales made under contracts dated on and after September 15, 1971,
was submitted to the Secretary of the Commission supplementing reports issued
in September 1970 and November 1971, relating to intrastate sales contracts dated
on and after January 1, 1966. This data is essential to an understanding of the
factors which effect regulation of the interstate market.
IX
On June 17, 1970, in Docket No. AR70-1 the Commission instituted a second
area rate proceeding in the Permian Basin area to review the just and reasonable
rates established by the Commission in 1965. Formal hearings were completed
in January, 1972. The Administrative Law Judge issued an initial decision on
December 20, 1972, which would raise ceiling rates for natural gas produced in
the Permian Basin. This decision is subject to Commission review.
On October 27, 1970, by Order No. 413, the Commission terminated moratorium
prohibitions against rate increase filings by natural gas producers in the Southern
Louisiana area. It was proposed that siich a termination would encourage in-
creased exploration and development efforts for natural gas and the dedication
of greater volumes of gas from that area to the interstate market.
27-547—74 5
56
XI
On October 16, 1969, the Commission instituted a Rulemaking in Docket No.
R-371, for just and reasonable area rates for the Appalachian and Illinois Basins
through rulemaking procedures rather than the lengthy area-rate hearings whicli
had been conducted in the major producing area, thus hoping to assure rapid
disposition of the matter and insure continued stability in the area. On Oc-
tober 2, 1970, the Commission, relying on written comments and reports and on
an oral conference, rather than a full-ltlown evidentiary hearing, issued Order
No. 411 establishing area rates for these Basins.
XII
In August of 1969 and July, 1970, the Commission urged the Secretary of the
Interior to conduct a general oil and gas lease sale in the Gulf of Mexico. Public
hearings were held on July 14, 1970. in New Orleans, at which the Chief of the
Bureau of Natural Gas presented detailed testimony in further support of the
sale. The oil and gas lease sale was held on December 15, 1970. Involved were
1,043 bids and bonuses to the Federal Government from 116 winners totaling
a record .$84.5.8 million. The Chief of the Bureaii of Natural Gas also testified
in favor of another lease sale at public hearings held in New Orleans on Sep-
tember 8. 1971. This sale, originally scheduled for Deceml)er 1971, was postponed
until September 12, 1972 after court action initiated by environmentalist groups.
It resulted in high bids totalling $586 million. The President in his June 4, 1971,
energy message to Congress proposed to make available the energy resources of
Federal lands. In compliance with the President's proposal, the Department of
Interior has published a tentative five-year schedule of twelve proposed lease
sales. The Commission and its staff has consistently supported, including detailed
testimony at formal hearings, all offshore lease sale proposals. The Chief, Bureau
of Naturgal Gas, appeared once again on August 22, 1972. in New Orleans to
testify in favor of another offshore lease sale which was held in December, 1972.
XIII
In order that the Commission may improve its capability in the measurement
of supply and demand and thereby enhance its ability to effectively regulate and
provide a continuing reliable supply of gas to meet consumer demands, the Con-
gress approved the Commission recommendation to undertake a National Gas
Survey by providing funds for the Agency's fiscal year 1971 budget. Some of the
more important questions to be examined in depth by the Survey are (a) the pre-
cise dimensions of the gas supply problems, (b) the extent to which pipeline
expansion of facilities is threatened by inflation and uncertainty of new gas
supplies, (c) the role of natural gas in air pollution control, (d) the supply-
price-demand relationship, (e) the potential impact of interfuel competition,,
(f) import-export policies, (g) the role of synthetic fuels in the long-term supply
of gas, and (h) the regulatory role in relation of these issues.
XIV
On November 4, 1970, the Commission undertook a nationwide investigation
to enable it to establish policies and regulations for developing plans to help
assure the reliability of electric power and natviral gas service — Policy State-
ment Notice of Investigation and Proposed Rulemaking with Respect to Develop-
ing Emergency Plans — Reliability of Electric and Gas Service. Docket No. R-405.
Although the proceeding was initiated for the purpose of fulfilling the respon-
sibilities of the Commission for reliability of gas and electric service under the
Federal Power Act and the Natiiral Gas Act, the resulting plans and procedures
will serve to aid in carrying out the overall Federal program to assure an ade-
quate energy supply.
The investigation was separated into two phases : Phase I concentrated, on
the period from November 4, 1970, (the date of the notice), tlirough March 31,
1971. The objective of this phase was "to elicit information from those antici-
pating emergency situations during this phase period." Only those with such an
emergency situation were required to respond and were requested to do so by
December 1, 1970. Phase II concentrated on the period from the date of the-
notice through 1975, and all gas transmission and distrilnition companies were
asked to respond by January 7, 1971, with projections through 1975, of relevant
Information including but not limited to —
57
(a) Adeijuacy of supplies and delivery capacity.
(b) Adequacy of plans to meet emergency conditions.
The Commission received about 300 replies from interstate and intrastate pipe-
line icompanies. privately and publicly owned distribution companies, interested
state regulatory agencies, trade associations and the Environmental Protection
Agency.
The Commission obtained data from the producers of natural gas to deter-
mine what volumes of proved natural gas reserves, if any, were held by pro-
ducers in any area that were not contracted to pipelines or direct customers.
XV
The Commission was advised that natural gas distributing companies, wliich
are exempt from the provisions of the Natural Gas Act under Section 1(c)
thereof, have received an increasing number of requests from distributors located
in other States and interstate pipeline companies for short-term supplies of gas
to meet temporary emergencies caused l)y weather conditions, acts of God, break-
down or facilities or other unforeseen situations or to replenish depleted storage'
reservoirs in order to meet consumer needs in a forthcoming lieating season. In
order to facilitate responses to such requests, the Commission indicated by
Statements of Policy issued May 6 and June 3, 1970, Order Nos. 402 and 402-A
that the recipients of such requests would not jeopardize their exempt statu.?
under the Act by making short-term sales or deliveries of natural gas in inter-
state commerce to the extent that such transactions enable those companies
confronted with emergencies to meet their system requirements, subject tO'
reporting provisions and prior Commission approval in emergencies exceeding
60 days. By Order No. 418 issued December 10. 1970, in Docket No. R-404, the
Commission amended its Regulations under the Natural Gas Act to permit inde-
pendent producers to sell natural gas to pipelines for emergency purchases for
periods up to 60 days without first obtaining certificate authorization from the
Commission.
XVI
The Commission on September IS, 1970, in Opinion No. 5S6 adopted a settle-
ment proposal STibmitted by a majority of the parties to the Hugoton-Anadarko
Area Rate Proceeding. Docket No. AR64-1, et al.. thus establishing just and
reasonable rates for the area. The Commission found that the proposed settle-
ment was fair to the consuming public and would promote certainty and stability
and contribute to obtaining additional supplies of gas from tliis crucial area.
This opinion on appeal to the Ninth Circuit, No. 71-1036, was upheld i'y the
Court of Appeals on July 31, 1972,
XVII
The Commission on February IS, 1971, issued Order No. 423 in Docket No.
R— 407 establishing as a matter of general policy a suspension period of one day
from the projjosed effective date of a rate change filing made by an independent
producer unless the Commission imposes a longer suspension period. The former
five-month suspension period which had generally been applied to producers
placed them at a disadvantage because they also were limited by contract as to
when an increase might be made effective. A five-month suspension period also
deprives a producer of revenues to which it would otherwise be entitled in the
event the proposed rate is found to be just and reasonable. Order No. 423 was;
remanded bv the court in Public Sen-ice Commission for the State of Xew York
V. F.P.V., 463 F. 2d 883 (D.C. Cir. 1972).
XVIII
On March IS. 1971. in Order No. 428 issued in Docket No. 393, the Commission
amended its regulations covering natural gas sales by small producers, which
are defined as independent producers with annual total nationwide jurisdictional
sales not in excess of 10,000,000 Mcf. Although only accounting for about 15%
of the total vohimes of interstate gas sales, small producers comprised all except
about 70 of the over 4.700 natural gas producers in the United States. Their
exploratory efforts are extremely valuable to the discovery of new sources of gas.
Under the new provisions, small producers may apply for a blanket certificate
to cover all existing and future jurisdictional sales. Those receiving such certifi-
cates are authorized to make small producer sales pursuant to existing and future
58
contracts at the price specified in eacli siicli contract. Tliereafter, so long as tlie
liolcier of tlie certificate qualifies as a small producer and complies with its terms,
the only filings required by the Commission are an annual statement of total
jurisdictional sales and applications for abandonment of facilities or service.
The Commission's purpose in thus classifying small producers was to facilitate
their entry into the interstate market and to stimulate competition among pro-
ducers to sell in interstate commerce as well as to encourage their exploratory
efforts. Assurance is given small producers that the provisions of their contracts
for the interstate sale of gas will not be subject to change. A further purpose is
to relieve the small producer of the expenses and burdens relating to regulatory
matters.
The Commission's action was not to deregulate sales by small producers, but
to exempt small producers from area price ceilings. Such sales will be regulated
in pipeline rate and pipeline certificate proceedings by Commission review of the
purchased gas costs of each pipeline with respect to small producer sales. The
Commission's order provided protection for the consumer by safegarding against
unreasonably high small producer prices.
On December 12, 1972, the U.S. Court of Appeals for the District of Colvimbia
in Tennessee Gas Pipeline Company v. F.P.C., D.C. Cir. No. 71-1722 et al., set
aside the Commission's Order No. 428 (including amendments thereto in Orders
Nos. 428-A and 428-B) concluding that the FPC exceeded its authority under
the Natural Gas Act. In its opinion precluding exemption of small producers
from direct rate regulation and filing requirements, the Court indicated that
it did not take exception to the Commission's motives or the benefits that might
flow to consumers of natural gas through some form of deregulation of small
producers. It stated : "the Power Commission has made a conscientious and intel-
ligent effort to cope with an enormous national problem. Where the Commission
has failed is not in its diligence and its expertise. It has simply failed because
the methods adopted do not square with its duties under the Natural Gas Act."
The Commission issued an order on March 30, 1973, authorizing temporary
certificates to small producers to collect their contract rates subject to refund,
pending judicial review of its Order 428. A petition for certiorari has been filed
with the Supreme Court.
XIX
The Commission has authorized increase imports of gas by pipeline from Can-
ada. The net import of natural gas from Canada in 1972 was 993.5 million Mcf,
which was an annual percentage increase of about 18 percent over the 1971 fig-
ure. During 1972, net Canadian imports accounted for approximately 4 percent
of U.S. consumption.
XX
As of November 1, 1972, the Commission authorized the importation of the
equiA'alent of 9,86.5 MMcf of liquefied natural gas (LNG) on a short-term basis
from Canada, Algeria and Libya. On March 9, 1972, the Commission is.sued
Opinion No. 613 granting the import authorization in Docket No. CP70-196 by
Distrigas Corporation for 15.4 million Btu of LNG annually. Other proceedings
are pending.
XXI
On April 15. 1971, in Order No. 431, the Commission promulgated as a new
Section of its General Policy and Interpretations, Section 2.70, entitled "Measures
for the Protection of Reliable and Adequate Natural Gas Service." The State-
ment of general policy provides that jurisdictional pipeline companies shall take
all steps necessary for the protection of as reliable and adequate service as pres-
ent supplies and capacities will permit during the 71-72 heating season and there-
after. In order to effectuate this, the Commission :
(a ) Encouraged companies to fill all storage fields ;
(b) Required the filing of curtailment plans as an amendment to existing
tariffs by jurisdictional companies which intended to curtail service ;
(c) Indicated that additional short-term gas purchases may still be necessary
to meet the demands and indicated the procedure under which this could be done ;
(d) Stated that where emergency gas purchases are made and/ or curtailment
program is instituted, volumetric limitations should be set on sales at current
levels ;
(e) Indicated that the Commission will reexamine existing commodity rate
levels and may redesign existing commodity demand rate relationships ;
59
(f ) Encouraged pipelines to enter into exchange arrangements with other pipe-
lines.
XXII
The Commission on May 6, 1971, in Opinion No. 595 set just and reasonable
rates for sales of gas in interstate commerce from the Texas Gulf Coast, Docket
Xos. AR62— 4, et al. The Commission set a ceiling of 24 cents fer Mcf for gas sales
made under contracts dated on or after October 1, 1968, whether within the tax
jurisdiction of the State of Texas or the offshore Federal domain. Rates for gas
sold in interstate commerce under contracts dated prior to October 1, 1968, were
established at varying levels with a just and reasonable rate of 19 cents effec-
tive as of October 1, 1968, for all such contracts. In addition the Commission
offered incentives to producers to stimulate exploration and production by per-
mitting credits to refund obligations through dedication of new supplies, and in-
creased rates if new dedications reached the levels set forth in the opinion. The
Texas Gulf Coast is the nation's second largest producing area. This case is on
appeal to the District of Columbia Circuit. Puhlic Service Commission -for the
State of New York v. F.P.C., No. 71-1828.
XXIII
On July 15. 1971, the Commission by Order No. 435 in Docket Nos. R-389 and
R-389-A, established initial rates at which sales of natural gas in the Rocky
Mountain Area are to be certificated, without refund obligation, for sales made
under contracts dated after June 17, 1970. The rates which the Commission estab-
lished represent the area rate levels for the areas involved until such time as just
and reasonable rates are promulgated for the area. This case is on appeal to the
District of Columbia Circuit. American Puhlic Gas Assn. v. F.P.C., No. 71-1812.
Concurrently, the Commission, in Docket No. R^25, gave notice instituting
a rulemaking proceeding to issue rules fixing the just and reasonable rates and
otherwise regulating jurisdictional sales of gas made under contracts dated
before October 1, 1968 and to determine whether the initial rates established by
Order No. 435 shall apply to contracts dated on or after October 1, 1968 for the
Rocky Mountain Area.
The Notice of Rulemaking was appealed to the Court of Appeals for the Tenth
Circuit (Phillips Petroleum Company, et al. v. F.P.C. Nos. 71-1659, et al). On
February 20, 1973 the Court affirmed the right of the Commission to determine
just and reasonable rates by informal rulemaking procedures. Setting of rates
by rulemaking has reduced regulatory lag.
On April 11, 1973, the Commission issued its Opinion No. 658 (Docket No.
R-425) establishing a ceiling rate of 24.0(? per Mcf, subject to Btu adjustment,
for gas produced in the Rocky Mountain Area and sold under contracts dated
prior to October 1, 1968 and wells dedicated to these contracts commenced on
or before December 31, 1972. This rate is exclusive of state production or sever-
ance charges. A minimum area rate of 15.0<;^ per Mcf, subject to Btu adjustment,
but inclusive of additive charges and adjustments and state production taxes
was also established.
XXIV
On October 29, 1971, in Docket No. AR67-1, et al., the Commission issued its
Opinion No. 607 setting just and reasonable rates for natural gas produced in the
"Other Southwest Area." This area covers all of Mississippi and Arkansas; four
counties in Northwest Alabama ; northern Louisiana ; Railroad Commission dis-
tricts Nos. 5, 6, and 9, in northeast Texas ; and 56 counties in eastern and south-
eastern Oklahoma. The opinion establishes prices by dates under three general
contract periods which include variations by date and sub-areas within these
periods. The ceiling prices for contracts dated on and after October 1, 1968, range
from 23.0 cents per thousand cubic feet to 26 cents for pipeline quality gas.
Lower prices are provided for contracts dated prior to this time. The opinion
includes provisions for escalation of area ceilings, provides for refunds in excess
of applicable area rates and places a moratorium on price increases until July 1,
1976. No minimum rates are provided. The higher prices provided incentives to
the producers in this area to find gas and dedicate it to interstate commerce.
XXV
On November 5, 1971, Docket No. R-403, the Commission issued Order No. 440,
adopting full-cost accounting for exploration and development costs on leases
acquired after October 7, 1969.
60
XXVI
On Janiiary 17, 1972, the Commission issued Opinion No. 607-A, which permits
producers to discharge their refund obligations by dedications of additional gas
reserves from the Other Southwest area to interstate commerce. This policy
is consistent with previous Commission decisions regarding Southern Louisiana
(Opinion Nos. 598 and 598-A) and Texas Gulf Coast (Opinion Nos. 595 and
595-A). This case is on appeal to the Fifth Circuit. Shell Oil Co. v. F.P.C., No.
72-1114.
XXVII
On August 3, 1972, after receiving comments from interested parties the
FPC issued Order No. 455, (Docket No. R-4441) authorizing a new optional
procedure for certification of new gas sales as an alternative to existing pro-
cedures. The Commission's action was designed to alleviate the gas shortage
through dedication of new reserves from domestic production to assure reliable
and adequate natural gas to the consumer at the lowest reasonable cost. Under
the new procedure, consumers will not pay higher rates for gas except for new
supplies, and then only to the extent that it is established that the price is
required by the public interest.
The optional procedure does not supersede the area rate procedures under
which parties may continue to operate but provides that producers may apply
for a certificate for sales in excess of the area ceiling rate for gas which was
not available to the interstate market prior to April 6, 1972 — the date of the
original rulemaking notice. It applies to all the producing areas of the nation,
and rates under the optional rules will be firm, not subject to refund. The
optional procedure is available only under certain specified conditions and
applications filed under this new procedure will be proces.s'ed within established
requirements, including : notice, intervention, and hearing. This proceeding is
on appeal to the District of Columbia Circuit in John E. Moss, ct ah, v. Federal
Power Commission, No. 72-1837.
XXVIII
On June 7, 1972, in Federal Potver Commission v. Louisiana Poiver & Light Co.,
€t al., 4 6 U.S. 621, (1972), the Supreme Court upheld the Commission in its
assertion of jurisdiction in effectuating a curtailment plan which includes de-
liveries not only to purchasers for resale but also to direct sales customers
of a jurisdictional pipeline. The Court held that under Section 1(b) of the
Natural Gas Act the Commission has the power to regulate the curtailment of
direct sales of natural gas along with the sales for resale. The Commission,
thereby, has been given wide latitude to insure the reasonableness and fair-
ness of curtailments of service initiated by interstate pipeline companies that,
due to the serious gas suply problem, are forced to deliver to their customers
less than the contracted-f or quantities of gas.
XXIX
On June 28, 1972, in Opinion No. 622. the Commission authorized the impor-
tation of the equivalent of approximately 1,000,000 Mcf per day of liquefied
natural sras (LNG) from Algeria for a period of 25 years as requested by Colum-
bia LNG Corporation, et al., (Docket No. CP71-68, et al.) The primary purpose
of the Commission's acting was to alleviate the existing gas shortage in the
United States. Columbia LNG and Consolidated LNG were authorized to import
LNG at 77 cents per MMBtu and the third importer. Southern Energy, was
permitted to import its respective volumes at 83 cents per MMBtu. The importers
are subsidiaries of individiial pipeline systems which supply gas to markets
in New York, Pennsylvania. Ohio. West Virginia. Maryland, Virginia. Kentucky,
the District of Columbia, Alabama. Georgia. Louisiana. Mississippi, South Caro-
lina. Tennessee. New Jersey, and Florida. In addition, the Commission imposed
incremental costing concepts whereby the risks and costs for the projects are
borne by the companies, their stockholders, and the consumers who contract to
purchase LNG, and not by those ultimate consumers who would not derive a
benefit from such importation.
On October 5, 1972, after granting rehearing in part of its Opinion No. 622,
the Commission issued Opinion No. 622-A which affirmed, with modifications,
its prior authorization of LNG imported from Algeria. The major modifications
include: (a) affirmed incremental pricing of regasified LNG by pipeline pur-
chasers but eliminated the requirement for pipeline customers to sell the LNG
61
under separate rate schedules; (b) determined El Paso Algeria was not a
natural gas company; (c) affirmed price ceilings of 770 and 83^ but clarified
that the importing companies may request modifications if actual costs exceed
these estimates; and (d) alowed minimum hill provisions to permit recovery
of certain fixed expenses in event of non-delivery. Environmental issues involv-
ing the routing of a portion of the pipeline will be subject to future hearings.
Petitions for review of the Commission Opinions have been filed in the District
of Columbia, Third and Fifth Circuits. On March 30, 1973, the Commission
granted petitions to amend the certificates so as to substitute a tunnel for a
trestle at the Cove Point Maryland project.
XXX
On July 31, 1972, in Docket No. R-418 the Commission issued Order No. 431-A
which extended for an indefinite period the provisions initiated in Order 431
(Item XXII) for limited term certificates with pre-granted abandonment to
sellers. To be eligible gas pipeline companies must demonstrate an emergency
need for gas on their system, and talve all steps necessary for the protection of as
reliable and adequate service as present supplies and capacities will permit in-
cluding adequate injection into storage and filing of a curtailment plan if cur-
tailment will be necessary. Pipelines are barred from initiating interruptible
sales during the term of the certificate authorization.
XXXI
On April 12, 1973, after notice of proposed rulemaking on November 8, 1972,
the Commission issued Order No. 481 (Docket No. R-458). The Order provides
that it will be the general policy to consider applications by independent pro-
ducers for special relief where reduced pressures, need for reconditioning wells,
deeper drilling, or other factors make further production uneconomic at existing
rates. Relief, where grantetl, will be in the form of a contractually authorized
rate increase, or rate increases where the contract rate has expired, in excess
of the area ceiling rate. This policy also applies to pipeline production from
leases acquired after October 7, 1969. Applicants must establish the economic
justification for sales that would otherwise be abandoned. This order should pro-
mote the recovery of gas reserves for the interstate market that might otherwise
be lost.
XXXII
After notice of rulemaking on November 9, 1972, the Federal Power Commis-
sion issued Order No. 482 on April 12, 1973 (Docket No. R-459) to provide spe-
cial pricing relief to producers to encourage the recovery and sale in interstate
commerce of gas which is or would otherwise be flared or vented. Under the
order, producers may apply for special relief from area rates or seek to sell gas
under existing provisions of the Commission's Rules for : limited-term certificates
and pre-granted abandonment ; optional pricing procedure ; or exemption of
emergency sales or transportation of gas. If pipeline purchasers install facilities
to recover gas that would otherwise be fiared, they can build the facilities under
their budget authorization, and may file for accounting treatment of facilities de-
preciation. Purchasers of the gas under the Order will be permitted to file for
higher rates to maintain the same differential between purchase and resale price
of other gas sold at the processing plant or in the same general area.
XXXIII
On December 7, 1972, the Commission issued Option No. 637 (Docket Nos.
CP72-35. et al.) on an application by Algonquin SNG, Inc. et ah to construct a
synthetic gas plant and related facilities near Fall River, Massachusetts. Naphtha
feed stock would be converted into synthetic gas (SNG) and sold to Algonquin
Gas Transmission Co. for transmission and resale in the northeastern states.
The Commission ruled that it did not have jurisdiction over the application
to construct and operate facilities to manufacture synthetic gas from naphtha
as naphtha is not "natural gas". The sale of synthetic gas to an interstate pipe-
line was also found to be nonjurisdictional. However, the interstate transporta-
tion and sale for resale after it has been mixed with natural gas in the interstate
pipeline's system was clearly within the FPC jurisdiction and a certificate of
public convenience and necessity was found necessary.
62
The FPC approved Algonquin Gas Transmission's proposed facilities and serv-
ices as serving the public convenience and necessity. It approved the initial
wholesale rates for the SNG service at $1.80 per Mcf as just and reasonable for
the first year but conditioned the authorization to provide that the SNG must be
sold at special service rate to recover all costs and fixing $1.80 per Mcf as a
maximum price for sales when the project is first placed in service. The antici-
pated plant output would provide a maximum of 120 million cubic feet daily for
sale.
XXXIV
On December 12, 1972, the Commission issued its Opinion No. 639 (Docket
No. R-371) denying petitions to amend regulations governing sales in interstate
commerce of natural gas produced in the Appalachian and Illinois Basin Areas
established by Order No. 411 (Item XI). Order No. 411, set just and reasonable
rates for "old" and "new" gas, and imposed a moratorium on rate increases.
In refusing to set new ceiling rates, the FPC indicated that setting rates
area by area has not proven a fiexible means to maintain a workable relation-
ship between supply and demand. A new area rate might lead to a new round
of area rate proceedings wiiich the Commission believed would not alleviate
the gas shortage. Further, the Commission stated it choose not to establish a
new rate for "new" gas as determined by contract date vintaging as adherence
to the vintaging concept is not necessary for the protection of an adequate and
reliable gas supply for the consumer.
The Commission said that the optional procedures permitted by its Order
No. 455 (Item XXVII) are well .suited to the pricing problems of gas in Appala-
chian-Illinois.
The wording of Order 411, and all other Commission area rate orders or opinions
of similar import, stating that "old" gas will be applicable to "gas sold pursuant to
a contract dated prior to October 8, 1969" will be literally and strictly applied,
the Commission said. If a contract dated prior to that date terminates, and the
buyer and seller enter into a new contract, the sales will be governed by the
applicable pricing provisions relating to "gas sold pursuant to a contract dated
after October 7, 1969". This will eventually result in elimination of a two-price
system.
XXXV
On January 8. 1973, the Com.mission announced several new actions to cope
with the current nationwide shortage of natural gas. The first step was issuance
of a proposed policy statement in a rulemaking proceeding (Docket No. R-467)
to establish priorities in the use of natural gas. The Commission propo.sed
priorities-of-service to be followed by jurisdictional pipeline companies in re-
questing approval for service to new and/or additional direct and resale cus-
tomers during the shortage period. To arrive at a rational energy resource pro-
gram with effective and timely procedures, the Commission requested that
interested parties submit their comments and suggestions.
In addition to evaluating the proposed specific priorities-of-service and their
impact on economic, environmental and conservation of energy considerations,
the Commission indicated it was soliciting comments on alternatives which
may be considered in allocation of limited gas reserves during a shortage period.
Alternatives include: (1) changes on rate design techniques, (2) revision of
take-or-pay provisions to conserve gas for superior end-use customers. (3) in-
centives to encourage additional storage facilities. (4) consideration of end-use
in reviewing import and certificate requests and tariff changes, (5) market
studies by pipelines to reflect end-usage of present sales as a basis for removing
low priority usages.
In its second action, the Commission adopted in its Order Nos. 467 and 467A
(Docket No. R-469) a policy statement establishing priorities for natural gas
deliveries by jurisdictional pipeline companies during p':>riods of curtailments.
Further, pipelines were directed to include procedures in their tariffs to meet
emergency situations, including environmental emergencies that might occur
during periods of curtailment.
In determining the priority-of-service limitations, the Commission indicated
it was aware of the economic impacts but that there was no choice to imposing
restrictions within its jurisdiction during the gas supply shortage. Further, it
called for cooperation of state authorities in implementing the program. The
basic objective of the priorities is the protection of deliveries for residential and
small volume consumers who can not be safely curtailed on a daily basis.
63
Eight initial priorities of service categories were established for deliveries
during periods of curtailment, except when extraordinary circumstances exist
(the same priorities are proposed for service to new and/or additional customers
during a shortage period under the proposed policy statement in Docket No.
R-167).
In its third step, the Commission in its Notice of Proposed Rulemaking and
Request for Comments (Docket No. 9-468) proposed revisions to its Regulations
to reflect the changes in its policy statement in Order No. 467 and 467A, and its
proposed statements of policy issued in its concurrent notice in Docket No.
R-467. The proposed revisions are designed to obtain additional information to
administer the Natural Gas Act with respect to the policies regarding end-use
priorities. In its proposed revision, the Commission solicited comments on its
proposal that certain existing and future large volume industrial sales be made
only on an interruptible basis.
On March 2, 1973, the Commission issued Order No. 467B (Docket No. R-469)
modifying its policy statement in Order Nos. 467 and 467A. The revised policy
statement provides that interstate pipeline companies will use the following
priorities for curtailment :
(1) Residential, small commercial (less than 50,000 cubic feet on a peak
day).
(2) Large commercial requirements (50,000 cubic feet or more on a peak
day) and firm industrial requirements for plant protection, feedstock and
process needs, and pipeline customer storage injection requirements.
(3) All industrial requirements not specified in the priority listing.
(4) Firm industrial requirements for boiler fuel use at less than 3,000,000
cubic feet per day, but not more than 1,500,000 cubic feet per day, where alternate
fuel capabilities can meet such requirements.
(5) Firm industrial requirements for large volume (3,000,000 cubic feet or
more per day) boiler fuel use, where alternate fuel capabilities can meet such
requirements.
(6) Interruptible requirements of more than 300,000 cubic feet per day, but
less tlian 1,500,000 cubic feet per day, where alternate fuel capabilities can meet
such requirements.
(7) Interruptible requirements of intermediate volumes (from 1,500,000 cubic
feet per day through 3,000,000 cubic feet per day), where alternate fuel capabili-
ties can meet such requirements.
(8) Interruptible requirements of more than 3,000,000 cubic feet per day, but
less than 10,000,000 cubic feet per day, where alternate fuel capabilities can meet
such requirements.
(9) Interruptible requirements of more than 10,000,000 cubic feet per day,
where alternate fuel capabilities can meet such requirements.
Lower priority categories (those with highest numbers) are to be fully cur-
tailed before any higher priority volumes. Direct and indirect pipeline customers
that use gas for similar purposes are to be placed in the same category.
Curtailment plans filed with the Commission shall provide suflScient flexibility
to allow pipelines to respond to emergency situations. Exceptions to the priorities
may be permitted under extraordinary circimistances.
The policy statement including amendments is intended only to state initial
guidelines, to provide pipeline curtailment planning and adjudication of curtail-
ment cases.
XXXVI
On Marcli 30, 1973, the FPC reaflSrmed its Opinions (Nos. 622 and 622A)
issued last June and October authorizing importation of LNG from Algeria and
construction of facilities for receipt and regasification of LNG at Cove Point.
Maryland, and subsequent transportation and sale of the resulting natural gas
in interstate commerce.
The Commission's original opinions authorized Columbia LNG Corpora-
tion to import 300 million cubic feet daily, and Consolidated Systems LNG
Company to import 350 million cubic feet daily to the Cove Point terminal. South-
ern Energy Company would import 350 million cubic feet daily at Elba Island
near Savannah. Georgia. The prior authorization for this large volumes import
was issued after extensive review of the project including the economic and
environmental implications.
The Commi'jsion's action in reafl^rming its authorization for the project per-
tains to the Cove Point facilities. Here the Commission approved the use of a
tunnel instead of a trestle to connect tanker docking facilities in the Chesapeake
64
Bay with landbased facilities for storage and processing tlie LXG. In authorizing
the modification to the project, tlie Commission found that changes did not con-
stitute a major Federal action significantly affecting the quality of the human
environment.
The FPC conditioned the granting of the certificate of public convenience and
necessity on applicants obtaining all necessary Federal, State, and local author-
izations including such items as : building permits. Coast Guard clearance, ad-
vising the FPC of changes in design and construction techniques, submitting
certificates of compliance with safety standards, etc.
The approval by the Commission involves a major project for augmentation
of waning domestic natural gas supplies.
XXXVII
In a notice of proposed rulemaking in Docket No. R-389B, issued on April 11,
1973, the Commission proposed to set just and reasonable rates and otherwise
regulate jurisdictional sales by producers of natural gas for all producing areas
on a nationwide basis. The single rate to be determined by final order in this
docket will apply to all jurisdictional sales of gas produced from wells com-
menced on or after January 1, 1973, except emergency sales certificated under
Order No. 431 or sales certificated under the optional certification procedure
established by Order No. 455.
The proposed single rate would be applicable to both onshore and offshore
production, whether gas-well gas or cashinghead gas. The single rate would be
exclusive of state production taxes, but would be subject to upward and down-
ward Btu adjustments.
XXXVIII
On May 23, 1973, the FPC proposed a single imiform rate for all producing
areas on a nationwide basis (excluding Alaska and Hawaii). The just and rea-
sonable rate to be determined in a rulemaking proceeding (Docket No. R-478)
shall apply to all jurisdictional sales of natural gas which is produced from wells
commenced before January 1, 1973, irrespective of contract date or date of
deliveries.
There will be a uniform rate for both onshore and offshore production,
whether gas-well gas or casinghead gas. This rate shall be exclusive of state
production taxes, subject to adjustments for Btu content and delivery point.
In announcing this Action, the Commission seeks to establish rate stability, rate
simplification, and provide the incentives necessary to encourage continued
production from existing fields.
65
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66
TABLE 2A
SALES BY PRODUCERS OF NATURAL GAS TO INTERSTATE AND INTRASTATE PIPELINE COMPANIES IN 1971
Million
cubic
feet
Percent
Inter-
state
sales
Total
market
sales
Producer sales to interstate market:
First 10 producers by rank: '
Humble Oil & Refinery Co.
Shell Oil Co
Amoco Production Co
Gulf Oil Corp
Phillios Petroleum Co
Mobil Oil Corp _ _
Texaco Inc
Union Oil Co. of Calif :
Atlantic Richfield
Continental Oil Co
Ten producers Total '
291 producers Total'
301 producers Total '
Other 3,449 producers Total
Total interstate sales producers 3,750 2
Sales to intrastate market, 3 total..
Sales to total market * total (less than 4,000 producers) 22, 493, 012
1, 348, 397
9.2 .. .
783, 669
780, 437
5.4 ....
5.3 ....
751,012
724, 194
683,618
5.1 ....
5.0 ....
4.7 .. .
609, 816
4.2 ....
549, 932
3.8 . .
500, 104
466, 236
3.4
3.2 ....
49.3 ....
7,197,415
6,576,517
13,773,932
45.1
94.4 .. .
823, 895
5.6
14,597,827
7,895,185 ....
100.0
64.9
35.1
100.0
TABLE 2B
PURCHASERS OF NATURAL GAS BY INTERSTATE AND INTRASTATE PIPELINE COMPANIES FROM PRODUCERS, 1971
Million
cubic feet
Percent of
interstate
purchases
Percent of
total inter-
and intrastate
purchases
Interstate pipeline company purchases:
1st 10 companies by rank :
El Paso Natural Gas Co 1,635,385
Tennessee Gas, Pipeline Division, Tenneco 1, 317, 987
United Gas Pipeline Co 1,311,390
Transcontinental Gas Pipeline Corp 968, 467
Northern Natural Gas Co 914,297
Natural Gas Pipeline Co. of America 898, 115
Columbia Gas Transmission Corp 786, 271
Michigan Wisconsin Pipeline Co 657, 858
Texas Eastern Transmission Corp 639,207
Texas Gas Transmission Corp 562,788
10 companies, total 9, 691, 765
67 companies, total 4,906,062
Total interstate purchases, 77 companies, total... 14, 597, 827
Sales to intrastate market,^ total 7,895, 185
Sales to total market," total... 22,493,012
11.2
9.0
8.9
6.6
6.3
6.2
5.4
4.5
4.4
3.9
66.4
33.6
100.0
64.9
35.1
100.0
1 Producers whose combined sales were 2,000,000 M cf or more sales volume, high and low, and accounting for 70 percent
of all natural gas produced and marketed in the United States.
- Includes all producers reporting sales to interstate markets.
3 Estimate derived as differential between reported interstates sales and total marketed production as reported by the
Bureau of Mines.
1 Marketed production, including inter- and intra-state sales as reported by the Bureau of Mines. Includes an un-
determined number of producers selling to the intrastate market v/ho do not report sales to the Federal Power Commission.
Sources: Sales by Producers of Natural Gas by Interstate Pipeline Companies, 1971, FPC. Bureau of Mines Mineral
Yearbook, 1971, Natural Gas, U.S. Departmant of the Interior.
67
TABLE 3A.-C0NCENTRATI0N RATIOS IN 3 MAJOR GAS PRODUCING REGIONS, 19G4-691
Percentage of annual volumes under
contracts
new sales
Region and year of sales contracts
Largest
firm
Largest
4 firms
Largest
8 firms
Southern Louisiana:
1964
, 17.3
40.2
48.1
66.1
44.7
35.1
38.4
58.7
76.0
57.8
52.5
36.7
57.8
45.3
92.0
66.7
46.3
(.')
62.6
53.1
1965 -.
20.6
62.3
1966 -
42.9
74.1
1967
19.9
59.7
1968
10.7
51.3
1969
11.1
63.7
Permian Basin:
1964
21.4
77.8
1965 ---
70.3
80.5
1966 . -
22.3
71.2
1967 --.
43.6
58.1
1968
14.9
56.8
1969
21.1
71.5
Texas Gulf Coast:
1964
35.6
48.1
1965
86.6
95.9
1966
. 34.4
83.7
1967
21.3
54.5
1968
(2)
0)
21.9
71.5
1 Compiled from FPC form 2. Percentages are based on each producer's sales volumes under non et al. contracts with
interstate pipelines in 1st year following the year of contract. To the extent that these producers were parties to et aL
contracts the concentration ratios are understated. The volumes exclude intrastate sales to interstate pipelines. The
years shown refer to date of new sales contracts. (The ratios for 1965-69 are reproduced in hearings before the Joint
Economic Committee, "Natural Gas Regulation and the Trans-Alaska Pipeline," June 8, 1972, p. 150.)
2 Not shown because non et al. contracts accounted for only 13 percent of sales volumes under new contracts in that
year. In all other years and in all areas shown, non et al. contracts covered more than 80 percent of sales volunies, except
in 3 instances where the coverage ranged from 55 to 70 percent.
Source: Office of Economics, Federal Power Commission.
TABLE 3B.-C0NCENTRATI0N RATIOS FOR 3-YEAR PERIODS, SOUTHERN LOUISIANA, 1964-691
Percent of annual volumes
Largest firm
Largest
4 firms
Largest
8 firms
Year of new sales contracts:
1964 to 1966 29.5
1965 to 1967 20.1
1966 to 1968 14. 1
1967 to 1969 8.3
49.5
44.5
31.0
29.4
59.3
56.0
43.0
45.2
1 FPC form 2. Percentages are based on each producer's sales volumes under non et al. contracts with interstate pipe-
lines in the 1st year following the year of contract. Intrastate sales to interstate pipelines are excluded.
Source: Office of Economics, Federal Power Commission.
68
TABLE 4
YEAREND 1970 AND 1971 DOMESTIC GAS RESERVES OF MAJOR PIPELINE COMPANIES DEDICATED TO INTERSTATE
SALES
Million cubic feet Percent of total
Yearend reserves 1970 1971 1970 1971
First 10 companies by rank:
El Paso Natural Gas Co _ 26,746,900 25,186,100 15.8 15.9
Tennessee Gas Pipeline Division Tenneco 18,188,079 17,582,419 10.7 11.1
Northern Natural Gas Co_.._ 13,748,646 13,620,456 8.1 8.6
Natural Gas Pipeline Co. of America 10,772,511 10,061,205 6.3 6.4
United Gas Pipeline Co 10,316,117 9,017,378 6.1 5.7
United Fuel Gas Co 8,768,084 . 5.2 ..
Transcontinental Gas Pipeline Corp.- 9,826,855 8,085,867 5.8 5.1
Columbia Gas Transmission Corp 8,993,706 _. . 5.8
Michigan Wisconsin Pipeline Co 8,353,799 7,880,179 4.9 5.0
Texas Eastern Transmission Corp 7,509,265 6,503,239 4.4 4.1
Arkansas Louisiana Gas Co 6,619,466 5,968,565 3.9 3.8
10 companies total 120,849,722 112,899,114 71.2 71.5
15 companies total 48,786,080 45,100,663 28.8 28.5
Total 25 major pipeline companies 169,635,802 157,999,777 100.0 100.0
Source: "The Gas Supplies of Interstate Natural Gas Pipeline Companies 1970, 1971," FPC.
TABLE 5
MANUFACTURING INDUSTRIES IN WHICH 4-FIRM CONCENTRATION RATIOS
EXCEEDED 60 PERCENT IN 1966
Concentration ratios
SIC
code Industry 4-firm 8-firm
3717 Motor vehicles 79 83
Steel :
33121 Coke oven and blast furnace..
33122 Steel ingot and semifinished shapes
33124 Hot rolled bars, shapes, etc
33126 Steel pipe and tubes
3151 Computing and related machines
3721 Aircraft -
3011 Tires and inner tubes
3861 Photographic equipment
3352 Aluminum rolling...
2111 Cigarettes
3411 Metal cans
2841 Soap and other detergents _..
2824 Organic fibers
3532 Household refrigerators
2032 Canned specialties
3661 Telephone apparatus
2141 Tobacco stemming
3694 Engine electrical equipment
2052 Biscuit crackers
2647 Sanitary paper products
3612 Transformers _
2087 Flavorings...-
3633 Household laundry equipment _
3229 Pressed and blown glass products
2823 Cellulose man-made fibers
3511 Steam engines and turbines
3572 Cathode ray tubes_
2812 Alkalies and chlorine _
2046 Corn milling _
2043 Cereal preparations
3741 Locomotives
3211 Flat glass
3691 Storage batteries _
2816 Inorganic pigments _
2063 Beet sugar _
2813 Industrial gases _ _
3572 Typewriters _
3313 Electrometallurgical
1 Ratios not available for 1966. Those shown are for 1963.
» No ratio published by the Bureau of the Census.
Source: "Studies by the Staff of the Cabniet Committee on Price Stability," January 1969, appendix table 5, p. 93.
Excludes industries with shipments of less than $500,000,000 in 1j66. Basic data are from Bureau of the Census, Annual
Survey of Manufacturers,
»68
176
170
184
163
174
»61
0)
163
178
67
88
71
90
67
79
65
78
81
100
71
83
72
80
85
95
72
93
63
79
94
97
69
91
72
81
59
68
64
80
66
80
63
71
79
95
72
85
85
100
87
98
89
(»)
63
88
67
90
87
(')
98
99
96
99
60
80
64
83
68
97
72
88
79
99
74
91
69
TABLE 6A
TURNOVER AMONG TOP 8 SELLERS OF NATURAL GAS TO INTERSTATE PIPELINES, 1964-69: SOUTHERN LOUISIANA
Name of producer
Ranking (high to low) by year of new sales contracts
1964
1965 1966 1967 1968
1969
Shell Oil Co- -._ 1
Gulf Oil Corp 2
Placid OilCo 3
Chevron Division of California Co 4
Union Producing Co 5
Bradco Properties, Inc 6
Barnwell Production Co... 7
John Franks 8
Mobil Oil Corp (1)
Texaco, Inc (')
Phillips Petroleum Co (0
Kerr McGee Corp (')
Union Oil of California. (')
Sunray DX Oil Co (')
Tidewater Oil Co (0
Coastal States (i)
Tenneco Oil Co.. 0)
U.S. Oil of Louisiana, Inc (i)
H-Tex, Inc. (i)
Sun OilCo (I)
Louisiana Land & Explor. Co (i)
Sohio Petroleum Co (')
Lake Washington, Inc... (')
Gen. Am. Oil Co. of Texas (i)
Humble Oil (i)
Pan American Petroleum Corp (')
Union Carbide Petrol. Corp (i)
Exchange Oil & Gas Co (i)
Superior Oil Co... (')
Transocean Oil, Inc (')
Columbia Gas Development Corp.. (')
Forest Oil Corp (i)
Texas Gas Explor. Corp (')
(')
(')
(')
3
8
(')
(')
1
C)
(•)
3
(')
(0
(')
(')
(1)
(')
8
(')
(')
(•)
(')
(0
(')
(')
(')
(')
(")
(')
(')
(■)
(0
(0
(')
(')
(')
(')
(')
(0
(')
1
4
2
(')
4
2
1
5
(')
(')
4
(')
(')
(')
(')
b
(')
C)
(')
(1)
6
(')
(■)
2
2
/
(0
(')
(')
(')
8
(>)
(')
(')
(■)
(')
2
(')
0)
(')
(')
3
(')
(>)
(')
(0
5
0)
(')
(')
(')
6
(')
(')
(')
(')
7
6
(')
(')
(')
8
(0
(')
(')
(')
(■)
3
(•)
(')
(')
(')
4
(')
(')
(')
(')
7
(0
(')
(')
(')
0)
1
1
(')
(')
(')
4
5
(')
(')
(')
5
(')
(')
(')
(')
6
(')
(■)
(')
(')
7
(■)
<>)
(>)
(0
8
(1)
(>)
0)
(')
(')
3
(1)
(')
(')
(')
6
(')
(■)
(0
(')
7
iNot among top 8 sellers.
Source: Compiled from FPC form 2. Rankings are based on each producer's sales volumes under non et al. contracts
in 1st year following the year of contract. Intrastate sales to interstate pipelines are excluded.
70
TABLE 6B
TURNOVER AMONG TOP 8 SELLERS OF NATURAL GAS TO INTERSTATE PIPELINES, 1964-69: PERMIAN BASIN AREA
Ranking (high to low) by year of new sales contracts
Name of producer
1964 1965 1966 1967
Sun Oil Co 1
Phillips Petroleum Co 2
Texaco, Inc. 3
The Pure Oil Co 4
Shell Oil Co_ _. 5
Warren Petroleum Corp 6
Delta DrillingCo 7
Continental Oil Co 8
Mobil Oil Corp (1)
Humble Oil. (i)
Jake L. Hamon ._. (i)
Ralph Lowe (i)
Tri Service Drilling Co (i)
Pan American Petroleum Corp (>)
Forest Oil Co _ (i)
Pecos Growers Oil Co (i)
Pauley Petroleum, Inc (i)
Pennzoil (i)
American Trading & Products Co (i)
Superior Oil (i)
Paul F. Barnhardt (i)
John L. Cox (1)
Charles B. Read... _ (i)
Union Oil of California (i)
Bronco Oil Corp... (i)
David Fasken (i)
Monsanto Co . (i)
Atlantic Richfield Co (i)
Darmac Corp (i)
Midland National Bank _ (i)
Texas American Oil Corp. (0
Chambers & Kennedy... (i)
Stetco-88, Ltd (i)
Perry R. Bass (i)
Sunset International Petroleum.. (i)
1968
1969
(■)
0)
(')
(')
0)
(')
(')
0)
(■)
0)
0)
1
(')
(')
(')
(')
(>)
(')
(')
(0
b
2
(')
(0
(')
(')
(■)
(')
0)
1
2
(')
0)
(0
(>)
(')
(')
0)
0)
(')
1
(0
(')
0)
4
3
(■)
1
(>)
3
4
(')
0)
(')
0)
b
0)
(')
C)
(■)
1
(')
0)
C)
(')
8
4
0)
3
(')
(')
3
(0
2
(')
(')
5
(')
(')
(')
(')
6
(')
(')
(')
(')
7
7
(0
(')
(')
3
(')
(')
(>)
(')
(')
2
1
0)
(')
(')
3
(')
(■)
(■)
0)
4
0)
(')
(')
(>)
5
0)
(')
(')
0)
6
0)
(')
(')
(')
8
(0
0)
(1)
0)
(>)
4
0)
(>)
0)
(')
5
(I)
(')
(0
(0
6
(')
(')
(')
0)
7
(')
(■)
(')
(0
8
(')
(')
(1)
0)
(')
2
(')
0)
0)
(')
5
()
0)
(0
0)
6
(>)
(■)
(')
(')
/
(')
(')
0)
C)
8
• Not among top 8 sellers.
Source: Compiled from FPC form 2. Rankings are based on each producer's sales volumes under non et al. contracts in
1st year following the year of contract. Intrastate sales to interstate pipelines are excluded.
71
TABLE Sc— TURNOVER AMONG TOP 8 SELLERS OF NATURAL GAS TO
GULF COAST I
NTERSTATE PIPELINES, 1964-69: TEXAS
Name of producer
Ranking (high to low) by year of new sales contracts—
1964
1965
1966
1967
1968
1969
Humble Oil. 1
McKeen Oil Co 2
Sunray DX Oil Co 3
C. Howard Phifer _.. 4
Sun Oil Co 5
Tidewater Oil Co 6
Coastal States 7
Cooper Petroleum Co 8
Carlton Oil Co (")
Union Producing Co _ (2)
Rodney Delange (2)
W. H. Doran, Jr. (2)
Sage Gas Gathering Co (2)
Cabot Corp (2)
Sinclair Oil (2)
Atlantic Richfield Co (2)
Texaco (2)
Killam & Hurd (2)
Crestmont Oil Co (0
Huisache Operating Co. (2)
Morris Cannon (i)
Pan American Petroleum Co (2)
Mobil Oil Corp (2)
Banquete, Division of Crestmont (2)
Te>.am Oil Corp (2)
Za-Tex Corp (2)
Clinton Oil Co (2)
Skelly Oil Co (2)
Cities Service Oil Co. (2)
Chevron Division of California Co (2)
Pennzoil Producing Co (2)
Larry Robinson, Inc.. (2)
Acquitaine Oil Corp (2)
Murphy Oil Corp (2)
1
(-)
(■)
(')
8
(=)
(=)
(2)
2
3
4
5
6
7
1
6
(n
(2)
Q)
(2)
(-)
5
D
(')
0)
C-)
(2)
(2)
1
(2)
Q)
(2)
(')
4
<2)
(2)
(?)
(n
(2)
(0
(2)
(2)
Q)
1
(2)
(2)
(2)
(2)
(2)
(2)
(')
(2)
(')
V-)
Q)
(n
2
(?)
(2)
3
Q)
(0
4
8
4
5
0)
0)
6
(2)
(2)
7
Q)
(=)
8
Q)
(2)
(2)
1
(-')
(2)
2
2
<=)
3
(2)
n
7
(2)
(2)
Q)
3
(^)
0)
5
(2)
Q)
6
(2)
Q)
8
(')
0)
(2)
(■')
Q)
(2)
V-)
Q)
(2)
(n
Q)
(n
(0
(')
(2)
5
(0
2
P)
3
(2)
(2)
0)
Q)
0)
(2)
0)
(0
(')
(0
(!)
C)
(2)
(0
Q)
(2)
0)
0)
(2)
,)
1
4
6
8
8
' Compiled from FPC Form 2. Rankings are based on each producer's sales volumes under non et al. contracts in first
year following the year of contract. Intrastate sales to interstate pipelines are excluded.
■iNot among top 8 sellers.
27-547 — 74-
72
Mr, Nassikas. I will try to make the summation shorter than the
prepared statement, sir.
I have given to the stenographer a list of the Commissioners and the
staff who have accompanied me to the hearing, I would like to intro-
duce Vice Chairman Rush Moody, Jr., who is to my immediate left at
the table, and Commissioner Albert Brooke. Jr., who is on my far left.
Commissioner Springer, who is the fourth member of the Commis-
sion, wanted me to extend his apologies to the committee for not at-
tending. At the same time he wished to sa}^ that the reason he didn't
feel that he would wish to participate is that most everything that has
transpired, transpired before he became a Commissioner wdiich was
about 5 or 6 days ago.
Senator Hart. I vmderstand. I think his judgment was good.
Mr. Nassikas. On my right is William P. Diener, one of my assist-
ants. The remainder of the personnel, I have given for the record.
There are two of our colleagues present whom the subcommittee
culled to testify subsequent to my testimony. I understand they will
testify tomorrow. That is, Mr. Wilson and Mr. Schwartz.
]\Iy prepared statement I will summarize.
Mr. Chumbris. Before you get into your prepared statement and on
tlie question of the subpenas, this subcommittee, over the past 15 or 16
years, has been very careful when requesting information from any-
one, and most of the times it has been a corporation. Whether it was by
subpena or not, they were very careful to make sure that the informa-
tion submitted would not be made public, thus givmg a competitor of
a particular company certain advantages to the detriment of the per-
son submitting that data.
In the statement that you submitted — in your order of June 22, on
page 3, you refer to confidentiality. Do you see a parallel between the
confidentiality that you are talking about in this order and the type
of confidentiality that we have always honored in this subcommittee?
Mr. Nassikas. On page 7, it is further asserted in the principal Com-
mission order :
Accordingly, we give express notice to the subcommittee that public disclosure
may well produce anticompetitive efforts in the natural gas industry and may
result in taking property without * * * just compensation.
I believe that this subcommittee would be most sensitive to these
rights, as part of the Senate Judiciary Committee.
To summarize, the first 10 to 11 pages concentrate on expressing to
the committee how pervasive the gas supply crisis is. I mince no words
in describing our gas shortage as a crisis. I have now had an oppor-
tunity to serve as Chairman of this Commission for almost 4 years.
I predicted on November 13, 1969, at the first policy hearing on
natural gas before the Senate Interior Committee, that there was a
deepening gas crisis, that we had to do something about it, and that
policies of the Federal Power Commission should be designed to elicit
more supplies of gas to better allocate the limited resources, and to
amend policies of preexisting commissions to meet these objectives.
I had a further opportunity on January 30, 1970, as I remember.
Chairman Hart, to testify in another policy hearing before the Sub-
committee on En^dronment and Energy of the Senate's Commerce
Committee regarding policy issues — not on gas, but electric power,
environment, etc. At that hearing, I again tried to present to your
73
■committee, as pcart of the liearino; transcript, what the problem was.
I wish I had Ijeen wrono; in my predictions of what the problem was
on gas. I wish that greater reserves of gas had been discovered or if
they had been discovered or if they were capped, that they became
uncapped and somehow we were notified as to where they were, so we
could be certain to regulate and establish policies that might respond
to that point.
Concurrent with these views, not only before congressional commit-
tees, but also in public statements, we presented at the first Appropria-
tions Committee hearing that I was privileged to participate in, in
March of 1970 — having gone through the Office of Management and
Budget in October 1969 — a plan for conducting the first national gas
survey ever undertaken by any agency of Government. Fortunately,
the funds were supplied, although not until December 1970, and we
immediately embarked on a broad gas survey which I am sure we
can discuss a little further later on.
What is the gas supply crisis? Well, we have had a decline of over
TiO trillion cubic feet of reported gas reserves in the last 5 years. We
consumed twice as much gas as we found. Our reserve-to-production
ratio has declined below about 10.
Mr. Chumbris. "Wliat was the ratio 10 years ago ?
Mr, Nassikas. In 1963 — as shown on page 2 — 18.9, according to
AGA reports and according to our form 15, which is reported by the
major pipelines, it was 20.2. You will see the parallel figures there.
At the end of 1972, AGA reports 10.4 and the form 15 — we don't cur-
rently have the figures available— was 11.4 for 1971. We are working on
a computerized process that may delay us a little bit this year, but
by computerizing this, I think we will be able to report these pipeline
reserves much faster than we have in the past.
If we consider projections for future gas requirements, by the year
1985 our staff predicts a shortfall even assuming rather substantial
supplemental sources of gas such as LNG, additional pipeline imports,
SNG, reform gas projects, and coal gasification. We still have a short-
fall that will require about 34 trillion cubic feet of discoveries annually
l>etween now and the year 1985 to meet demand and avoid the short-
fall.
Remember, during the last 5 years, all reported reserve additions
have averaged 10 trillion cubic feet a year so that our objective is to
more than triple that amoimt.
We have had some turn around, I believe, in response to some of
our policies as well as in response to more lease sales offered by the
Department of the Interior, That is provided on page 4. There was
an increase of 23 percent in the number of gas wells drilled in the first
three quarters of 1972 compared to 1971 and an 18-j)ercent increase in
exploratory gas well footage.
This is, nevertheless, a ripple in the oceans. It is not fast enough.
It is inadequate. We have to have far greater commitments to explora-
tion and development in tlie United iStates. not only for gas, but for
oil. Because, remember, as I say in my principal statement, we discover
liistorically about 25 percent of our gas as a result of a directional
drilling for oil.
Mr. Chumbris. What is the lead time? Let's say I was given an
increase and I decided to start exploring for more gas : Wlien would
74
I be able to put that on the market to sell it to a pipeline to get it to
Detroit?
Mr. Nassikas. The lead time, -when you are rather close to existing
pipeline connections, and you have to put in some laterals and other
pipeline connections, even on the Outer Continental Shelf, might run
3 to 5 years.
If we are in an area such as the Outer Continental Shelf of the
Atlantic — and I hope and trust that there will be lease sales that are
environmentally acceptable in the course of the next year in the Atlan-
tic— where the leadtime, even if there was a go-ahead today on a lease
sale, is a minimum of 5 years before the exploration and development
of that gas or whatever oil might be found reaches the market.
But after all, there is not a real shortage of gas because potentially
we have a lot of gas in the ground. The U.S. Geological Survey esti-
mates potential gas resources of from 2,100 trillion cubic feet in the
ground up to about 6,100. However, some of this gas may be in areas
where it is neither technologically nor economically recoverable. The
recent Potential Gas Committee's report estimates about 1,146 trillion
cubic feet of potential gas. There is a potential supply of gas of per-
haps 30 to 65 years, depending upon whose estimate you use.
The difficulty is that potential gas is not gas that can be burned at
the burner tip. Some of it is in inaccessible horizons, in remote regions,
or difficult geological strata. It may be that the gas is not there in
the quantities that have been predicted. On the other hand, it could
turn out that there are larger quantities than had been predicted and
I certainly liope so for the good of the Republic.
In the event we cannot develop gas resources to meet the demand
for gas and thus serve our environmental objectives, the unfulfilled
demand for gas is tlien transferred to other fuels. Yet, it is inaccurate
to represent that all of the energy ills of the Nation are attributable
to a natural gas shortage, and I will tell you why this is so in very
short terms.
Xo, one, last year we had gas curtailments — that we didn't wish to
have because this means jobs, it means industries that are not employ-
ing, it means hardship — representing a shirtfall of about 1 trillion
cubic feet of gas. This was predicted as early as August 1972. We also
had predictions the year before as to where the shortfall would be. We
came very close in our estimates, so that there could have been some
planning for the referred demand that was inevitable.
If we translate a trillion cubic feet of gas into terms of the amount
of oil that this would displace, it is about 10 days' supply of oil,
taking production 13 to 15 million barrels per day. So that the short-
fall is 10 or 11 days' supply of oil or 10 or 11 days' production of coal.
Obviously coal (unless gasified or liquefied) does not substitute for
gas in many of its uses. Oil does in many of its uses.
In fact, I presented a statement that documented this particular
point before the Cost of Living Council that might be of interest to
this committee if you haven't already seen it.
Senator Hart. We will receive it and if it is appropriate to have it
printed, certainly we will.
Mr. Nassikas. I have a copy of this that I brought with me and I
would like to offer that for the record when I have completed my
prepared statement.
75
There are other constraints that limit the accessibility of other
energy fuels which create shortages. No. 2 fuel oil, for example, last
year was blended with Xo. 6 residual, blended by the supplier because
"the No. 6 residual could not meet air quality standards. By blending
with No. 2, which is low sulfur, the residual could be supplied to
electric utilities, particularly on the east coast of the United States,
to meet air quality standards as well as emission standards in the
regions.
As for propane gas, it is amazing to me how very well-informed
students of energy, including Government officials, are under the mis-
taken impression that the Federal Power Commission has jurisdiction
over propane gas. I would like to state for the record very clearly we
have no jurisdiction over propane gas. We do not control the price,
the supply, or regulate propane gas in any way. So if there are propane
gas shortages in the United States, which I regret, these cannot be
attributable to anything the Federal Power Commission has been
delegated to do by Congress.
Turning to pages 10 to 17, 1 have prepared a historical summation of
judicial findings concerning producer regulation and industry com-
petition. I am not going to go over it in detail. The conchision from
this section is that there are no decided cases by courts of appellate
jurisdictions, particularly the U.S. Supreme Court, which state that
on a national basis the natural gas industry is structurally anticom-
petitive or that there is an impei'fect market structure which would
thus require regulation. There is also no decision that says that on a
national basis there is not workable competition in the natural gas
industry.
So that I cannot draw on the law of decided cases and say that
very wise men reviewing comprehensive evidentiary records have con-
cluded judicially that we must regulate the natural gas industry be-
cause there is not workable competition in the gas industry. So I will
simply rest for the moment with my prepared statement on that par-
ticular isue.
If there is no basis in the law from which one can determine that
the absence of worl^able competition among gas producers forms a
predicate for continued price regulations under the Natural Gas Act,
we have got to now determine from economics or economic considera-
tions whether we can reach any conclusions respecting competition in
the natural gas producing industry.
Some economists may disagree with this statement. I think there
will be economists who will agree also, just as I, as a lawyer, disagree
with some observations of economists in which they pronounce what
the precepts are of law decided by the Supreme Court. This does not
exclude economists working for the Federal Power Commission, by
the way.
Perfect competition is an economist's term, the definition of which
is irrelevant to pragmatic economic life. Workable competition, on the
other hand, normally envisions a situation where no one seller or group
of sellers acting in concert has the power to choose their level of profits,
either by giving less or chang^ing more. Under these circumstances,
market conditions penalize poor service and high costs. Prices are deter-
76
mined by supply and demand and not by a seller's own price or indi-
vidual output.
At the bottom of page 18, I state, I think, a very important con-
clusion which is not mine but rather one contained in the Economic
Eeport to the Federal Trade Commission of February 12, 1972. It
states that coal, oil, natural gas, and uranium are sufficiently substi-
tutable in their use by electric utilities to support the conclusion that
they trade in the same economic market. This increased substitutability
causes an increase in the size of the market, and tends to reduce con-
centration levels, erode existing market power, and promote competi-
tion. In my opinion, there is credible evidence that the decisions of
sellers in the natural gas producing industry, in terms of price and
output, cannot be made in isolation from fuel prices and output in the
larger energy mai-ket. AMiile many of these same natural gas sellers,
likewise participate in other energy sectors, in quantitative terms, their
market power is probably diminished.
Then at page 20 — without listing the relevant factors in analyzing
workable competition, wliich many of the treatise writers as well as
the Justice Department and past attorneys general and present ones,
I assume, utilize with respect to price discrimination, meeting rivals'
prices, and predatory pricing — the Commission regulates the wellhead
price for about two-thirds of the annual domestic output, thereby re-
placing normal market-determined pricing conditions. Under tradi-
tional producer area rate decisions, maximum ceiling prices (minimum
prices in certain producing areas) are established representing the
maximum rate a seller may receive if he is contractually authorized.
So that we prescribe or have prescribed rates in the past, in decided
cases, all of which have been affirmed, by the way, by various U.S.
courts of appeals, witli the exception of the Texas gulf coast case
pending in the Court of Appeals in the District of Columbia.
In these eight area rate decisions which have been decided l)v the
Commission, by my colleagues and me, on the present Commission,
rates were determined as they were by previous Commissions on tlie
basis of average costs. When you determine on the basis of averages,.
a less efficient seller may find that he cannot survive in a competitive
market because his cost may exceed the average : a more efficient seller
can survive and can perhaps enhance his position.
The main point is that those producers who cannot demand a price
higher than the maximum area ceiling will most likely direct their
efforts toward those reserves having marginal costs less than such
prices.
There may be uniformitv. in at least the prices of new contract gas
volumes in particular producing areas, but this is in response to gov-
ernmental price regulations.
The lona: and short of it is that the marketplace has not been free
to determine the price of gas with reference to its economic value,
marginal costs, or commodity value in relation to substitutable fuels.
And this is a large issue which is iiendins; before tlie Coiiuiiis=:ion and
T am sure will be ppuding before the courts: the extent to which our
Commission may depart from cost-based regulation and prescribe
pricos on the basis of other considerations, market consideration, com-
modity value, inter-fuel competition.
77
As you know, our Commission is divided on tliat issue, at least in
two major cases, one of which is pending on reconsideration, and one
of which where reconsideration was denied hj a vote of 2 to 1.
In any event, in conjunction with price considerations, it should be
noted tliat the industry has not been able to exercise market power in
my judgment so as to exact excessive profits.
We cannot. ob\dously, quantify and it is dangerous to try to gen-
eralize in using broad figures. Nevertheless, I do think it is fair, as I
have stated on pages 21 and 22 — that it is speculative to quantify what
the profit realization may be of the gas production functions of a
diversified utility — gas utility or oil utility. Nevertheless, it may be
observed that the average rate of profit on stocldiolders' equity for
petroleum-related industries for the decade 1961 to 1971 was 11.4 per-
cent as compared to an 11-percent rate for all manufacturing indus-
tries for the same period.
The gas industry's rate of growth, which is another criterion that
is used in any kind of economic analysis, has likewise not been solely
market determined. Over the last 3 years, we have produced on aver-
age about 22 trillion cubic feet annually Over the long term, the aver-
age growth of the gas industry was substantial, increasing from 5
trillion cubic feet in 1946 to the' current level of 22 trillion cubic feet.
Demand, as contrasted with output, has far outstripped our capabili-
ties to produce — not necessarily in terms of transmission capabilitv or
pipeline, or a distribution network, but ratlier available suppl3^ which
can be purchased by interstate pipeline companies to meet the de-
mands of their markets in various parts of the United States.
In round figures. 30 trillion cubic feet — 2814 trillion is what I have
here — is a conservative estimate of requirements for natural gas in
1975. I think this is considerably toned down by not recognizing the
definite in})ut into increased demand and pressures for increased
demand for gas as a result of an environmental restraint, air quality
standards to be specific. So I think the demand, if it was measured in
real terms, would be far in excess of 30 trillion cubic feet, let alone 281/^
trillion cubic feet in 1975.
Regrettably, we will not meet that demand. No matter what we do,
there will still be a shortfall, in my opinion, in meeting tlie demand
in 1975. While gas demand continues to increase, ability to produce
sufficient supplies has decreased.
The Commission is attempting to allocate our resources more effec-
tively. This is at page 23. For instance, on the average, about 50 per-
cent of the gas in intrastate markets is burned under boilers, whether
it is electric utilities or large commercial users of gas. industrial users.
In the interstate market, perhaps 35 percent of our gas supply is
burned on the boilers. Electric utilities last year generated 25 to 27
percent of their total generation by the consumption of gas under boil-
ers, which is about 32 to 33 percent conversion efficiency.
If we can divert gas away from boiler fuel use where alternate sup-
plies of environmentally acceptable fuels are available, then we will
automatically allocate our gas resources to more efficient uses, which,
I believe, is part of our economic regidatory function.
Accordingly, we have issued a series of policy statements and rule-
makings which are designed to establish curtailment programs which
are equitable in accordance with the highest and best use of gas, and
78
additionally, we have a proposed rulemaking-, comments for which,
have been received, although we have not yet acted on it, suggesting
or asking for comments as to whether we should disallow the use of
gas to be burned on the boilei-s as a matter of end use. This is a radical
move.
On the other hand, we must adopt programs which will enable us
to utilize this resource. If other environmentally acceptable fuels are
not available to burn under boilers, then we arrive at an impasse as
to whether or not we stop economic progress as to that particular end
use, and that particular region, and allocate it to other regions of the
United States.
There are extensive capital requirements. I think it can be argued,
although I don't think very effectively, that joint bidding on leases
may sometimes result in some type of collusiveness between the joint
bidders. I think it would be unrealistic to say that this cannot happen
or it doesn't happen. I am certain that on occasions it does happen. At
the same time, the reason that you have joint bidding, in my opinion,
is largely to spread the risk, to diversify the inherent risk that is in-
A'olved. The amount of capital that is required today to bid on leases
is far higher than it was just 3 to 5 years ago.
Two examples. The lease sale on December 31, 1972, in south
Louisiana, attracted $1.7 billion of capital just for the privilege of
buying a lease to explore and develop those leaseholds. Before another
cent Avas spent, a drilling commitment for a rig, or $2 to $5 million,
was spent on the Outer Continental Shelf. Pipeline companies, accord-
ing to our staff's evaluation, advanced to excess of $300 million to that
process in order to acquire the first right, the contract right, to acquire
gas, to fill their pipelines, to meet consumer demands.
The second example is the Texas Gulf Outer Continental Shelf lease
sale that was held early this week or last week — just a short time ago —
in which $1.6 billion in bids were made. So that for two sales between
December 1072 and June 1973, $3.3 billion was committed to explora-
tion and development of gas and oil in our Outer Continental Shelf.
I think that there could be some very constructive action taken by the
Department of Interior in modifying their leasing procedures. Rather
tlian a so-called royalty and bonus bid, which directly inures to the
benefit of the Treasury, I would suggest deferral l^onus bidding and a
royalty which would stretch out over some period of time, yet have
mandatory regulations that the leasehold must be developed within a
specific period of time.
Vriij do I suggest this? This isn't the first time. I suggested this
time and again to the Department of Interior and to committees of
Congress, because in this way the smaller producer, or combinations
of smaller producers, will be able to finance their enterprises in com-
petition with larger producers which will create a healthier clim.ate
in the competition for leases than exists today. This is particularly
necessary when we know that the President has recommended about 3
million acres annually over the course of the next 5 to 7 years. If we
have 3 million acres annually, say three large lease sales or five large
lease sales, then I believe that it becomes almost imperative that some
type of program be adopted to l)e certain that there is a healthy com-
petitio}! in this industry and that there is not some restraint, because
of capital requirements, or competition evidencing itself.
79
Barriers to entry, nevertheless, despite capital comniitnients. are
modest in on.sliore activities. They are increasing in offshore activities.
The only way, nnder your current bidding procedure, as I said earlier,
that some of' your smaller producers can even get involved is by work-
ing together vith other larger producers or a consortium of small
producers, or working with pipeline companies.
Of course, nonconventional gas supplies, such as naphtha, later coal
gasification, perhaps direct gasification of oil, perhaps liquefied coal
processes, and liquified natural gas. are going to enhance competition
because the barriers to entr}" should not be prohibitive.
So, I think that there may be greater competition from that stand-
point as we go on.
I don't want you to lose sight of the observation tliat I made at the
bottom of page 27, that there is a great deal of "artificiality" in con-
structing such a quantitative presentation of concentration ratios, and
any given economist or group of economists could spend generations
arguing over the appropriate conclusions Avhich decisionmakers should
di-aw therefrom. I know that your subconnnittee will remain cognizant
of these caveats.
In assessing concentration ratios, one source gives some indices for
further assessment. Generally, this theory postulates that the top 8
firms should control about 50 percent of the market before further
inquiry is needed to determine the existence of a structural oligopoly.
Table 2 shows the percent of sales by large producers (over 2 mil-
lion Mcf annually) to interstate pipelines for 1971. Information on
intrastate producer sales, representing about one-third of annual do-
mestic production, is unavailable. The top 4 producers accounted
for aix)ut 25 percent of jurisdictional sales to intei-state pipelines in
1971; the top 8 producers, about 43 percent. Ten producers made
about one-half of the 1971 sales to interstate pipelines, and 300 pro-
ducers accounted for about 95 percent. On the buying side, the top
4 pipelines accounted for about 36 percent of the purchases, and
the top 8 pipelines, about 58 percent.
Within separate producing areas, to the extent that they are relevant,
concentration ratios would be somewhat higher. In south Louisiana,
for instance, the top 4 producers account for about 35 percent of
the sales to interstate pipelines; the top 8 producers, slightly over
50 percent. On the purchasing side, the top 4 pipelines purchased
60 percent of the production; the top 8, about 90 percent. On a
national basis, there appears to be an absence of structural imperfec-
tions, which in my opinion would indicate that workable competition
does exist, at least among sellers, using concentration ratios of annual
production. Table 5 simply illustrates the numerous manufacturing
industries vrith higher concentration ratios than exist in gas produc-
tion, and such industries are not subj-^ct to direct Government price
regulation.
Some economists on the Commission's staff have performed analyses
of concentration ratios based upon new contract volumes and uncom-
mitted reserves, contending that this is the relevant market since it
represents the volumes available for sale in any given year.
However, both these studies have maior shortcomings. It only tells
part of the story. Therefore, it is misleading.
80
As of June 30, 1972, for instance, the Commission staff reported un-
committed reserves available for sale in the lower 48 States at 3.4
trillion cubic feet. Incidentally, our supplemental report that we
issued yesterday confirms that report nationally of 3.4 trillion cubic
feet, and we have set forth in the staff report what the differences are
between that and the initial report that was issued. The concentra-
tion ratios for the top 4 and top 8 of that 3.4 trillion cubic feet
were 48 percent and 68 percent, respectively, on a national basis, and
range as high as 100 percent for less than 4 producers in certain
specific pricing communities. That is in table 1.
But these figures are erratic. They represent circumstances at a
single point in time. Gas exploration and marketing are continuing
activities which I don't believe can be meaningfully analyzed at a
single point in time. Such figures should and do vary dramatically,
for" example, as tables 6 a, b, and c, demonstrate, depending upon
the election of the time for measurement, but they are misleading for
purposes of analyzing workable competition isolated from an evalu-
ation of other factors. If uncommitted reserves were averaged over a
reasonable time frame, for example, 3 to 5 years, one could anticipate
concentration i-atios paralleling those for new contracts, which latter
ratios are comparable. Uncommitted reserves represent a small frac-
tion of total proven reserves — about 1.5 percent — and I indicate that
the average volumes have declined.
On page 32, we note that utilization of new contract volumes or
uncommitted reserves does not reflect the volumes actually available
for that purpose. There are gas reserves available for sale, whether
through new contracts or renegotiation, from the expiration of exist-
ing flowing gas contracts. The staft"s estimate is set forth on page
32 with the assumption in footnote 41 that gas reserves remaining
after 1972 from contracts expiring that year approximated 2.5 trillion
cubic feet annually. Thus, if we add gas reserves released from con-
tract to other micommitted reserves, gas volumes available for sale as
of June 30, 1972. would be closer to 6 trillion cubic feet rather than
3.4 trillion cubic feet. This does not moot any conclusions to be
drawn from concentration ratios of uncommitted reserve volumes.
However, I l)elieve a more credible appraisal of concentration ratios
in relation to market structure should include the volumes of reserves
available upon expiration of flowing gas contracts.
Then I have evaluated turn-over ratios in my principal statement.
I won't go into those ; they are on pages 33 to 34.
I conclude that there is credible evidence to support the thesis that
workable competition exists in the natural gas producing industry. I
further submit that those who would advocate continued regulation
have not sustained the burden of presenting evidence that on a na-
tional basis the industry is not workably competitive. I further find no
evidence of anticompetitive conduct by producers vis-a-vis the struc-
ture of the industry. I recognize there is some evidence of structural
imperfections in the industry, but not to the extent that deregulation
of new gas prices with appropriate monitoring and safeguards against
anticompetitive conduct in any market area should not be tried on an
experimental basis, through legislation by the Congress, in order to
establish prices through the operation of the laws of supply and de-
mand in an intercompetitive fuels market rather than by continual
81
regulation of siicli new gas volumes dedicated to the interstate market.
Past practices have, in my opinion, been antithetical to the overall
j)ublic interest, particularly before I became chairman of this Com-
mission. Excessive volumes of gas have been diverted from jurisdic-
tional consumers to intrastate markets, including the combustion of
large volumes to generate electricity when alternate fuels could have
been utilized.
More and more risk capital is being committed to nonconventional
gas resources at prices to the consumer double or triple the price levels
from traditional domestic sources of pipeline gas. Low gas prices have
significantly contributed to artificial demands for this premium fuel,
and as supplies have declined, demand and upward price pressures
have shifted to other fuels.
Drilling activity in our continental resource bases, both for oil and
gas, has declined, with balance of payments and national security con-
sideration becoming more important as increasing quantities of oil
are imported to meet consumer needs. I submit that the "costs'' to the
IN'ation's energy consumers from continued regulation may be far
greater than would result from a market-clearing price for natural gas
determined b}^ the impersonal forces of the marketplace appropriately
monitored by antitrust enforcement by the Justice Department and the
Federal Trade Commission, and by the Federal Power Commission
within the ambit of its regulatory responsibilities.
I submit that the attainment of the Nation's economic, social, and
environmental objectives will not be met by adhering to past energy
policies, including unrealistic pricing of wellhead prices of natural gas.
And I further submit that the Congress should expeditiously con-
sider legislation at this Congress, which would return to the market-
place the responsibility of setting wellhead prices for new gas.
I might conclude finally — and I don't think this need be said, but I
am going to say it — until Congress has amended the Natural Gas Act,
we will continue to regulate within the constraints imposed by the
'Congress and the judiciary.
Thank you, Mr. Chairman, members of the subcommittee.
Senator Hart. Thank you, Chairman Nassikas.
From the thrust of your testimony, and more particularly from
my reading of the prepared statement in its entirety. T take it that
you believe the Avellhead natural gas shortage is real and that it is not
contrived oi- artifically created by producers to force a price increase?
Mr. Xassikas. Yes. sir, I have no evidence to the contrary.
Senator Hart. That judgment, I take it, comes from various studies
and litiofated cases, the basics of which I would like to examine with
you. or ))erhaps, ask staff to examine with you.
But, before doing that, I think we ought to do two other things.
First, acknowledge the presence of the able Senator from Massachu-
setts. Mr. Kennedy, who joined us just after you began your testimony,
Perhai^s Senator Kennedy has something he would like to comment
on at this point or do you want to reserve ?
Senator Kkxxedy. You are very kind. Mr. Chairman. T know that
you have extensive questions for the witness. I appreciate it very much
if I would have an opportunity to inquire very briefly of the witness
himself.
Senator Hart. Fine.
82
Senator Kennedy. I reoret. Mr. Chairman, not having an oppor-
tunity to hear yonr full statement and comment. I think you have
heard today some of the difficulties and complications we are facing
in this committee and other committees in trying to fulfill our respon-
sibilities.
One of the points that Avas brought out during the course of your
statement is the availability of certain information to this committee.
This morning I chaired the hearings uPider the Administrative
Practices Committee and our witness was Attorney General Richard-
son who was testifying on the Freedom of Information Act, wdiich
has been the act which I believe tliat you relied upon in your denial
of certain materials to this committee. I inquired of Mr. Richardson,
as the primary spokesman and. really, the architect of the administra-
tion's position, what the justification was for any of the administrative
agencies to use the Freedom of Information Act. He indicated, in
response to a series of questions, that he found it extremely difficult to
rationalize" or justify the use of the Freedom of Information Act to
the ]Members of Congress, particularly when they are fulfilling their
legislative purpose and legislative function.
I am just wonderijig whether the views of your people who have
been in touch with ]Mr. Richardson, or Avhether your view of the act
was anv difterent from the conclusions which have been drawn by
Secretary Richardson ?
jNIr. Xassikas. Basically, as we set forth in our revised order issued
just a few days ago, we believe that the Freedom of Information Act,
as well as the Natural Gas Act, establishes a policy which we believe
we should follow, and that is, that information that is secured on the
basis that it is confidential will be maintained and its disclosure
Senator Kennedy. We are not talking about public disclosure today.
^Ir. Nassikas. If the committee isn't talking about public disclosure,
then it seems to me that you are observing the Freedom of Infonnation
Act which the Congress passed, which does protect privileged infor-
mation against public disclosure but not against the Congress.
The chairman recited the act. I have read the act. I have studied it.
We also have legal counsel's memorandum.
With reference to your other observ'ation. as to whether we had dis-
cussed this with Attorney General Richardson, the answer to that is no,
we have not sought or discussed our legal views with the Justice
Department.
We have our own counsel, and as a regulatory agency we make our
decisions without advice from the Justice Department.
Senator Kennedy. Your counsel has not suggested that the Freedom
of Information Act applies to the relationship between the Congress
and your agency, has it ?
]Mr. Nassikas. We have a memorandum that has been delivered.
Senator Kennedy. That is a rather simple ciuestion.
Mr. Nassikas. There is an implication to that effect, yes. The memo-
randum sets it forth.
Senator Kennedy. That the Freedom of Information Act applies in
an}- way to requests of Congress and an}^ administration agency — I
don't believe your counsel has given you advice that it does, has he?
^Ir. Nassikas. The memorandum is about an 8-page memorandum
that goes into the Freedom of Information Act in specific relation to
83
the disclosure of the information which was requested by this siibcom-
mittee prior to the issuance of the subpena, so I am responding directly
to 3'our question.
Senator Kexxedy. Does it or does it not ?
Mr. Nassikas. It does. That is what it states ; and if you would like
to read it, it is part of your evidence now.
Senator Kexxedy. The act is very clear and it says it does not, and if
there is any kind of legislative confusion, it is one that I think under-
lines the iniportance of making sure that we do have legislative action.
And it would be useful and helpful, I think, to have a consistent
viewpoint between the Attorney General and your counsel, because
we are getting, as a subcommittee of the Judiciary Committee, two
different positions in a matter of about 4 or 5 hours.
Mr. Nassikas. I don't believe Attorney General Richardson was
asked a question based on the facts in this case.
Senator Kennedy. No, he was asked about the application of the
act to regulatory agencies by request of Congress.
Mr. Nassikas. I think that is too broad for anybody to answer.
Senator Kennedy. Well, he answered it. He answered it quite
clearly.
Mr. jSTassikas. I don't think that he necessarily would answer it the
same way if he had all the assumptions and facts.
Senator Kennedy. We will find out.
What assurances can you give, what will be the cost again to the
consumers if there is to be a deregulation ? As I understand, in terms of
the cost per thousand cubic feet
Mr. Nassikas. I don't think that the cost to consumers can be
quantified as a result of deregulation compared to what the cost to
the consumers might be if there is not deregulation.
Senator Kennedy. Let's just respond to the question. What v\-ould
be the cost if there is deregulation, and then I will let you give what
the cost would be if there is not.
Mr. Nassikas. I say one cannot quantify. I cannot quantify what
the cost to consumers would be of deregulation, and deregulation of
new gas is all I am talking about, not deregulation, period, for all
gas.
Deregulation of new gas, defined by stature, with appropriate moni-
toring by the Federal Pov.er Commission, I have defined in my prin-
cipal statement. So I cannot quantify, nor do I believe any economist
can quantify, except on the basis of speculation.
Senator Kennedy. Let's speculate. Will the price go up or will it
go down ?
Mr. Nassikas. I assume the price will go up with deregulation of
new gas because of the fact that gas has been maintained at artifically
low levels by the regulation of the Federal Power Commission, which
I head.
Senator Kennedy. How much will it go up ?
]Mr. Nassikas. This cannot be predicted. It depends on the availa-
bility of substitute fuels and an assumed supply-price elasticity factor.
It depends on the price of oil, the price of coal, the price of intrastate
gas, on environmental restraints, and on import policies.
Senator Kennedy. Let's take the given situation at the present time,
the immediate situation in terms of the legislation that exists on the
84
books with regard to environment, the general utilization of coal,,
and otlier kinds of research. Let's just take the present conditions.
What is your estimate about the increase in the cost I
Mr. Nassikas. As I say, I have no estimate to give you.
Senator Kennedy. You don't know. Have you done a study on that ?
Mr. Nassikas. "We have not done any studies that I know of that
would indicate where the price level would go in the eA'ent of deregu-
lation of gas.
Senator Kennedy. Do you mean to tell me you are unable to tell
the consumers of this country wliether they are going to be paying-
more with deregiilation. and how much more they are going to pay,
and your testimony is that it is just a matter of speculation?
Mr. Nassikas. No ; that is incorrect.
Senator Kennedy. What is your answer ?
Mr. Nassikas. My answer is that you cannot honestly quantify what
the price will be but, nevertheless you can state that if there is decon-
trol of the gas so that you provide incentives for exploration and de-
velopment, then new gas supplies should be found and developed so
that the overall energy costs over the longer term should be less to
consumers.
Second, consumers are interested wherever they may be situated, in
my home State of New Hampshire or in yours of ^Massachusetts, not
only in price but also in supply and imless and until we get the ade-
quate supplies, we are not going to be able to serve consumers and un-
questionably the price of other fuels will go up if there is an unful-
filled demand for gas to other fuels which are in short supply.
Let me give you one example so I can illustrate my point. In the
Algonquin case which serves New England, we have authorized syn-
thetic gas to be purchased by synthesis of naphtha from abroad at
$1.80 per thousand cubic feet. That compares with a delivered price at
Boston of about 60 cents for natural gas from domestic sources.
In the event we can develop additional supplies of gas, shall we
say, delivered to Boston at 5 or 10 cents more than the current 60
cents delivered price, the consumers in that region will benefit.
Senator Kennedy. Let's get back again. What are the incentives to
the companies to go on out there and explore further \
Mr. Nassikas. In the event of decontrol ?
Senator Kennedy. Yes.
Mr. Nassikas. The incentives are that if we decontrol and if the
leases are available, both of which are required, the producers are going
to develop more gas. They are going to find gas. They are going to
start getting a return commensurate with their risk investment and
they are ffoing to be able to dedicate new (?as supplies to the interstate
market. Remember, much of our gas in Texas has flowed into intra-
state markets. In fact, the Federal Power Commission has substan-
tially contributed to the development of the Eepublic of Texas by its
low "price policies which divert gas from the northern interstate
markets to Texas intrastate consumers.
Senator Kennedy. Is the investment return commensurate with their-
investment going to mean higher prices for the consumer ?
Mr. Nassikas. It may mean higher prices for the consumers tem-
porarily, but not higher prices from the standpoint of the overall gas
supply to consumers.
85
Senator Kennedy, Let's take the person wlio now uses the gas for
cooking. Is that going to mean higher prices ? For what period of time
is your estimate ?
Mr. Nassikas. I can't give you an immediate estimate. I will say that
if we can't decontrol or if the Federal Power Commission is not au-
thorized by Congress to regulate on the basis of market forces, then
the last costly alternate to supplies that are not forthcoming has to be
LXG or coal gasification or has to be more gas from Canada which we
can't get even at higher prices.
In all of these instances, in the event you don't decontrol, you are
dealing with gas that is more than a dollar delivered to the east coast
of the United States.
Senator Kennedy. Mr. Chairman, I thought that the Power Com-
mission and the other regulatory agencies existed for the development,
the acquiring of special information that would be useful and helpful
to the Congress in answering the consumers who write to us wanting
to know what the impact of decontrolling is going to be.
Does that mean higher prices and for how long? An adequacy of
supply and for how long ? Your testimony is that you are unable to give
either to me or the members of this subcommittee or the consumers of
this country what this process or procedure for deregulation means.
In terms of consumers of this country, the homeowners — not about
some general kind of theory about what may or may not happen at
some time in the future, the effect of environmental laws, the greater
use of coal, the research in solar energy — ^they want to know what the
impact is going to be for the consumers, and I do, too.
I want to find out whether the Power Commission has done any kind
of study. If they were to get a deregidation, what is the impact going
to be on the consumers and over what period of time ? It is a question on
the mind of every consumer who uses gas in this country.
Mr. Nassikas. I understand.
Senator Kennedy. ^Miat are we going to tell them ?
Mr. Nassikas. Over a period of time
Senator Kennedy. Let's take a 6-month period.
Mr. Nassikas. You can't do it.
Senator Kennedy. You can't do it over 6 months? You can't tell
what deregulation is going to cost the users of gas in this country.
Mr. Nassikas. As to the next G months, if we decontrol the impact
would be virtually zero because by the time you develop new gas
supplies with exploration and development, it will take at least 3 to 5
years before it is developed. So in the next 6 months, the answer to
your question is : I think the impact is zero.
Senator Kennedy. Have you done any studies from the consumers'
point of view as to what decontrol would mean? Just answer that.
Mr. Nassikas. I haven't personally conducted the studies but we
have studies called to our attention which have been reviewed by our-
selves and by economists on our statf.
Senator Kennedy. Let me ask a question. Have you done studies as
to what the impact is going to be from the consumers' point of view?
Mr. Nassikas. AVhen you talk of a study, I consider a study as
some
Senator Kennedy. Just yes or no.
86
Mr. Xassikas. No. no study from which one can then state, based on
that study, that if you deregulate, consumers are going- to pay "a?" for
gas. But overall, the consumers of this country — and I would like to
have a hearing on the issue of decontrol — are going to benefit from the
Federal Power Commission's recommendation of deregulation rather
than continued control of gas prices.
Senator Kexxedy. You haven't done any study to show that?
Mr. Xassikas. We have years of experience with declining gas de-
liveries at the jDrice levels which have been established by our Com-
mission and the price of gas in most regions of the United States for
a premium fuel is on a bargain basis.
Senator Kexxedy. We have a vote. We will have to recess.
[A brief recess was taken.]
Senator Hart. The committee will be in order.
The Senator from Massachusetts hopes to return. I would like the
staff to begin to examine with Chairman Nassikas the studies on which
the general conclusions have been based, and Mr. Chumbris has a ques-
tion to follow on the lines of what Senator Kennedy w^as asking.
Mr. Chumbris will ask that. I will then ask Mr, Bangert to
commence.
Mr. Chumbris. Chairman Xassikas, this morning I had a colloquy
with Congressman Brown along the lines of the colloquy that you had
with Senator Kennedy. The point has been raised by some that the
consumer would have to pay more if we continue the practices that
have been in effect since 1960, or let's say somewhere in that area, on
the theory that because of the capped price over those years, there
had not been sufRcient discovery, exploration, development, and mov-
ing of that natural gas. The shortage has been alleviated by coal,
which I understand is now 35 cents for a comiDarable amount; oil,
which I understand is now 60 cents for a comparable amount; and
synthetic and liquefied natural gas, which I understand range from
$1.25 to $1.50 for a comparable amount with the possibility of prices
reaching as high as $2 for a thousand cubic feet.
Thus, if there is not an improvement in the price picture to en-
courage the development of new gas, the amount of gas has to be
made up by this higher-priced gas. As the article in Business Week
pointed out, the pipeline people have to keep these pipelines filled.
And even if there is a deregulation, they cannot possibly get more
than 15 trillion of the 30 trillion that they need in their pipelines
and they have to pick that other 15 trillion at the higher price of
$1.25 or $1.50.
That is what came out in the colloquy this morning. Is it your con-
tention that 3'ou can't tell what the cost is going to be beca,use de-
regulation has not yet been enacted by law and you are just meeting
it on a case-by-case basis; that therefore, you can't speculate as to
what the further impact is going to be under the old price and as to
where you will be able to buy the substitutes and what the costs of
those substitutes are gomg to be since they are not controlled as the
natural gas is controlled by the Federal Power Commission?
Mr. Xassikas. I am in agreement with that observation but I do
not think that one can honestly say where precisely a price level would
be in the event that there is deregulation. I have had discussions with
various economists and the consensus of the ones with whom I have
87
discussed tliis issue is that the way you determine what will happen
is to try it^ — to try it, but be certain that when you try it you have
chosen monitoring and surveillance so you don't get any economic
aberrations that may result in an injustice to consumers.
Actually, the least costly alternative to additional supplies of gas
i-ight now seems to be, as I said earlier. LNG or importation of naphtha
and reformed gas at $1.80 in Provideaice, R.I. Distrigas, which is a
subsidiar}' of Cabot Corp., authorized imports of gas there at levels
that exceed $1 to the Everett, Mass., terminal.
So that if we don't spend our domestic source of gas and blend it
into the price of gas that we will receive from Texas or south Louisi-
ana, it is just boimd to be higher by not decontrolling. If we decontrol,
then in the course of time, we should develop substantially higher gas
supplies; if we don't develop the new supplies, and a very large incre-
ment of new supplies of gas is not the result of decontrol, obviously it
shouldn't be continued.
"\Miat should happen is that controls should be reimposed. To that I
agree. I think one observation that would be helpful to the committee,
and certainly for the record of the committee, is to take a typical
residential gas heating consumer in New York City — just to pick a
city in the eastern part of the United States — and apportion the vari-
ous elements of cost included in the price to the residential gas con-
sumer, to the houseowner that we are all concerned about, particularly
in the Federal Power Commission. Now $1.46 is the distributor's share.
The pipeline receives for transportation, 22 cents, and the producer
receives around 20 cents. So that when we talk about decontrol, we are
talking about the impact on the producer price, not on the other com-
ponents, except as they are passed through without further return to
the pipeline. So that even if the price went up another 10 cents in the
example that I have given you, the price would still be $1.98, or an
increase of about 5 percent.
]Mr. Chumbris. Just this one further question and then I will leave
the questioning to the staff under the direction of the chairman.
Let's assume that right now the pipelines have commitments to serve
gas and it is at 20 cents per cubic feet and there is a contract that runs
for another 5 years. This gas will cover certain areas of Detroit, Mil-
waukee, New York City, and Philadelphia. Then a new development
of homes in another part of the city, a completely new development
with no commitment of gas, can't get any of this 20 cent gas, so a con-
tract is made with the same pipeline company to take care of this area
and the gas comes in at $1.80, as you have noted.
Would that mean that the citizens in this new development would
have to pay on the basis of $1.80, whereas the people who were lucky
enough to have their homes built previously would continue to pa;^
under the 20 cent contract ?
Mr. Nassikas. I think generally so, although there would be excep-
tion? to that depending on the tariff of the company. But generally
speaking, when a pipeline is in curtailment they normally don't at-
tach new customers so the new customers that get on the line would
have to pay a higher price if that incremental supply is available, un-
less we ourselves authorized some cutback of service of existing con-
tracts, which we haven't done nor do we expect to.
27-547—74 7
88
Incidentally, the average price paid per M ft^ in tlie year 1972
to gas producers by all interstate pipelines was 20.45 cents per M ft^.
In 1964, that figure was 16.59 cents. This Commission, which some
people suggest is oriented to the producers, has maintained price levels
to consumers of gas in the United States, insofar as the weilliead price
is concerned, at 20.45 or 123.9, compared to the 1964 base of 100. So
this increase is really quite modest on the a\erage wdien we consider
that the Consumer Price Index, for example, for all commodities has
gone up from 100 in 1964 to 134.9 in 1972. The increase in the price of
wellhead gas since 1964 is about 24 percent, compared to a 35-percent
mcrease in Consimier Price Index.
Mr. Chumbris. When you say 123, that is starting with 100 as a
base. So actually it is only a 25-percent increase if }'0u look at it from
$16 to $20, whereas if you did the same thing in compamble meats
and rents, the percentage would be much higher.
Mr. Xassikas. Or the price of newspapers.
Mr. Chutnibris. Thank you.
Senator Hart. I promised to let Mr. Bangert get on with his;
thoughtfully prepared stall questions, but do you have any study that
would assist you, us, and the public in an understanding of the rela-
tionship between price and supply ?
Mr. Nassikas. I am sure tiiat there are some studies. I might
refer you to the Council of Economic Advisers' three successive re-
ports, very lengthy studies in which the reconunendation was made
that gas be decontrolled. I don't believe they conihie their recommenda-
tions to new gas. That is their study.
As for studies by our own statf, I will be glad to check with the
economists on our stafl'. They have all kinds of studies, some of which
may be useful, others of which may not be. So let me check with our
economists.
Senator Hart. Let's see what you can get.
It was my understanding that a study of that sort, on the relation-
ship of price to supply, was to have been a part of the national gas
reserve study, but it wasn't.
Mr, Nassikas. We tried. I think your recollection is 100 percent
correct, Chairman Hart. We had hoped that we might be able not
only to conduct studies, intensive studies on this, but to determine
the elasticity of supply to price.
We are having a meeting of our Executive Advisory Committee
this week; the. summary reports are out. And I believe, as regards
this particular aspect of our study, that we were unsuccessful at this
first staire of the national gas survey in getting definitive reports.
Mr. ISIcAvoy and other members of the faculty of ]MIT are working
on a study in which our staff, particularly the economists and the Bu-
reau of Natural Gas, is participating, and in which I personally have
spent a good deal of time trying to determine whether we can measure
the elasticity of supply to price and also measure the converse; that is,
the demand constriction ns the price coes up.
Mr. AcAvoy has certain assmnptions and theories in his studies. A
gentleman named Dr. Khazzoom presented econometi'ic studies to the
Commission in evidence that was presented in the south Louisiana pro-
ceeding. We did not adopt Dr. Khazzoom's findings because they were
not credible.
89
At the same time, Dr. Khazzoom did make at least a contribution to>
the literature, although not a contribution that adjusts reasonable rates
in that case. I say with all candor as to elasticity of supply to price^
there are some economists who use a factor of 0.1 ; others go to 0.5 ;
others go to 0.6, When you have got a spread of 1 to 6 to 7, I don't
know personally what to believe until I have seen the experiment con-
ducted, and so far as I am concerned, decontrol is experimental, just as
much of our rate regulation is experimental as authori;?ed by the courts.
Senator Hart. If I understand you, I think it is fair to say that you:
and the Commission at this moment do not have a study on paper deal-
ing with the relationship of price and supply that you feel is fair
and complete.
Mr. Xassikas. Xothing definitive. I don't want to leave the impres-
sion that our statf of economists doesn't have some studies that I may
not have seen; or that they have studies in their otHce that I have seen,
but are discounted.
Senator Hart. And the effort in connection witli the national ixas
reserve study to develop a price-supply study failed ?
Mr. Xassikas. I would say yes. I would like to just qualify the
answer because of the question.
I think you put it in terms of the iiational gas reserve study, and
it is an accurate question except that the elasticity study that we were
hopeful of conducting, making some contribution, was on potential
gas. AVe wanted to develop on the various assumptions, price assump-
tions, what supplies might be converted from a potential gas supply
to a proved or deliverable gas supply; that is. what price levels would,
induce enough additional exploration and development, and what
would be the response to each increment of price, taking various incre-
ments as an assumption.
Let's say an increase of 5 percent woidd induce a 1-percent increase?
in supply. An increase of 10 percent would induce another 2 percent^
an increase of 20, et cetera. We had basic assumptions that vre pre-
sented which are part of the public record on our gas survey and
which will be publislied on this type of effort. However, as to the elas-
ticity relating to decontrol, we were unsuccessful.
There is a massive report by the Legislature and Eegulation Com-
mittee, Task Force, of the Technical Advisory Committee on Supply^
where the position is taken on decontrol and it includes dissents by
one of our economists. Mr. David Kelfrey of Ralph Nader's associa-
tion, and another gentleman who was associated with so-called public
interest causes. We do have that study. It is about 500 pages long, but
I am not convinced one way or another by either the majority or
the dissent.
Senator Hart. Based on the recent track records, if we compare the
period lOCvS-BT to the 1968-72 period, we find that we have had rate in-
creases of about one-third and in that same period we have had ap-
proximately a 50-percent reduction in new reserve additions.
]Mr. Xassikas. We had rate increases of one-third for what?
Senator Hart. For the period 1963-67 compared to 1968-72, I mn
told that there was a rate increase for natural gas of about one-thircL
]Mr. Xassikas. The price paid at the wellhead was 15.59 cen:tsL In
1967, that had gone up to 17.13 cents.
Senator Hart. It was 17 cents in 1963.
90
!Mr. Xassikas. In 1063 it was 17 cents. Then it went down because
in 1061 the price we show is 15.59 cents here. This is interstate gas,
interstate pipeline. Then throno-h 1967 it liad gone np to 17.13 cents.
Then in 1968 and 1969, it went to 17.32 cents. It was 17.62 cents in
1970 and the average price was 18.11 cents. In 1971, it was 19.23 cents;
1972, 20.54 cents.
That was the price paid at the wellhead. The price received by
pipeline is, of course, a different situation which would reflect in-
creased costs not only for gas but for increased pipeline costs, labor,
inflationary impact, et cetera.
Senator Hart. What I am looking at and the figui'es that suggested
the increase of about a third, comparing the two periods, is a weighted
average initial contract price per thousand cubic feet. This is part of
a document that is not yet in the record.
In fairness to you. I suppose we should wait until an explanation is
available to us clarifying the sources of those figures. And we will
submit this to you in writing if our understanding is confirmed, and
YOU can respond.
Our understanding is that comparing 1963-67 to 1968-72, there is
an increase of about 33 percent — 33.5 percent.
]Mr. Nassikas. As I say, Mr. Chairman, I will be very happy to re-
spond anytime that you wish me to once I know what is the predicate
of the estimate. The estimate may be right insofar as it defines the
estimate and it may not be right insofar as it doesn't fully define what
the particular witness is talking about.
Senator Hart. All right. In the same period, we would have had a
decline of about 50 percent in new reserve additions. Of course, the
obvious question is, again assuming these facts, if a price increase of
a third causes this to fall back 50 percent, how high do you have to
go before you get none, or how high do j^ou have to go before you
get more ?
]\Ir. Xassikas. It sounds as though it is somewhat a frustrating and
empty performance, doesn't it? But it really isn't.
Senator Hart. No, it isn't if these figures
Mr. Nassikas. I mean, Mr. Chairman, I am agreeing with you in a
sense, that if the prices goes up a third and as the price goes up you
get a decline in exploration, then eventually if that trend continues,
what you'd better do is lower the price to get an increase in explora-
tion. I don't think that will happen. I don't think even the economist
who might have said that will agree with that.
In other words, I still believe that No. 1, there is leadtime. I am not
apologizing for anything, but I have to explain. There is leadtime
involved between the time we structure the policy that ends up with
a nonappealable final decision, and the response of industry to that
policy.
Second, there is the question of when a lease sale is going to be held.
The big lease sales that we have — there was one in December 1970.
Then there was a drought of lease sales until September 1972, which
was a deferred sale, delayed 9 months by environmental opposition.
One more big lease sale was held in December of 1972, and then an-
other one, Texas Gulf, last week.
If I am right to positing the view that it is 3 to 5 years before ex-
ploration and development is translated into flowing gas, that lead-
91
time is part of the reason that there may not have been as hirge a re-
sponse to our policies as we would have hoped.
A second part of the reason may be the fact that the lease sales are
still too recent to be definitive as to what is going to be developed in
that particular area. So I say that we also have to consider the impact
of economic stabilization.
We liave had off-again, on-again price freezes in the United States
over the course of tlie past 3 years. Currently we are in the middle
of a 60-day freeze. We deferred any action in our national rulemak-
ing to proscribe uniform rates insofar as may be feasible because of
the freeze.
The only reason I mention this is that policies which fluctuate and
which prevent prices being changed in accordance with free market
regulations do deter incentive.
One final point. On nonappealable final decisions, most of our prod-
uct rate decisions were decided back in 1971.
However, the decisions affirming those cases came down only within
the past 6 months and these are not all nonappealable final decisions.
They may ultimately be appended to the U.S. Supreme Court.
So, I say again, that until there is a nonappealable final decision
this is definitely a deterrent to the committing of capital at risk to
exploration and development or to the dedicating of new supplies to
the regidated interstate market.
It is one reason, and I think one very substantial reason, why I now
advocate decontrol of new gas, whereas for over 3 years I have rec-
ommended against it because of the fact that we have not had any
action by the Congress to allow the Federal Power Commission to
regulate by market forces, and I don't believe we are going to get
that kind of action from the Congress. I think we ought to try decon-
trol of new gas to turn around this deplorable lack of drilling. Also,
we might say even if the response was only to our price increase — and
so far it has not been very substantial — I don't think that we can quite
measure what the response might have been if we had done nothing.
I am sure the response would have been far less had we not adopted
policies designed to cope with the energy crisis.
Senator Hart. You emphasize that the deregulation should be of
new gas ?
Mr. Nasstkas. Yes : I do.
Senator Hart. As I understand the administration's message, it is
talking about deregulating gas.
Mr. Nassikas. I don't evaluate the bill that way and yet there are
many aspects, and quite crucial aspects, of the admiiiistration's bill
with which I do not agree.
Senator Hart. If the definition in the administration's bill is the
gas that shall be unregulated includes new and old
Mr. i^AssiKAs. I am opposed.
Senator Hart. You are opposed ?
Mr. i^AssiKAS. I am opi^osed to the deregulation of old flowing gas,
I believe that flowing gas that is committed to contract shoidd coutinue
to flow in accordance with the terms of that contract, subject to our
regiilatory review.
Let me get right to the point. As a contract for flowinc; gas expires^
let's say 20 years have gone by and it expires as of today — under the
92
"present statute, under section 7, that dedication of gas to the interstate
line cannot be abandoned without our approvah The contract can be
renegotiated but it cannot be abandoned without our approval.
Second, in the event that a gas contract expires, as far as I am con-
'cerned, I don't think that we should then have an unregulated price
for the gas that would be dedicated to that interstate pipeline without
the restraint of classic, regulatory overview of the prudence of the
purchase of that gas by the pipeline company.
Under the administration bill, I believe that a fair reading of it —
jet it may not be so — is that once a contract for flowing gas expires,
then the free market takes over. A new gas price, an escalated gas price,
would then be charged and we could not even be empowered to review
the reasonableness of that price in our pipeline regidation. I don't
'believe this should be done.
My concept of deregulation is very narrow. It would be applicable
to new gas supplies. I do believe that a test of wells commenced for
new dedications to the interstate markets, as we have adopted in some
of our own orders, may be an appropriate rule to consider for decon-
trol, although various options, including new discoveries or dedica-
tions should be evaluated during the course of the hearings. In any
-event, we should retain our abandonment authority and pipeline regu-
latory review of the cost of purchased gas.
As to whether we should go further and decontrol or deregulate
small producers, which was suggested under the sanctity of contract
legislation is another question. While we didn't deregulate, we did try-
to relieve small producers from area ceilings and that issue is on appeal
to the U.S. Supreme Court. 'VAniether you should take that class of
small producers, as we did, and try to create more competition, and
then continue to regulate the old gas as well as larger gas pi'oducers
1)ut decontrol the new gas contracts sul:»ject to close surveillance and
monitoring, is perhaps another question, I want to point out that
legislation will be necessary to exempt small producers from price
ceilings if the Supreme Court does not affirin the FPC and re^•erses
the Court of Appeals of the District of Columbia.
The administration bill, by the way, expands our jurisdiction to
direct industrial sales, which is a recommendation that I made to the
administration.
I believe we should have jurisdiction over direct sales as well as sales
tfor resale — not simply on initial rate levels, but totnlly. Today if a
pipeline makes a sale to an electric utility or some industrial user di-
rectly and that gas is consumed, tlien we don't liave any price control
over the future supply of gas although we can allocate its use. I be-
lieve our jurisdiction should be extended to direct sales in interstate
commerce in the same manner as our jurisdiction under the Natural
Gas Act applies to sales for resale.
It would expand our jurisdiction. I think it is the only instance while
T have been chairman that I have recommended expansion of juris-
diction because I really think the marketplace should be the pi-imary
determinant of competitive rates for new gas commitments to the in-
terstate market rather than C~>mmission regailation. Pending congres-
sional amendment of the Natural Gas Act to authorize the prescription
of just and reasonable rates by competitive market forces, it is my opin-
93
ion that we must set rates based on cost factors as the controlling
criterion.
Senator Hart. 'Mr. Bangert?
j\rr. Chumbris. IVIr. Chairman, would Mr. Bangert yield on one
point that you raised about 1963-67 and 1968-T"2 ? Is the fact that, or
the point that, the exploration may haye gone down in that second 4-
year period related to the increase in inflation? We had a big inflation
starting about 1968 and continuing into 1972, whereas from 1967-68,
at least the first 2 years were very leyel and they start picking up after
the Vietnam war got really heated. What role would that have in a
man's saying, well, I better wait a little while before I start exploring,
or does that make sense ?
Mr. Nassikas. Costs relating to exploration are certainly an im-
portant factor constraining inyestments without adequate return. I
happen to believe, however, that the lack of the required level of in-
vestment commitment is more attributable to uncertainty of appeals,
regulatory lag and environmental restraints than to inflationary costs.
I also think — again. I want to emphasize that while we have had a
turn around of gas, oil continues to decline and unless there is massive
oil drilling or drilling for oil in the continental United States, we are
not going to experience the turn around of gas of the magnitude we
require. Oil and gas exploration go hand in glove. We talk of natural
gas shortages in the United States. We must also face the public issue
of oil shortages. In my opinion, there is a devastating oil shortage in
the United States, short of meeting market demand, and with environ-
mental restraints we also have a critical shortage of deliverable coal
which should last us for 600 years if policies permitted its develop-
ment.
Mr. Baxgert. Has the FPC ever obtained, voluntarily or by sub-
pena, internal company reseiwe estimates to see if they square with
the AGA reported reserve estimates ?
Mr. Nassikas. No, not the internal company reserve estiinates. The
FPC staff conducted an uncommitted nationwide reserves study ; the
report was issued in February 1973.
As to proved reser^^es. reported by the AGA, the staff has a com-
plete study and evaluation of the raw data in the files of the various
companies and based upon a statistical data base whereby 60 to 65
percent of the report of reserves recovered and that is set forth in
the study.
I sent a copy of that to Chairman Hart as well as to a member of
your staff.
Mr. Baxgert. Is this the National Gas Reserves Study that you
are talking about ?
Mr. Nassikas. Yes.
Mr. Baxgert. Did you receive internal company documents at that
time?
Mr. Nassikas. Our auditing staff is composed of engineers, geolo-
gists and others. Tliere are about 22 of them, in addition to academi-
cians, some State resource agencies, the U.S. Geological Survey on the
Outer Continental Shelf, etc.
These task forces reviewed company records at the offices of the
company and under procedures which are set forth in our reserve
study. It was under the direction of Paul Root, our technical director,
94
who is here with me. The information was analyzed and reviewed,
notes were taken, and there were checks made of the data by the staff.
The information which they obtained — that is, their workins: notes
from tlie company records — was tlien retnrned to the Federal Power
Conmiission and those notes which relate to the raw data of the com-
pany are in our files today and are of a confidential status.
Mr. Bangert. Is this natural gas reserve study the one that showed
that there were 9 percent less reserves than shown by the industry's
AGA study?
Mr. Nasisikas. Yes.
]\f r. Baxgert. Does the Federal Power Commission now have those
internal company documents ?
Mr. Nassikas. No, it does not have the documents. I thought I was
clear on that. The basis of coiiducting the study was to evaluate com-
pany documents made available to our staff on an independent basis
with no company participation.
I can have Mr. Root describe it in great detail, but in very brief
terms, notes were taken. There was a system set up for uniform re-
porting and evaluation, so far as you can have uniformity in evalua-
tion on judgmental factors. And the sheets that were used by the
employees to transcribe the data from the company records, which
were the basis of our study, are in the files of the Federal Power
Commission.
The company files from which these notes were taken and evalua-
tions were made, remain at the company under the terms of our order.
Mr. Bangert. As I understand it. then, you looked at geographic
and geophysical data ; is that correct ?
Mr. Nassikas. I would like to request leave of the chairman. Dr.
Eoot is an expert in this field; he conducted the study and I would be
very happy to have him give you the benefit of his evaluatioii because
it is more than simply geological data that was taken from those rec-
ords. There is geological data, but there is pressure data. There are all
kinds of technical data which Dr. Eoot is fully qualified to explain
if you wish to have him respond to this question. At the leave of the
chairman, I will produce him ; he is right here.
Senator Hart. It would be helpful ; yes.
INIr. Nassikas. As a lawyer, I loiow my shortcomings, so I much
prefer to have an expert talk about this subject.
Mr. Bangert. It would be of assistance to the record if Dr. Root
could give a bit of background with respect to the positions he held
prior to coming to the Federal Power Commission to conduct the
survey.
Dr. Root. My name is Paul J. Root. I am serving as technical di-
rector for the Natural Gas Survey. I am on leave of absence from the
University of Oklahoma where I was associate professor of petroleum,
geological engineering.
Mr. Bangert. Where were you prior to that ?
Dr. Root. Prior to that, I was senior research engineer for Gulf
Research and Development. Before that, I held a teaching position at
the University of Texas where I obtained my Ph. D. degree. Before
that, I taught at Pennsylvania State University for a year. Do you
want me to go back further ?
95
Mr. Bangert, I think that is fine. Would you go ahead and give us
a little background with respect to the method in which the Natural
Gas Eeserve Study was conducted ?
Dr. Root. In response to your specific questions, at the present time
we do not have in the files estimates of reserves that were made by
the companies. We have reserve estimates that were made by our own
teams, teams which were composed of experts from Government and
universities, who were under contract to the FPC. They went to the
company offices and examined the basic raw reserve data. They ex-
amined all data that was available — well logs, which gave a record
of certain physical quantities versus depth and are useful in determin-
ing reserves ; pressure information ; core analysis data and infonnation
on fluid analysis. That was all used by the teams to obtain an
independent estimate of reserves.
They obtained estimates on a reserve-by-reserv^e basis and accumu-
lated estimates for the individual reserves to come up with a field
estimate.
Mr. Baxgert. Did you examine fields, Doctor?
Dr. EooT. We examined reserve engineering, geological, and eco-
nomic data that is necessary to calculate the reserves. Yes, this was
obtained from the fields.
Mr. Bangert. But did you, in fact, make a field examination ?
Dr. EooT. I don't quite know what you mean by a field examination.
In other words, the well logs can be taken at only one time in the life
of a well — when it is completed.
Their records, you know — you can go back and look at them and
make independent determinations of reserve. Similarly, with the core
analysis data, essentially we looked at the records and that is what you
do when you make a reserve study.
Mr. Bangert. Were you able to compare on an area-by-area or,
reallv on a field-bv-field basis the results of your study with the re-
sults of the AGA study ?
Dr. Root. The field team's supervisor had available to him the esti-
mates made by, or used by, the American Gas Association for given
fields. He had the estimates for all the fields in the sample and, of
course, he was able to compare the two. He was able to compare our
field team reserve estimates with other information that was available
from — as it says in the order form 15 — other sources of information.
!Mr. Bangert. How were the fields sampled ?
Dr. Root. Essentially, a sampling procedure was stipulated by the
statistical validation team, and that procedure was used as the basis
for sampling.
]\rr. Bangert. Is it correct that the study sampled 145 fields?
Dr. Root. No.
ATr. Bangert. How many fields?
Dr. Root. 15S fields.
ATr. Bangert. 1.58?
Dr. Root. Yes.
Afr. Bangert. Out of those, how many were old, mature, large
fields?
Dr. Root. I don't know how many would be old. mature, laro-e fields,
but. if you mean how many of them were major fields, which is the
96
terminology we use in the report, there were 108 fields which were-
reported in that reserve going to 400 cubic feet.
Mr. Bangert. These were large fields that had been in production
for some time ; is that correct ?
Dr. Root. I am not sure just how long they had been in production.
I would say there were some relatively new fields and some fields that
have been in production for a long time.
Mr. Bangert. Was that 100 percent sampled of those 108 fields?
Dr. Root. That is correct.
I^Ir. Bangert. So that leaves us with 50 other fields. What kind of
fields were those ?
Dr. Root. They were fields that were smaller in size than 400 M ft^
Mr. Bangert. Were they smaller in terms of reported reserves ?
Dr. Root. That is correct.
Mr. Bangert. What was your sampling percentage there ?
Dr. Root. I don't remember the exact number. I could give that to
you later,
Mr. Bangert. Does one-half of 1 percent sound right ?
Dr. Root. I don't really know.
Mr. Bangert. Did you find discrepancies greater than 200 percent
between the AGA reserves and your estimates in the 50 fields ?
Dr. Root. I don't know. I don't remember those offhand. We had
done work like that, but I haven't looked at that for quite some time. I
don't remember what the range of the differences was.
Mr. Bangert. Perhaps that would be furnished for the record.
Dr. Root. Yes, we can furnish that later. I just don't recall offhand.
Mr. Bangert. As I understand it, you went to the offices of the com-
panies and obtained this information. Was that information phoned
back to Washington or brought back to Washington ?
Dr. Root. There are two types of information.
First of all, the field team went to the company office. It looked at
the basic raw data and it filled out its own Avorksheets and it computed
the reserves. The actual numbers, the calculated or estimated reserves,
were telephoned to Washington. The actual worksheets themselves
were placed in an envelo]3e. The envelope was sealed. It was signed by
the field team leader and the representative in the company office.
Those envelopes contained workpapers and were brought back to
Washington in accordance with the March 9, 1972. order.
Mr. Bangert. Do yoii have any idea what the cost of the national gas
reserve study was?
]Mr. Nassikas. I have a fair estimate. It amounted to around a mil-
lion dollars, but that inchides not only the independent gas reserve
study by the FPC staff, Ijut also the remainder of the survey, whicli is
extremely significant, I think, including the failure.
There is a transmission section, distribution section, and a supply
section ; I think a fair estimate of the number of people working on it
might have approximated 250 to 300, including Interior, Federal agen-
cies, academia, consumer representatives, and industry.
Mr. Bangert. In this study, is there any way to break down the total
proven reserve figures to show the reserves by each producing area so
that they can be compared to the AGA figures ?
97
Dr. Root. No area basis — it was not designed to give us figures on
an area basis.
Mr. Bangert. How about in a field-by-field basis ?
Dr. KooT. Yes, for the fields that were part of the sample, we have
the reserves determined. The reserves in those fields were determined
on a reservoir-by-reservoir basis, so those numbers are available.
However, the'^ AGA numbers at this time are still in the hands of
the independent accounting agency in accordance with the order of
September 21, and they will be returned.
Mr. Bangekt. To whom was this information phoned in. Dr. Root ?
Dr. Root. Information on the actual reserves determined in the
field was phoned to Mr. Lawrence Magnum, who is the field reserve
team supervisor. The worksheets are presently in my custody in accord-
ance with the March 9, 1972, order.
Mr. Bangert. Is the basic data that you saw the same material that
was furnished to the AGA ?
Dr. Root. I don't understand the question.
Mr. Baxgert. As I understand it, the various companies supply
AGA with reserve estimates. Is the material that you examined in the
offices the same material that the companies used to report to AGA ?
Dr. Root. Well. I think not, because you are talking about an actual
reserve number, and we looked at basically raw data. Hoav you deter-
mine all the factors in a given reservoir that makes up the reserves,
the estimates and calculations— we looked at those things. We didn't
look at just the final answer for the reserves.
:Mr. Baxgert. Would tnat be the term that the company would use
to make up the final answer for AGA ?
Dr. Root. Well, in a sense, you are asking me to speculate on some-
thing I Imow nothing about. Any person making a reserve estima-
tion would use the same type of data that we use.
]Mr. Baxgert. Did you look at, for instance, any internal estimates
made to the board of directors, or any internal estimates used for
Internal Revenue Service, or anything like that?
Dr. Root. Xo.
Mr. Baxgert. I would like to, at this point, discuss docket Xo.
R-405, Mr. Chairman.
Mr. Xassikas, do you believe that the second R^05, showing uncom-
mitted reserves, is evidence of a shortage of gas?
Mr. Xassikas. Yes.
]Mr. Baxgert. Was the data that you received from the 79 com-
panies in connection with R-405 ever audited or verified by the Fed-
eral Power Commission ?
Mr. Xassikas. I don't believe so. It was supplied by the companies
in response to an order of the Commission, but the Federal Power
Commission stali' did not go into the company records or anything
of that sort to determine the authenticity of what was being reported.
Mr. Baxgert. So that as I understand it, the Federal Power Com-
mission sent out an order and questionnaire form and the companies
filled in the questionnaire and sent it back. Is that correct? _
Mr. Xassikas. Basically. Basically under the supervision of an offi-
cer that was appointed for that segment of the R-405 reserve study.
Mr. Baxgert. Are those questionnaires the documents that we have
gotten under subpena this morning, Mr. Chairman?
[ 98
Mr. Nassikas. I want to be sure of that. Yes, my staff so advises
me. Also set forth in my formal response to the sub];)ena was other
■data, worksheets.
Mr. Bangert. As I understand it, there was the original 11-405 in
1970, and then there was an update of E-405.
Mr. Nassikas. Yes, the order of November 4, 1970, was the first
that we issued in 405 relative to uncommitted reserve data.
Mr. Bangert. Did you get responses to that first R-405?
Mr. Nassikas. It was done differently. As I understand it from
my review with the staff, the first 405 case culminated in a report
filed with the Commission's secretary on March 8, 1971, by three in-
vestigating officers. Mr. Williams and Mr. Brady have gone on to
greater things beyond the Federal Power Commission. Mr. Tour-
tellotte remains working with us.
A system of checking data was devised in that investigation. The
Commission's order of November 4 specified that the information
collected would be held on a confidential basis, and on November 20,
1970, a letter with a questionnaire attached was sent to 75 major pro-
ducers in that case.
The letter requested the companies to present thier answers to a ques-
tionnaire to the staff in Houston, Tex., Tulsa, Okla., and Washington.
This was a matter of convenience, actually, and expedition.
Subsequently, I am informed that two members of the Office of
Oenei'al Counsel and two members of the Bureau of Natural Gas were
dispatched to these cities for the purpose of acquiring the data.
The procedures used by the staff in that data collection process were
relatively simple.
First, according to Mr. Tourtellotte, a company brought the infor-
anation to the staff'. Second, the staff copied the company figures on
FPC workpapers in the presence of company representatives. Third,
the company papers were returned to the representatives immediately
after copying.
Mr. Bangert. Was that material maintained in a confidential
manner ?
Mr. Nassikas. Yes, it was.
Fourth, the staff checked the company name off the list to indicate
a response.
The staff workpapers do not indicate what figures belong to what
<'ompanies. After the staff had collected information in all three
geographic locations, the figures were composited and reported to the
Commission.
The workpapers were deposited by ISIr. Williams in a safe belong-
ing to the Office of Administration, according to JMr. Tourtellotte, and
it was Mr. Tourtellotte's opinion that the Commission requiredthat
information be held confidential even though it was not even iden-
tifiable by company name. And he further stated that in his discus-
sions with technical people at the FPC, he was informed that some
people in the industry could piece together the information provided
on the investigative officer form and then make a fairly reliable guess
as to which company operating in a given area submitted the figures.
I have requested my staff's general counsel to conduct a diligent
search to see if those papers, even though they don't identify a com-
99
pany, are still aA'ailable, and to date general counsel has been unable'
to locate them.
Mr. Bangert. Do you know what may have happened to them?
Mr. Nassikas. I don't know. There is always speculation, but until
the search has been completed, I am not going to speculate. For ex-
ample, with I'eference to the papers in the latest 405, I thought that
these had been inalterably destroyed and, much to my satisfaction, they
had not been; I was able to direct their being retained and pieced
together.
So, general counsel has been instructed to search for the workpapers,
although I don't know how useful the papers are. I don't even know at
this stage whether the other two investigative officers, Mr. Williams
and Mr. Brady, used the identification procedures which were reported
to me by Mr. Tourtellotte. I have not talked to Mr. Williams or ]Mr.
Brady.
Mr. Bangert. Did the Commission itself establish any ground rules:
respecting destruction or return of data to the companies in the first
E-405 ?
Mr. Nassikas. Not to my recollection. That was some time ago. I
have no recollection of anything beyond the Commission order sent
to maintain or keep in confidential status.
Whatever that order stated it states. I have no recollection of any
order relating to base data filed with the staff.
As far as I am concerned, any documents or field notes that are
relevant to any investigation by any member of the FPC statf must
and should be maintained in confidential status and not destroyed.
]Mr. Bangert. Do you have an order out at FPC, to the effect that
documents can't be destroyed without your permission ?
Mv. Nassikas. Certainly, as to all of our 405 data in the new investi-
gation, there is an order. In fact, I supplied a memorandum to you^
and although this is not an all-points memo, it makes clear to all de-
partment heads, particularly those who have custody of any informa-
tion of the kind that it is to be retained, that it is not to be destroyed
and it is to be made available.
And although it is not necessary to say this, regardless of whether
or not this committee had requested this information, that would be
the rule. A^Hien a subcommittee of the Congress requests data and we
state in a response that data is confidential, as Senator Hart noted in
his opening statement, our staff should certainly take heed of that
and should be doublv certain tliat nothing is destroved.
Mr. Bangert. I assume that if, in fact, the data in the old 5-405-
has been destroyed, it should not have been as far as you are concerned.
Mr. Nassikas. If it is, that would be my view. I think any evidence
that is collected by the staff, and which may be relevant,, should be
retained.
I practiced law for over 20 years before I came down here. Let me
explain that for a second. If you are going to try a lawsuit and you
have evidentiary record exhibits, the working files should not be de-
stroyed. It may be that someday somebody may file a motion. This has
been my practice and policy long before I came to Washington. We
don't have a mentality of destruction. We have a mentality of con-
struction and retention.
100
Senator IL\rt. I know we are going to take up the problem of the
document destruction at a later hearing, but since you had made the
point, it does appear that some person or persons on your staff had a
different philosophy.
Mr. Nassikas. That is entirely conceivable. It is most regrettable,
as I say. I still am enraged by the incident.
Senator Hart. Parents always say that their children, when they do
things they should not, are sometimes just follov/ing the examples of
their elders. I suppose it is barely conceivable, in light of Watergate,
that some of the elders set examples that might have influenced your
Commission personnel.
]Mr. Nassikas. I don't think the analogy is well taken as to the
"Commission.
Senator Hart. I'm speaking of your staff personnel.
jMr. Nassikas. As I say, sometimes you get some very m.ysterious in-
sights into staff motivation. I suj^pose the best way to maintain some-
thing as confidential, in a w^ay, is to haA^e some kind of security or to
dispose of it. At the same time, when the plain language of an order
states "to maintain in confidential status," I must say that the order
might have added "and maintain physically, in fact, in a safe," or
something of that sort, and I suppose you can always add on to an
order, once you realize somebody claims he misinterpreted it. I think
it Avas clear enough. I thinlv it was a violation of our- oi-der.
Senator Hart. It is too bad you have to be explicit on something
so basic.
]Mr. Nassikas. I am in accord with you. T would say one thing: that
the evidence that we have here, of course, having ]:)ieced it all together
{igain, does result in an uncommitted reserve study that is almost 100
percent within that limit of the issue in the first place.
There were some very minor differences that we explained in our
testimony. There were differences, but what the staff issued in the first
place was almost 100 percent accurate.
Mr. Bangert. Do you mean to say there were mistakes in the docu-
ment tliat was made available to the public on February 22?
Mr. Nassikas. Let me see what we did issue liere as of yesterday.
This is what the memorandum states, rather than the press release, and
yet the press release is accurate, too.
Perhaps I ought to go through the press release brieflv. There are
some differences, but they are very minor. Let me state just the lan-
guage here :
Today's report corresponds to the report of February 22. 1972, indicating that
nnconimitted reserves available in the lower 48 States decreased from 4.6 trillion
cnliic feet at the end of 1969, to 4.4 trillion cubic feet as of October 1, 1970, to
3.S trillion cubic feet as of December 31, 1971. * * *
Senator Hart. Mr. Chairman, before you leave this evening, would
you make that document available to the reporter?
Mr. Nassikas. Yes. indeed.
In the lower 48 States, as of June ?>0. 197-2 (as renorted on Feb-
ruary 22, 1973), the volumes were 3.400.000..51 1.000. The revised vol-
umes reported on June 25. 197o, for tlie lower 48 States were 3,401,064
million. The total for tlie Ignited States, including Alaska, as of June
30, 1972, was 21,217,682 million.
101
The volume report on June 25 was 31,218,245 million.
Then in the Anadarko area there was a change in one figure. Vol-
lunes reported February 22, 1973, as at June 30, 19T2, were 50,(523 mil-
lion; I am dealing with mm's here. Then, as of June 25. that figure
became 51,176 million. Then on the lower 48 States, June 30, 1972, there
is another fractional change and we have attached to this a memoran-
dum by staff explaining the differences.
The' overall result is largely the same, almost 100 percent the same.
I will leave a copy of this with the reporter as soon as we are finished.
[The press release follows. Testimony resumes on p. 106.]
Federal Power Commission,
Washinfffon, B.C., June 25, 1973.
Federal Power Commission Staff Releases
revised report on uncommitted gas reserves
The Federal Pow^r Commission st{iff today released a revised report signed
liy Tliomas J. Joyce, Chief of the Biu-eaii of Natural Gas,' of uncommitted natural
gas reserves available for sale as of June 30, 1972.
The revised report incorporates reserves available for sale from one company
which hafi not )ieen includril in the previous report issued February 22, 1973. The
company did not sul)mit its filing through the prescribed procedure.
The information was sent to the Public Files. It was not included in the report
issued Feln-uary 22, 1973. The total proved reserves available for sale as given iu
the revised report are shown in the following table :
TOTAL LARGE PRODUCER PROVED NATURAL GAS RESERVES AVAILABLE FOR SALE
[Millions of cubic feet at 14.73 Ib/in^a and 60° F|
Volumes reported on—
4, 578,
480
4, 374, 834
3,817,
838
3,401,
064
5, 985, 284
6,074,
131
31.640,
699
31,218,245
Dale Feb. 22, 1973 June 25, 1973
Lower 48 States:
Dec. 31, 1969_ 4,578,480
Oct. 1, 1970 - 4,374,334
Dec. 31,1971 _... _ 3,817.838
June 30, 1972 -.. 3,400,511
Total, United States including Alaska:
Dec. 30, 1969 — 5.985,284
Oct. 1, 1970 ---- 6,074, 131
Dec. 31, 1971 - 31,640,699
June 30, 1972 -- 31,217,692
Today's report corresponds to the report of February 22, 1973. indicating that
uncommitted reserves available in the lower 48 states (Alaska and Hawaii not
included) decreased 4.6 trillion cubic feet at the end of 1969, to 4.4 trillion cubic
ftet as of October 1, 1970, to 3.8 trillion cubic feet as of December 31, 1971. This
latter volume is equal to 1.-5 percent of the proved reserves as reported for that
date by the American Gas Association (A.G.A.) .
When uncommitted reserves in Alaska are included, the total is 31.2 trillion
cubic feet as of June 20. 1972, compared to 6.0 trillion cubic feet at the end of
1969. The sutsstantial increase results from the addition of the volumps of
A'.askan North Slope reserves which did not become available until the end of
1971. During the period December 31, 1971, to June .30, 1972. uncommitted
reserves including Alaska declined from 31.6 trillion cubic feet to 31.2 trillion
cubic feet.
Inclusion of the additional uncommitted reserves information not previously
included changed the total uncommitted reserves availalile as of June 30, 1972,
in the Hugotou-Anadarko as set forth in the following table :
102
TOTAL UNCOMMITTED NONASSOCIATED NATURAL GAS RESERVES
Volumes reported —
Date Feb. 22, 1973 June 25, 1973
Hugoton-Anadarko area:
Dec. 31, 1969 - 350,271 350,271
Oct. 1,1970 --- - 384,741 384,741
Dec.31, 1971 - 33,807 33,807
June 30, 1972.. 50,623 51, 176
Lower 48 states:
Dec. 31, 1969.. - 3,972,972 3,972,972
Oct. 1,1970 - 3,777,646 3,777,646
Dec. 31, 1971.. 3, 102, 178 3, 102, 178
June 30, 1972 2,758,371 2,758,924
Total, United States Including Alaska:
Dec.31, 1969 — 5,248,726 5,248,726
Oct 1 1970 - --- 5,349,900 5,349,900
Dec. 31, 197'l'.":"".:'. 4, 833, 170 4, 883, 170
June 30, 1972 4,539,363 4,539,916
In addition to the inclusion of tlie previously incorrectly filed information, the
Tables of the report were revised to eliminate internal inconsistencies in the
data reiwrted for Associated Dissolved Gas Volumes which resulted from posting
errors. Revised tables are included in the report.
June 25, 1973.
Memorandum to : The Commission
From : Chief, Bureau of Natural Gas
Subject: Revised Staff Report on Nationwide Investigation: Large Producer
Gas Reserves Available for Sale (Docket No. R— 105)
The Commission on September 12, 1972, reissued Docket No. R-^05 in order
to elicit additional information to further assess the adequacy and reliability
of gas supply to meet consumer demand. Responses were due by October 6, 1972.
Many of the resiwndents filed late and 15 did not file at all. A letter was sent
by tiie Secretary on November 15, 1972, to the non-filing companies requesting
compliance. One respondent filed incorrectly and the data for that company
was not included in the February 22, 197,3 report. That data has now been incor-
porated and posting and tabulating errors which were revealed by post-audit
have been corrected.
The reserve figures reported by the "Large Producers" are set forth on the
attached tables. Table I contains Total Gas Reserves, Table II, Nonassociated
Gas Re.serves, and Table III, associated — Dissolved Gas Reserves that were avail-
able for sale on the dates si>ecified. Footnotes for the tables follow the 3 attached
tables. An overall summary is shown on the following table :
AVAILABLE FOR SALE'
[In trillions of cubic feet]
Non- Associate-
Total associate Diss.
Lower "48":
Dec. 31, 1969...
Oct. 1, 1970
Dec. 31,1971....
June 30, 1972...
Total United States:;
Dec. 31, 1969...
Oct. 1,1970.. --
Dec. 31, 1971...
June 30, 1972...
4.6
4.0
0.6
4.4
3.8
.6
3.8
3.1
.7
3.4
2.8
.6
5.9
5.2
.7
6.0
5.3
.7
31.7
4.9
»26.8
31.2
4.5
26.7
1 Due to rounding off of numbers, numbers do not precisely correspond with data of tables I, II, and II
2 Includes Alaska.
» Includes North Slope Alaska.
103
The iuclusion of Alaskan North North Slope reserves in the Total and Asso-
ciated— Dissolved gas reserves in Tables I and II, masks any U.S. total trends^
over tiie time span of the two investigations, because of the extremely large size
of these reserves v^'hich were not reported in the first R-405 reserve report. There-
fore, in order to see any significant U.S. trends the lower "48" figures should be
used. There are slight upward trends as shown in Table I, Total Gas, for Federal
Offshore in South Louisiana, the Hugoton-Anadarko Area, the Rocky Mountain
Area, Appalachian Area, California, and Miscellaneous States. The upward trend
in these areas, however, cannot overcome the overall downward trend in total
gas on Table I for the lower "48". Even Alaska, with or without the North Slope
reserves, shows a downward trend.
Table II, Nonassociated Gas, shows the .same trends as Table I.
Table III, Associated-Dissolved Gas shows slight increasing trends in Federal
Offshore Louisiana, Rocky Mountain Area, and Miscellaneous.
Thomas J. Joyce.
Attachments.
Respondents
Amerada Hess Corp.
American Petrofina Co. of Texas
Amoco Production Co.
Anadarko Production Co.
Ashland Oil and Refining Co.
Atlantic-Richfield Co.
Austral Oil Co., Inc.
Aztec Oil and Gas Co.
Bass Enterprises Production Co.
Belco Petroleum Corp.
Beta Development Co.
Cabot Corp.
California Co., Division Chevron Oil Co.
Champlin Petroleum Co.
Chevron Oil Co.
Cities Service Co.
Cities Service Oil Co.
Clinton Oil Co,
Coastal States Gas Producing Co.
E. Cockrell, Jr.
Colorado Oil and Gas Corp.
Coltexo Corp.
Columbia Gas Development Corp.
Continental Oil Co.
Edwin L. Cox
Diamond Shamrock Corp.
Dorchester Gas Production CJo.
Exchange Oil and Gas Co.
Forest Oil Corp.
General American Oil Co. of Texas
Getty Oil Co.
Gulf Oil Corp.
Hassle Hunt Trust
Helmerich & Payne, Inc.
J. M. Huber Corporation
Humble Oil and Refining Co.
Hunt Oil Co.
The .Jupiter Corp.
Kerr-McGee Corp.
Lone Star Producing Co.
Louisiana Land and Exploration Co.
LVO Corp.
Mapco Production Co.
Marathon Oil Co.
Mobil Oil Corp.
Monsanto Co.
Natural Gas and Oil Corp.
Northern Natural Gas Prod. Co,
Ocean Drilling & Exploration Co.
Petroleum Inc.
Phillips Petroleinn Co.
Pioneer Production Corp.
Placid Oil Co.
Penuzoil Producing Co.
Pennzoil United, Inc.
Pubco Petroleum Corp.
The Rodman Corp.
Shell Oil and Gas Co.
Signal Oil and Gas Co.
Skelly Oil Co.
Sohio Petroleum Co.
Southern Natural Gas, Jt. Venture
Southern Union Gathering Co.
Southern Union Production Co.
Suburban Propane Gas Corp.
Sun Oil Co.
Tenneco Oil Co.
Tennessee Gas Supply Co.
Terra Resources Inc.
Texaco Inc.
Texas Gas Exploration Corp.
Texas Oil and Gas Corp.
Transocean Oil, Inc.
The Superior Oil Co.
Union Carbide Petroleum Corp. (Ash-
land)
Union Oil Company of California
Union Texas Petroleum
Union Pacific Railroad Co.
Warren Petroleum Corp.
27-547—74-
104
TABLE I.— TOTAL LARGt PRODUCERS PROVED NATURAL GAS RESERVES AVAILABLE FOR SALE-
PSIA AND 60 F
MMCF AT 14.73
Total proven
reserves as
of Dec. 31,
1969,
reported by
American
Gas
Association
Large producers reserves
available for sale
Total proven
reserves as
of Dec. 31,
1971,
reported by
American -
Gas
Association
Large producers
available fo
reserves
sale
Area
As of
Dec. 31, 1969
As of
Oct. 1, 1970
As of As of
Dec. 31, 1971 June 30, 1972
South Louisiana
... 80,769,437
2,014,110
2,173,303
74,968,645
1,770,603
1,873,267
Onshore
Offshore
... 56,666,983
... 24,102,454
1,004,206
1,009,304
1,117,499
1,055,804
47,128,723
27, 839, 922
572, 157
1, 198, 446
398, 830
1,474,437
Federal
1,159,553
38, 893
1,442,685
State. .. ..
31,752
... 67,540,216
Texas gulf coast
1,056,974
735, 326
60, 844, 298
631, 840
544, 441
Onsho,''e
597,210
459.764
494, 405
240,921
311,266
320,574
344,917
Offshore ..
199, 524
Federal
305, 574
15,000
152,624
State
46, 900
Permian Basin.. _
Hugoton-Anadarko
... 29,977,869
... 36,894,586
591,927
355, 542
251,828
198, 569
7,463
4,363
52,222
45, 482
353.087
394, 963
430,320
205,620
10, 846
1,115
10,252
60, 002
26.622,622
33 299,985
20, 657, 856
17,087,479
6, 588, 177
1.016,482
5,729,499
625, 194
445, 046
42.624
551,694
241,031
10, 752
3,484
58,911
61,853
318,976
1 54, 866
Other southwest
fiocrty Mountain .
Appalachian. __
Unclassified areas:
Michigan...
California
All others . .
... 23,236,084
... 17,514,030
... 6,048,395
750.964
... €,870,946
304,165
171,061
264, 807
11,6C8
0
79, 568
82, 470
Total lower "48"
Alaska
... 269 906.692
... 5,202,143
4, 578, 480
1,406,804
4,374,834
1,699,297
247, 440, 277
31,365,341
3,817.838
27,822,861
2 3,401,064
27,817,181
Total United States...
... 275,108,835
5,985,284
6,074,131
278,805.618
31,640,699 s
31,218,245
1 The revised value is 54,866 mmcf rather than the previously reoorted 54,313 mrncf. The omission was occasioned by
the failure of 1 company to file data under the proper procedures. The compnay subsequently refiled the data.
2 The revised value is 3,401,064 mmcf rather than the previously reported 3,400,511 mmcf. The omission was occasioned
b\i the failure of one company to file data under the proper procedures. The corrpany subsequently retiled the data.
3 The revised value is 31,218,245 mmcf rather than the previously reported 31,217,692 mmcf. The omission was occasioned
by the failure of one company to file data under the proper procedures. The company subsequently refiled the data.
105
TABLE ll.-TOTAL LARGE PRODUCER PROVED NONASSOCIATED NATURAL GAS RESERVES AVAILABLE FOR SALE-
MMCF AT 14.73 PSIA AND 60*F
Area
Total proven
reserves as
of Dec. 31,
1969,
reported by
American
Gas
Association
Large producers reserves
available for sale
As of
Dec. 31, 1969
Oct. 1
As of
1970
Total proven
reserves as
of Dec. 31,
1971,
reported by
American
Gas
Association
Large producers reserves
available for sale
As of
Dec. 31, 1971
As of
June 30, 1972
;South Louisiana 66,602,555 1,552,668 1,812,726 62,543,880 1,490,827
Onshore 46,671, 155
Offshore 19,931,390
781,038
881, 530
936,775 39.056,971
875,951 23,476,909
3.12, 441
1,148,385
Texas gulf coast 50,791,040
944, 294
648, 047 46, 081, 948
590, 129
Onshore.
Offshore.
484, 530
459, 764
408, 925
239, 121
259, 589
320, 540
Federal.
State...
305, 540
15,000
1,660,762
277,396
1, 383, 366
Federal. __ •_ 1,111,400 1,353.273
State 36,986 30,093
Total lower "48" 205,990,919
:Alaska 4,882,353
3,972,972
1,275,754
502,927
303, 403
199, 524
152,524
46, 900
Permian Basin. ._ 16,843,155 583,594 342,811 15,299,504 339,590 215,728
Hugoton-Anadarko 34,290,945 350.271 384,741 30,979,944 33,307 151,176
■Other southwest 16,253,844 1^2.949 323,046 14,544,882 433,135 64,384
Rocky Mountain.. 15,215,440 188,023 193.745 14,788,864 115.540 132,701
Appalachian 3,996,851 3,592 5,854 4,042,757 10,550 11,425
Unclassified areas:
Michigan 73,263 3.725 200 179,479 3,484 0
California 2,857,034 43,515 7,150 2,312,432 36,370 57,300
All others .._. 66,737 45,240 59,315 182,395 47,546 62.521
3,777,646 190,986,196 3,102,178 2 2,758,924
1,572,254 4,967,421 1,780,992 1,780,992
Total United States 211,873,232 5,248,726 5,349,900 195,953,617 4.883,170 3 4,539,918
1 The revised value is 51,176 rather than the previously reported 50,523 mTicf. The omission was occasioned by the fail-
ure of 1 company to file data under the proper procedures. The company subsequently refiled the data.
2 The revised value is 2,758,924 mmcf rather than the previously reported 2,753,371 mmcf. The omission was occasioned
■by the failure of 1 company to file data under the proper procedures. The company subsequently refiled the data.
3 The revised value is 4,539,916 mmcf rather than the previously reported 4.539,363 mmcf. The omission was occasioned
by the failure of 1 company to file data under the proper procedures. The company subsequently refiled the data.
106
TABLE III— TOTAL LARGE PRODUCER PROVED ASSOCIATED DISSOLVED NATURAL GAS RESERVES AVAILABLE
FOR SALE— MMCF AT 14.73 PSIA AND 60 F
Total proven
reserves as
of Dec. 31,
1969,
reported by
American
Gas
Association
Large producers reserves
available for sale
Total proven
reserves as
of Dec. 31,
1971,
reported by
American -
Gas
Association
Large producers reserves
available for sale
Area
As of
Dec. 31, 1969
As of
Oct. 1, 1970
As of
Dec. 31, 1971
As of
June 30, 1972
South Louisiana
... 14,166,882
351,442
360, 577
12,416,106
279, 776
212, 505
Onshore
Offshore.
... 9,995,818
.. 4,171,064
223, 168
128,274
180, 724
179,853
8,053,093
4,363,013
1229,716
50, 060
121,434
91,071
Federal . .
48, 153
1,907
89,412
State
1,659
Texas gulf coast
.. 16,734,649
112,680
87, 279
14,750,807
Onshore
Offshore
112,680
0
85,479
1,800
41,677
34
41,514
0
Federal
34
0
0
State
0
Permian Basin..
Hugoton-Anadarko
.. 13,089,093
.. 2,462,994
8,333
5,271
108,879
10, 546
3,871
638
3,606
242
10, 276
10, 222
107,274
11,875
4,982
915
3,102
686
11,286,103
2,127,329
5,719,148
2,023,868
260, 537
184, 541
3,175,368
196, 046
105, 356
8,817
118,559
124, 391
202
0
22, 541
14,307
103, 248
3,690
Other Southv^est
Rocky Mountain
Appalachian
Unclassified areas:
Michigan
California .- ..
.. 6,624,707
.. 2,056,895
258, 602
82,186
. 3,826,608
106,677
132, 106
183
0
22,268
All others
11,248
2 19, 949
Total lower "48"
Alaska
.. 59,313,864
31d, 780
605. 508
131,050
597, 188
127,043
52,139,853
26, 397, '.20
26
715,660
041,869
3 642,140
26,036,189
Total United States....
.. 59,633,644
736,558
724,231
78, 537, 773
26
757, 529
26,678,329
1 The correct number is 229,716 mmcf rather than 265,353 mmcf which v/as incorrectly posted.
2 The coriect number is 19,949 mmcf rather than 19,105 mmcf which was incorrectly posted on the subtotal sheets
but included in the total.
3 The correct number is 642,140 mmcf rather than 584,664 mmcf for this subtotal which was incorrectly tabulated and
posted.
Mr. Bangert. As I understand it, the R-i05 update was classified
as administratively confidential by the FPC ; is that correct i
Mr. Nassikas. It was confidential ; we never issued an order to our
staff' statino- that a classification of this data is administrativelv con-
fidential. We didn't issue an order to that effect, but the data, in terms
of the Older, was confidential and it was delivered under the terms of
the order to the custody of a person named on the order. Therefore,
any release of that data to anyone else would, of course, be admin-
istratively confidential within the staff of the Commission, even if
there was no such order issued.
Mr. Bangert. That applied also to staff members of the Commis-
sion ; is that correct ?
Mr. Nassikas. That would apply to any agency that wished to secure
this information, any bureau of tlie Commis.sion.
Mr. Bangert. So that if staff' within the Commission wanted to
obtain that information they would be prohibited from obtaining it ;
is tliat correct?
Mr. Nassikas. They would be prohibited from obtainino- that in-
formation without a request to the Commission and a determination
by the Commission as to whether that information sliould be released
to that person under appropriate confidential restrictions.
107
There was no request made to the Commission for any of their data,
to my knowledge, as distinguished from the staff.
Mr. Baxgert. Do yon have an order in writing with respect to how
Commission personnel can get access to administratively confidential
material ?
Mr. Nassikas. I don't believe so, yet I would defer to Mr. Maxson,
the executive director, who has some expertise in working with them
daily. My answer to that is I don't believe so, subject to check.
Mr. Baxgert. You didn't know this, Mr. Chairman, but apparently
the Economics Office did attempt to get that material to use in the
recent Belco case,
Mr. Xassikas. I know it now ; I didn't know it then.
]Mr, Bangert. They wanted to use the material to show high con-
centration ratios. Since you dissented in that case, if they had asked
vou for it would you liave given it to them ?
Mr. Nassikas. I don't know. Many times people ask me what I would
have done had something been asked of us. I will say this, that I most
certainly would not disclose information as a matter of administration,
as Chairman nor would I make that kind of decision without confer-
ring with my colleagues, because I am only Chairman. The Commission
is the one that has the authority in these issues, which are the subject
of a Commission order. Even if they don't have authority, I keep them
informed and seek their advice as may be appropriated.
]Mr. Bangert. Has there been any order recently issued barring the
Office of Economics" access to nonpublic data, except on your approval ?
]\fr. Xasstkas. I think there is a memorandum that I sent that I may
have submitted to you. I am not quite certain; let me check here. There
is a memorandum, I know, in which I requested from memory, and
tlie memorandum will speak for itself. Has that particular memo-
randum been turned over to you ? Do you have it ?
]Mr. Baxgert. I am not sure whether we do or not.
]Mr. Xassikas. Has that been turned over to you by our economist?
Mr. Baxgert. I don't have a memorandum you wrote. I am asking
wliother you wrote a memorandum.
^Ir. Xassikas. I wrote a memorandum which stated something to the
effect — and I will submit it for the record — that if the economists
desire any information which is subject to the confidential orders of
this Commission, they shall, through the division chief, namely Haskell
Wald. make their request to me as Chairman of the Coimnission, rather
than making the request directly to other employees.
As a matter of administration and before we'have a violation of our
ordere. I don't want our economists or any other members of our staff
scurrying around with other employees of the Commission trying to
seek access to information this Commission has stated is confidential.
^Ir. Baxgert. This applies to all bureaus ?
^Ir. Xassikas. It will apply to all bureaus. Since I have been chair-
man, I don't know of any other bureaus that sought the information.
Certainly as chairman, I am not discriminating against or selecting out
anv bureau.
108
Where you liave particular action by one ofRce of the Commission, I
think my order as chief executive officer ought to be read to that bureau..
If there were otlier requests, I would issue a blanket order.
Mr. Bangert. Isn't your Economics Office supposed to testify and
present evidence in rate cases, and sliouldn't it have access to that
material furnished to the FPC by companies ?
Mr. Nassikas. Not material that has been supplied to the Federal
Power Commission on the basis tliat the integrity of that informa-
tion will be maintained by the Commission as confidential. If we secure
infomiation that is to be utilized for the purpose expressed in our
order, then I don't think that we are operating in good faith within
the regulatory process if we decide to turn over that information for
purposes that were prohibited by the initial order.
Now, the information that was requested, to be specific, was infor-
mation on concentration ratios. That was in a memorandum which was
subsequeiitly — which has been filed with you now. I think it was
voluntarily supplied to you before the hearing.
The Commission decided, when it was called to our attention for
the first time, that the concentration ratios would not violate the
confidential aspects of our order.
Accordingly, we published the concentration ratios. It is now in
a public file. We supplied it also to your committee, and this can be
used for any purpose at any time.
Now, going back to your hypothetical question, had the request
been made by the economists back at the time they made that request
to supply concentration ratios without the disclosing of names of the
users, it might well have been honored at that time and the problem
would never have arisen.
Mr. Bangert. As I understand it, the Natural Gas Bureau did
furnish certain concentration ratios to the economic division. How-
ever, there were mistakes in the material, and due to the time con-
sumed in correcting these mistakes, the economic division didn't get it
until the day of, or the day before the Belco case.
Mr. Nassikas. I don't know what the facts are there. As Chairman
of this Commission. I do not review evidence prepared by the staff
or prepared or presented by any other witnesses. I sit in an a))pellate
capacity as delegated Iw the Congress, a quasi-judicial capacity, and
I have honored this separation of function as chairman and will con-
tinue to honor it as long as I am chairman.
I do know if any member of the staff is aggrieved — jNIr. Wald is5
an expert on this end as chief of the Bureau of Economics — if there
is a problem that arises on that score, there is an established procedure
wh.ereby he can go to the executive director, see if he can iron this
problem out there, and if it will not violate any rules of judicial con-
duct, and if I can resolve the problem, I will resolve the problem.
I have resolved two or three of these problems relating to commands
of the Office of Economics or requests by that Off.ce to file separate
briefs or take independent A'iews or whatever it may be.
Mr. Bangert. Let's move on to tlie AR-60-1 case.
Mr. Nassikas. Yes.
Mr. Bangert. As I understand that case, prices were increased by
about 35 percent to 26 cents per thousand cubic feet in southern
Louisiana.
109
jNIr. Xassikas. That is new gas, from 20 cents to 26 cents. That case
has been affirmed by the court of appeals.
Mr. Bangert. At that time, each producer came in and indicated
that the 2G-cent price would provide adequate incentives for future
exploration and development in southern Louisiana, and the Commis-
sion felt at that time that the price would make a major contribution
to bringing forth additional gas.
Has additional gas been forthcoming?
Mr. Nassikas. Some has, but Jiot in the magnitude of order we would
have wished. Certainly that entire position of producers I cited and
quoted
Mr. Baxgert. That is really what I wanted to talk to you about.
The producers were accorded a 15-percent return on investment, and
now we find they are accorded a 29-percent return in southern Louisi-
ana as per the Belco case.
Mr. Xassikas. I could discuss this w^ith you for hours, if you would
like. Under the Pillshury doctrine. I know you and I as attorneys
would not w^ant to be disqualified by some counsel for discussing the
inner workings of the Belco case.
I cannot respond to any evaluation on the basis of the Pillshury
case which does protect regulators from discussing their dissents or
majority opinions freely with congressional committees to avoid the
risk of being disqualified.
On that point, lefs see what happens.
Mr. Bangert. Has the Commission ordered that the higher prices
must be used for additional exploration and development?
Mr. Xassikas. The order speaks for itself. The majority of the Com-
mission is here today, but I am sure the majority — the law is as ap-
plicable to the majority as it is to me. For those who don't understand
the PUlshury doctrine, there is not a reluctance on my part to testify
freely, but rather my desire not to impair my opinion in cases pend-
ing on appeal or before the Commission.
Senator Hart. Let me make a comment.
Mr. Xassikas. Yes, j\Ir. Chairman.
Senator Hart. The practice of the Judiciary Committee in connec-
tion with judicial nominations, for example, has been to avoid inquiry
of a witness who himself has been a judge who has filed an opinioir
or made a decision.
Our practice is not to go beyond the four corners of the opinion, not
to inquire why he reached a certain conclusion.
]\rr. Nassikas. Yes.
Senator Hart. To the extent that questions would be beyond that
mark, the chairman is correct in withholding comment.
Mr. Nassikas. Yes.
]Slr. Bangert. Yes, sir. Well, on the draft that we received Friday
the Commission cannot compel a producer to explore and develop.
Is there any new legislation, other than the deregulation that you
talked about today, that you recommend to cure the problem ?
Mr. Nassikas. I am sorry. Is that on page 5 of my statement?
Mr. Bangert. Yes, sir. Well, on the draft that we received Friday
it w^as. Maybe it is on page 6 of the finished product ; I am. not sure.
Mr. Nassikas. Oh, yes, that is right, the finished product.
no
A producer needs no certificate, before that, citing the Permian
decision. Your question is whether there ought to be legislation
compelling them to produce ?
Mr. Bangert. Other than the deregulation that you suggested to-
day, are tliere additional legislative steps that need to be taken in
order to get gas ?
Mr. Nassikas. I don't think the compulsion to produce can be leg-
islated with any practicality. The heart of our free enterprise system
is a kind of independent, economic, decisional process. I believe there
is a law of economics — a desire to make a profit, if you will.
I happen to think profits and rewards and reasonable returns for
committing capital at risk are a part of our system we should never
abandon. So in the absence of some type of governmental takeover, I
don't Iviiow of any way to compel production except to set up the
climate which is in the public interest and get competition and develoj)
the resources.
Senator Hart. This is almost burdening an already burdened rec-
ord, but, philosophically, how do you apply that to the position you
take with electric utilities ? You require them to produce, don't you ?
Mr. Nassikas. I think your observation is most astute. Electric
utilities or gas pipeline companies are public utilities, obligated to
provide services. They have monopoly characteristics which require
their continued regulation in order to protect consumers from being
charged excessive rates.
Xow, the characteristics of producers as was set up in the shortest
and inost incisive terms in the Permian Basin case is that they are
not a class of regulated monopoly that would require regulation.
They don't lend themselves to regulation on a company-to-company
basis. That was tried in the late fifties and early sixties and failed.
They don't have any particular ser\dce area that they serve. There
are thousands that compete. Without getting into a repetition of my
principal statement, I don't believe — nor does the Supreme Court
tielieve — that producers should be regulated as public utilities, like
electric utilities or pipeline companies. I don't think it is inconsistent
to suggest you must have regulation of natural monopolies with
pliased decontrol of gas producers, but you must have continued reg-
ulation only if competition cannot be made to "work" by enforcement
of antitrust laws.
Senator Hart. Just for the record, the Commission in the Permian
Basin case says :
There is no evidence of competition between producers to make new sales by
offering lower prices. On the contrary, the primary competition revealed by the
record was among the pipelines to secure new gas at higher prices.
"\Miatever degree of competition may exist among producers is not
to afford tliem protection under the Natural Gas Act.
Maybe it is not like a utility, but it is not like an automobile com-
panv. either.
Mr. Nassikas. I am not quite sure I agree with your observation. I
think automobile companies and manufacturers of that kind are quite
competitive in a way, except that they dominate markets to a greater
degi'ee than gas producers.
Ill
Senator Hart. Let's take some other industry. I have listed auto
companies in that group of six or seven highly concentrated industries.
The natural gas operation may not be like an electric utility. It cer-
tainly is not like — what is our favorite area of utter confusion? Can
anybody think of any other industry in America that is really competi-
tive ? I would welcome suggestions. I was going to say we will hold the
record open if somebody wants to nominate an industry that meets that
definition.
Mr. Nassikas. I would say this : "We certainly ought to enforce our
antitrust laws, but I don't think the producers really lend themselves
to the category of being regulated like electric utilities.
In that Permian Basin decision, Mr. Chairman, your quotation was
accurate, but in affirming the Commission's opinion, the Supreme Court
stated :
The records before the Commission, however, support its conclusion that com-
petition cannot be expected to reduce field prices in the Permian Basin to the
lowest possible reasonable rate consistent with the maintenance of adequate
service in the public interest.
Footnote 21, chapter 13, of my principal statement comments on this
point.
Mr. Bangert. That leads into the last area that I would like to cover
with you, Mr. Chairman, and that is competition, industry structure.
On page 8, you indicate that the Commission has taken sigiiificant
policy initiatives to stimulate competition.
Mr. Nassikas. I believe we have. At least on a policy basis, apart
from the framework of a specific case, this Commission has tried to
foster an increase, not a decrease, in competition, insofar as the gas
industry is concerned. That is the point I am trying to make.
Mr. Bangert. Well, antitrust economists tell us that competition
fosters rivalry among sellers. I am wondering how the Commission
has fostered rivalry among the various producers ?
Mr. Nassikas. One of our most significant actions to foster pro-
ducer competition was releasing 4,000 independent producers from
price ceilings, whereas the large producers — around 100 — were still
subject to our total regulation.
I think that was one of the largest steps taken by any regidatory
agency I know of to increase competition in a major industry. It gave
the small producers a better competitive posture in relation to large
producers than if they were all subject to the same area price restraints.
That is one large action that we took, but there are others.
Wlien I came to the Commission, pipelines couldn't charge the
same area rates as producers. Again without getting into a decided case,
we decided that it would be a good idea to place pipeline producers
on a parity with regular producers, so that the pipelines' position vis-a-
vis the producers' would be improved.
I don't think that in the electric utility industry — by way of anal-
ogy— electric utilities should simply rely on a source of supply without
knowing something about it, any more than I feel the pipeline com-
panies should simply wait for a producer to do something. They must
try to insure the integrity of their service to the consumers. It seems
logical to improve a pipeline's competitive position in relation to a
producer's and thus increase competition in the industry.
112
I would say order 45-3 by which we rolle'^t price data on fossil fuels,
"which data is disclosed to the public and interested Government
agencies, is germane. That was quite a controversial rule when we
made it.
I think that merely disclosing this information increases the com-
petitiveness of the industry, although some sectors argued it had the
opposite result.
^Ir. Bangert. Reading the quotes in the Penman case and the
Sovthern Loiusimm case on pages 12 and 15. it seems to n"ie there was
indication of serious imperfections attributable to proclucere and pur-
chasers in both cases.
^Ir. Nasstkas. Certainly as to Sonther-n Lovmava^ as set forth on
page 15, it was stated by the Commission that there were serious
market imperfections before the FPC. At the same time when we con-
sider the Austral Oil case, the fifth circuit court of appeals observed,
"At the same time there seems to be general agreement that the m.arket
is at least structurally competitive." The Supreme Court in Permian
described producers as 'intensely competitive' (300 U.S. at 757, 88
S. Ct. at 1354). The Permian decision states that the Commission
did not find any evidence of a competitive structure, nor was any
evidence adduced by the pi'oducers to try to prove the point.
That went up on a rather narrow basis, that the court used the
records before it. Certainly those decisions speak for themselves, and
I think I made it clear in my principal statement that there may be
imperfections of structures in some areas. Tliere are unquestionably,
as I tliink I said in my direct statement.
As to these imperfections, let's be certain that laws are enforced;
as to those areas where you might have decontrol, if prices start rising
as a result of collusion or antitrust violations, then lets us bring suit.
Mr. Bangert. Do you hold that the Permian Basin has a market that
is competitive?
Mr. Nassikas. I think that is an issue in the Belco decision as well as
the Permian Basin case now pending before the Commission. ISIy col-
leagues wrote the majority decision in Belco with which I disagree as
set forth in my dissent.
Mr. Baxgert. On page 13 of your testimony you indicate that the
Commission puts the burden of proof on producers to show that com-
petition exists. And then on pages 34 and 35 you indicate that the
burden is on those who contend the industry is not competitive.
Isn't that a contradiction in your statement ?
Mr. Nassikas. I don't think so. ^ij concluding statement is directed
toward the legislative purpose these hearings are serving. And that
is, it is desirable in the national interest, in public interest, to decon-
trol any part of the gas industry.
It seems to me if the contention against decontrol is that there are
such imperfect structures in the industry that it is not worlcable and
competitive, and therefore that we should not release regulatory con-
trols, then the allegation must be supported by convincing evidence to
prove that regulation should continue. If proponents of continued
regulation do not carry the burden of persuasion, then deconti'ol
is in order. The presumption should be that the industry is workably
competitive until proven otherwise.
113
At the same time I will repeat it, because I don't want anybody to
misundei'stand. So long as tlic Congress has directed ns to regulate, we
must regulate and we shall continue to do so. We have been maintain-
ing the price of gas at far lower than its commodity value, in accord-
ance with the Natural Gas Act.
Senator Kennedy. Will the Senator yield at this point ?
Senator Hart. Let me just read one statement to the chairman and
then I shall conclude. You are an extremely able and gifted leader,
so you should not be disturbed at having read back to you statements
you made in the past. We are all used to that.
]Mr. Nassikas. I will listen to it and I am sure I will affirm that I
said it. Go ahead.
Senator Hart. "It has been suggested that the answer to regulatory
problems is to deregulate producers' prices. I do not agree. At the
time of a developing national supply crisis, deregulation will be con-
trary to the national interest. There is serious question whether inter-
fuel competition can provide a meaningful restraint on the prices that
can be chai'ged producers in all markets. While there may be active
interfuel competition in certain industrial and commercial markets,
prices will be impaired in the residential market.'' I am sure you don't
agree with that now, do you ?
Mr. Xassikas. That was stated June 5, 1970. at which time I would
have been chairman for not quite a year. I believed at that time that
the programs and policies that the FPC and other sectors of our
Government were developing would result in a constructive develop-
ment of energy resources to meet our economic needs. Moreover, my
remarks were directed to total deregulation — not limited and strictly
monitored decontrol of new gas dedications to the interstate market. I
found out after having served almost 4 years as Chairman of the FPC,
that I was wrong in my judgment : That all energy sectors of the
Government — and 1 include Congress in there— would take action that
would turn around our deteriorating energy situation. The actions
were not taken. I feel, as I said earlier, that with 60 or TO decisions con-
stantly on appeal to the courts that the FPC — most of our cases were
appealed by the companies for setting rates too low, with nonavail-
able final decisions still not having been made in area rates — that a
climate of uncertainty has not been conducive to optimum energy
resouri^e development or allocation. And it seems to me that we should
try to decontrol the new gas and see if we can develop more gas supply
at a reasonaljle price. Direct regulation of natural gas producers con-
sidered in the context of developing shortages of oil, coal, and nuclear
power does not seem to be the long-range benefit efficient energy
resource utilization.
At the same time I say every caveat I raised in that statement of
Jiuie 1970, Mr. Chairman, is still applicable today. These are caveats,
which require in conjunction with- decontrol of iiew oas to carefully
review^ price impacts. We should end up with more energy and I
think overall savings to the consumers, if an intercompetitive fuel
economy determines price levels.
The easy way for me as a regulator would be to say, all right, con-
tinue to regulate and keep that price as low as it can possibly be kept,
regardless of the gas supply to consumers. That would be easy, but not
114
in the public interest. It "was these policies of the past that I failed.
I don't say this critically of the predecessors on the Commission.
However, the Commission and I should benefit from the failures of
reo'ulation and not repeat the mistakes of the past.
If Congress gives us the power to regulate according to market
forces, this would be a giant stride in the right direction.
I say we don't have that authority. We have to regulate on cost.
We have so regulated, and because of our restraint of prices gas is the
cheapest fuel in the United States today in almost all markets.
Senator Hart. Senator Kennedy.
Senator Kennedy. On that point, in other words, you just changed
your mind ; is that about it ?
ISlr. Nassikas. Yes. I changed my mind.
Senator Kennedy. Around 180° ?
Mr. Nassikas. Yes — with the exceptions previously noted — based
on 3 years experience and recollecting that energy is necessary to
survival of this Nation.
Senator Kennedy. Well, you recognized that 3 yeai-s ago, didn't you ?
Mv. Nassikas. Yes.
Senator Kennedy. "Wliat were these decisions made in other gov-
ernmental agencies that
Mr. Nassikas. NEPA was not really on the way until 1970. but it
didn't become very effective until late 1970. NEPA was established
and applauded ; this agency applauded it. The air quality amendments,
the Refuse Act, the water quality amendments, the effect of environ-
mental policies and standards upon development of resouices. Tlie
slippage in our nuclear programs, the domestic oil and coal shortage —
that is, the degenerating energy situation — all contributed to my l)elief
that the regulatory structure for gas should be changed.
Back in 1970, 1 would not envision — I did not envision- — for iiistance,
that we would still be waiting today for a go-ahead on the xVlaska
pipeline where we can bring down 30 trillion cubic feet of associated
gas as the oil is marketed. Economic stabilization, these are tough deci-
sions for anybody to make — Congress, the President, or anybody else.
Economic stabilization, I think, has had its impact in retarding the
development of resources. I would like to see more market regulation
of new gas and see on a closely monitored basis what develops there,
and I believe that overall it will beneht consumers as well as benetit our
overall society.
Yet, I changed my mind, and I think people should change their
minds if they find based on further experience that the national inter-
est would be better served by revised energy policies. By way of sum-
mary, our Government leasing policies over the past 6 years have been
inadequate. From 1968 to 1971, the Department of the Interior offered
for lease in the offshore Federal domain less than 2 million acres of
land. While the past has accelerated in the last 2 months wherein
almost 114 million additional acres of land were offered for lease, the
overall program for the pnst 6 year? lias l>een inadequate and has
contributed to the energy shortage. Ambient air quality and emission
standards have been unrealistically imposed, restraining the economic
accessibility of resources. Environmental opposition to resource sales,
as well as to the building of powerplants or coal mining, have delayed
the development of badly needed energy resources.
115
An unfavorable balance of payments will be accentuated by the
necessity for importing a greater proportion of our oil and natural
gas needs. If present trends continue, our national security will be in
jeopardy. The necessity for tlie massive injection of new natural gas
and oil supplies from domestic sources mto our energy economy is, in
my opinion, so vital as to affect the survival of this Nation.
These are among the reasons why my views concerning natural gas
regulation today vary from my views expressed 4 yeare ago.
Senator Ejennedy. Your position on June 5, 1970 — was there not
deregulation in terms of pricing ?
]Mr. Nassikas. Yes.
Senator Kennedy, You thought it would not be helpful, in terms of
developing a national supply, if we deregulated; isn't that what you
.said in 1970 ? At the same time, developing national supi)ly regulation
would be contrary to national interest ^
Mr. Xassikas. Yes.
Senator Kennedy. You also thought there was a serious question,
as to whether natural gas prices
Mr. Nassikas. Whatever I stated then is correct for that time.
Senator Kennedy, You said that the answer is better regulation,
not its avoidance ; is that correct ?
]Mr. Xassikas. Yes,
Senator Kennedy. Can j'ou tell us, or provide for the committee any
of the studies or documents that you might have that led you to believe
that with the deregulation there is going to be better supply or that
the consumers are going to pay less ?
Mr. Xassikas. One is simply determining what the response was to
the policies which we adopted and the exent to which these policies
have reduced further supply of gas.
We get the thoughts, evaluate these, and we also get drilling
statistics.
Based on empirical experience, the fact is there has not been a turn-
around in gas. That I mentioned earlier, when you were out; nor has
there been a turnaround in oil, which is essential in these United
States.
Senator Kennedy. Obviously you had some evidence or some studies
that led you to these conclusions about supply and price, and the an-
swer was not deregulation. You must have made some study of that
prior to the time after you had been in that job for 1 year, and obvi-
ously you come with a background of experience in this field. You
were no newcomer to the field, and then we find 3 years later that you
have made a complete, 180-degree turn. I think all of us, obviously,
change our minds about different issues. What I would like to Imow
is what was the material that you had that led you to make up your
mind in 1970, and what is the other evidence you have in 1073. I would
assume this turnaround means hundred of millions, or billions, of dol-
lars to the American consumers, and I don't find bits of information
that the Congress has about the EPA and these other statistics con-
vincing.
I want to be able to respond to consumers in my State that other
material has come forward. Based upon that material, you have come
to different conclusions. That is not unusual.
116
For example, the Food and Dru^ Administration has new kinds of
information. They tJiink varions drn<>s are nsefnl and lielpfnl. They
find additional studies. They change their mind 180 degrees on it.
You have said you have been aide to collect this material over the
last 3 years, material developed by independent agencies that have
responded to the kind of challenge that you put forward, material that
represents the best evidence. Maybe there is some agreement or dis-
agreement and you and your fellow commissioners, as exj^erts charged
by the Congress, have drawn that conclusion. I want to see if you have
that material, or wliether your response is of the general nature you
have given to Senator Hart earlier.
Mr. Nassikas. The controlling reason is that empirically, looking
back on what has happened, we are running out of gas in the United
States, and consumers in the United States are entitled to gas service
and not have to have their investment in various kinds of gas appli-
ances or investment simply confiscated by lack of gas.
I have got to consider the alternatives, also, to the gas supply prob-
leins. Since 1970, we have had deepening curtailments of pipeline-
supplied gas in the United States. About 5 percent of all gas supplied
last year, and about 10 percent of the major pipelines, were affected..
In 1970, that did not exist. The crisis deepened even further than I
thouglit it would between 1970 and 1973. It is the studies
Senator Kexxedy. Which crisis is this?
Mr. Nassikas. The crisis of the shortage of gas to meet consumer
demand.
Senator Kenxedy. Have we ascertained that there really is a short-
age, or have we ascertained that the companies are holding back noAV
in anticipation of increased revenue they are going to receive if your
deregidation takes effect ?
]Mr. Nassikas. Senator Kennedy, we have found on at least three
separate occasions that there is not only a crisis but an emergency exist-
ing— a national emergency with reference to gas — and I think the
sooner the consumers of the United States know there is an emergency
and there is not enough gas to meet industrial, commercial, or resi-
dential needs, the better off' they will be.
Senator Kex^xedy. There are those who believe, with the announce-
ment of your position on deregulation and the statement that cost
would increase up to approximately $1 at the wellhead, that a number
of these companies are withholding the product now, and tiwing to
create a climate of scare and fright.
Certainly Congressmen, as well as others, have indicated that, but
you dismiss those allegations.
Mr. Nassikas. I do not dismiss any allegation that is made. But
nevertheless, like you, I believe this should be weighed, and not simply
accepted, as allegations. If they are supported by evidence that there
is withholding, and if there is a scarcity, that soit of thing, that can
be documented, then action must be taken to determine whether there
has been collusive withholding in violation of antitrust laws.
I have worked on this Commission now for 4 years, and as far as I
am concerned, from the evidence I have seen, we have a devastating-
gas shortage in the TTnited States, and the consumers of the United _
States should realize it. The prices
117
Senator Kennedy. The point here, Mr. Chairman, is that this was
the issue which this committee, under Chairman Hart, and tlie FTC
were attempting to document, and without any cooperation from the
FPC, without having the pertinent documents made avaihable to
it, how are we going to determine this, and how is the FTC, if the
FPC does not make these documents available ?
Mr. NAssiKiVS. Of course, the FTC has their responsibility and we
have ours.
Senator Kennedy. And the public has theirs, too.
Mr. Nassikas. We have our responsibilities to the public as defined
by Congress.
Senator Kennedy. And when those rules were made, the Congress
didn't have on its mind the shortage — the extent of the shortage in
this countr3^ You seem to be saying : "I am not going to get into help-
ing the FTC, because I have my jurisdiction and the FTC has theirs.
Even if the public wants to know, that is too bad. because we are not
going to let the FTC have oui- information. After all, it is ours." That
seems to be pretty narrowminded.
IMr. Nassikas. Let me point out hearings before the Senate Com-
mittee on Commerce, committee print, page 352. There the staff of
the Federal Trade Commission goes to great lengths to point out the
extent to which the Federal Power Commission cooperated with the
FTC, instructing the FTC as to the methodology and methods of
determining gas reserves data. This is set forth in the record of
those proceedings.
Next, I would like to point out that the FTC, if they desired any in-
formation from the FPC. is perfectly privileged, as discussed in this
committee print, to file a motion with the Commission and state what
infonnation they may desire.
So then if the FPC decides to aid their purposes at least it is on an
open record, rather than to secure information under one pretence and
than turn it over to another commission for another regulatory pur-
pose. I don't think that is fair play to the public and I don't think:
I am going to abide by it.
Senator Kennedy. Has there been any material that the Trade
Commission has requested of you in trying to provide this informa-
tion in the public interest that you failed to provide to them ?
Mr. Nassikas. Not to the Federal Trade Commission that I know
or.
Senator Kennedy. Has there been a^iy material that the FTC has
requested of the Power Commission, that the Power Commission has
not made available to them ?
Mr. Nassikas. Not to the Commission itself. There may have been
some staft' inquiry that I am not aware of.
Senator Kennedy. The field-by-field assessment 2
^Ir. Nassikas. There is a letter that came in, as I recall, that our
general counsel called to my attention. Some employee of the FTC
within the past 2 or 3 weeks was directed to Mr. Edminor, who is one
of our counsels at the FPC ; I don't know if he was responded to or
not. They never requested anything from the Power Commission.
Senator Kennedy. "Will that material that is being requested be^
furnished ?
Mr. Nassikas. I don't know. I don't know what material it was.
118
Senator Kennedt. Is there any reason that it will not be furnished ?
Mr. Nassikas. Yes ; there are reasons why it may not be furnished.
The reasons are if it would be violative of Commission order and good
faith in the conduct of governmental aif airs.
Senator Kennedy. Would the field-by-field assessment that was
conducted under the National Gas Reserve Study fall mider that ?
Mr. Nassikas. I would have to study it.
Senator Kennedy. We will recess for just a few minutes.
[A brief recess was taken.]
Senator Hart. The committee will be in order.
Senator Kennedy.
Senator Kennedy. Thank you very much, Mr. Chairman.
In your 1970 speech, did you deal also with the percent of the pro-
duction that was in the largest fuel companies, if there was not a
competitive industry ?
Mr. Nassikas. I don't recall whether I had any figures or coopera-
tion on that at all.
Senator Kennedy. You supplied for us some material today pre-
pared by the Gas Supply Section that indicated you know what per-
cent of the production was by a certain number of companies. Are
you familiar with that material ?
Mr. Nassikas. Yes, basically.
Senator Kennedy. And for the most part, that indicated approxi-
mately 85 percent — I would think 85 would be a reasonable figure —
of the production is from the four largest — this is in the percent of the
reserves, excuse me, U.S. uncommitted reserves by areas and largest
producers. That would indicate that approximately 85 percent or more
of the reser^^es were held by four companies.
Mr. Nassikas. Let's see. Appended to my statement, table 1 indi-
cates that, in the lower 48 States, the four largest companies controlled
51.9 percent of the uncommitted gas su]:>ply. Then, taking Alaska,
the four largest control 93.9 percent of Alaskan reserves; then a
weighted average for the total United States, 51.4 percent. That is
what my talile 1 shows.
Senator Kennedy. Well, I was just interested — I see in the bottom
line you. have, for the lower 48, about 51 percent. I don't see in that
list above by nreas any figure that would indicate that it is less than
about 6?) percent, or 57 percent. Would you clarify that for me?
Tliese figures would indicate, going down them, as follows: south
Louisiana, four companies, 96 percent: offshore Federal, 57 percent;
off sliore State, 54 percent ; Texas Gulf, 89 percent. It goes right down
the list.
Mr. Nassikas. The percentages at the bottom of table 1 are not nec-
essarilv directly related to the area percentages. The four companies
controlling the largest amount of uncommitted reserves on a lower
48 States, or national basis, may be entirelv different companies than
the four largest for any given area. However, the percentages are
related from left to risfht on the table on both an area or total basis.
Senator Kennedy. The competition is not reflected, therefore, in
the various areas, is it?
IVIr. Nassikas. Well, the extent to which the larger companies con-
trol uncommitted reserves does reflect competition or noncompetition.
I stated that, and I think that this is relevant. I have also stated that
119
in addition to uncommitted reserves that we have to consider reserves
that are released from firm contracts upon expiration of those con-
tracts, which ahnost doubles, not quite, but raises the level of available
reserves from 3.4 trillion cubic feet in the lower 48 States to 6 trillion
cubic feet. But this table reflects only concentration ratios by the
4, 8, and 20 largest companies for the areas set forth in table 1.
Senator Kennedy. Well, it appears to me that at least the four larg-
est companies in these respective areas control about 85 percent of the
reserves, although there may be a difference in the number of com-
panies nationwide. But with regard to the particular zone areas, do the
statistics that have been worked out show about 85 percent ?
Mr. Nassikas. Xo, it would vary, as I stated, by areas. Let's take,
for instance, June 30, 1972, the bottom line. You take the four largest
companies
Senator Kennedy. "Well, the four largest companies have 96 percent
of the reserves in southern Louisiana.
Mr. Xassikas. Yes, this is 1971 ; 96.9 ; onshore.
Senator Kennedy. How much competition is there if the four major
companies have 96 percent ?
Mr. Xassikas. Well, as to uncommitted reserves, I would say the
four largest companies control almost 100 percent of the micommitted
reserves on that onshore, and there is relatively little competition as
to those particular reserves. Remember, the pipeline companies that
are buying from those producers may also have some market power,
although I do feel the real marketing strengtli lies with the sellers of
the uncommitted reserves. I don't disagree with that observation.
Senator Kennedy. Wouldn't that be true also of the offshore States ?
Their companies have 84.5 percent ; isn't that the same ?
Mr. Xassikas. Yes, then, of course
Senator Kennedy. If you want to go to 1972, they have 94 percent.
Mr. Xassikas. There is one at 100 percent.
Senator Kennedy. Right. What does that mean? You are as aware
of those figures as I am. The statistics from 1971 to 1972 show there
are seven areas where the percentage of concentration has actually
increased.
Mr. Xassikas. As to those points in time, June 30, 1972, and De-
cember 30, 1971, and as to those areas where a number of producers
controlled that percentage of reserves, the higher the control by four
of the largest companies, then obviously, the higher the bargaining
po^yer of those four largest companies. Overall, however, on a national
basis, or even as to the Federal domain here— you start getting into
the Federal domain here in 1971— the four largest controlled 57 per-
cent. However, you move up to 1972, comparing the four largest com-
panies for the same area, that percentage decreased to 49.6, so it is
less than it was in 1971.
Senator Kennedy. As I gather in looking through this— and I am
not going to take the time of the committee to do so — there are seven
areas in the 1972 period where the percentage of control by the com-
panies has actually increased, not decreased. It would appear that in
a number of these particular areas designated on this table, where
there is only one pipeline, the clearest indication of the competitive
situation would be the areas which are indicated as having a very,
27-547 0—74-
120
very high percentage of control by the four major companies — from
100 percent to the high 90*s, and generally averaging 84.
Mr. Nassikas. I don't understand, again, the reference to the 85
percent. The exhibit on file in table 1, shows 48.4 percent for the four
largest companies in the lower 48 States in June 1972, wliich is a de-
crease from 1971; 93.9 percent for Alaska; and 51 percent overall for
the United States.
For the eight largest, you have 67.5 percent as of June 30, 1972.
By the four largest, 93.9—1 am sorry. For the lower 48, four largest,
you have 48.4 ; eight largest, 67.5 ; 20 largest, 92.7.
Then across the board, including Alaska, you have four largest, 51
percent ; eight largest, 73.9 ; 20 largest, 94.8.
Senator Kennedy. I might ask the chairman here as a point of
clarification, is the competition measured on the basis of a national
figure or on the basis of the area-by-area competition?
Senator Hart. I am advised that section 7 cases are regional — mar-
ket areas.
Mr. Nassikas. I indicated earlier, too, that in various market areas
you may have greater or lesser degrees of competition.
Senator Kennedy. In most of the areas it is less rather than more.
I would let the record show those percentages. I think they provide
convincing evidence of the point I am trying to make. If there is
a difference interpretation of it, I would be glad to hear it. Let me ask,
finally — I have some other questions, Mr. Chairman. The hour is late,
you and the chairman have been veiy generous, and I apologize for
going in and out.
Senator Hart. Please continue.
Senator Kennedy. What is the definition of "proven reserves" ? Tliat
is rather a basic question.
Mr. Xassikas. It is a word of the art, actually, and proven resources
have been defined in the National Gas Reserves Study conducted by
our staff. On page 5 of the National Gas Reserves Study, published by
our staff in May 1973, this definition is given in making estimates of
the national gas reserve, the definition is cited in the reserves estima-
tion and that, as appended here, is as follows :
The reserves are natural gas reserves estimated to be recoverable from proved
reservoirs under the economic and operating conditions existing at the time of
tlie estimate. Such volumes of gas are expressed in cubic feet, at 14.73 pounds per
square inch absolute pressure and 60 degrees F. temperature. These reserve
estimates include gas of all types, regardless of availability of market, ultimate
disposition or use.
Senator Kennedy. Is there such a thing as reserves that are known
but not proven ?
Mr. Nassikas. Yes, probable reserves are reserves associated with
known fields which may be proved or disproved with additional
drilling.
Senator Kennedy. What are the words of the art — known reserves,
proven reser\es, potential reserves ?
Mr. Nassikas. Proven reserves are known reserves.
Senator Kennedy. What are the other words of the art ?
Mr. Nassikas. Potential.
Senator Kennedy. Those are the only two ?
Mr. Nassikas. Reserves are generally termed as either "proved*' or
"potential." Potential reserves are resources that either have not been
121
found, or, if found, have not been developed enough to be termed
"proved." Potential reserves may be divided into different categories
based on the reliance of the estimates. The Potential Gas Committee —
an industry committer — divides potential resources into the three
following categories: (1) probable reserves, the most reliable of the
three categories, are reserves associated with laiown helds but are not
developed enough to be termed "proved" ; (2) possible reserves, are de-
fined as the supply from new field discoveries in formations that are
productive elsewhere; and (3) speculative reserves, these are the most
nebulous of the undiscovered supplies and are attributed to new field
discoveries in formations or areas (such as the Atlantic offshore) not
previously- productive. The Potential Gas Committee's latest estimate
of our domestic potential gas reserves is 1,146 trillion cubic feet which
is broken down into the three categories as follows: (1) probable, 266
trillion cubic feet; (2) possible, 384 trillion cubic feet ; and (3) specula-
tive, 496 trillion cubic feet. The Geological Survey estimates that there
are about 2,100 trillion cubic feet of potential recoverable undiscovered
resources. However, the Survey does not divide this estimate into
various categories of reliance.
Senator Kennedy. I would like to know the amount of reserves that
fall into those categories.
Mr. Nassikas. On proved reserves, as reported figure by the Ameri-
can Gas Association, as of the end of 1972, the AGA reported about
234.6 trillion cubic feet of proved reserves in the Lower 48 States,
and you can add another 31.5 trillion cubic feet for Alaska, to aggre-
gate 266.1 trillion cubic feet.
Senator Kennedy. Does the FPC have a figure?
Mr. Nassikas. We have pipeline figures, which cover about 70 per-
cent, and we have our pipeline figures only through 1971. At the end
of 1971, reserves dedicated to interstate pipelines were 161.3 trillion
cubic feet. We should have the 1972 figures available within the next
2 or 3 months. We have a lag because we are trying to computerize this
operation of the FPC. In any event, we do have that also which we
can give you. In 1970, our reserves study — that is, the staff's report —
^hows that there were about 261 trillion cubic feet of proved gas re-
serves in all fields which would include Alaska.
Senator Kennedy. What is the Geological Survey's estimate; have
they made any estimates on it ?
Mr. Nassikas, No; the Geological Survey does not make estimates of
proved reserves on a national basis, but they have estimated the un-
discovered recoverable potential gas resources to be about 2,100 tril-
lion cubic feet. This includes the continental margin to water depth
of 656 feet (200 meters). The survey also estimates there is an addi-
tional 4,000 trillion cubic feet of submarginal resources for a total of
6,100 trillion cubic feet of undiscovered resources. The 4,000 trillion
cubic feet of submarginal resources are not considered to be economi-
cally recoverable if found and are primarily located on the contin-
ental margin between 656 feet and 8,250 feet 7 2,500 meters) of water.
This geologic finding will be comparable, to the Potential Gas Com-
mittee which is an industry committee, whose estimate would be 1,146
trillion cubic feet of gas, compared to 2,100. The Geological Survey's is
roughly double the industry's as to "potential" reserves. As to proved
reserves, the Geological Survey does not have an estimate, I am in-
122
formed by my staff, although they did participate in the national gas
survey as to the Outer Continental Shelf, and estimated proved re-
serves for fields in the sample for the Outer Continental Shelf.
Senator Kennedy. Their track record, as I underetand, has been
pretty accurate over a period of years.
Mr. Nassikas. I Avould hope that when the Geological Survey says
2,100 trillion cubic feet of undiscovered potential, their report is right
and industry's figures are wrong.
Senator Kennedy. And if they are right, how big a shortage is
there really ?
Mr. Nassikas. Even if they have 2,100 trillion cubic feet of undiscov-
ered potential, that has to be converted to a proved reserve. It has to
be explored, No. 1. It is not found; it is remaining to be discovered,
and it has to be explored and deveolped. And under the basic laws of
economics, it will neither be explored or developed, unless the price
is higher than past levels.
Senator Kennedy. Isn't that up to the industry whether it is ex-
plored or developed ?
Mr. Nassikas. Yes; but largely the availability of leases — most of
this gas is in the Outer Continental Shelf, in the Federal domain,
which requires a leasing program. In fact, on the Atlantic coast,
George's Pank off Cape Cod is a very lucrative field of gas, but taking
the entire Atlantic coast, about -16 to 65 trillion cubic feet of undis-
covered potential resources are in the Atlantic coast. If we need gas
supply to serve the consumers of the eastern part of the Unitecl States,
and the Northeast where I came from, those are the reserves that
should be developed.
Senator Kennedy. Do you think the gas companies are ever going
to change the policies by which they have now strangled the New
England homeowners and let us import it into New England ?
Mr. Nassikas. T^t's suggest this. Senator Kennedy. Have the record
state that. No. 1, residual fuel oil in New England has been a free
import area for 5 to 8 yeai"S.
Senator Kennedy." On home heating oil. No. 2, the oil industry
fought us every bit of the way just as they are now fighting on the
importation of the No. 2 oil.
Mr. Nassikas. I have recommended a relaxation of the import
controls on No. 2 oil, as a member of an oil compact, and I have fought
over a period of 4: years for further imports of No. 2 fuel oil, and I
know it is right.
Senator Kennedy. For you ?
Mr. Nassikas. All right.
Senator Kennedy. If the estimates of the Geological Survey, as I
understand from the information that has been made available to me,
that the 2,000 trillion cubic feet is generally considered to be a con-
servative figure, how many years of reserves
Mr. Nassikas. Well, a l.i-percent growth rate, which is most con-
servative, would be a 65-year supply, if it can all be developed. Of
course, the Geological Survey would be the fii"st to admit — and I
would recommend tliat the committee ask them to testify — that this
gas is incapable of being developed in the estimated quantity.
Senator Kennedy. I had an oppoi-tunity to discuss with the chair-
man the intention of the committee to go into the whole question of
123
the destruction of the confidential papers in the Power Commission.
There was a story on this by Mr. Mintz, and the chairman has given
instruction to the members of the connnittee that they are going to
have a special hearing on this whole question. I think that that makes
a great deal of sense. I just want to ask you whether there is any-
thing you want to say on that particular issue today. In this com-
mittee we have been run through the shredder on the ITT affair and
the Gray affair, and now we see this looming up again as a result of
the Federal Power Commission, and I would listen to any comment
you would like to make.
]\Ir. Nassikas. I have already commented extensively today, in re-
sponse to the chairman's questions. The staff' — I have submitted a re-
port of what happened by our executive director. I want to say that
I have denounced this action, it violated our Commission "s order, we
don't have a shredder, there are no instructions by the Commission to
destroy, the instruction is to preserve and not destroy, and this is an
incident I, of course, regret. This does not in any way indicate that
there is anything going on at the FPC that is designed not to dis-
close records that should be disclosed within the limitations of the
Freedom of Information or the Natural Gas Acts. I welcome any of
you of this committee or any other committee — in fact, I agreed to
a private investigation of my staff. There have been 6 to 8 hours at a
time of examinations and private interrogations of my staff', by
members of the subcommittee. If your conscience is clear, you can
welcome any investigation and let the chips fall where they may.
There is nothing to hide here.
Senator Kexxedy. On the matter I talked to you about earlier, the
field-by-field investigation that was made by Mr, Lytle, I have a copy
of that letter which seems to me to be entirely relevant to the Trade
Commission's investigation. It is about 3 weeks old. Would you be
kind enough to let us know what the resj^onse to that is going to be by
the Power Commission ?
Mr. Nassikas. It may end up as a staff' response, not a Commission
response. Whatever the response is, we will see to it that the committee
gets a copy of it.
Senator Kennedy. Is there any reason that we can't have a copy of
the response ?
Mr. Xassikas. We will supply you with a copy of the report. It is
IDart of our public file, and if some staff'man wants some information
from another staffman at our Commission, I don't think that is any-
thing that shouldn't be disclosed.
Senator Hart. The request is for a copy of the response to that com-
munication, and I would appreciate it if I can get it.
[The document referred to follows. Testimony resumes on p. 134.]
Federal Power Commission,
Washington, B.C. June 29, 1973.
Hon. Lewis A. Engman,
Chairman, Federal Tirade Commission,
Washington, B.C.
Dear Chairman Engman : I enclose a copy of the reply of Paul J. Root,
Technical Director of the National Gas Survey, to a June 5. 197.3 letter from
Theodore L. Lytle, Jr., Attorney, Bureau of Competition, Federal Trade Com-
mission, wherein a request was made of Edward A. Minor. Office of General
Counsel, Federal Power Commission, to supply natural gas reserve estimates for
124
certain individual fields in Offshore Louisiana to Mr. Lytle. As the attached reply
indicates, such data at the Federal Power Commission is confidential, whether
prepared by the United States Geological Survey and reported to the Supervisor
of the independent reserve teams or by the independent reserve teams, under
Commission orders of December 21, 1971, and March 9, 1072, as well as Section
8(b) of the Natural Gas Act and applicable provisions of the Freedom of In-
formation Act.
The Federal Power Commission has received no request for disclosure of
field-by-field reserve estimates conducted under this Commission's National Gas
Survey from the Federal Trade Commission, as distinguished from a staff mem-
ber of your Commission directing his inquiry to a member of our staff". Nor have
we been advised how disclosure of such data, obtained by this Commission under
express conditions that such data would be held in confidential status, would
serve the regulatory purposes of the Federal Trade Commission. Similar in-
formation, relating to uncommitted natural gas reserves studies of our staff',
has been sought indirectly by the Subcoumiittee on Antitrust and Monopoly of the
Senate Judiciary Committee, for the benefit of the Federal Trade Commission, in
letters to me of March 7, 1973, and June 11, 1973, from Senator Philip A. Hart,
Chairman of that Subcommittee.
You no doubt fully appreciate that there are policy reasons for assuring the
confidential status of reserve information, as well as the proprietai*y interests
inherent in such data, and that it would represent a breach of faith, as well
as a violation of outstanding Commission orders, and compromise the regulatory
integrity of this agency for us to secure information in furtherance of our reg-
ulatory purijoses on a confidential basis and then subsequently release such
information to another agency charged by the Congress with different regula-
tory functions. We are mindful that your Commission possesses broad independ-
ent investigatory authority under Section G of the Federal Trade Commission
Act.
Disclosure of detailed reserve estimates would undoubtedly inhibit future
exploration for new gas reserves which result would operate to the detriment
of the Nation as the acute gas shortage continues to produce adverse economic,
social and environmental effects. Such disclosure could also inure to the bene-
fit of a natural gas producer's eomjjetitors, particularly in highly competitvie
areas such as the Outer Continental Shelf.
On the basis of outstanding Commission orders, the constraints of the ap-
plicable provisions of the Natural Gas Act and Freedom of Information Act,
and the policy reasons I have mentioned herein, the Commission concurs with
Dr. Root's reply to Mr. Lytle of your staff. Moreover, to disclose such i-eserve
data as requested by Mr. Lytle could produce anticompetitive effects in the
natural gas industry and resifit in the taking of private property without com-
pensation and without affording the basic safeguards of due process.
Notwithstanding these considerations, we are certainly interested in proper
protection of the public interest, and if the Federal Trade Commission be-
lieves such confidential data is essential to carry out its regulatory purposes,
I would recommend that your Commission file an appropriate pleading with
the Secretary of the Federal Power Commission for this Commission's review
and action. Such a procedure would permit resolution of the issue of data dis-
closure on a public record, where all interested persons, including the individual
natural gas companies, may be heard and the rights of all concerned may be
protected under l)asic precepts of due process. In addition, such a procedure
would avoid placing FPC employees, such as Mr. Minor, in the position of an-
swering an FTC staff request that, if honored, would require Mr. Minor to
violate outstanding FPC orders.
The Federal Power Commission desires to continue to cooperate with you
within the limits of its regulatory powers and enabling statutes. I hoi>e that the
staff personnel of our respective regulatory agencies can likewise maintain the
existing excellent liaison relationships in furtherance of the public interest. ■
Sincerely, ^ ^^ ^^
John N. Nassikas,
Chairman.
*E.g. Hearings before the Senate Commerce Committee, March 22, 1972. Committee
Print at 353.
125
Federal Trade Commissiox,
Washington, D.C., June 5, 1973.
Edward A. Minor, Esq.,
Office of General Counsel,
Federal Potcrr Commission,
Washington, D.C.
Dear Mr. Minor : The recently released Federal Power Commission's National
Gas Reserves Study lists tbe major Offshore and smaller Offshore fields surveyed.
Twenty of the 22 major Offshore fields listed and four out of five of the smaller
fields listed are fields located in Offshore South Louisiana. As you know, the
Federal Trade Commission's Investigation styled In the Matter of the American
Gas Association, File No. 721 0O42 inter alia is attempting to compare Offshore
South Louisiana field-by-field estimates submitted to the A.G.A. with Offshore
Louisiana field-by-field estimates used by the various companies for internal
purposes. In this connection, the A.G.A. field-by-field estimates for Offshore
Louisiana have been obtained as have certain company documents. The Federal
Power Commission's estimates for the 24 South Louisiana Offshore fields selected
for their survey are needed to provide another means of verification and cross
reference. In our interest to be as thorough as possible, the Federal Power
Commission's reserve estimates for those Offshore Louisiana fields listed in
Table 4, p. 22 entitled "Major Offshore Fields in the statistical sample" (see
attachment A) and in Table 6. p. 24 entitled "Smaller Offshore Fields in the
statistical sample" (see attachment B) are hereby requested.
Thanking you in advance for your cooperation.
Sincerely yours,
Theodore L. Lytle, Jr.,
Attorney, Bureau of Competition.
Attachments.
Attachment A
Field Name (From Table 4, p. 22; "Major Offshore Fields in the Statistical
sample").
Cameron, East Block 64-63-48-49.
Cameron, West Block 180-173-174-179-181-144.
Cameron, West Blocks 17-18-47-48.
Coon Point & Ship Shoal Blocks 39-26.
Delta, West Block 25-27-24-23-22.
Eugene Island Block 266-246.
Eugene Island Block 292-293.
Grand Isle Block 43-68-71.
<\Iain Pass Blocks 40-41-42-37-57-43.
Marsh Island, South — Mound Point — Marsh Island, South Block
23-22^4-35.
Marsh Island, Southwest — Mound Point — Rabbit Island.
Ship Shoal Block 176-177-19&-199.
Ship Shoal Block 208-209-214-215-233.
Ship Shoal Blocks 28-19^27.
Timbalier, South Block 172-16^165-173-166-171.
Vermilion Block 14.
Vermilion Block 39-38-42.
Vermilion Block 66-76-57.
Attachment B
Field Name (From Table 6, p. 24; "Smaller Offshore Fields in the Statistical
sample").
Cameron. East Block 24-23.
Eugene Island Blocks 231-214-230.
Ship Shoal Block 222.
Vermilion Block 16.
126
Federal Power Commission,
Washington, D.C., June 29, 1973.
Mr. Theodore L. Lytle, Jr.,
Federal Trade Commission,
Washington, D.C.
Dear Mr. Lytle : This will respond to your letter of June 5, 1973, to Edward
Minor, Office of General Counsel, requesting that you be supplied certain Federal
Power Commission reserve estimates for Offshore Louisiana gas fields, specifically
for the 20 major offshore fields for Louisiana at p. 22 of the National Gas Re-
serves Study and for the four minor offshore fields for Louisiana at p. 24 of that
study.
Under letter dated February 25, 1972, from Acting Secretary of the Interior
William Pecora to Chairman John N. Nassikas, the United States Geological
Survey (USGS) accepted responsibility for making reserve estimates for that
portion of the National Gas Survey covering the Outer Continental Shelf and
reported their reserve estimates to the Supervisor of the indei>endent reserve
teams. (See Appendix VIII to National Gas Reserves Study, May 1973). That
agency performed the reserve estimates for the following major offshore fields
referred to in Attachment A of your June 5 inquiry :
Cameron, East Block 64-63-48-49.
Cameron, West Block lSO-173-174-179-181-144.
Cameron, West Blocks 17-18-47-48.
Delta, West Block 25-27-24-26-23-22.
Eugene Island Block 266-246.
Eugene Island Block 292-293.
Grand Isle Block 43-68-71.
Main Pass Blocks 40-41-42-37-57-43.
Marsh Island, South Block 23-22-24-35.
Ship Shoal Block 176-177-198-199.
Ship Shoal Block 208-209-21-4-215-233.
Timbalier, South Block 172-164-165-176-166-171.
Vermilion Block 39-38-42.
Vermilion Block 66-76-57.
The independent reserve teams, composed of members of the Commission's
staff and other professional personnel made reserve estimates for the follow-
ing major offshore fields :
Coon Point and Ship Shoal Blocks 39-26.
Marsh Island— Mound Point, Babbitt Island, Ship Shoal Blocks 28-19-27.
The independent reserve teams also made the reserve estimates for the follow-
ing smaller offshore fields, referred to in Attachment B of your June 5 inquiry:
Cameron, East Block 24-23.
Eugene Island Blocks 231-214-230.
Ship Shoal Block 222.
Vermilion Block 16.
The staff independent reserve teams and the USGS made reser\'e estimates
for March Island, South — Mound Point. The staff independent reserve teams
made an estimate for the state portion of Vermilion Block 14, while the USGS
made the reserve estimate for the federal portion of that field.
All individual field-by-field reserve estimates, including those identified in At-
tachments A and B to your June 5 inquiry, whether reported to us by USGS
or from the independent reserve teams, are confidential luider the terms of
the Commission orders of December 21, 1971 and March 9, 1972 (copies of which
are enclosed). Section 8(b) of the Natural Gas Act, 15 U.S.C. 717g(b), and the
Freedom of Information Act, 5 U.S.C. 552(b) (4) and (9). Accordingly, any
member of the Commission staff is prohibited from disclosing these field-by-
field reserve estimates to you.
Sincerely,
Paul J. Root,
Technical Director,
National Gas Surrey.
Enclosures : (2)
127
Enclosure 1
United States of America, Federal Power Commission
Before Commissioners : John A. Nassikas, Chairman ; John A. Carver, Jr., Albert
B. Brooke, Jr., Pinkney Walker, and Rush Moody, Jr.
0RDB21 directing STUDY AND ANALYSIS OF NATURAL GAS RESERVES AND
prescribing PROCEDURES FOR THE NATIONAL GAS SURVETT
(Issued December 21, 1971)
On February 23, 1971, the Commission authorized the establishment of Na-
tional Gas Sur^-ey advisory committees and prescribed procedures under which
the National Gas Survey would be carried out. Subsequent Commission order.s
have established particular committees. Paragraph seven of these establishing
orders stated that the advice and recommendations of the members of these
committees may be presented to the Commission, but provided that the ultimate
decisions based on the committees' advice or recommendations are reserved to
the Federal Power Commission.
In our order of February 23, 1971, we stated the following :
•'To accomplish the objectives of the Natural Gas Act, in providing for the
ultimate consumer an adequate and reliable supply of natural gas at a reasonable
price and the Nation a vital energy resource base, the Commission will direct
the conduct of the Survev thi-ough the members of the Commission and its
staff."
A report presenting a preliminary draft for procedures concerning a survey
and analysis of natural gas reserves was received by the National Gas Survey
Coordiating Comimttee on October 12, 1971, and by the National Gas Survey
Exectuive Advisory Committee on October 21, 1971. The Task Force on Natural
Gas Supply to the Survey's Supply Technical Advisory Committee recommended
procedures for such a survey and analysis at its December 14. 1971. meeting.
Those procedures, as reviewed and modified by the Commission, are attached as
Appendix A. We believe that an analysis of natural gas reserves is an important
step in the accomplishment of the objectives sought by the National Gas Survey.
The Commission finds:
A survey and analysis of natural gas reserves to be conducted by the National
Gas Survey in the manner hereinafter prescribed is necessary and appropriate
to the purposes of the Natural Gas Act and is in the public interest.
The Comm,ission orders:
(A) A survey and analysis of natural gas reserves in the United States shall
be conducted, following in general the procedures prescribed in Appendix A hereto
subject to such other and further orders as the Commission may hereafter adopt.
(B) Any non-public commercial information concerning an individual natural
gas company's reserves obtained during the coure of this survey and analysis
shall be treated as confidential without public disclosure, by the staff of the Com-
mission and its agents, including any accoimting firm selected by the Commission
to assist in this survey and analysis, unless otherwise directed by the Commission.
The provisions of Section 8(b) of the Natural Gas Act [15 U.S.C. 717g(b) ] and 5
U.S.C. 552(b)(4) and (9) [Freedom of Information Act] shall apply.
(C) The procedures specified in Appendix A do not preclude the undertaking
of such other procedures or reserves studies or the obtaining of such further in-
formation or data relating to gas supply as may be determined by the Commission
or Staff to be necessary or appropriate in carrying out the Commission's National
Gas Survey to serve the public interest.
(D) The ultimate form of reporting of natural gas reserves data shall be as
determined by the Commission.
(E) In order that this portion of the National Gas Survey may proceed im-
mediately, this initial survey and analysis shall estimate re.serves as of Decem-
ber 31. 1970, the latest date for which complete information is presently available
By the Commission.
[Seal] Kenneth F. Plumb, Secretary.
128
Appendix A
National Gas Reserves Study
The Federal Power Commission (FPC), acting tlirough the National Gas Sur-
vey, will direct an independent estimation of proved recoverable reserves of na-
tural gas of the United States. This estimation will deal with naturally occurr-
ing gas which analysis of geologic and engineering data demonstrates with rea-
sonable certainty to be recoverable in the future from known oil and gas re-
servoirs under existing economic and operating conditions. The study will not
include gas in storage.
Natural gas is defined to be a mixture of hydrocarbon compounds and small
quantities of various non-hydrocarbons existing in gaseous phase or in solution
with oil in natural underground reservoirs at reservoir conditions.
Reservoirs are considered proved that have demonstrated the ability to produce
by either actual production or conclusive formation test.
Estimated gas reserves will be reported in cubic feet at 14.73 pounds per square
inch absolute pressure and 60°F. temperature as of December 31, 1970.
All definitions and terminology will conform to that used by the American
Gas Association (A.G.A.) Committee on Natural Gas Reserves as set forth in
the report, "Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the
TJnited States and Canada and United States Productive Capacity as of Decem-
ber 31, 1970," and the American Petroleum Institute (API) Technical Reports
Nos. 1 and 2.
I. FORMATION OF ORGANIZATION
To conduct the survey, independent experts will be employed or commissioned
by the FPC and organized in four work disciplines.
A. Gas field identification will be provided by a comprehensive list of all gas
fields in the United States. The list will assure that all fields with gas reserves
are identified for survey. The Oil Information Center (OIC) at the University of
Oklahoma Research Institute will be commissioned by the FPC and charged with
this responsibility. Mr. Jack L. Morrison is the director of the Oil Information
Center.
B. Independent reserve teams will be supervised by Mr. Lawrence R. Mangen,
FPC Assistant Section Head of the Gas Supply Section. The teams are to be made
up of geologists, engineers and other professional staff members of the Federal
Power Commission to review data ordinarily needed to determine gas reseiTes,
with assistance, as available, from the United States Geological Survey, United
States Bureau of Mines, and from colleges and universities.
C. The independent accounting agent will be selected by the Federal Power
Commission. This agent will be commissioned by the Federal Power Commission
to:
1. Provide security for individual field reserve estimates ;
2. Classify gas fields by reserve size and age ; perform random selection of
fields for reserve estimations as prescribed by the statistical validation team ;
3. Consolidate the findings of the reserve teams ; and
4. Report United States gas reserves estimates to the National Gas Survey.
D. A statistical validation team will be supervised by Dr. Marie D. Wann,
Chief Mathematical Statistician, Statistical Policy Division, United States Ofiice
of ^Management and Budget. The team will consist of other experts from the
Office of Management and Budget and otliers commissioned by the FPC. This team
will liave the responsibility of prescribing sampling procedures for valid reserve
estimation.
E. Task Force Advisory Sections, which shall perform as work teams and not
Industry Advisory Committees, will be selected from the membership of the
Supply-Technical Advisory Task Force-Natural Gas Supply. These sections will
perform the tasks assigned by the Supply-Technical Advisory Task Force-Natu-
ral Gas Supply as indicated in Attachment A (Items B, F, N, P, and W) and
other tasks as assigned.
II. SECURITY CONSIDERATIONS
Individual companies must, for competitive reasons, iirotect highly confidential
information in competitive areas such as offshore Louisiana. The security prob-
lem will be accommodated by :
A. Requiring that all company-fnr'nished data be evaluated at the companies'
offices with no data or worksheets leaving the premises. All independent reserve
129
team generated worksheets will be preserved in the companies' oflBces until
July 1, 1974.
B. Having the complete list of A.G.A. individual field reserve estimates avail-
able only to the independent accounting agent. All these reports ai'e to be
returned to the member of the A.G.A. Committee on Natural Gas Reser\'es
assigned to the particular area involved as soon as the study is completed.
C. Having the A.G.A. reserve estimates for the randomly .selected sample fields
for independent reserve estimation available to Mr. Lawrence R. Mangen, super-
visor of resei've teams.
III. DETAILED PROCEDURES
They are diagrammed on the information flow chart. Attachment A. Informa-
tion boxes on the chart bear the same letter designation as the corresponding
descriptive paragraphs which follow.
A. The National Gas Survey requests that the industry representatives who
provide A.G.A. reserves also submit those reserves by fields on a confidential
basis directly to the selected accounting agent.
B. A Natural Gas Supply Task Force Advisory Section (Item B, Attach-
ment A) will recommend a data for recording U.S. gas fields and reserves. The
for'mat will be readily convertible to computer cards and will record the follow-
ing information for each gas field :
1. A.G.A. District.
2. State.
3. Railroad Commission District or State Subdivision.
4. Field Name or Names.
5. Discovery Date.
6. Gas Reserves as of December 31, 1970.
C. A Task Force Advisory Section (Item B, Attachment A) will meet with the
industry representatives and will explain the data format. A request will be
made that each A.G.A. subcommittee chairman provides the indicated data on all
gas fields in his area.
D. A computer card will be punched for each gas field. A computer program
will be written for error checking and sorting as is needed.
E. A listing of all gas fields for which reserve data has been submitted will be
prepared by the accounting agent and forwarded to the Oil Information Center
(OIC) at the University of Oklahoma Research Institute. This list will provide
the state, field name, and discovery date — but no reserve information.
F. Tlie field list developed from the A.G.A. records will be compared by the
OIC with a list from the United States Government Interagency Oil and Gas
Field Study. The "government" data is presently stored by computer in a data
bank at the OIC.
G. Screening and verification of the field lists will be done by the OIC. This
operation will reconcile field names and identify duplications and omissions.
Other information sources such as U.S. government publications, state geological
survey publications, and oil and gas regulatory agency publications will be used,
if nece-ssary. A Task Force Advisory Section (Item F, Attachment A) of the
Supply-Technical Advisory Task Force-Natural Gas Supply, will assist in clarify-
ing field nomenclature.
H. The OIC will compile the complete list of gas fields in the United States.
It will include all gas fields with remaining recoverable gas reserves as of Decem-
ber 31, 1970. The fields will be grouped by state and substate areas. The listing
will be alphabetical and will convey field name and date of discovery.
I. A copy of the gas field identification list and a supplemental list of "A.G.A.
omitted fields"' will be forwarded by OIC to the accounting agent. National Gas
Survey teams will later estimate reserves for any omitted field.
J. A copy of the gas field identification list will be forwarded to the National
Gas Survey together with a .statement of accuracy. Both documents will appear
in the final reserves publication.
K. The independent accounting agent will stratify all fields in each A.G.A.
subcommittee area by size and age so that a statistically valid sampling proce-
dure can be prescribed.
L. The statistical validation team will prescribe the number of fields to be
surveyed independently in each A.G.A. subcommittee area by size and age cate-
gory in order to project a statistically valid reserve estimation with a reason-
able degree of accuracy and cei'taiuty.
Sampling will be started on a minimum basis to test the magnitude of devia-
tion. If, in the initial field reserve estimations, the standard deviation of the
130
percentage differences from their mean is too large to assure the desired cer-
tainty and accuracy, additional sampling will be carried out as required or the
specifications will be modified. The National Gas ISurvey will balance the time
required against the desired accuracy so as to obtain the best results in a reason-
able time.
M. The accounting agent will select the fields to be surveyed in each category
as prescribed by the statistical validation team and will furnish a list of field
names to the independent reserve team supervisor with a copy to the Task Force
Advisory Section (Item N, Attachment A). The list of "A.G.A. omitted fields"
will also be submitted for independent I'eserve estimations.
N. The Task Force Advisory Section (Item X, Attachment A) will assign each
sample field to a company, and will schedule reserve team visits to the various
companies. Valid results will require a company to furnish data for each ran-
domly selected field.
0. Companies will prepare to fui'uisli, if available :
1. A working area with telephone connections. Materials should include a cal-
culator, adding machine, planimeter, and normal office work desks, tables, and
equipment.
2. The type of information which may be requested of the companies for use
during reserve team visits is listed for reference :
a. For each field : It will probably be necessary to supply the following
items, if available :
(1) A map of the field area showing the location and completion of
all wells drilled prior to December 31, 1970.
(2) Electrical well surveys to illustrate the depth and configuration
of all gas-bearing reservoirs.
(3) Core analysis needed for basic rock properties.
(4) Reservoir production histories may be needed which tabulate oil,
gas, condensate and water production for each gas reservoir on a yearly
basis to December 31, 1970.
(5) Specific gravity of gas.
(6) Formation temperature.
(7) Original reservoir pressure.
b. For fields in which porosity -area reserve estimates liave been made, the
following additional information may be requested :
( 1 ) Effective porosity — electric well surveys and core analysis.
(a) Porosity
(b) Salt water saturation
(2) Productive reservoir volume — copies of isopach maps should be
available for examination Planimetered volumes should he available.
c. For fields in which pressure-volume reserve estimations have been
made, the following additional information may be requested :
(1) A tabulated record of reservoir pressure measurement versus gas
\\'ithdrawals.
(2) Backup data for each pressure measurement.
d. Questions on interpretive data, such as estimated recovery efficiency,
may be furnished by companies, if requested by the resen-e teams.
P. The National Gas Survey will provide an appropriate seminar for the
independent reserve teams prior to beginning the field surveys. The seminar
will be conducted by a team of qualified geologists ; engineers and other qualified
personnel selected from government agencies and/or colleges and universities.
The seminar will be held at an early date for the purpose of assuring qualitv
reserve estimations, the use of standard techniques, and definitions.
Q. Independent reserve estimations will be made in the offices of the various
companies. Each company will furnish a qualified representative wlio is familiar
with all the reserve data pertaining to the subject field. He will furnish these
data to the reserve teams as needed and will insure that no data other than
the independently derived field reserve are taken from the working area. He
will be available to answer inquiries of the reserve teams but will not be a
member of the team.
131
R. Independent reserve estimations are transmitted on a confidential basis
to tlie reserve team supervisor. The reserve team supervisor will compare the
independent field reserve estimates with reserve estimates from the A.G.A. He
may compare them with any other source including (but not limited to) the
following :
1. OIC Data Bank at the Oklahoma University Research Institute.
2. Natural Gas Companies' Annual Report of Gas Supply — FPC Form 15.
3. Industry professional publications.
4. United States Geological Survey data.
At his discretion, he may call for a recheck of the work of the first reserve
team or he may call for a re-examination of the data by a "senior reserve
team" of his choice. A final reserve estimate for each field will be transmitted
to the accounting agent.
S. When the accounting agent has received all final reserve estimates, he
determines the deviation from the mean of the sample. He forwards the devia-
tion information to the statistical validation team.
T. The statistical validation team determines the adequacy of the sample.
Additional sampling will be prescribed if it is required to obtain the desired
accuracy and certainty.
U. The accounting agent will randomly select the additional fields. Additional
reserve estimations will be made by the reserve teams in accordance with the
original procedure, and the results will be compiled and examined as before.
Y. When sampling is suificient to assure the desired accuracy, the statistical
validation team reports to the National Gas Survey. The report will include a
description of the sampling procedure and a statement of the reliability of the
survey.
W. One independent reserve team will have the res]X)nsibility of compiling
and reporting United States dissolved gas reserve statistics as needed. The Task
Force Advisory Section for dis.solved gas (Item W, Attachment A) will furnish
historical data.
X. The accounting agent submits a report to the National Gas Survey on
Unitetl States gas reserves as of December 31, 1970. When the report is accepted
by the National Gas Survey, the accounting agent will dispose of all record.^
which reflect gas reserves by field in the manner prescribed in paragraph II-B.
Y. The reserve team supervisor will submit a detailed siimmary of the methods
and procedures used to make the independent reserve estimations. He will receive
assistance from the personnel conducting the Reserves Seminar and will be ad-
vised by the Task Force Section on reserve determinations methods (Item P,
Attachment A). The reserve team supervisor will return all A.G.A. records which
reflect gas reserves by field to the member of the A.G.A. Committee on Natural
Gas Reserves assigned to the particular area involved when the accounting
agent's report is accepted.
Z. The National Gas Survey will publish its initial reserves report in the
following form :
1. Complete list of gas fields in the United States by states and substate areas
with year of di.scovery. A statement of accuracy by the Director of the Oil In-
formation Center, University of Oklahoma Research Institute.
2. Detailed description of sampling procedures. A statement of statistical
accuracy by the leader of the statistical validation team.
3. Detailed description of methods and procedures of reserve determination
by the reserve team supervisor.
4. Report of reserves from the accounting agent. Report will include :
a. Gas field size distribution.
b. Gas reserves by states.
5. Recommendations relating to future estimations of national gas reserves
132
ATtACaKEKT A
NATIONAL GAS RESERVES STUDY
OUGAHIUnOR
MRAL RfSfRVEl REPOin
133
Enclosure 2
United States of America, Federal Power Commission
Before Commissioners: Jolin N. Nassikas, Chairman; John A. Carver, Jr., Albert
B. Brooke, Jr., Pinkney Walker, and Rush Moody, Jr.
ORDER amending ORDER PROSCRIBING PROCEDURES FOR THE NATURAL GAS SURVEY
(Issued March 9, 1972)
By order issued December 21, 1971, the Commission directed that a study and
analysis of natural gas reserves be conducted and prescribed procedures for its
undertaking. In ordering paragraph (C) of that order, the Commission noted
that the procedures therein specified did not preclude the undertaking of such
other procedures therein specified did not preclude the undertaking of such
other procedures or reserves studies or the obtaining of such further information
or data relating to gas supply as may be determined by the Commission or Staff
to be necessary or appropriate in carrying out the Commission's National Gas
Survey to serve the public interest.
The procedures set forth in that order establishetl independent reserve teams,
to be made up of geologists, engineers and other professional staff members
of the Federal Power Commission to review data ordinarily needed to determine
gas reserv^es, with asistance, as available, from the United States Geological
Survey, United States Bureau of Mines, and from colleges and universities.
These independent reserve teams would make independent reserv'e estimations
of selected natural gas fields in the offices of the various companies, transmitting
those estimations on a confidential basis to the reserve team supervisor.
The Commission reiterates the need for protecting the confidentiality of
properietary information. The Commission recognizes that the publicizing of such
information would have an inhibiting effect upon future exploration for natural
gas reserves since speculators could equally benefit with those companies willing
to make geological and geophysical expenditures. Therefore, the Commission
reaffirms ordering paragraph (B) of its December 21, order which reads as
follows :
"Any non-public commercial information concerning an individual natural gas
company's reserves obtained during the course of this survey and analysis .shall
be treated as confidential without public disclosure by the staff of the Commission
and its agents, including any accounting firm selected by the Commission to
assist in this survey and analysis, unless otherwi.se directed by the Commission.
The provisions of Section 8(b) of the Natural Gas Act [lo U.S.C. 717g(b)] and
5 U.S.C. 552(b) (4) and (9) [Freedom of Information Act] shall apply."
Among the security considerations prescribed to preserve that confidentiality,
the Commission required in its order that all company-furnished data be evaluated
at the companies' offices with no data or worksheets leaving the premises. Worlc-
sheets generated by independent reserve teams were to be preserved in the com-
panies' offices until July 1, 1974. Upon reconsideration, we believe that the con-
fidentiality of such worksheets as are prepared by independent reserve teams may
be better protected if tho.se work.sheets are returned to the Commis.sion's offices
in Washington, D.C. to the custody of the Technical Director of the National Gas
Survey, who shall' take all steps necessary for protecting the security of these
worksheets.
TJie Commission finds:
The objectives of the National Gas Survey will be served by maintaining the
worksheets generated by the independent reserve teams in a central repository,
properly secured.
It is in the public interest that such worksheets be retained by the Commis-
sion, subject to further order.
The Commission orders:
(A) The procedures approved in Paragraph II A of Appendix A to the "Order
Directing Study and Analysis of Natural Gas Reserves and Prescribing Proce-
dures for the National Gas Surevy'' (December 21, 1971) is hereby amended in
accordance with Paragraphs B and C, infra.
(B) Worksheets generated by the independent reserve teams in the course of
their independent reserve estimations shall be returned to the Commission's
Washington. D.C, offices and there preserved in the custody of the Technical
Director of the National Gas Survey, subject to further order.
134
(C) The confidentiality of these worlvslieets shall be maintained without public
disclosure pursuant to the provisions of Section 8(b) of the Natural Gas Act
[15 U.S.C. 717g(b)] and 5 U.S.C. 552(b) (4) and (9) [Freedom of Information
Act], subject to further order.
By the Commission.
Kenneth F. Plumb, Secretary.
[seal]
U.S. Senate,
Committee on the Judiciary,
Subcommittee on Antitrust and Monopoly.
Washington, D.C., March 7, 1913.
Hon. John N. Nassikas,
Chairman,
Federal Power Commission,
Washington, D.C.
Dear Mr. Chairman : The February 22, 1973. release of the Federal Power
Commission (No. 19013) rei>orts that total uncommitted natural gas reserves
availaible for sale in the lower 48 states "as reported by 79 large gas producers
declined from 4.6 trillion cubic feet at the end of 1969 to 3.4 trillion cubic fe-et
by mid-1972'' — a decline of 26 percent. The relea.se indicates that the aggregate
figures were compiled from individual company responses pursuant to FPC
order.
Congress is deeply concerned about the present unavailability of natural gas
and has been conducting continuing hearings on its causes and extent. At my
request, the Federal Trade Commission also commenced an investigation of the
reliability of natural gas reserve data. I understand that the Commission's ef-
fort to obtain internal company reser\'e data has l)een frustrated by the refusal
of the major producers to comply with Commission process.
The fact that the Federal Power Commission has obtained important infor-
mation, heretofore unavailable to the Congress and the FTC, could represent a
significant breakthrough in the quest for reliable and verifiable natural gas re-
serve estimates. Would .vou, therefore, kindly provide the Federal Trade Com-
mission and myself with the following :
1. The questionnaire or other re(iuest for information sent to the 79 pro-
ducers.
2. A description of the procedure used to verify the data supplied by the
producers.
3. An estimate of the proportion of domestic natural gas reserves available for
sale controlled l>y the 79 producers.
4. An analysis of the 26 percent decline in reserves showing the amount of
decline resulting from sales and from write-downs and other adjustments on
an aggregate basis and for each of the 79 producers.
5. For each protlucer, identify its jiipeline customers and the amounts and
prices of gas sold for the 1970-mid-1972 period.
6. With regard to the 3.4 trillion cubic feet of natural gas available for sale
in mid-1972, .specify the uncommitted reserves reported for eacli of the 79
producers.
Your prompt attention to this matter will be appreciated.
Sincerely,
Philip A. Hart, Chairman.
Senator Kexxedy. You have some of the other commissioners here ;
I didn't know whether there was anything they would like to mention,
any agreement or disagreement with some of the points raised here.
i\Ir. Moody. Senator, we have a very articulate and able chairman.
I think we agree basically with most of what he said today.
Mr. Brooke. I would concur in that statement.
Mr. Nassikas. I stated earlier that Commissioner Springer has only
been a commissioner for 5 or 6 days, so he decided he really couldn't
contribute to this hearing and apologizes to the committee for not be-
ing here. He is in Scotland — at least should be tomorrow night.
Senator Kennedy. Are you familiar with Mr. Diener ?
135
Mr. Nassikas. He is my top administrative assistant.
Senator Kexxedy. You made some recommendations about this
study, when you were Avith the FTC.
Mr. DiENER. Senator Kennedy, I don't recall. I was involved some-
what before I left the employ of the FTC.
Senator Kennedy. On the AGA reserves ?
Mr. DiENER. I can't recall ; it was 2 or 3 years ago.
Senator Kennedy. You don't recall recommending the closing of the
file on that?
Mr. DiENER. I do not recall. I could have written a memorandum to
that effect. If there is such a memorandum, I would like to take a look
at it.
Senator Kennedy. If there is a memorandum of yours, and if you
did make that recommendation, do you feel any kind of restraint about
being involved in the case over at the Federal Powder Commission ?
Mr. DiENER. Involved in what case over at the Federal Power Com-
mission ?
Senator Kennedy. In the decisions affecting natural gas.
Mr. DiENER. I am not involved in any decisions. I am just counsel.
I don't have any votes.
Senator Kennedy. You wouldn't feel any kind of restraint? Is that
your document ?
Mr. DiENER. This is my recommendation [referring to the memo].
I recall it now.
Senator Kennedy. This will be made a part of the record.
Mr. DiENER. This says close the files because of insufficient evidence
without prejudice at that time.
Senator Kennedy. A^Hiat was the Commission's action on that
recommendation ?
Mr. DiENER. I can only surmise ; it is still going on. This was written
to my supervisor not to the Commission. I don't know what the
Commission did afterward.
Senator Kennedy. You are still serving and counseling the Com-
mission on this particular matter, as the Power Commission
Mr. DiENER. We have no investigation in the FPC of the AGA sub-
committee in south Ix>uisiana. I think that after the contents of this
letter are read, when you put it in the time frame
Senator Kennedy. If you want to submit any supplementary or
explanatory material, it will be received.
Mr. DiENER. As long as this is in the record, in toto. I have nothing
more to say with respect to the memorandum.
[The memo referred to plus an explanatory supplemental response
from Mr. Diener follows. Testimony resumes on p. 137.]
Memorandum
To : Owen .Tohuson, Assistant Director, Bureau of Competition.
From : William P. Diener, Attorney, Bureau of Competition.
Subject : American Gas Association, Inc. File No. 7110042.
Recommendation : Close File No. 711 0042, without prejudice, for lack of evi-
dence of collusion among members of the AGA South Louisiana Area
Subcommittee.
On October 5, 1970, the Bureau of Competition was charged with conducting
a selective "pilot" investigation of the AGA South Louisiana Area Subcom-
mittee. The Office of Planning and Evaluation's memoranda of October 5 and
October 13, set definite boundaries for this investigation : collu.sion among mem-
bers of the AGA South Louisiana Area Subcommittee in determining natural
27-.")47 O— 74 10
136
gas reserves and a possible violation of Section 5 of the F.T.C. Act, Concurrent
with the AG A investigation, two related matters were given high priority ; 1 )
the energy position of the concentrated industry study, and 2) mergers in the
energy field.
The pilot AGA investigation was originally planned to reach a point at which
a decision could be made either to expand the investigation or close the files.
As a result of the investigation to date, and in lieu of the responses to our out-
standing letter of Dec-ember 24 to John O. Jacobs, Jr. of the AGA, it is my
prcsonal belief that the file should be closed. My evaluation of the evidence
gathered to-date indicates an absence of any collusion at the AGA Subcom-
mittee level. / therefore recommend closing File No. Ill 001^2.
PARTIAL SUMMARY OF INVESTIGATION
National Economic Research Afisociates. Inc: Messrs. Bass and Xet.schert deny
the existence of a natural gas shortage. Instead, they attribute a major share of
the current "crisis" to an overly-conservative AGA definition of "proved re-
serves." They cited one example of acreage in Offshore Louisiana which was not
included in "proved reserves." This gas may well be included in other reserve
estimates (e.g. possible, probable, speculative), because they were not recoverable
under "existing economic and operating conditions."
United States Geological Surey : Mr. Si)eer indicated a producer would be
economically "stupid" to withhold gas from the market : moreover ; he is unaware
of any instance where this has occurred.
Federal Power Commission : The issue of AGA determinations of gas reserves
is presently being litigated in AR69-1 (Note: Office of Planning and Evaluation
questions whether or not, in fact, this issue will be litigated). Moreover, two
submissions of evidence in AR69-1 are germane to our case :
1. Arthur Young & Co. audited uncommitted reserves in South Louisiana
and found no withholding. (May 18, 1970)
2. Over 90% of the shut-in gas completions as of December 31, 1969. had
been committed to contract. (April 1, 1970.)
Finally, the FPC checked with USGS and the Louisiana Department of Conserva-
tion, thereby concluding there were no discovery gas wells with unreported
uncommitted reserves.
Antitrust and Monopoly Subcommittee, U.S. Senate. This subcommittee, from
which Senator Hart's allegations contained in his letter of September 1 were
initiated, was, and continues to be, without any evidence of collusive activity.
ANALYSIS
Numerous allegations have arisen due to the current "energy crisis." These
assertions cover a wide range of fossil fuels in the oil companies to higher con-
sumer utility rates. The major petroleum companies do control the supplies of
natural gas. The natural gas producers may be intentionally withholding gas
awaiting a higher price. The alleged gas shortage may be due to conservative AGA
definitions. However, assuming any one or all of these allegations are correct,
I believe they are outside the scope of our investigation.
The decline in gas reserves may be a result of our current economic situation.
Corporations may be reducing "inventories" to more manageable levels, with a
resultant decline in the reserve-to-production ratio of natural gas. An artificial
demand for gas may have been created due to the FPC's rate posture. The demand
for oil has grown at a rate half that of gas, yet exploratory effort for the two
is often related.
Even assuming producers are sitting on gas reserves, Interior has autliority to
cancel leases or accelerate exploration activity in the offshore areas. The
Louisiana Department of Conservation has comparable authority in the onshore
areas.
It is this writer's belief that it would be a mistake to proceed further without
either expanding the scope of this investgiation or closing the present one. I
question our expertise to go further. Moreover, I feel the numerous allegations
can be considered through our merger study or energy study, with a more effective
utilization of our limited resources.
Respectfully submitted,
William P. Dibner,
Attorney, Bureau of Competition.
137
Federal Power Commission,
Washington, B.C., July 11, 1973.
Hon. Philip A. Hart,
Chairman, Suhcommittee on Antitrust and Monopoly, Committee on, the Judici-
ary, Washington, D.C .
Dear Mr. Chairman : This letter represents my supplemental response to the
hearings before your Subcommittee on June 26, 1973, in which Senator Kennedy
produced a memorandum authored by me, but undated, from an investigatory
file while I was employed at the Federal Trade Commission. (Transcript at
170). This response neither denounces nor expands the subject memorandum,
nor has my response been approved by the Federal Power Commission. My
response is precipitated because of Senator Kennedy's questions at Transcript
pp. 169-170. Please be advised that the subject memorandum written by me
while in the employ of the Federal Trade Commission in no way conflicts with
the discharge of my responsibilities as administrative law assistant to the
Chairman of the Federal Power Commission.
On Jime 14, 1970, I entered government service as a Trial Attorney in the
Bureau of Competition of the Federal Trade Commission. On April 11, 1971, I
resigned from the FTC to accept a position as Trial Attorney at the Federal
Power Commission. I was appointed Attorney-Adxiser to the Chairman of the
Federal Power Commission on January 23, 1972 ; a position which I continue to
occupy.
The subject memorandum, which was undated, was drafted sometime during
the i^eriod October 5, 1970 (the date the investigation was initiated) to April 11,
1971, and is addressed to Owen Johnson, then an Assistant Director of the
FTC's Bureau of Competition. As the memorandum indicates, the scope of the
investigation was to determine if there was "collusion among members of the
AGA South Louisiana Area Subcommittee in determining natural gas reserves
and a possible violation of Section 5 of the F.T.C. Act." I recommended closing
the inve.stigation, without prejudice, because "[m]y evaluation of the e^adence
gathered to date indicates an absence of any collusion at the AGA Subcommittee
level."
At pages 2-3, I summarized some of the evidence obtained during this initial
pilot investigation, including inter alia reference to Senator Hart's allegations
to which I indicated were "without any evidence of collusive activity." In addi-
tion to the lack of evidence concerning the circumscribed inquiry of this initial
investigation, I also indicated the FTC may not possess the "expertise to go
further" and that the "numerous allegations can be considered through our
merger study or energy study, with a more effective utilization of our limited
resources."
I am unaware as to what action Mr. Johnson took with respect to my recom-
mendation. I am also unaware as to whether or not the Federal Trade Com-
mission received such a memorandum or any subsequent action they may or
may not have taken with respect to American Gas Association, Inc., File No.
711-0042. Inquiries eonceraing the present status and scope of that investigatory
file should be directed to the FTC.
In summary, there does not now [exist, nor has there in the past existed, any
conflict of interest between a recommendation made by me in an intra-agency
memorandum while in the employ of the Federal Trade Commission and the
discharge of my responsibilities at the Federal Power Commission, either as
trial attorney or as attorney-adviser to the Chairman. I have adhered to both
the spirit and the letter of the canon of legal ethics, as well as the standards of
ethical conduct for government employees contained in Executive Order No.
11222. I view such standards as a minimum and have always, in my government
service, imposed more demanding and exacting standards on my own conduct.
I have returned herein the copy of the intra-agency subject memorandum
which your staff fonvarded to me so that I could file this supplemental response.
Sincerely,
William P. Diener.
Mr. Xassikas. A copy of this memorandum, Mr. Chairman, I as-
sume will be supplied by the staff to me so I can review it?
Senator Kennedy. Yes.
We will have to recess now. We thank you very much for coming.
We will go to the next wdtness after the recess.
138
[A brief recess was taken.]
[The following letter, relating to Dr. Root's testimony, was received
for the record. Testimony resumes on p. 154.]
FEDEEAi Power Commission,
Washington, B.C., July 2t, 1973.
Hon. PHiLrp A. Haet,,
U.S. Senate,
Washington, B.C.
Dear Senator Hart : This letter is being sent to the committee for inclusion
in the Record of the Hearings held before the Subcommittee on Antitrust and
Monopoly of the Committee on the Judiciary on July 26-28, 1973. It is intended tol
serve two purposes. First, it will provide information which I indicated during
my testimony would be transmitted for the record at a later date. Second, it
will clarify and respond to statements, which I consider to be incorrect or mis-
leading, made during the course of the hearing concerning the National Gas
Reserves Study.
Additional information is presented to complete my responses to two ques-
tions asked by Mr. Bangert. The questions and responses are as follows :
Question 1. "What was your sampling percentage there [the fields with reported
reserves of less than 400 Bcf.] "
Answer. The procedures followed by the Statistical Validation Team, the
characteristics of the sample, the statistical analysis used and the results ob-
tained are presented in The Report of the Statistical Validation Team which is
Appendix VI of the National Gas Reserves Study. Exhibit A indicates for the
record the members of the Statistical Validation Team. A brief excerpt from
the Summary of the report will be used as the vehicle for conveniently and
completely conveying the information requested.
On the basis of a imputation list of 6,.358 gas fields and their estimated reserves
developed both from data supplied by the American Gas Association (A.G.A.) and
from public sources, the Statistical Validation Team chose a standard sampling
procedure which is widely used in situations similar to this study. The sample
was composed of all 108 fields on the population list with reserves reported to be
greater than 400 billion cubic feet (Bcf), and 50 fields selected from the remainder
of the population fields whose reserves were reported to be equal to or less
than 400 Bcf. [The respective sampling percentages were 100% and 0.8%.]
Independent estimates of gas reserves for the designated sample fields were
made by field teams eomiwsed of government and university experts. The Sta-
tistical Validation Team formiilated the method for estimating the total U.S.
gas reserves from the independent reserves estimates for the sample fields. As a
result of the analysis, the total U.S. reserves of non-associated and associated
gas for the fields comprising the population list were estimated to be 228.5
trillion cubic feet (Tcf) at the end of 1970 (Table 1). The standard error of
the estimate due to sampling was 11.0 Tcf. Reserves in the 158 sample fields
represented approximately 5(5 percent of this total reserves estimate.
The standard error of the total reserves estimates is a statistical measure of
the reliability of that estimate. Additional sampling would reduce the standard
error and, therefore, improve the statistical accuracy of the estimate. It is the
judgment of the Statistical Validation Team, however, that additional sampling
would have little practical effect on the reliability of this estimate of total
reserves because of the problem of measurement error. That is to say, even if an
independent estimate of gas reserves had been made for each field in the popula-
tion, the value of total reserves determined would only be an estimate of the
"true" value because of judgment inherent in estimating the reserves of indi-
\'idual gas fields.
Question 2. "Did you find discrepancies greater than 200% between the
A.G.A. reserves and your estimates in the 50 fields?"
Answer. It is extremely misleading to refer to i>ercentage discrepancies, be-
cause doing so implies that one of the two estimates is considered to be the true
value. The number and nature of the judgmental decisions required in making
a reserve.s estimate precludes the designation of a true or exact value. It is a
practical reality that knowledgeable and competent experts given the same
basic data might arrive at considerably different values for the resert'es in a
given field. It is also true that the proven reserves of a field can only be stated
with exactness when the field has been depleted.
To avoid the difficulties inherent in specifying the true value of the reserves
of a field, comparisons within the NGRS have been expressed on the basis of the
139
ratio of the estimate made by the iudependent field reserves team (FPC esti-
mate) to tliat reported by A.G.A. (A.G.A. estimate). For the 50 field module
four ratios greater than 2 were obtained and the pertinent information regard-
ing them can be summarized below :
Stratum from which the field was selected (Bcf)
Ratio
0-1 8. S3
0-1 3. 03
10-50 4. 32
50-200 2. 11
Expressing the differences as a percentage of the A.G.A. value, only the first
three of the above ratios would yield percentage differences greater than 200'%
and all three are confined to strata containing very small fields.
On the other hand an alternative convention could have been adopted in which
the ratio of the A.G.A. estimate to the FPC estimate would be used and per-
centage differences would be expressed as a percentage of the FPC estimate.
On the basis of this convention, 18 of the ratios for the fields in the module of
50 would be greater than two and 14 of the percentage differences would be
greater than 200%. Actually, two of the percentage differences would be infinite,
i.e., the independent field reserves teams foimd that two of the fields in the
module of 50 for which the A.G.A. carried reserves were, in fact, depleted.^
A consideration of the results of the analysis of the 108 major fields is also
instructive. There are no instances in which the FPC estimate is over twice the
A.G.A. estimate. However, there are 12 " instances in which the A.G.A. estimate
was over twice the FPC estimate, and 7 of them had percentage differences (ex-
pressed as a percentage of the FPC estimate) greater than 200'%.
Essentially, the first convention focuses on differences in which the FPC esti-
mate is greater than the A.G.A. estimate (A.G.A. underestimates) and the sec-
ond on those in which the A.G.A. estimate exceeds the FPC estimate (A.G.A.
overestimates). Without recourse to formal statistical analysis, the fact that the
A.G.A. overestimates as defined above exceed the A.G.A. underestimates by a
factor of a greater than four would, in itself, lend strong support to any conten-
tion that the A.G.A. proven reserves total is an overestimation.
Finally, it should be noted that comparisons of the A.G.A. estimates and the
FPC estimates are not relevant to the discussion of the validity of the statistical
sampling and analysis techniques used in the NGRS to obtain the overall
re.serves estimate. The A.G.A. estimates were only used to define the statistical
population so that a frequency distribution could be expressed for sampling pur-
poses. It is true that distortions in the iwpulation would be manifest in the
frequency distribution, and that they would affect the reliability of the estimate ;
however, they would have relatively little effect on the projected total reserves,
The standard error, a statistical measure of the reliability of the projected total
re.serves takes into account variability of measurements within strata, and it
was used by the Statistical Validation Team to assess the adequacy of the
sample.
In regard to the testimony of Mr. Halverson, I would like to make several
observations. First, and iieriiaps most important, the statements made by Mr.
Halverson are unsupported by documentation and are meaningless unless a
definition of reseiwes is stated and all reserves estimates citetl are consistent
with the definitions. Indeed most of Mr. Halverson's dilemma appears to be de-
finitional in nature. If the definition of reserves is really the issue, then it should
be addressed directly. In the National Gas Reserves Study the definition of
reserves used throughout the study is stated clearly and explicitly in the report
so that ambiguity does not cloud the presentation of the results. The definition
is as follows :
The reserves . . . are natural gas . . . reserves estimated to be recoverable
from proved reservoirs under the economic and oi^erating conditions existing
at the time of the estimate. Such volumes of gas . . . are expressed in cubic
feet at 14.73 pounds per square inch absolute pressure and 60° F temi)erature.
1 This serves as a further indication that as stated in the National Gas Reserves Study
there "is a strong justification for continuous monitoring of reserves".
2 This differs from the correspondins flfrure of 11 shown in Exhibit .3 of the testimony
of Dr. Howard William Pifer III which does not include one field mistakenly classmed on
the A.G.A. major field list as an associated gas field but which was found on subsequent
investigation to contain only dissolved gas.
140
These reserves estimates . . . include gas . . . reserves of all types regardless
of size, availability of market, ultimate disposition or use.
The field teams were further instructed to make the following assumptions
relating to economic and operating conditions :
1. A ready market Avill exist for all volumes of gas produced.
2. If sold in interstate commerce, sales price for gas will be at the effective
rate as of December 31, 1970 (or at FPC ceiling if the gas is not under contract)
with no allowance for price escalations beyond those already approved in FPC
area rate orders . . .
3. Everything will be frozen at 1970 levels ; i.e., prices, wages, etc.
4. Environmental effects will not restrict gas recovery.
5. Nuclear stimulation is not an economic method of gas recovery at present.
6. Compression will be installed if and when economically justified.
7. The recovery factor will differ significantly for water drive reservoirs, frac-
tured reservoirs, exceptionally high pressure reservoirs, low permeability reser-
voirs and associated gas reservoirs, for example. The estimator will not limit his
consideration to the "prevailing practice" in the field, but rather should consider
the possibility of adding compre.ssors or other equipment and base his estimate
on the recovery eflBciency which would result from installation of such equip-
ment, if he felt it appropriate to install the equipment.
Second, Mr. Halverson makes the statement that "It is our experience that
the raw data necessary in order to make original estimates of natural gas re-
serves cannot be obtained outside of company sources and that when the Fed-
eral Power Commission relies solely on the company (without independent
audit) and to provide all the raw data, that reliance is misplaced." I wish to em-
phasize again that the FPC field reserves teams did, in fact, make an indepen-
dent estimation of the reserves for all fields comprising the statistical sample
The field team leaders are either trained geologists or petroleum engineers who
have had extensive experience in making reserves estimates as part of their
duties with the Federal Power Commission. They know what basic data are
required and because of their extensive experience they can anticipate the types
of data which would normally be available under various circumstances. The
procedures used by the field reserves teams are given in detail in the Reserves
Estimation Manual included in Appendix IV of the National Gas Reserves
Study. In addition to brief description of their activities is given in the Summary
of the report as follows :
When the reserves teams analyzed an individual filed, their estimate was
developed on a reservoir-by-reservoir basis. The teams estimated the reserves
for each reservoir in the field and summed the reserves of all reservoirs to ob-
tain the field reserves estimate. Estimates were developed from the basic raw
data which were supplied by the company. These data usually consisted of
various types of electrical, radioactive and accoustical well logs ; core analyses ;
fluid analyses, open hole, production, back pressure, draw down and build-up,
and other type well test ; temperature measurements ; gas analyses ; structural
and isopachous maps : and pressure and production history. The liasic data were
reviewed to determine their adequacy, accuracy, and validity. The independent
reserves teams utilized this information, and by applying accepted geological
and engineering methods, made their own independent estimates of rserves.
Rather than rely solely upon the various factors developed by the company, the
teams derived their own factors for measurable physical properties sucli as
porosity, water saturation, temperature, and pressure. Additionally, they were
required to exercise their professional judgment in the interpretation of struc-
tural and isopachous maps and records, and tlie selection of appropriate aban-
donment pressures, recovery factors and similar factors affecting the volumes
of reserves which would be recoverable.
As noted by Mr. Halverson in his criticism of the reporting procedures used by
A.G.A., "Even this review [of the reserves estimates compiled for the fields] is
limited in the sen.se that Subcommittee members only .see the final estimate for
a particular field and they do not see the underlying data." To overcome this very
deficiency the NGRS was designed so that the field reserve teams could see and
nnaly::e the underlying data. Perhaps an equally significant implication, of Mr.
Halverson's criticism is that it applies with the .-^ame force to the procedures
apparently lieing used by the staff of the Federal Trade Commission. As he has
stated, "The [FTC] investigation was not attempting to make original estimates
of proved re.serves in South Louisiana but was instead attempting to obtain re-
serve estimates already prepared." If acceptance of reserves estimates without
141
review of the underlying data is considered to be a questionable step in the A.G.A.
reporting procedure, it must be considered to be an equally questionable step in
the FTC investigation. The reserves estimates obtained from the companies are
based on the same primary raw data analyzed by the field reserves teams in the
NGRS. However, a more serious consideration and perhaps even a critical in-
firmity in the FTC investigation is that the judgmental decisions made by indus-
try personnel who prepared the reserves estimates have been untested or unchal-
lenged. The FTC investigation might be characterized as one involving the proc-
essing of "paper re.serves." whereas the NGRS is based on indei^endent e.stimates
of proven reserves actually in the ground at a certain point in time.
Finally, the definitions and procedures used and the results obtained in the
NGRS are a matter of public record. Any interested individual can judge them
on the basis of professional quality, procedural correctness and thoroughness of
the study. Until the FTC investigation has been subjected to the .same public
scrutiny, evaluation of the investigation should be withheld.
It is not my intention to offer a detailed point-by-point critique of Dr. Pifer's
testimony. Instead I would like to indicate in general, the areas of his testimony
which I consider to be inaccurate, incorrect or misleading. I should welcome the
opportunity of presenting a more detailed analysis for the record if the Commit-
tee feels that would be helpful.
As background to my comments on Dr. Pifer's prepared statement and his re-
sponse to questioning at the hearing, several factors should be stated which will
serve to place the remainder of my remarks in proper perspective. It should be
emphasized that Dr. Pifer was asked to serve as a member of the Statistical
Validation Team because of his background in the application of statistics. In his
capacity as a member of the Statistical Validation Team he was acting as an
agent of the Fecleral Power Commission as set forth in Purchase Order No. 1067
(Exhibit B) which constituted the contractual agreement between Dr. Pifer and
the Federal Power Commission. The conditions of the contract clearly indicate
that the scope of Dr. Pifer's participation in the National Gas Reserves Study
was limited to the activities of the Statistical Validation Team. The Commission's
Order of December 21, 1971. which established the NGRS described the respon-
sibility of the Statistical Validation Team as that of "prescribing sampling
procedures for valid reserve estimation."
Dr. Pifer's services were not obtained on the basis that he was knowledgeable
on the subject of the e.stimation of natural gas reserves and there is nothing
in his credentials to indicate that he is an expert in this area. Other technical
experts with the required training and exi>erience to be able to provide authori-
tative opinions relative to the estimation of natural gas reserves were used in
the study as appropriate. In particular the following four individuals, expert
in various aspects of reserves estimation, taught courses which made up part
of the training program for reserA'es teams members :
Prof. Elmer E. Templeton, Head, Department of Petroleum Engineering,
Marietta College ; Dr. R. G. Hamilton, well-logging consultant, Tulsa. Oklahoma :
Dr. Abdul-Kader M. Kotb, Chairman, Department of Petroleum Engineering,
West Virginia University ; Dr. Kenneth K. Landes, Professor of Geology
Emeritus, University of Michigan.
The following academic personnel participated in the evaluation of the field
team work and procedures : Dr. Murray F. Hawkins. Head, Petroleum Engi-
neering Department, Louisiana State University : Dr. Frank B. COnselman,
Director, International Center for Arid and Semi-Arid Land Studies. Texas Tech
University and past President of The American Association of Petroleum
Geologists ; Dr. Wilfred R. McLeod, Assistant Professor of Petroleum Engi-
neering, Montana College of Mineral Science and Technology.
In addition Prof. Templeton was asked to prepare a report on Dissolved
Gas Reserves which appears as Appendix VII of the National Gas Reserves
Study.
There are several very important reasons that the terms of the contractual
agreement should be considered. First, there apparently has been some mis-
interpretation of the role intended for Dr. Pifer in the National Gas Reserves
Study as defined in his contract. Second, Dr. Pifer has testified relative to
functions of the National Gas Reserves Study which were outside the scope
of the contract and, in my opinion, beyond his area of expertise.
In his prepared statement Dr. Pifer has expressed concern about the reserves
teams estimation of reserves. In the early stages of the NGRS, there was some
uncertainty as to the exact manner in which the field reserves teams should
142
perform the task assigned to them in the Commission's Order of December 21.
1971. For that reason I personally served as a field team leader on one of the
vei'y early field trips so that I might be in a better position to discharge iny
responsibilities in the National Gas Reserves Study. In particular, I wanted
to be in a position to be able to make constructive recommendations about the
procedures to be followed by the field reserves teams and to ascertain, in my
own mind, the time required to obtain indei>endent, reliable reserves estimates
imder actual study conditions. The results of my exi>erience, those of other
field team leaders and the experience and background of other Staff members,
are all reflected in the Reserves Estimation Manual. As a result of having
served as a field team leader, it is my strong judgment that the Reserves
Estimation Manual has pi'ovided guidelines which would enable the field teams
to make valid gas reserves estimations.
In addition, three qualified academicians were asked to evaluate the work being
performed by the field teams. Their evaluations, included as Exhibits C, D, E
and F, reinforce my opinion that field reserves teams did obtain independent and
reliable reserves estimates. It is noteworthy that eight field team leaders were
responsible for nearly all of the field reserves estimates and that the profes-
sional quality of the work of each of these eight men was evaluated on at least
one occasion. Similarly the worked performed by the U.S.G.S. and the U.S. Navy
teams was coordinated so that all reserves estimates would be made on the same
basis.
Before leaving the subject of reserves estimates, the descriptions of in-depth
and evaluation estimates given by Dr. Fifer are not consistent with those given
in the Reser^-es Estimation Manual. The definitive text pertaining to the type of
estimate to be used is as follows :
. . . Further, these limitations make it necessary to use two types of estimates,
an "In-Depth Estimate" or an "Evaluation Estimate".
Either method is acceptable for the Independent Reserve Study. The method
chosen depends on the judgment of the estimators :
1. In-Depth Estimate — the reserves for a reservoir have been estimated by
recalculating or obtaining each needed factor from the basic raw data, such as
core analyses, logs, pressure determinations, etc. The basic raw data have also
been tested to assure its reliability and representativeness.
2. Evaluation Estimate — enough of the factors used to calculate reserves have
been checked to assure, in the judgment of the evaluator, that the estimating
factors used by the company are reasonable and acceptable for calculating the
reserves. However, if any significant errors are found for any one or more par-
ticular factors, they would be recalculated from basic data. The basic raw data
are tested as in 1., herein.
There was no support among the other eleven members of the Statistical Vali-
dation Team for presentation of results from the regression model recommended
by Dr. Pifer. Dr. Miesch in his letter of February 7, 1973, (Exhibit G) discussed
his concern about the application of this technique. At a meeting of the Statistical
Validation Team on February 27, 1973, which Dr. Fifer was unable to attend, the
use of the regression model was rejected as a tool for the statistical analysis of
the data for the sample of gas fields. The following paragraph in the report of the
Statistical Validation Team relating to the meeting of November 30. 1972 which
was attended by Dr. Pifer, should be cited because it accurately demonstrates
that the Team devotetl considerable deliberation to this point before reaching its
ultimate decision.
On November 30. 1972, the Statistical Validation Team met to review tabula-
tions shox^ing characteristics of the sample, to discuss the methods to be iised
subsequently in analyzing the results of the Study and to discuss the organization
of the Team's report. There was considerable sentiment that the statistical analy-
sis presented in the Team's report should be based on conventional methods for
estimating population projierties from the sample statistics. HoweA'er. it was felt
that an alternative approach, based on regression analysis, should be presented
in a separate report because it could potentially portray differences attributable
to size, field discovery date, geographical region, type, team personnel and other
pertinent factors. The alternative approach could be of value in planning future
re.source sti;dies.
My comments on the iuiml>er of ratios of FPC reserves to A.G.A. reserves
which either are greater than 2 or less than 0.5 have been given in my respon.se
to Mr. Bangert's question (Question 2 in this letter). Dr. Pifer's a.'^.sertion that
the variability between the FPC estimates and the A.G.A. estimates "is signifi-
cant" is .somewhat ill-defined in a technical sense. However, if he means that the
A.G.A. estimates tend to be overestimates of proven reserves, I agree whole-
143
hearteclly. I would also like to emphasize that those cases in >A'hich the FPC
estimate differed consitlerably from the A.G.A. estimate have not gone unnoticed.
The field team leaders have cited, as might be expected, a variety of practical
reasons for the differences and I accept their professional judgment. The presen-
tation of a comi>lete account of the various practical considerations involved
is beyond the scope of this reply. However, the factors leading to many of the
A.G.A. overestimates were outlined in the Discussion of Results section of the
National Gas Reserves Study as follo\^s :
The field reserves teams based their estimates on production and pressure
figures when sufficient historical data were available. In some cases in which
an FPC team based its estimate on the production data up to December 31, 1970,
the A.G.A. estimate seemingly was either still based on volumetric calculations
or production curves which had not been updated. This is the probable cause
for many of the differences ob.served particularly in the Texas Gulf Coast fields
and is a strong justification for the continuous monitoring of reserves.
Dr. Pifer's findings based on his analysis of the ratios of the FPC estimates
to the A.G.A. estimates are not surprising. Other realistic factors, apparently not
considered by Dr. Pifer, are involved which would lead an expert in the subject
area to anticipate greater variation of the ratio for the smaller fields than for
the larger fields. Similarly, the variation shown between the average i-atios for
the FPC. U.S.G.S. and U.S. Navy teams might well be expected as a reasonable
range especially in view of the differences in the types of fields examined. His
assertion that the cause of this difference is the fact that the U.S.G.S. have
developed their own basic raw data and. therefore, did not rely on company-
supplied information is completely untrue. The basic raw data in the files of the
U.S.G.S. AAere supplied to them by the companies and are exactly the same type
of data analyzed in company offices by the FPC teams. It seems axiomatic that
the magntiude of an individual's or team's reserve estimate is independent of
whether the estimate is made in a Government office or in a company office as
long as the same information is available.
Dr. Pifer did not mention, although the information was available to him, that
for the one field examined by both an FPC team and a U.S.G.S. team, the FPC
team's e.stimate was the higher of the two.
Before leaving this topic I would like to add that Dr. Pifer was given the data
used in his analysis of the ratios so that he coidd perform duties outlined in
Purcha.se Order 1067 (Exhibit B). Item 2e in the .section on Requirements and
Scope of Work specifies as follows: "Coordinate his work with the Technical
Director of the National Gas Survey or his Representative."
Dr. Pifer never pre.sented his analysis of the ratios to me. I first saw his
analysis when I obtained a copy of his statement to the Subcommittee.
Some of the data used and analyzed in the NGRS are considered confidential
(see the Commission's Orders of December 21, 1971 and March 9, 1972). How-
ever, the report does contain a considerable amount of useeful information. The
cited lack of a comparison of NGRS and A.G.A. data seems a little strange in
view of the fact such a comparison is given on page 3 of the NGRS report.
The chronology of events relating to the Statistical Validation Team has been
given in detail iii the report of the Statistical Validation Team which is Appen-
dix VI of the National Gas Reserves Study. That information which is presented
in the Background Section will be repeated here for the record because it shows
that, to the extent possible within the physical constraints of time and scheduling,
all possible options which bore on the statistical design and analysis asi^ects of
the study were left open to the Statistical Validation Team.
The activities of the Statistical Validation Team as outlined in the Resen-es
Study Order fall within two broad categories: (1) the formulation of procedures
for selecting a sample of gas fields for analysis by the government field reserves
teams; and (2) the estimation of the aggregate nonassociated and associated gas
reserves and the reliability of the estimate based on the results of government
field team analysis of reserves for the fields making up the sample.
After the Reserves Study Order was set forth it was necessary to accomplish
other tasks before either of the above activities could be initiated.
Before the sampling procedures could be formulated, it was necessary that :
(1) An organization be selected and conunissioned by the Federal Power Com-
mission to serve as the Independent Accounting Agent; (2) The data stipulated
in the Reserves Study Order be transmitted to the Independent Accounting Agent
by the industry representative who provide A.G.A. reserves figures; (3) The
reserves data be processed by the Independent Accounting Agent and a report on
the accuracy of the data reduction prepared; and (4) The initial stratification
144
[frequency distribution] of gas fields be prepared by the Independent Account-
ing Agent for consideration by the Statistical Validation Team.
Before the aggregate reserves could be determined it was necessary that:
(1) The reserves for the fields designated in the sample be estimated by the field
reserves teams; and (2) The statistical parameters be calculated by the Inde-
pendent Accounting Agent for use by the Statistical Validation Team.
Immediately after execution of the Reserves Study Order, the Federal Power
Commission staff initiated the procedui-es necessary to acquire the services of
an Independent Accounting Agent. The necessity for a departure from the out-
lined sequence, however, was recognized during the planning of the National
Gas Reserves Study. First, it was believed that considerable time would be re-
quired for the field reserves teams to make all of the necessary reserves esti-
mates. Second, it was believed that the time requireil to complete all steps for
selecting a sample would be considerable.
Field teams were sent on five trips in January and February of 1972 for the
purpose of (1) training personnel who would participate heavily in the project,
and (2) determining the time required for making individual field reserves
estimates which would serve as a basis for future planning. These initial trips
confirmed that the time requirements for making the field reserves estimates
would undoubtedly be critical in the schedule for the study. When the overall
time limitations were also considered, the urgency of fully developing this phase
became apparent. A proposed procedure was the stipulation of 102 major gas
fields to constitute the certainty stratum of the sample. It was felt at that time
that the 102 major gas fields might contain all fields with reserves greater than
400 Bcf, accounting for about 50 i^ercent of the total reserves.
On February 3, 1972, Mr. Thomas H. Jenkins, Dr. Marie D. AVann and Dr. Paul
J. Root discussed the designation of the certainty stratum. Dr. Wann, in a
memorandum to Mr. Thomas H. Jenkins on February 4, 1972. suggested that the
National Gas Survey proceed with the reserves estimates of the 102 major fields.
The field reserves team scheduling was arranged on that basis, subject to final
review by the Statistical Validation Team. This review, wherein the Team stipu-
lated the exact sampling procedure to be followed, became ix>ssible after the
frequency distributions were prepared by the Independent Accounting Agent.
On March 9, 1972, Arthur Young & Comixiny, in accordance with standard
government service procurement practices, was awarded a contract to serve as
the Independent Accounting Agent. From April through June 1972, industry
representatives who prepare A.G.A. reserves transmitted data to Arthur Young &
Company to calculate the necessary frequency distributions (or stratifications
of the population of gas fields) for the Statistical Validation Team to use in
stipulating the techniques and procedures to be followed in order to obtain a
valid sample.
The Statistical Validation Team met on May 10, 1972, to discuss the Reserves
Study Order, the role of the Team in the study, progress made in implementing
the Order, aspects of statistical sampling theory pertinent to the study, and
procedures to be followed by the Team. The Team reserved specific recommenda-
tions until the preliminary frequency distributions were available.
Tlie Statistical Validation Team met again on July 27, 1972, to review the
initial stratifications prepared by Arthur Young & Company. The Team recom-
mended that revised stratifications with a reduced number of classifications
according to size, geographical area and field discovery date be prepared. In
regard to the certainty stratum, the Team suggested that Mr. Lawrence R.
Mangen, Mr. William L. Monroe and Dr. Paul J. Root obtain from Arthur Young
& Company a list of the names of 108 fields shown on the frequency distribution
to contain reserves greater than 400 Bcf and compare it with the initial list of
102 major fields. It was further recommended that the comparison of the lists
be made by the above group of FPC staff members to determine if an undue
number of fields and consequently an undue amount of field team work would
be involved in changing the definition of the certainty stratum to the 108 fields
listed by Arthur Young & Company. The group was ad\ised that if the amount
of additional work involved were not prohibitive, then the list of 108 fields would
be considered as the certainty stratum. However, if the group detemiined that
the amount of additional work involvetl were prohibitive, it was to check with
the Statistical Validation Team for further instructions.
The amount of additional work involved in making this change was determined
not to be appreciable, hence the 108 fields were considered thereafter to con-
stitute the certainty stratum. On August 29, 1972, Mr. John K. Sheehan of Arthur
145
Young & Compauy delivered a listing of the 108 fields with reserves figures to
Mr. Lawrence R. Mangen, the supervisor of the Independent Reserves Teams.
During tlie period from July 27 to September 15, 11>72, technical details of the
method for selecting the sample of smaller fields were discussed by Mr. William
L. Monroe and Dr. Paul J. Root with the various individuals associated with
the Statistical Validation Team. All of them were given the opportunity to com-
ment on the proposed procedures, which were then revised and modified in re-
sponse to comments and objections received. Final instructions were given in
September 15, 1972, to Arthur Young &; Company to develop the list of fields
constituting the remainder of the sample in accordance with the techniques pre-
scribed by the Statistical Validation Team.
These instructions specified that the remainder of the sample would consist
of approximately 300 fields partitioned into six modules of approximately 50
fields each. In addition, they specified the order in which the modules would be
considered for actual field work. The preliminary written instructions and the
particular values of the parameters to be used for the actual sample selection
process were prepared by Dr. Basil P. Korin. The final specifications transmitted
to Arthur Young & Company contained modifications required to accommodate
the suggestions received from other members of the Statistical Validation Team.
The principal suggestions were that the number of fields to be drawn from the
smaller .size strata should be increasetl, and that the field list within each stratum
should be randomly ordered before selection of the sample. The six modules of
smaller fields were selected as stipulated by the Statistical Validation Team,
and six lists of field names, one for each module, were delivered to Dr. Paul J.
Root on September 22, 1972.
By September 1972 the number of technical experts from the Federal Power
Commission's Bureau of Natural Gas assigned to the field reserves estimation
efforts had been greatly increased, such that the analysis of the certainty stratum
and one module definitely seemed feasible within the general time frame of the
National Gas Reserves Study. Therefore, soon after receipt of the lists, field teams
began to analyze fields from Module 1, i.e., the module designated as having top
priority. On October 10, 1972, the lists of fields with reserves were delivered to
Mr, Lawrence R. Mangen.
On November 30, 1972, the Statistical Validation Team met to re\aew" tabula-
tions sliowing characteristics of the sample, to discuss the methods to be used
subsequently in analyzing the results of the Study and to discuss the organization
of the Team's report. There was considerable sentiment that the statistical anal-
ysis presented in the Team's i-eport should be based on conventional methods for
estimating population properties from the sample statistics. However, it was felt
that an alternative approach, based on regression analysis, should be presented
in a separate report because it could potentially portray differences attributable
to size, field discovery date, geographical region, type, team i^ersonnel and other
pertinent factors. The alternative approach could be of value in planning future
resource studies.
The statistical methods used by Arthur Young & Company in processing the
field team results for analy.sis by the Statistical Validation Team were trans-
mitted by letter to Arthur Young & Company on January 17, 1973. The letter also
served as a means of relaying instructions dealing with the preparation of data
to be used interaially within the Statistical Validation Team for estimates of
total reserves to be made using alternative methods.
On January 29, 1973, Arthur Young & Company submitted the computer pro-
gram for calculating the independent reserves estimate to Mr. William L. Mon-
roe, who verified that the program performed the desired analysis iLsing test
data.
On February 2, 1973, independent reserves estimates for a majority of the
fields in the certainty stratum, all fields in Module 1 and some additional fields
were given personally to a representative of Arthur Young & Company for key-
pimching and initial processing. Data from the processing of the fields in
Module 1 were requested. The last of the field reserves data in the certainty
stratum was transmitted to Arthur Young & Company on February 5, 1973. All
data were processed by Arthur Young & Company to estimate the total non-
associated and associated gas reserves for the fields on the population list, and
the preliminary results were delivered to Dr. Paul J. Root on February 27, 1973.
The Statistical Validation Team met on February 28, 1973, to discuss the
information prepared by Arthur Young & Company to indicate the preliminary
estimate of the total gas reserves, its precision, and to discuss whether process-
ing of additional modules would be required to obtain a sufliciently accurate
146
total reserves estimate. The Team discussed tlie composition of the final report
and made final assignment for its completion.
In order to insure the accuracy of the individual reserves data used by
Arthur Young & Company to calculate the total reser\'es estimate, the data were
listed and delivered personally to Mr. Lawrence R. Mangen. After verification
the final estimate of the reserves as reported herein was given to Dr. Paul J.
Root on April 10, 1973.
The above excerpt from the report of the Statistical Validation Team is, in
my opinion, an accurate account of its activities. I disagree with Dr. Pifer's rec-
ollections about the formulation of pi'ocedures for the Team as stated in his
oral testimony before the Subcommittee. I can emphatically state that this was
not done by the field teams supervisor, that the field teams supervisor was not
from the University of Colorado at Boulder nor did anyone from the Univer-
sity of Colorado at Boulder participate in any phase of the National Gas Re-
serves Study.
Similarly, I disagree with Dr. Pifer's contention that he was not given the
opportunity to make comments on the report of the Statistical Validation Team.
A draft copy of the report was mailed to all members of the Statistical Valida-
tion Team on February 8, 1973, (A copy of the transmittal letter is shown in
Exhibit H). The draft of the report was discussed at the meeting of the
Statistical Validation Team held on February IS, 1973, which Dr. Pifer was
unable to attend. Team members were advised that they could send additional
comments to me. Another draft i*evised to reflect comments received from Team
members at and subsequent to the meeting of February 18, 1973, was mailed
to all Team members on March 20, 1973. (A copy of the transmittal letter is
shown in Exhibit I). A special meeting attended by Mr. Wade P. Sewell, Mr.
William L. Monroe, Dr. Howard W. Pifer III and me was held on April 4, 1973.
One purpose of the meeting was to enable Dr. Pifer to discuss the draft report.
Dr. Pifer offered no specific comments at that time but said he would forward
his suggestions to us. It should be noted that other comments received as late
as April 17, 1973, wei*e accommodated in the report. Specific comments were
never received from Dr. Pifer, although I feel that he was afforded ample
time and opportunity to make them.
Many of the questions raisetl concerning the study are not confined within
the framework of the objectives of the study and how those objectives were
achieved. The purpose and scope are clearly defined in the Natural Gas Reserves
Study as follows :
As specified in the Commission's Orders, the reserves study program was de-
signed to yield an independent estimate of the total proven gas reserves in the
United States including Alaska and the offshore areas as of December 31. 1970.
Non-associated, associated and dissolved gas were to be included in the total
estimate.
The scope of the MGRS was limited to an estimation of the magnitude of the
proven reserves and did not include an analysis of deliverability, Similai'ly. no
evaluation of the total gas resource base nor forec-asts of gas to be discovered
in the future were made. Gas volumes which cannot be produced economically
now but which might only become available through the application of new
technology were not included.
The report provided impartial, unbiased results in fulfillment of its expressed
puri^ose. It presents, for the first time, a comprehensive estimate of the Nation's
gas reserves made indei>endently and objectively by a Government agency. Tlie
results provide a useful basis for decisions by the Federal Power Commission as
well as other government agencies, the Congress and the public.
The views expressed herein are personal and do not constitute an ofiicial
statement of this Commission.
Respectfully submitted,
Dr. Paul J. Root,
Technical Director, National Gas Survey.
Exhibit A
ST.\TISTICAL VALIDATION TEAM
Daniel M. Bass, Chairman. Petroleum Engineering Department, Colorado School
of Mines.
Basil P. Korin, Chairman, Department of Mathematics and Statistics, American
University.
147
Lawrence R. Mangen, Team Leader— National Supply Team, Bureau of Natural
Gas, Federal Power Commission.
Daniel F. Merriam, Chairman. Department of Geology, Syracuse University.
Alfred T. Miesch, Geologist, United States Geological Survey, Department of the
Interior. ^ „ , ,
William L. Monroe, Mathematical Statistician, Bureau of Natural Gas, Federal
Power Commission.
Howard AV. Pifer III. Assistant Professor of Business Administration, Harvard
Business School.
Paul J. Root, Technical Director. National Gas Survey, Federal Power Com-
mission.
Wade P. Sewell, Chief, Division of Econometric Analysis, OflSce of Economics,
Federal Power Commission.
Harrv B. Sheftel, Office of Management and Budget.
Joseph Waksberg. Associate Director, Statistical Standards and Methodology,
Bureau of Census. Department of Commerce.
Marie D. Wann. Chief Mathematical Statistician, Office of Management and
Budget.
nr ■ .OForWM? Jl,'-Jr inr.l_rro P.^fiC big (4I TFRI l ."»«Vi
■j Federal Power Coninission
5S Office of Administrative Operations
^g UUl G Street, N. W.
Waghinorton. D. C. 20U26
ORDER FOR SUPPLIES OR SERVICES Exhibit B
Page 1
MMtK M I. r.WKAChS AM) I'AI'i.US WITH OHIlEli AM>/OI,
cosrnACT susiiiLUs ^ Y
DATE OF ORDtR
5/9/72
2520100.001 Salaries and Expenses, Federal
Power Commission, 1972
ONTRACTOR iT<one and a<:drcsi, miiuJin^ Zlh" Ci. Jr)
r Dr. Hcn^ard W. Pifer, III ~\
TO— > Assistant Professor of Business
Administration
Harvard University Graduate School
Soldiers Field
|_ Boston, Massachusetts 02163 _J
CONIKACI NO ytl Dnj)
OROtn NO
1067
REQUISITIONING OFFtce
REQUISITION NO /PURCHASE AUTHORITY
SHIP TO (Cooiignoc and addrax. meludtng ZW code)
5g
■O.^CHASE
D
DEli/ERY
D
REFERtN'Cfc YOUR PLEASE FURNISM THE FOLLOAlNG ON THE TER'.^S
SPECtFlED ON BOTH SIDES OF THIS ORDER AND ON THE ATTACHED SHEETS. IF ANY. INCLUDING DELIVERY AS INDICATED. TH.S PURCHASE IS
NEGOTIATED UNDER AUTHOR'TY OF
EXCEPT FOR THE DI'-LING irSTRUCTlONS ON THE REVERSE, THfS DELIVERY ORDER IS Si IB 'EOT TO INSTRUCTIONS CONTAINED ON THIS SlOE ONLY
OF THIS FORM AND IS ISSUED SUBJECT TO THE TERVS AND CONDITIONS OF THE ABOVE NUf-^iBEREO CONT RACT
GOVERNMENT D /L. NO
DELIVERY TO FO B- POINT ON OR DISCOUNT TERMS
BEFORE
SCHEDULE
SUPPLIES OR SERVICES
AGREEMEIIT FOR PR0?ESSI0:iAL SERVICES
This document constitutes authority, ternjs and cc m
fraduats
nsi ;
■te:
Dr. Hovmrd W. Pifer, III, Harvard University
Massachusetts (hereinafter called the Contractor) she
of the Statistical Validation Team for the National
in the Federal Power Conmission's Order of December
.shall be effective May 9, 1972 and will terminate Dec
REQUIRE^ENTS AMD SCOPE OF V?ORK
1.
The statistical validation team has
respoiisibilities :
the f oliowi ig listid
ee.
The statistical validation team ;d.ll prescr
of fields to be surveyed indepeniently in
coramitteo area by size and age category in
a statistically valid reserve estimation wi
degree of accuracy and certainty
b.
Sampling will be started on a mi
magnitude of deviation. If, In
estitoations, the standard
(Cm*
D
D
SEF. BILLING lKsritUCTIO.\S O.V ItKVh.llSE
SHIPPING POINT
MAn.l^rvOlCEs^o•
GRO^S SHIPPING VktlGHT
;ions V
Bi
erve a;;
>urvey
.971.
31,
Sc}iool,
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as
1,
embfer
reby
ston,
a member
provide
he contra
972.
ts
be the
ch A.G
order
h a re
t(.
number
A. sub-
project
sonable
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the init ial
deviatjion of -ijhe j)ercentdg:e
to test the
field 3 eserve
GRAND TOTAL -
$2,1*50.00
iSrt
merit
UNnLDSi/.ies ot avcr
i/.ies ot AVt.R;cA, , yr/
Richard M. Kane
wo FORM 14/. JUNC lur^
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148
differences from their mean is too large to assure the desired certainty and
accuracy, additional sampling will be carried out as required or the specifications
will be modified. The National Gas Survey will balance the time required against
the desired accuracy so as to obtain the best results in a reasonable time.
c. When the accounting agent has received all final reserve estimates, he deter-
mines the deviation from the mean of the sample. He forwards the deviation
information to the statistical validation team.
d. The statistical validation team determines the adequacy of the sample.
Additional sampling will be prescribed if it is required to obtain the desired
accuracy and certainty.
e. When sampling is sufficient to assure the desired accuracy, the statistical
validation team reports to the National Gas Survey. The report will include a
description of the sampling procedure and a statement of the reliability of the
survey.
2. Specifically, the Contractor will provide the services and accomplish the
tasks for the statistical validation team as summarized below :
(a) Serve as a member of the Statistical Validation Team as described in
rPC's order of December 21, 1971 ;
(&) Assist the Statistical Validation Team in accomplishing the above objec-
tives cited from the order ;
(c) Attend meetings of the Statistical Validation Team ;
(d) Participate in the writing of all reports required from the Statistical
Validation Team ;
(e) Coordinate his work with the Technical Director of the National Gas Sur-
vey or his representative.
COMPENSATION
Maximum cost to the Government for performance hereunder shall not exceed
two thousand four hundred fifty dollars ($2,450.00) and said compensation shall
include travel and subsistence expenses. Partial payments may be made on
vouchers submitted through and approved by the Technical Director, National
Gas Survey. Final payment will be made upon determination by the Technical
Director that contract requirements were met.
DATA RIGHTS
All writings, reproductions, drawings, or other graphical representations, and
works of any similar nature produced in the performance of this contract shall
be the sole property of the Government. Tlie Contractor agrees not to assert any
rights at common law or equity and not to establish any claim to statutory copy-
right in such data. The Contractor shall not publish or reproduce such data in
whole or in part, or in any manner or form, nor authorize others to do so without
the written consent of the Government until such time as the Government may
have released such data to the public.
To the extent applicable, the terms, conditions, and instructions set forth in
Standard Form 32 shall bear upon the Contractor in performance hereunder.
This procurement is entered into pursuant to Section 302(c) (4), Federal Prop-
erty and Administrative Services Act of 1949. as amended (41 U.S.C. 252(c) (4).
The Contractor agrees to perform all services set forth or otherwise identified
above for the consideration stated herein. Contractor is required to sign this docu'
ment and return two copies to the issuing office.
United States of America,
Richard M. Kane,
Director, Office of Administrative Operations.
Contractor.
149
Montana College of Mineral Sciences and Technology,
Butte, Mont., December 22, 1912.
Re Order No. 1101.
Dr. Paul J. Root,
Technical Director, National Gas Survey, Federal Power Commission,
Washington, D.C.
Dear Dr. Root : Under the terms of our agreement for my professional services,
I was supposed to participate in the following activities.
(a) Become familiar with the procedures used by the FPC field reserve
teams
(ft) Work with various FPC field reserve teams
(c) Provide special information or advice to field reserve teams operating
in the Northwestern portion of the United States.
id) Report on methods relating to estimations of national gas re.serves.
(e) Coordinate his work with the Technical Director of the National Gas
Survey or his representative.
I have completed all the above activities, reported to you twice by telephone
and today under separate cover have mailed you a report covering these activities.
Attached please find an invoice for my service.
Very truly yours.
Dr. Wilfred R. McLeod,
Department of Petroleum Engineering.
Montana College of Mineral Science and Technology,
Butte, Mont., December 22, 1912.
Re Activities with National Gas Survey independent reserve team.
Dr. Paul Root,
Technical Director, National Gas Survey, Federal Power Commission,
Washingto}i, D.C.
Dear Dr. Root, On the twenty-third of May, 1972. under order number 1101, the
Federal Power Commission and myself entered into an agreement whereby I
should assist the staff of the Federal Power Commission by working with the
independent reserve teams of the National Gas Survey. Specifically, I was ex-
pected to and did participate in the following activities :
(a) become familiar with the proce<lures used by the FPC field reserve
teams ;
(ft) work with various FPC reserve teams;
(c) provide special information or advice to field reserve teams operating
in the Northwestern portion of the United States ;
(d) report on methods relating to estimations of national gas reserves ;
(e) coordinate my work with the Technical Director of the National Gas
Survey or his representative.
The order, issued December 21, 1971, directing study and analysis of national
gas reserves and prescribing procedures for the National Gas Survey was read
and clearly understood by this author. I was also briefed by yourself, and later
Mr. Tommie Hillis, on the procedures used by the FPC field reserve teams. I
might add that these are all clearly defined in the FPC Bureau of Natural Gas
Reserve Estimation Manual — a copy of which you sent me.
Following your instructions, on December 3, 1972, I journeyed from Houston,
Texas, to join an FPC field reserve team in Cody, Wyoming. The team was
composed of Mr. Tommie Hillis, Supervisor, and Bruce Wamsley and David
Maldonado, his assistants. The team spent December 4th and half of December
5th in the offices of Marathon Oil Company evaluating a total of thirteen in-
dividual reservoirs.
On arriving at the Marathon Oil Company's offices, the members of the team
held a conference \vith various company men who were familiar with the fields
to be studied. The fields in question were quite old, records were missing, and
had the Marathon Oil Company not been as cooperative as they were it would
have been imix)ssible to make a meaningful reserve estimate for many of the
reservoirs.
In most of the thirteen reservoirs, the computation of gas reserves was accom-
plished by the use of production-pressure decline curves. However, material
balance, volumetric and time decline methods of computation were also used.
The team left Cody on the afternoon of December 5th in — 26°F weather and
150
traveled to Oklahoma City, arriving at about 10 :30 p.m. on Wednesday, Decem-
ber 6th, we commenced work in the offices of Texas Pacific Gas Company at 8 :00
a.m. After a conference witli the company representative, we set to work making
our reserve calculations. This particular field, drilled in the 60's, was quite small
and consisted of less than twenty wells. Reasonaby accurate pressure and
production data along AAith complete well files were available. Production-pressure
decline curves we used for reserve determination. On the morning of December
7th, we left Oklahoma City for Dallas, Texas.
We checked into the offices of the Lone Star Gas Company at about 10 :00 a.m.
that same day, and after the usual conference with the Lone Star engineers
familiar with the field, we commenced making our independent reserve calcula-
tions. Again, this field was quite small, consisting of some 13 Lone Star wells
and about tliree wells belonging to otlier individuals. I recall that tliere were
about eleven plotted P/Z versus cumulative gas prodviction curves. The data
points were rechecked by our team and in most cases the curves redrawn and
tlien used to determine remaining resreves. In the case of two wells for which
pressure data was inadequate we utilized micrologs and sonic logs to obtain
net sand count, porosity, and water saturation ; we then carried out volumetric
calculations to estimate the gas reserves. W^e were fortunate to find P/Z versus
cumulation gas pro<luction information in commercially published data for the
other three wells which did not belong to Lone Star biit which were situated
in tlie same reservoir. Our work in Dallas was completed at about noon on
December 8th, and we all left for our individual homes. I arrived back in Butte,
Montana, the next day, December 9, 1972.
GENERAL COMMENTS
In all the gas fields for which we made reserve estimates, the calculation
procedure was quite straightforward and can be found in most standard petro-
leum engineering textbooks as well as in the Natural Gas Reserve Estimation
Manual.
As is to be expected, certain on-the spot decisions had to be made from time
to time concerning the treatment of data or tlie use of one computational tech-
nique over another. I found the team leader quite competent in this respect.
Additionally, the other members of the team also performed their tasks quite
comijetently. Much can be said to the credit of the FPC about the manner in
which the team comjwrted themselves. I was quite plea.sed to be associated A^ith
these men and to have had the opportunity to i>articipate in the survey. There
.seems to be little more that I can add to tliis report. However, if after you have
read it you find that there are areas on which you wisli me to elaborate, I shall
be only too willing to comply.
Very truly yours,
Dr. Wilfred R. McLeod,
Department of Petroleum Engineering.
Lubbock, Tex., December 21, 1972.
Dr. Paul J. Root,
National Gas Survey, Federal Potrer Commission, Washington, D.C.
Dear Dr. Root : I am writing in accordance with the provisions of FPC Order
No. 647 dated November 15, 1972, whicli is an agreement for professional services
to be performed hy me in connection with the activities of the independent re-
serve teams of the National Gas Survey.
The basis and methods of operation of the reserve teams are spelled out in the
Federal Power Commission Bureau of Natural Gas Reserve Estimation Manual,
dated August, 1972, prepared by Mr. Lawrence R. Mangen of the Bureau of Na-
tural Gas. This manual provides background data as to the purposes of the sur-
vey, describes the methods to be used, establishes a professional level of per-
formance and conduct for survey personnel, states economic assumptions, and
includes useful compilation of technical reference material, including charts,
tables and nomographs.
In connection with the requirements of the contract cited I have visited reserve
teams in the field as tabulated here\%ith.
Usual procedure was to establish local contact with the team leader, join the
team, review the data in general and in sufficient detail to get the "feel" of the
151
problem, and then participate as possible in ttie actual compilation procedure. In
the course of this association it was usually possible to develop a personal ac-
quaintance with the individual team members, and also to determine the at-
mosphere in which the work was being conducted.
In all cases I found the teams to be operating in a competent and efficient
manner, and adhering as closely as possible to the guidelines contained in the
Reserve Estimation Manual. I may add that they exhibited a high degree of
dedication. The relations between team members and the company representa-
tives to my observation were professionally correct. The operators" representa-
tives wre cooperative and courteous, and at the same time avoided anything
that might be construed as an attempt to influence or modify the work of the
teams. I formed the impression that the team visits created a new" awareness of
and respect for the technical proficiency of F.P.C. personnel, and in one or two
cases the company men welcomed the teams" investigations as supplementing
work that they had not themselves been able to extend, reportedly because of per-
sonnel shortages.
Most of the work observed was done on the basis of pressure vs. cumulative
production curves, and in well-documented fields the results had a high degree
of reliability. However, in some cases information was less complete, or as at
Cotton Valley, complicated by re-injection of gas or liquids. The MPI Ellen-
burger Field studied by Mr. Bassett's team at Midland consisted of only four
wells with meagre production history and reservoir data, and had to be handled
by volumetrics in a notoriously difficult reservoir. In this case the team used the
only method possible, and was fully aware of its specific limitations.
One of the by-products of this survey may prove to be the establishment of
more useful and widely-accepted standards of reserve estimation for natural
gas fields. The FPC Manual provides a useful text that should be widely accepted
if available. For what may be the first time a comprehensive national survey is
being made with methods and standards coordinated in detail. However, certain
important criteria need to be established, such as uniform minimal or cut-off
reservoir pressures. Should reserves be calculated to a terminal 500 psia? 1000
psia? vacuum? The difference is proportionately less important in the high-
pressure fields, but may involve important gas volumes in large-volume reservoirs.
Another point perhaps deserving study has to do with completeness of present
development. By the time the team has finished its study of a field, it may have
an opinion as to the possible existence of undrained or luidrilled acreage, either
in extension of or within proved producing areas, or in other reservoirs of the
same structure. An estimate, however qualified, would be useful for planning
purposes, and the teams are certainly competent to make them, within proper
guidelines.
The chief problems will undoubtedly be in the carbonate reservoirs, and here
it would be valuable to tackle the toughest of them, to find out just how much
variation of reliability may exist. It would also appear that a special attempt
might be justified to take on a great variety of the smaller fields — more than the
now planned — particularly where there is reason to believe that the principal
operators may not be ideally staffed from the technical standpoint.
Very truly yours,
Frank B. Coxselman, Ph. D.,
Contract Consultant.
Host operator and
Dates
Place
Team leader
Team members
representative
Fields surveyed
Nov. 13, 14....
.- Corpus Chrisli,
Wayne Thompson.
Bernie Karp, Wm.
Humble 0. & R.
Tom O'Connor
Tex.
Howard, Carl
Pavetto, and
Dan Plum.
Co. (0. M.
Stewart).
(Texas).
Nov. 14-l/_._.
do
. Frank Baker
. Thomas Ross and
Mobil Oil Co. (W.
Thompsonville
James New.
G. Kimbrough)
and Arco (S. W.
Coan).
Mobil Oil Co
(Texas).
Nov. 28..
Midland, Tex
John Bassett
Douglas Howard
and Sam Hazou.
MPI Ellenburger
(Texas).
(Virgil Stone).
Nov. 29, 30....
.. Bossier City, La..
. John Olson
Charles Cook,
Cotton Valley Op-
Cotton Valley
Larry Hamby,
erators Com-
(Louisiana).
and Marvin
mission (T. L.
Barnes.
McGinnis).
Dec. 13, 14...
.. Houston, Tex...
. James N. Hicks..
Frank Olson and
Southern National
Patterson
John Dante.
Gas Co. (H. K.
Heberling).
(Louisiana).
27-547 O-
-74 11
152
Louisiana State University
AND Agricultural and Mechanical College,
Baton Rouge, Ala., May 19, 1912.
Dr. Paul Root,
U.S. Federal Power Commission,
Washington, D.C.
DBiiR Dr. Root : At yovir request I am giving you my evaluation of the i)er-
formances of the Reserve Teams I worked with this spring in New Orleans on
their visits to Texaco, Amoco and Humble. In my opinion all three of the team
leaders were very competent and on a team basis I would rate two of the teams
very good and the other excellent. They were all well organized and very capable
in their evaluations. I should like also to comment on the very fine cooperation
extended to the Reserve Teams by the three companies. It was a pleasant and
cooperative atmosphere to work in.
In summary i)erliaps I should state what I have implied in the above remarks :
that these teams are without doubt obtaining reliable reserve data.
Yours very truly,
Murray F. Hawkins, Jr.,
Head, Petroleum Engineering Department.
Louisiana State University'
AND Agricultural and Mechanical College,
Baton Rouge, La., June 30, 1972.
Dr. Paul Root,
U.S. Federal Power Commission,
Washington, D.C.
Delar Dr. Root : During June I worked with Reserve Teams in the Houston
oflBces of Marathon Oil Company and Union Oil Company of California. I found
both team leaders very competent but members of the teams much less experi-
enced than those I saw during my New Orleans visits. The effect of this appears
to be to work the team leaders harder and possibly to slow the effort somewhat ;
however the quality of the work is excellent.
Both oil companies provided very nice working space and were very coopera-
tive with the teams.
Yours very truly,
Murray F. Hawkins, Jr.,
Head, Petrolemn Engineering Department.
Exhibit G
U.S. Department of the Interior,
Geological Survey,
Denver, Colo., February 7, 1973.
Mr. Paul Root.
Technical Director, National Gas Survey, Federal Power Commission, GAO
Building, Washington, D.C.
Dear Paul : As I related to you on the phone yesterday, I have become some-
what concerned over some of the statistical methods proposed for the analysis
of data being accumulated for the gas survey. Perhaps my concern is unwarranted,
but I am pleased to accept your suggestion to put it in writing for your informa-
tion or for distribution to the Statistical Validation Team.
I believe that it is imperative in this undertaking that the statistical methods
be as simple and straightforward as possible, and that there be as little room
for challenge as possible. The method being used for sampling the fields less than
400 bof is simple and straightforward — a statisfied random design — and is gen-
erally recognized as one of high efficiency. The method has been convention for
a long time and the methods for estimating the means and its variance are well-
established. This is not to say that these methods can't be improved upon, but I
do say that this is not the place to try to do it.
In some hand-written notes included in with some other materials I received
from you recently, equations are given for 4 different methods for estimating the
total reserves, labeled in the notes as (1) Classical Stratified Sampling, (2) Ratio
153
Adjustment, (3) Difference Adjustment, and (4) Linear Regression. Three of
the metliods would employ the AGA data, and thus would not provide independent
reserve estimates. One of the methods (Difference Adjustment) is totally un-
familiar to me, but I note that the difference correction term goes to zero when
the average reserves in the sample equal the average reserves in the population.
If this happens in a given size-stratum, the fields in the stratum would not be
included in the total reserve estimate.
We have also discussed some various other regression methods for estimating
total reserves. The methods may have a great deal of merit, but they are new
in this type of problem so far as I am aware, and I suggest that they be avoided
for the immediate purpose.
As you can see, I have some fear that the Statistical Validation Team is going
to arrive at some conflicting answers and that some of these answers may not
be subject to easy defense. I don't see any need for this. The procedures used to
sample the fields were straightforward and perfectly geared toward use of some
highly conventional methods of computation to arrive at unbiased estimates
of both the total reserves and of error bounds for it. I do not believe we should
be developing new approaches at this time.
I don't know whether I'm alone in my concern or whether some others who
attended the last meeting and perused the materials sent out recently might
feel somewhat the same way. Anyway, I appreciate your suggestion that I use
this means to state my opinion.
Sincerely yours,
Alfred T. Miesch,
Research Geologist.
Memorandum
Febbuaby 8, 1973.
To : Statistical Validation Team Members and Observers.
From: Paul J. Root. Technical Director, National Gas Survey.
Subject: Draft Material for Review by the Statistical Validation Team.
Enclosed are the following items relative to the Statistical Validation Team
Report :
(1) Revised Outline.
(2) Draft Chapter 1^ — ^Introduction.
(3) Draft Chapter 2— Background.
(4) Draft Chapter 3 — Sampling Procedure.
The outline represents a revised version of that sent to you with my letter
of December 19, 1972. It reflects modifications which were made as drafting of
the report of the Statistical Validation Team, the reports of the other com-
ponents of the National Gas Reserves Study and the overall Study report pro-
The title given to Chapter II does not seem appropriate. It seems more like
a chronology of the Statistical Validation Team activities. Perhaps someone can
suggest a better title. Similarly, I would welcome any other criticisms or com-
ments you may wish to make about the enclosed material.
The next meeting of the Statistical Validation Team will be held in Room
4008 of the offices of the Federal Power Commission at 1 :30 p.m. on February
28, 1973.
I look forward to seeing you at that meeting.
Paul J. Root,
Technical Director, National Gas Survey.
Memorandum
March 20, 1973.
To : Statistical Validation Team Members.
From : Paul J. Root. Technical Director National Gas Survey.
Subject: Review of the Draft of the Final Report of the Statistical Valida-
tion Team.
Enclosed is a revised draft of the Statistical Validation Team Report which
includes all tables and figures except for the map indicating the definition of
the geogrphical regions. We would appreciate having your comments and sug-
gestions pertaining to possible additions, deletions and modifications as soon
as possible. In particular, we need your comments on the discussion of the
154
reliability of the estimate and suggestions as to how to describe the combined
effect of sampling error and measurement error.
Responses should be directed to either ^Nlr. William L. Monroe or me before
April 2, 1973, as we would like to complete the report in early April. It should
be possible to accomplish the editing and publication of the tiual report through
correspondence and telephone calls and another meeting of the Statistical
Validation Team will probably not be required.
Inclusion of the figures for the reserves of the AGA omitted fields will not be
included in the Statistical Validation Team report, but will be included in the
reix)rt of the Independent Accounting Agent.
We plan to continue the work ou the regression model and subsequently to
publish a report on those efforts. Dr. Howard Pifer will discuss this phase of
the statistical analysis with the FPC members of the Statistical Validation
Team in early April.
Paul J. Root,
Technical Director, National Gas Survey.
Federal Trade Commission,
Bureau of Competition,
Washington, B.C., February 1, 1974-
Dr. Paul J. Root,
Technical Director, National Gas Survey, Federal Power Commission, Wash-
ington, D.C.
Dear Dr. Root : I have the courtesy copy of your letter to Senator Hart dated
July 27, 1973. In that letter, you comment on sundry statements made on June 26-
28, 1973 at hearings held by the Senate Subcommittee on Antitrust and
^Monopoly, including remarks made by me on June 27 with regard to American
Cas Association (AGA) reporting of proven reserves. I also have the courtesy
copy of your November 20, 1973 letter to Senator Stevenson in which you
comment on statements made by me during the course of a Senate Commerce Com-
mittee hearing on October 11, 1973. Since the matters discussed in your Novem-
ber 20, 1973 letter essentially duplicate issues raised in your July 27, 1973 letter,
I have specifically directed my comments to your July 27 letter but they are
equally applicable to your November 20, 1973 letter. In replying to you, I am
requesting that Senator Hart and Senator Stevenson make a copy of this letter
a part of the record of their respective hearings. I wish to emphasize that this
response reflects personal views and is not an oflicial statement by the Federal
Trade Commission.
The first four and one half pages of vour letter relate to the Federal Power
Commission's National Gas Survey (NGS) and the- report of this survey entitled
"National Gas Reserves Study" (NGRS). The NGRS presents an estimate
of the proved reserves of natural gas in the United States as of Decem-
ber 31, 1970. As you indicate (page two), of the 6,358 gas fields identified by the
NGS, all 108 fields thereof reported by the AGA to contain 400 Bcf (billion cubic
feet) of gas or more (referred to in the NGRS as the "certainty sample") were
surveyed, but only 50 of the 6,250 "under 400 Bcf" fields were surveyed. It is
noted that the 6,250 fields were divided into six stratum according to the amount
[)f reserves (jf gas in each field as reiM)rted by the AGA, and that the 50 fields
^vere then randomly selected from these stratum, with the nuniber drawn from
any one strata determined in part by standard deviation figures derived from
AGA reserve estimates for the fields in the .strata.
Based upon this survey of 158 fields, the NGRS concludes (Appendix VI, page
25) that "the estimate of statistical reliability attributable only to sampling can
be expres.sed by stating that there is 95 percent confidence that the reserves lie
within 22.0 Tcf [Trillion cubic feet] (or 10 percent) of 228.5 Tcf." I have no
quarrel with this statement as a mathematical expression, but I am highly
concerned with the sampling procedures that underlie it. Specifically, I am con-
cerned that the sampling was weighted toward fields in which AGA under-
reporting was least likely to occur and that few if any fields were surveyed in
which AGA under-reporting was most likely to occur.^
Staff of the Bureau of Competition has reviewed AGA estimates of fields in
the Offshore Area of South Louisiana and has concluded that tracts reported
1 The significant role played by producers in establishing the procedures used by the
NGS to estimate proved reserves is summarized in an attachment hereto.
155
by the AGA to contain relatively small amounts of reserves are most frequently
the ones that are most seriously under-reported." This suggests that had the pur-
pose of the NGS been to examine critically the accuracy of AGiV figures, the cer-
tainty sample would have been drawn from among those fields reported by the
AGA to contain relatively small amounts of natural gas. Instead, the certainty
sample was drawn from the fields reported by the AGA to have the most gas
and this bias was continued throughout the stratum. Thus the NGS sampled
.2170 of the fields in the 0-1 Bcf and 1-5 Bcf stratum, .41% of the 5-10 Bcf
strata, 1.25% of the 10-50 Bcf strata, 3.53% of the 50-200 Bcf strata,
4.95% of the 200-400 Bcf strata, and as noted, 100% of the over-400 Bcf strata.
In all, only 26 of the 5,620 fields reported by the AGA to be under 50 Bcf in size
were surveyed.
The relatively under-developed, significantly under-reported fields have been as
might be anticipated, fields with comparatively recent discovery dates. However,
the NGS rejected stratification by discovery date. As a result, only 18 of the 50
randomly selected fields had discovery dates as recent as 1960-1970, and there is
no way of knowing from any published data from which strata these 18 were
drawn.
Further, the Federal PovA^er Commission is well aware that AGA under-report-
ing is particularly suspect in Offshore South Louisiana, as well as in the Rocky
Mountain region and Alaska." Notwithstanding this fact, the NGS rejected strati-
fication based on geographic distribution. As a result, only nine of the 50 random-
ly selected fields were located in Offshore South Louisiana and in the Rocky
Mountain region, with none being drawn from Alaska. Whether any of the nine
were drawn from fields with discovery dates as recent as 1960-1970 and from
the 50 Bcf and under stratum is unknown.
The selection of only 26 fields out of 5,620 in the suspect 50 Bcf and under
stratum, with only a few if any having been drawn as well from the suspect geo-
graphical regions and the suspect discovery date group, is in my opinion a pre-
scription for overlooking xVGA under-reporting. As the NGRS acknowledges,
usage of a confidence inteiwal re<:iuires some degree of normal or symmetrical
distribution (NGRS, Appendix VI, page 26) and failure to adequately sample
from population stratum introduces the ix)ssibility of major error in estimating
these stratum (NGRS. Appendix VI, page 18). The meager random sampling by
the NGS not <mly fails entirely to recognize the possibility of as.vmmetry in
population due to AGA under-reporting, but it leans over backwai-ds to avoid
discovering it.
It was the Federal Power Commission's concern over the accuracy of reserve
reporting in Offshore South Louisiana that led to the mailing of questionnaires,
on August 14. 1969, to producers requiring them to furnish detailed information
on reserves in all fields (over 200) in that area. Producer opposition to these
questionnaires resulted in FPC abandonment of this inquiry. The Federal Trade
Commission investigation seeks much of the same information from producers
which the FPC sought. Until a field by field check is made on all AGA estimates
for Offshore South Louisiana, and possibly of the San Juan and Uinta-Green
River sub-areas of the Rocky Mountain region and of Alaska as well, the NGS esti-
mate, like the AGA estimate, will remain suspect.
The NGS limited its sampling from small fields and eschewed stratification
by geographic area and field discovery date in part through reliance on standard
deviation figures derived from AGA reserve estimates. Your conclusion (page
five) that any distortions through the use of AGA figures would have relatively
little effect on projected total reserves, because the standard error "takes into
account variability of measurements within strata," misses the point that the
"standard error" takes into account only such variability as its sampling method
is designed to detect. A check on the accuracy of critical AGA figures might
have revealed, as our investigation has thus far revealed, far more deviation
than AGA figures in fact reflect. This check, which could well have dictated a
radically different approach to sampling, was never made.
Your ol)ser\'ations (pages three and four) that there were, among the 50
randomly .selected fields, less instances in which NGRS estimates exceeded AGA
estimates by a ratio of 2 :1 than instances in which the reverse occurred can
-The Federal Power Commission has apparentl.v also been suspicious of AGA under-
reportinfr of reserves in these comparatively undevelopecl fields, as witness its uncom-
mitted gas reserves study made in connection with the South Louisiana rate case.
"E.g.. see [FPC] StafF Counsel's answer in Opposition to Petition to Reopen Proceed-
.ings. pp. .''>-4, AR69-1 as regards offshore South Louisiana and Appendix A of FPC Order
No. 4.35 regarding the Rocliy Mountain region. The AGA has admitted publicly that its
1968 and 1969 estimates of proved reserves were under-reported by 26 Tcf.
156
likewise be explained in terms of biased sampliug. The fact that there were four
instances among the 50 fields in which NGRS estimates exceeded AGA estimates
by a ratio of 2 :1 and no such instances within the certainty sample appears to
corroborate my statement that AGA under-reporting is more prevalent among
smaller sized fields.
At page three you state that "[i]t is extremely misleading to refer to per-
centage discrepancies [between AGA estimates and NGS estimates], because
doing so implies that one of the two estimates is considered to be the true value."
Xotwithstauding this statement, you conclude one page later that comparisons
between certain AGA and NGRS estimates "lend strong support to any conten-
tion that the AGA proven reserves total is an over-estimation." The NGRS is
replete with charts comparing NGS and AGA estimates, e.g. see pages 3 and 18
of the NGRS and page 21 of Appendix VI thereof, and it concludes at the outset
(page 3) that "[t]he NGRS estimate is lower than the estimate by AGA; how-
ever, the difference is less than 10 percent."
NGS reserve team supervisors were not only encouraged to compare their
estimates with AGA estimates but with any other available estimates, including
Form 15 estimates, published industry estimates, and U.S.G.S. data (see NGRS,
Appendix I. page 8). If the NGS had required producers to furnish their own
in-house estimates and back-up calculations, as we have required in our in-
vestigation, NGS i>ersonneI would have been in a far stronger i)osition to assess
whether all relevant raw data had been made available to them upon which to
base an estimate. Likewise, if raw data had been sought from more than one
producer in each field as was not the case with the NGS, NGS ijersonnel would
have had an additional check on whether all relevant raw data had been
furnished.
One further comment on the NGS before turning to your comments on my
remarks of June 27. The NGS assigned the task of compiling a list of gas fields
not reported by the AGA to the Oil Information Center (OIC) of the University
of Oklahoma Research Institute. The NGS directed the OIC to perform this task
by using its "data base" and other information sourc«g — each of the other in-
formation sources that was specified is a government publication (see NGRS,
Appendix II, page 1). The apparent sources for the data base itself were govern-
ment production reports (in the 12 states that publish them) and othemdse, the
International Oil Scouts Annual Review (See NGRS, Appendix III. pages 3-5).
It is dubious whether production reports are the best sources for locating fields
not in production. The Oil Scouts is a producer organization subject to the same
influences as the AGA subcommittees which estimate reserves. While govern-
ment publications may be useful sources for compiling a universe of gas fields,
staff meml)ers of the Bureau of Competition have found no source in this regard
equal to the unpublished well drilling, testing and completion reports maintained
by the Federal and state governments — apparently the OIC overlooked this
source. Further, our investigation has uncovered a number of instances in which
temporarily abandoned reservoirs contained gas in paying quantities which was
not reported to the AGA. Notwithstanding this, the OIC mathematically elimi-
nated all "abandoned or temporarily abandoned fields or pools" (NGRS, Appendix
III, page 7) from its list of gas fields to be estimated by the NGS.
With i-egard to statements in your letter specifically addressed to my remarks,
the first appears at page five and is to the elTect that my remarks of June 27 are
unsupported by documentation and meaningless unless a definition of reserves
is stated. This is to assure you that my remarks were based entirely upon docu-
ments, obtained primarily from producers of natural gas, and that all of these
documents are still in the custody of the Federal Trade Commission. As for a
definition of reserves, I stated specifically (Tr. 227) :
It was found that proved reserves is a term used industry-wide and that
the definition of proved reserves iitilized by the AGA is also the definition
employed by companies.
In our investigation, the companies which have thus far made formal returns
on their subpoenas have indicated that they employ the AGA definition of proved
reserves.
It was never my intention to imply (as you seemingly, at page seven, allege)
that the NGS does not constitute an independent estimate of reserves. My sole
concern in the remarks that you quote (page .seven, top) was that the FPC (or
157
for that matter any other agency) use particular care to obtain from producers
all the raw data that is necess,ary to make a complete estimate of the reserves
in a field.
At page nine you conclude that the "FTC investigation might be characterized
as one involving the processing of 'paper resen-es'," apparently basing this on mv
remark (Tr. 226) that:
[T]he [FTC] investigation was not attempting to make original estimates
of proved reserves in South Louisiana but was instead attempting to obtain
reserve estimates already proposed.
As you may know, the FTC has issued subpoenas to eleven major producers in
Offshore South Louisiana. Each subpoena is identical in form. Specification G
calls for, into' alia, all company documents containing "estimates or evalua-
tions of the volume of natural gas present or recoverable or ultimately recov-
erable ... (3) in specific fields, poi-tions of fields, leaseholds and/or portions of
leaseholds located in Offshore South Louisiana." Specification I calls for all com-
pany documents which "refer, analyze. . . . relate to . . . [a]ny natural gas esti-
mates or evaluations called for by Specification G ; the preparation or comple-
tion of such estimates or evaluations ; the procedures, criteria or interi^retation.s
used in such preparation or completion . . ." etc. While staff already has com-
pared various estimates set to paper, it will also have and plans to make use of
the raw back-up data and calculations in order to check out the estimates. More-
over, staff, working with required consultants, will compare reserves and also
audit a number of them.
In your final comment (page nine) you state that further evaluation of our
investigation should be withheld until there has been as much public scrutiny
of our investigation as there has been of the NGRS. While I am not convinced
that all aspects of the NGRS have been subjected to public scrutiny (see attach-
ment), nevertheless I support your apparent view that a full evaluation of our
investigation should not be made until it has been completed. If you have occa-
sion to read some of the comments filed with Senator Hart's Subcommittee as a
result of my testimony and my responses thereto, you will discover that others,
by readily assuming that we employed definitions and procedures in our investi-
gation which in fact were not utilized, have already sought to evaluate the def-
initions and procedures ,and, therefore, the results of our investigation. Never-
theless, I welcome these comments as well as yours since they have engendered
the public interest which the situation clearly warrants.
Very truly yours.
Enclosure.
James T. Halverson.
Director, Bureau of Competition.
Attachment
By order of April 6, 1971. the FFC established three advisory committees.
The relevant one for this discussion is the Technical Advisory Committee —
Supply. This committee is headed by Myron A. Wright, Chairman of the Board
of Humble Oil Refining Company (now Exxon USA) with Dr. Paul J. Root. Tech-
nical Director National Gas Survey, serving as the FFC's Coordinating Repre-
sentative and Secretary. On December 21. 1971 a Supply — Technical Advisory
Task Force — Natural Gas Supply was announced by Order of the FFC. This
Task Force is orgahizationally responsive to the Technical Advisory Committee —
Supply. The Task Force Director is Ralph W. Garrett, Exploration Analysis
Manager, Humble Oil and Refining Company (now Exxon USA). Tlie Deputy
Director is Worthy Warnack, Geologist, Humble Oil and Refining Company
(now Exxon USA). Task Force members include employees of Phillips Petro-
leum Company, Union Oil Company of California, Gulf Oil Corporation, Texaco
Incoriwrated, Standard Oil Company (California), Mobil Oil Corporation,
Shell Oil Company. Atlantic Richfield Company, Amoco Production Company,
and United Gas Pipeline Company. Dr. Root is also the Coordinating Repre-
sentative of this group.
This Ta.sk Force and the Advisory Committee — Supply were responsible for
formulating the procedures used in the Study. Although the Ta.sk Force was
first authorized on December 21, 1971, the minutes of an October 21, 1971 meet-
ing of the P]xecutive Advisory Committee indicate that the Task Force on Supply
had its first meeting on September l.l, 1971. This meeting appears to be in direct
contravention of Executive Order 110O7 because the FPC had not as yet author-
158
ized the Task Force's creation nor had it specifically determined on the formal
record that this Task Force would be in the public interest. The Task Force had
an indeterminate number of meetings between September 15 and December 21,
1971. At least one of these meetings was held in Rumble's Office in Houston. No
minutes are available for these meetings which is also in direct contravention
of Executive Order 11007
By another order, also on December 21, 1971, the Commission announced the
procedures of the Study. A portion of the third paragraph is particularly im-
portant, "The Task Force on Natural Gas Supply to the Survey's Supply Tech-
nical Advisory Committee recommended procedures for such a survey and
analysis at its December 14, 1971 meeting." Thus, in addition to this September
15 meeting, there was a December 14 meeting. There are also no minutes available
of the December 14 meeting of the Task Force so it is impossible to tell whether
the FPC had any input at all into the procedures as adopted.
Senator Hart. The committee will be in order.
I am sorry that I was not here when we recessed, having left to
get to a vote on the floor. I would have thanked the chairman and his
associates from the Power Commission for the time they gave ns.
We resimie now to hear from Prof. Howard "W. Pifer, of the Gradu-
ate School of Business of Harvard University.
Professor, I apologize for your having been delayed so long today
and I understand that you are going to permit us to print your state-
ment in full in the record and you will try to develop it through ques-
tions. For those here in the committee room not familiar with the
reason that we believe you can contribute substantially to this record,
I should point out that Professor Pifer was an independent member
of the Power Commission's national gas reserve study and, I be-
lieve, also a member of the Technical Advisory Committee for Supply
for the National Gas Service.
This one paragraph underscores Professor Pifer's expertise :
On April 28, 1972, I agreed to serve on both the Technical Advisorv Committee
for Supply— Tac— of the NGS and the Statistical Validation Team of the NGRS,
stating that my interest in serving on these committees stemmed both from the
realization of the complex energy issues faced by regulatory agencies, in general,
and from an understanding of the technical forecasting problems specifically
associated with estimating natural resource reserves.
Senator Hart. Now, some of the questions.
Your statement and accompanying letter is critical of the sui-vey
and reserve study. Unless there is some feeling that your recent criti-
cism stems from a deep commitment in opf)osition to the suggested
deregidation, I ask you if I do or do not understand you correctly,
that you may come out on the side of deregulation ?
159
STATEMENT OF HOWAED W. PIFER III, PROFESSOR, GRADUATE
SCHOOL OF BUSINESS ADMINISTRATION, HARVARD UNIVERSITY
Professor Pifer. That is quite possible. In my statement, what I
tried to indicate is that I have not taken a position and I believe, as an
independent member of both the Natural Gas Surv^ey and the Natural
Gas Reserve Study, that I should remain independent and be con-
vinced by the information made available. I cannot at this point come
out with a recommendation regarding dei'egulation, and I am con-
cerned primarily with whether we do have a gas shortage.
If I miderstood Chairman Nassikas, he was basically saying, "Tiy
it, you may like it." I am very concerned about that opinion regarding
deregulation. I feel the industry^ has, in general, felt that way. I think
the studies thus far that have been clone to test out social behavior have
been negative. For example, the negative income tax tried in New
Jersey — when people find out something is temporaiy , their behavior
is different. Trying it on a temporary basis, I don't think would work.
In my position at the business school, I teach in an area involved
with corporate planning, and I can think of no company who would
make a significant capital expenditure without first simulating or
attempting to find out how that would be affected by price changes or
Government reactions. That is basically what Chairman Nassikas was
indicating in response to the questions of Senator Kennedy. I think
he is saying no studies will work, let's try it. I think that is erroneous.
If, in fact, after adequate information is collected — hopefully, in the
form of an independent gas survey — the information comes out that
we do have a gas shortage, and possible alternatives do not seem likely
to work, then I would not be opposed to deregulation. I have no policy
position to take at this point.
Senator Hart. Mr. Nash.
Mr. Nasii. Thank you. On page 2 of your testimony. Professor
Pifer. you say despite the natural gas reserve study which you worked
on as an independent member, questions still remain as to the level of
existing reserves and the impact of price on the future supply of gas.
As the chairman testified, these were the two basic questions which
the natural gas reserve study was designed to answer. Do you agree
that tlie study was intended to answer these questions ?
Professor Pifer. The gas reserve study was primarily intended to
determine what proven reserves were as of December 31. 1970. It is in
many ways a very important issue that we point out that it is in 1970
and that it is proven reserves.
The discussion that Senator Kennedy was havins: in the last min-
ute, was retrardino; whether the reserves are proved. There is poten-
tially a tremendous amount of sfas; however, under current economics
it may not be recoverable. So that, in mv opinion, the study came out
"^avins: what the reserves were under those conditions, and yet it could
have come out with much more information as to the impact of price.
160
It never dealt with the impact of price, other than the price in 1970.
We don't know what happens to recovery ratios with a change in
price.
Mr. Nash. Do you believe that tlie study provides there is an ade-
quate basis to conclude there is a gas shortage ?
Professor Pifer. Not in my opinion. There is nothing in the gas
reserve study that deals with the impact of price.
Mr. Nash. I assume you are aware that within the last 3 years, the
price of new gas has almost doubled — in some instances, tripled — and
this has occurred progressively over time. Given your experience in
corporate planning at Harvard Business School, do you think this
type of action will encourage or discourage the additional expendi-
tures for drilling ?
Professor Pifer. I stated on page 1 of my prepared statement my
response to that, and, if possible, I would like to read that :
When evaluating public policy, it is often useful to attempt to understand the
behavioral response of each interest group. Under the current levels of uncer-
tainty in the natural gas industry, no one should be surprised that new additions
to gas reserves have declined. During a period in which anticipated price in-
creases exceed the general rate of inflation by a substantial amount, no rational
businessman would commit a natural resource such as gas to a 20-year contract
in which price escalation would be held to less than the general rate of inflation.
The issue is, in my opinion, that we have seen the price go from 20
cents to 45 cents in southern Louisiana. It is my understanding that
they are now coming in with requests at 65 to 70 cents. There is no
economic rationale for not withholding your reserves. Until there is
some reduction in the uncertainty — and that does not have to be
through deregulation — I suspect they are going to maintain their with-
holding of reserves.
Mr. Nash. Are you saying the piecemeal price increases granted
have enhanced the decision of the companies to Avithhold gas supply ?
Professor Pifer. I think that is correct. In addition, there is the fact
that the escalation rates tied to a contract are not in any way tied to
inflation. Yet, I suspect we are going to have inflation greater than 1.5
percent in the next few years.
Mr. Nash. As I understand, you agreed to serve on the national gas
reserve study and national gas survey, sometime in April 1972. 1 would
like to know what meetings you attended and whether you attended
the initial meetings, and what work was done before you were made
aware that there were meetings to attend ?
Professor Pifer. The first meeting I attended was on September 12,
1972, for the national gas survey. There had been two meetings, one in
December 1971, and another in April 1972. 1 was not invited to tlie one
in April 1972. However, my name appeared as a member of the com-
mittee in the minutes of that meeting wliicli I received yesterday. I
never received minutes of that meeting or future meetings. Therefore,
that study was well underway when I joined it.
In looking back through the minutes, the committee appeared to be
undergoing a significant change and was expanded to bring in mem-
bers of the public, and I assume other meml^ers of the industry. How-
ever, the committee was an advisory committee, and there was very
little in the way of setting policy or actual analysis, so that the work
was underway.
161
With respect to gas reserves study, I attended the first meeting of the
first evahiation team, in May 1972, and we met every other month
in preparation of the gas reserves study. Because of some political con-
straints, in the sense that statements had been made that we would
survey one field in every State and survey every large field, the study
was begun before the committee had met and also before any formal
statement of what the reserve team procedure would be.
]VIr. Nash. If you were on a statistical evaluation committee sup-
posed to evaluate what the reserves in the United States are, who, if
you know, did the work and laid out the procedures before your com-
mittee was constituted ?
Professor Piter. I believe that was done by the field team supervisor.
Mr. Nash. Wlio was that?
Professor Piter. Lawrence Mangen.
Mr. Nash. Was it done solely by him ?
Professor Piter. There was also assistance by a member of our
committee.
Mr. Nash. Was he an industry representative ?
Professor Piter. No; he was from the University of Colorado at
Boulder. His assigimient as part of the statistical evaluation team wa3
to come up with a procedure.
Mr. Nash. Where was most of the work done — at the committee
level or task force ?
Professor Piter. For the national gas survey ?
Mr. Nash. Yes.
Professor Piter. Clearly, on the task force level. The Technical Ad-
visory Committee had only two meetings after my joining on April 28,
1972. One was in September and the fijial was this last March, in
which we basically approved a report which in my opinion was inade-
quate, a summary of more than 1,100 pages of documentation by the
task force. In my statement I go into the detail of it, but I believe 86
percent of the task forces were made up of members of the industry
or Government, excluding the Federal Power Commission, and 60
percent of them were direct rej)resentatives of the industry, and five
of six committees had chairmen and deputy chairmen who were also
members of the industry.
Mr. Nash. On page 14 you refer to the inadequate amount of time
afforded you to review survey reports. Can you tell me who prepared
the reports?
Professor Piter. I suspect that the task force chairmen and col-
leagues, whether from the committee or from his own company, did
the bulk of the drafting of the report. I think the dissenting state-
ments to the regulation and legislation task force specified tliat the
majority of the comments on regulation and legislation were drafted
by membei*s of that committee who were with the industry. That
committee was well represented by lawyers, counsel for several major
oil companies.
Senator Hart. That is another signal for a vote. Professor. If there
is no objection, why don't you and Mr. Nash continue.
Mr. Nash. Thani: you.
Dr. Pifer, can you state whether in any case the task force had a
chairman who was not a representative of the petroleum industry?
Professor Piter. I am sorry.
162
Mr. Nash. You referred to the chairmen of the various task forces
responsible for the drafting. "Who were the specific chairmen of the
task forces ?
Professor Pifer. You want their names ?
Mr. Nash. If you can supply it for the record.
Professor Pifer. The overall head of the Technical Advisory Com-
mittee on Supply was Mr. Myron Wright, chairman of the board of
Exxon. His vice chairman was Mr. William Slick, senior vice presi-
dent of Exxon. On what I consider to be the two most important task
forces were, first of all, natural gas suj^ply, Mr. Ralph Garrett of
Exxon, and his deputy was Mv. Worthy Wardack, also of Exxon. The
other major one was regulation and legislation, and the task force
director there was Mr. Earl Wright, vice president of Texaco, and
Mr. Hammond, associate general counsel, was his deputy.
Mr. Nash. What role, if any. did independent members play on the
task forces ?
Professor Pifer. I can only speak for myself. Very much of the
work was done at the task force level, so the members of those task
forces could have been involved in the final report. I think it is interest-
ing to note that in the regulation and legislation report, the two major
dissenting opinions came from Dr. Schwartz of the FPC and Mr.
Calfee of a public interest group. The reports were never in any way
summarized adequately or prepared for the particular Technical
Advisory Committee. I will point out most of the public interest mem-
bers were on tlie Technical Advisory Committee. Approximately
33 percent of the committee was made up of members of academia,
public interest groups, or corporate representatives not directly in-
volved with the producing industry, so that if you look at the structure
of the supply task force and advisory committee you will find that the
people that are ]:)ublic interest group members wei-e at the advisory
level and not at the operating level, and you will find that tlie amount
of time that we had to read the reports was extremely short.
Mr. Nash. Yes, you indicated you had about 1,100 pages to review.
How much time was afforded to review those pages ?
Professor Pifer. The reports started to come in to us March 22,
1973, and our final meeting was on May 22 ; we had less than 2 months.
One of the main concerns I had, and t tried to voice, was the fact we
did not have a summarv of the, I think, somewhat humorous is-
sue. In my dissenting opinion I tried to point out that the regulation
and leo-isLation task force re])ort proposed deregulation. When I
pointed that out to the technical director of the survey, he asked,
"Where is that reference, I can't find it."' I pointed out to him that it
was on page 126 or 127. His comment was that he tried to find it, but he
looked at only chapter 1, because that deals with the FPC. Mem-
bers of that committee were made up of several general counsels from
gas companies and were basically making statements of policy for the
Technical Advisory Committee.' The Technical Advisory Committee
never received a summary of these.
Mr. Nash. Do you know whether the independent members of the
various coinmittees received copies of re):)orts before they appeared
at a committee meeting to take action respectinir the reports?
Professor Pifer, I can only speak for myself. I did not receive a
copy of the report until I arrived at the final meeting and having re-
163
ceived that copy, I then received, before we discussed it, a revised copy.
So I now had two copies at the meeting- ; I could compare tiiem, which
makes for a very good practice, trying to find out wliere the changes
were.
Mr. Nash. I understand that natural gas reserves study was released
May 17, 1973. Were you provided with a copy of it to make any com-
ments before it was released ?
Professor Pifer. No. I did receive a summary copy of what the
statistical evaluation team report would be. I asked that certain
changes be made. I was told it was too late to do that. I did finally re-
ceive a final copy of the Technical Gas Survey, from Dr. Root on the
3d of June. I was down in Washington on other business right after its
placement in the Public Information Office, and I did receive a copy
of it from there.
Mr. Nash. Let's get into the substance of the survey a little bit. The
survey provided a total number of proved reserves. Did the survey in-
clude offshore reser^'es? Did the natural gas reserves study aggre-
gate proved reserves include offshore reserves ?
Professor Pifer. Only the offshore reserves, proved as of Decem-
ber 31, 1970. It included a reasonably small portion of what are now
proved offshore reserves.
Mr. Nash. You think there were a significant number of reserves not
included in the total ?
Professor Pifer. I think that is true. Another point on that is that
all of the fields offshore in the Federal domain, of southern Louisiana,
were estimated by the USGS, and in fact, some of the data that I had
pointed out were estimates in excess, not lower than the AGA estimates.
Also, they sometimes were made on the basis of their own data, not
on the basis of company data.
Mr. Nash. Let's turn to forecasts of offshore reserves made by com-
panies. Were any forecasts of offshore reserves made by companies
included in tlie report ?
Professor Pifer. Mr. Nash, no forecasts of any reserves were pub-
lished at all. There was a survey done, and in that survey there was
general agreement among the task force to supply only estimated
reserves in the inland regions.
There is a comment by the chairman of that committee in my state-
ment that he would provide documents for offshore projections, if
others would. And no one would. No reserve forecasts were made pub-
lic, and none were made at all offshore.
Mr. Nash. As I remember, the initially approved work program
included the specification that there would be forecasts made of future
supply. Am I correct ?
Professor Pifer. The work force had quite a lengthy and ambitious
list of items. They also were to estimate prices, equipment expendi-
tures, and production, through the year 1990. None of that was done
Mr. Nash. Dr. Pifer, with respect to forecasts provided to the study
group, were any forecasts at all provided to the study group by gas
producers ?
Professor Pifer. Are we talking about the survey or study, Mr.
Nash? In the NGS, forecasts were to be made by individuals and
would not represent confidential information of that firm. Several
firms declined to make any forecasts and instructed its employees not
164
to make any forecasts. Some members of the committee did, in fact,
make forecasts and I believe there were a substantial number of fore-
casts made. However, the task force decided in its final meeting not
to publish these and to give them to the FPC. One of the final discus-
sions was whether or not this should be made public, and after some
discussion it was noted that these would be put in a public file.
]\Ir. Nasii. To the best of your knowledge they exist in a public file
now at the Power Commission ?
Dr. PiFER. I assume so.
Mr. Nash. On page 17 of your testimony. Doctor, you indicate that
there were inherent biases in the study. Could you elaborate on that,
please ?
Dr. PiFER. The first one that comes up is the significant economic
changes to the industry since 1970. The reserves study published
nothing other than the total reserves as of 1970. They also collected
information on gas in place, and gas in place is differentiated from
proven reserves by the recovery ratio assumed. Some assessment should
have been made of the recovery ratio at both 20 and 45 cents because
the recovery ratio would be significantly lower at 20 cents than 45.
The second area was the fact we sampled the fields under 400 million
cubic feet, and that sample was based upon a stratification based upon
the AGA estimate of what the field size should be. This has some po-
tential bias if, in fact, the AGA estimates are lower than what we
would indicate. However, some of the data I presented in exhibit 3 of
my statement point out that there was a tremendous amount of vari-
ability in the ratio the AGA said was in a given field and what the
FPC said. A total of 22 out of 50 fields in the sample we undertook, or
44 percent of them, were off by a magnitude of 100 percent either above
or below what the AGA said.
Mr. Nash. I"''p to how high did the variations go ?
Professor Pifer. They went as low as nothing, where there was said
to be gas, and up to eight times as much.
Mr. Nasti. Were these variables witliin the 1 -percent sample of 50
fields or within the 100-percent sample of 108 fields ?
Professor Pifer. There appears to be less variation in these larger
fields. "What I was describing was only in the smaller fields.
Mr. Nash. If you were trying to find gas not reported by the AGA,
would you expect it to be in the 108 fields which had reserves of 400
billion or more cubic feet or in the small fields ?
Professor Pifer. Clearly, we would expect to find the variation in
the small fields.
Mr. Nash. If you were a member of an evaluating team why did you
choose a sample of 100 percent of the largest fields
Professor Pifer. As I stated before, that was done before the com-
mittee was formed. And we were committed to the 100-percent sam-
pling in the maior fields. It is my understanding that the larflfer fields
were completed about November of last year. This left very little
time to prepare the overall estimate, and so we only sampled 50, or
decided to sample 50, of the smaller fields.
Mr. Nash. We have just been advised that there is another vote on
top of the vote the Senator just left for, and we can relax the rules
to a certain extent. The chairman was hoping he would be back.
165
I suggest that Ave suspend. And after talking with General Counsel
Charles Bangert, we suggest that we submit written questions to you,
because the chairman has at least one more vote. That means another
20 or 25 minutes which would detain us at least until 6 :30.
If it is agreeable to you, sir, we will suspend tlie hearing at this point
and submit the written questions to you. Is that agreeable to you ?
Professor Pifer. Yes.
[The following was received for the record. Testimony resumes on
p. 183.]
Testimony of Howard William Pifer III, Graduate School of Business
Administration, Harvard UNiviaisiTY
I must indicate at the outset that my comments should not necessarily be
taken as opposition in the long run to deregulation. It is my opinion, however,
that the industry, throiigli the National Gas Survey, has not provided sufficient
information for legislators and/or regulators to adequately determine whether
a natural gas shortage exists and, if it exists, whether the shortage will continue
without radical departure to deregulation. Alternatives exist and should be
evaluated.
When evaluating public policy, it is often useful to attempt to understand
the behavioral response of each interest group. Under the current levels of uncer-
tainty in the natural gas industry, no one should be surprised, that new additions
to gas reserves have declined. During a period in which anticipated price in-
creases exceed the general rate of inflation by a substantial amount, no rational
businessman would commit a natural resource such as gas to a twenty year eon-
tract in which price escalation would be held to less than the general rate of
inflation.
Yet that has been the historical record. "When faced with uncertainty — uncer-
tainty whether FPC regulation will continue, what future price levels and allow-
able rates of price escalation will be, what the duration of future delays in rate
determination cases will be, etc. — it makes economic sense for the gas industry
to withhold committing known gas supplies.
If the above is a reasonable representation of management behavior, then legis-
lators and regulators should concentrate on methods of inducing the gas pro-
ducers to increase the supply of natural gas. Reregulation need not be the sole
alternative.
The question still remain as to the level of existing reserves and the impact
of price on the future supply of natural gas. Unfortunately, adequate responses
to these questions cannot, at this time, be made.
The hypothesis that inadequate basic information on both reserves and pro-
jected supplies of natural gas exists to properly evaluate the proposed deregula-
tion legislation results from my involvement with both the National Gas Survey
(XGS) and the National Gas Reserves Study (NGRS).
On April 28, 1972 I agreed to serve on both the Technical Advisory Committee
for Supply ( Supply-TAC) of the NGS and the Statistical Validation Team (SVT)
of the NGRS, stating that my interest in serving on these committees stemmed
both from the realization of the complex energy issues faced by regulatory agen-
cies, in general, and from an understanding of the technical forecasting problems
specifically associated with estimating natural resource reserves.
national gas survey
Upon joining the Supply-TAC, I assumed its role to be (1) the supervision of
the six Task Forces (TF) and their preparation of reix)rts in accordance with
the August 20, 1971 .specification of a work program, and (2) the preparation
of a summary report which would both summarize and integrate the findings
detailed in the TF reports. In my opinion, the Supply-TAC has failed to ade-
quately re.spond to its assignment.
At a time when the stnicture of the U.S. natural gas industry should be
under serious reevaluation. the learned judgment of recognized experts should
be a valuable input to the legislative and regulatory process. In my opinion, the
Supply-TAC report does not adequately meet the criterion of an independent
evaluation of the U.S. natural gas indu.stry due to its failure (a) to require
accountability of its task forces, (b) to properly focus attention upon con-
166
elusions reached by its task forces, and (c) to provide a forum for adequate
discussion of tlie key policy issues raised.
The following comments expand upon my dissenting opinion to the Supply-
TAC Summary Report (Attachment A) and incorixjrate additional comments
regarding the NGRS.
Prior to providing details to support the above-mentioned concerns I vpould
like to briefly describe the structure of the Supply-TAC and its six TFs. I be-
lieve that, in part, this structure precludes an independent evaluation of the
U.S. natural gas producing industiy.
The Supply-TAC is quick to point out that it "represents leaders from the
producing industry, academia, government, consumer-interest organizations,
and other groups." A summary of the membership of the Supply-TAC and its
TFs tends to negate the potential impact of members not representing either the
industry or government (see Exhibit 1). For example, two thirds of the TAG
members were affiliated directly or indirectly with the producing industry and
government (excluding FPC representatives). The remainder represented or-
ganizations and institutions with no direct affiliation with the gas producing
industry.
In order to meet the goals of the NGS, the Supply-TAC recommended the
establishment of six subordinate TFs to conduct its major investigations. Un-
fortunately, these TFs were primarily manned by industry and government
representatives. Eighty-six percent of the combined TF membership were in-
dustry related or government employees and only fourteen percent represented
non-affiliated organizations and in.stitutions. In addition, nearly sixty percent
of all TF members were direct representatives of the producing industry with
all TFs chaired l)y industry members with the exception of the Synthetic Gas-
Coal TF. Thus, the operational segment of the NGS was heavily oriented to-
ward the producing industry. This issue becomes exceedingly important when
one attempts to evaluate the conclusions reached by the Supply-TAC.
(a) To require accountahUitij of its task forces. — In establishing the Task
Force-Supply, the Supply-TAC specified a work program in which the TF-Sup-
ply was asked to :
(a) develop a procedure for verifying gas reserves data,
(b) develop historical data on exploration and development activities and
expenditures, reserve additions, production and deliverability,
(c) define the relationship between oil and gas,
(d) project future gas reserves by area.
(e) project future industry gas production volumes and deliverability by
areas,
(f) estimate the average price of all gas being sold each year,
(g) project overland imports from Canada and Mexico,
(h) project revenue, capital requirements, operating costs, and net
capital requirements for the exploration production sector of the industry,
and
(i) evaluate ffictors affecting natural gas reserve additions, production
and deliverability including :
(1) government regulations
(2) fiscal policies
(3) prices and costs
(4) field compression
(5) federal and state leasing policies
(6) environmental considerations
The detailed list of objectives was snecified in the August 20, 1071 Work Pro-
gram— more than 20 months ago — and is provided as Attachment B.
The first task was accomplished through the National Gas Reserves Study
(NGRS), a topic which I will discuss in detail later. With that exception, the
TF-Supply in my opinion accomnlished nothing !
The final report of the TF-Supply was distributed to members of the TAC
on April 26, 1973 and did not include a supply forecast as detailed in the work
program. Instead, the TF summarized studies by the Potential Gas Committee
and the National Petroleum Council and indicated where the.se documents could
be obtained. I found this response more than one and one-half years after its
initial assignment totally inadequate.
From the outset, the TF-Supply sought new approaches to project future gas
supplies and for this they should be commended. Statements to the effect that a
compilation of existing studies would not be adequate sounded appropriate
167
amidst promises of innovation. Unfortunately, the TF-Supply couclnded, after
completing a forecasting procedure which resulted in regional inland gas supply
forecasts under varying price and offshore leasing assumptions :
"Without specified uniform assumptions or knowledge of the different assump-
tions which may have been used by individual forecasters, the Task Force is of a
consensus that it is not in a position to either endorse or comment on the various
regional forecasts or the consolidation of them for a total inland U.S. forecast.
For these reasons, this report does not include a forecast of supply."
A historical perspective is required to properly evaluate the merits of this
conclusion.
General procedures for preparing gas supply projections were developed by
the TF-Supply and approved by the Supply-TAC at its September 12, 1972 meet-
ing. Upon approval, si^ecific instructions were distributed to TF members and
regional projections of future gas supplies and their related price and offshore
leasing assumptions were forwarded to the Technical Director, National Gas
Survey. These instructions make explicit that : "Each Task Force member should
make his forecast entirely independently of any other Task Force member."
Why. then, after the fact, did the TF-Supply conclude that it was not in a
position to either endorse or comment on the various regional forecasts? Why
did the Supply-TAC accept the TF report which did not (a) project future gas
reserves, (b) project future gas production volumes, (c) develop a technique
for estimating the future average price of natural gas. or (d) project revenue,
oi>erating costs and net capital requirements for the exploration-production
component of the U.S. natural gas industry?
Perhaps the answer to the first question is reflected in the TF-Supply
statement :
"Individual forecasters were left to their own best opinion on several signifi-
cant assumptive items such as (1) future trends in federal ix)licies regarding
taxes and oil imports, (2) industry capital limitations, (3) regional variations
in gas price with respect to the national average, (4) future liquid hydrocarbon
prices, and (5) technological changes."
Yet, before the fact, the TF-Supply clearly specified in its instructions that
each forecaster would be responsible for making his own assumptions regarding
these issues. To fail to publish the regional gas supply forecasts after clearly
specifying the procedure can only suggest, in my opinion, compelling political
reasons for nondisclosure.
Several reasons might be given for the failure of this TF to complete its
task. First, one should investigate the TAC/TF concept to determine whether
such assignments can effectively be completed within the existing organizational
structure. Without a staff assigned directly to the TF which would be responsi-
ble for implementing its work program, the TF is hindered by a committee of
advisors, none of whom are oriented toward the detailed analysis required. In
addition, the composition of the committee and its lack of financial resources
to procure outside analytic services severely limit the TF's ability to overcome
the political implications of any policy statement it might make.
I am not alone in questioning the current organizational structure. Professor
Harbaugh of Stanford in a letter referencing the Supply-TAC Summary report
concluded :
"In preparing the final summary report of the Supply TAG of the National
Gas Survey, I suggest that a new study be recommended to attempt to forecast
future gas supplies. It is unfortunate that the Task Force for Natural Gas
Supply was unal)le to carry out its commission with respect to preparing fore-
casts of future gas supplies on a nation-wide basis. If anti-trust considerations
would continue to preclude such a study by a committee drawn from industry,
perhaps such a study could be carrier out by an independent research
organization."
Second, one should investigate the legal con.straints imposed by the FPC.
The TF-Supply specifically noted in the minutes of its January 16, 1978 meeting
that the responses of TF members to the gas supply forecasting procedure
were constrained by the confidentiality of data as well as possible anti-trust
implications. While the FPC legal rulings often interfered with full industry
disclosure, I have not been convinced that resolution of these legal issues would
have eliminated an implicit unwillingness by industry members to face up to
the task required. Let me be si>ecific by examples :
(1) On page 3 of its final report, the TF concludes: "There was some
opinion within the TF that it is not possible to forecast the future response
of gas supplies to price with enough accuracy to justify the effort."
27-54T 0—74 12
168
(2) On page 4 of the minutes of the July 12, 1972 meeting, it states:
"Some of the people preparing the forecasts indicated that if it is necessary
that all workpapers or source documents be delivered to and maintained
in the FPC's files, then the companies represented would base their forecasts
on public information only ... (it was) suggested (that) the TF might
adapt another forecast such as that prepared by the National Petroleum
Council to meet its needs."
(3) On page 4 of the minutes of the January 16, 1973 meeting, it states:
"(The TF Chairman) indicated that his company prepared offshore esti-
mates for Region 6A (the Gulf Coast Offshore Region) but were reluctant
to submit them because all other companies failed to respond. (His Com-
pany) would still submit offshore projections if other TF members would
volunteer to contribute forecasts of future gas supplies. . . . Another sug-
gestion that elicited considerable discussion was the possible adoption of the
NPC forecasts. . . . Others suggested that the NGS should refer to the NPC
report and that the TF should not submit forecasts for any of the areas. . . .
It was further suggested that consideration be given to an attempt to
secure clearance from the Justice Department which would permit a collec-
tive forecast of offshore supplies by industry representatives on the TF.
There were no responses to this suggestion."
While these exceri^ts are but a few that could be traced to the TF-Supply,
I believe they indicate a basic unwillingness to come to grips with a difficult
task. It is quite likely that the TF-Supply set out with good intentions and was
unable to satisfactorily complete the project. If this is so, then a thorough in-
vestigation of the TAC/TF process should be undertaken in order to provide
legislators and regulators in the future with the valuable input of industry r?pre-
sentatives. Unfortunately, the TAC's acceptance of this inadequate report un-
dermines the credibility of the entire report.
The minutes of the TF-Supply indicate that serious objections to the fore-
casting procedure arose approximately one year ago. While the forecasting
procedure was discussed at the September 12, 1972 TAC-Supply meeting, the
discussion was limited to acceptance or rejection of the proposed method. No
other TAC-Supply meetings were held until May 22, 1972 where the final report
was discussed. During this period, Supply-TAC members who were not on the TF-
Supply were unaware of the problems that existed within the TF and, thus,
were unable to provide alternatives to the final outcome (i.e., no supply fore-
casts).
Without a nationwide forecast of future gas supplies under varying assump-
tions as specified in the work program, the NGS provides no quantitative in-
formation to assist in the valuation of proposed legislation and/or regulation.
(h) To properly focus attention upon conclusions reached hij its task forces. —
A major responsibility of the Supply-TAC was to provide a summary which would
highlight the major findings of the TFs and focus attention on the conclusions
reached by the TFs. Unfortunately, the Supply-TAC Summary Report as pre-
sented at the May 22, 1973 meeting failed to capture the essence of the TFs'
conclusions, leaving the uninformed reader the task of reviewing the support
documents to determine the conclusions of the NGS. This problem was most
notable in the TF-Regulation and Legislation report.
There is little doubt that the TF-Regulation and Legislation was thorough in
its deliberations. Even its vocal critic. Dr. David S. Schwartz, began his minority
opinion bv stating : "There is a great deal of factual and analytical material in
the majority report of the Ta.sk Force." The three hundred page document does
not provide" either an introductory or concluding section; instead, it spreads its
conclusions throughout the exhaustive report. Let me try to state those conclu-
sions which are es.sential to any discussion of future regulation and legislation :
(1) On pages 87 and 8.S of its report, the TF-Regulation and Legislation
concludes: "This trend (i.e. demand exceeding supply) has accelerated and
now calls for new approaches for gas pricing which will allow this premium
fuel to attain its market value . . . The supply-demand imbalance necessitates
an approach which would allow natural gas to reach its commodity value
in a competitive market."
(2) On page 127. the TF-Regulation and Legislation concludes: "Dpresju-
lation of natural gas producers is necessary to help correct the supply-
demand imbalance."
Why were these critical conclusions buried in the TF report? Why were they
not emnhasi^ed in fhe TAC summary?
Fortunately, two dis.senting opinions raised these issues to the surface, so
that the Supplv-TAC Summary Report mentions, in a casual manner.
169
"This report had two dissenting opinions on the conclusions that producer
regulation has been unsuccessful and that deregulation of natural gas producers
is necessary to correct the supply-demand imbalance. The dissenting opinions
state that effective consumer protection necessitates regulation from the well-
head to the burner top and deregulation of natural gas prices could lead to
spiralling wellhead prices which could reach unreasonably high levels."
I do not find it surprising that the TF proposes deregulation as the required
legislation, a general recommendation actively sought by the industry for more
than two decades. What I do find surprising, however, is the manner in which
it was proposed.
The first chapter of the TF-Regulation and Legislation report concentrates
upon the regulatory powers of the Federal Power Commission and concludes
that "an approach which would allow natural gas to reach its commodity value
in a competitive market" is necessary. This conclusion is based on the premise
that past regulatory actions have not worked and have resulted in a serious
imbalance between supply and demand. No quantitative support is given to
support this proposition.
Then, in Chapter Three which was devoted to a summary of legislative pro-
posals through the 92nd Congress, the task force concludes :
"The extent to which natural gas sold in interstate commerce should be
regulated has been considered by Congress on many occasions since the mid-
1930's. However, only the Natural Gas Act and subsequent amendments thereto
have been passed by Congress and enacted into law. More recently, the present
nntionwide shortage of natural gas has caused Congress' attention to be foci; ^eu
on the supply and demand imbalance. A variety of bills have been introduced
which address themselves to this problem.
"It must be concluded that Congress' inaction in this field, coupled, until
recently, with the lack of any prospect for meaningful legislative relief, has had
an adverse effect on supply- demand relationships. Congress is in a better iwsition
to take fundamental remedial action directed to the supply-demand imbalance
than is the Commission whose authority is limited by statute and court decisions,
and who.se actions continue to be subject to challenge in the courts. Deregula-
tion of natural gas producers is necessary to help correct the supply-demand
imbalance."
These conclusions, especially the final sentence, are unsupported by factual
information and underscore the need for balanced representation not only on the
TAC but also the TFs.
It should be noted that the TF-Regulation and Legislation was dominated
by industry representatives. Of the fourteen non-FPC members, ten represented
industry, two were government representatives and two were aflBliated with
public interest groups. Although the TF-Regulation and Legislation report
received several short opinions, the two .substantive minority reports by Dr.
David S. Schwartz (Office of Economics, Federal Power Commission) and David
W. Calfee (Attorney at Law. Public Interest Research G-roup), both members of
the TF, openly question the industry orientation of the report. I find it unfor-
tunate that the composition of this task force was permitted to be so blatantly
biased toward the industry.
(c) To proiHde a forum, for adequate discussion of the key policy issues
raised — The Natural Gas Survey has been in process for more than two years
with less than two months allocated to TAC members for review and comment
upon six lengthy TF reports. In the last .vear. the Supply-TAC has convened
only twice, the aforementioned September 12, 1972 and May 22, 1973 meetings.
With respect to integrative efforts, the committee members were limited to
approximately three hours to collectively review the Supply-TAC Summary
Report with ten days allotted for individual written comments and no time
provided for review of other committee member's opinions. While I appreciate
the urgency associated with energy i.ssues, it is my opinion that the Supply-TAC
was hindered in its ability to wrestle with some difficult policy issues ; the option
being to minimize any integrating efforts of the committees.
Once again, the structure of the TAC/TF organization can be openly questioned.
With an abundance of advisors and no operational staff to assist in the informa-
tion retrieval and report generation phases of the NGS, the TF chairmen have
little option but to depend upon their colleagues (however defined) to assist.
Those that are most willing to volunteer their services generally not only have
a vested interest in the final outcome, but also a similar perspective as the TF
chairmen. When under time pressure to produce a document for public dis-
.semination, a rational man would not actively seek individuals to assist in draft-
ing a report who would oppose the general consensus of the group and, therefore,
prolong deliberations.
170
While the individual TFs were perhaps constrained by deadlines, the Supply-
TAC was under extreme pressure to approve a summary report at its May 22,
1973 meeting. Exhibit 2 highliglits the work schedule of the members of the
Supply-TAC.
Beginning on March 22, 1973 committee members were mailed individual
copies of the TF reports for review prior to the final Supply-TAC meeting.
These reports totaled more than 1100 pages and were not adequately summarized.
Four days before the Supply-TAC meeting, a summary report was distributed
and it was noted that this document, along with the final TF presentations, would
be the major order of business.
This timing placed severe constraints upon committee members who were
not actively supporting a prior po.sition since an understanding of the overall
implications required an inordinate amount of preparation. This time commit-
ment could have been significantly reduced if (a) public interest members had
confidence in the independence of the TF reports, and (b) summaries of the
individual reports had been provided. Without these aids, the ability of the
committee to openly discuss the conclusions reached by the TFs and .summarized
in the Supply-TAC Summary Report was severely limited. Di.scussion was further
hindered at the meeting by the distribution of a revised Supply-TAC Summary
Report which required committee members to compare the two copies for sub-
stantive changes.
After witnessing the May 22. 1973 meeting and reading the summary report,
I submitted a di.'^senting opinion on May 31, 1973 which was hand-carried to
Washington, D.C. to meet the June 1 deadline for comments. On June 5, 1973
the Technical Director of the NGS informed committee members that the due
date had been extended until June 22, 1973 to permit members an opportunity
to submit conunents after reviewing the final copy of the summary report and to
permit reactions to written comments submitted by other members. On June 11,
1973 the Technical Director distributed copies of three letters (mine included)
which were in response to the original June 1 deadline.
Since that time, I have not received additional communications. Unfortu-
nately, the process of specifying an unreasonably short deadline and then, after
the fact, extending the deadline does not elicit the same response level that an
initial announcement of a one month deadline would have.
National Gas Reserves Study
On May 17, 1973 the Federal Power Commission released the NGRS and noted
that :
"An independent government study carried out under the direction of the
Federal Power Commission shows that the nation's proven recoverable natural
gas reserves totaled 261.6 trillion cubic feet at the end of 1970. nearly 10 percent
below the American Gas A.ssociation's estimates for that date."
The FPC staff report concluded :
"(This Study) is a highly significant first step, but still just that. It is
imperative that the United States, so dependent upon its own fossil fuel resources,
have a continuing program to provide government and industry planners with a
comprehensive, accurate and credible inventory of our proven fossil fuel re-
sources. The primary goal of this program was to establish, on a consistent basis,
a conclusive estimate of the proven reserves of natural gas available under exist-
ing economic and technical conditions. That goal has been achieved. However,
much more information is needed to complete the evaluation. A similar appraisal
of the Nation's oil reserves should be undertaken : de'iverability studies to deter-
mine optimum rates of production should be made; further economic studies
should be conducted to assess the response of resource base development to eco-
nomic stimuli ; and a combined state and federal effort to improve the energy
data gathering, storage and retrieval effort should be initiated."
I heartily agree that the NGRS is a significant first step : but one which leaves
many questions unanswered and raises many doubts about the data collection
process employed. Having been associated with the NGRS as a member of the
SVT, I must preface my remarks by publicly stating that the FPC staff, to the
best of my knowledge, fulfilled its responsibility in a professional manner.
Unfortunately, there were inherent biases in the study which, when coupled \^'ith
the limited amount of information reported, severely restricts the value of this,
the first NGRS. In fact, the staff recommendation to immediately update the
study .so that an independent estimate of the nation's proven gas reserves are
available for the year-end 1972 should be a prerequisite for legislative action.
In addition, the information collected and made available to the public should
be greatly expanded.
171
The data collection and information reporting procedures employed within
the NGRS maintained the confidentiality of company records. The details of
these procedures are outlined in the NGRS and I will only comment on key
areas of concern.
(1) reserve team estimation of reserves — The process of estimating reserves
can he segmented into four components : (a) geological samp'es, (b) primary
raw data which is the result of laboratory tests using the geological samples,
(c) gas-in-place which is determined by well-specified empirical relationships
using the primary raw data, and (d) recoverable reserves which are determined
by applying a recovery ratio to the gas-in-place measurement. This process is
depicted in Figure 1.
At the May 10, 1972 meeting of the SVT, the field team Supervisor described
the procedure being utilized by the reserve teams to estimate gas reserves and
outlined three areas where subjectivity was employed: (a) interpreting geologi-
cal test data (for example, electrical well surveys, core analysis, si>ecific gravity,
formation temperature, reservoir pressure, etc.), (b) calculating gas-in-place,
and (c) determining recovery eflSciency. In accordance with instructions from
the field team Supervisor, reserve teams perform two types of reserve estimates —
in-depth analysis which begin with the raw data, and evaluations which employ
company-developed parameters to calculate gas-in-place. At that time, the in-
depth procedures were generally being vised. The field team Supervisor noted
that reserve team members had expressed concern that the current procedures
did not provide suflScient time to adequately estimate gas reserves. Unfortunately,
the final report does not describe the frequency with which each procedure
was employed. If time pressures resulted in an increasing number of evaluations,
the independence of the data collection procedures could be susi^ect.
(2) reserve team reporting to supervisor — After completing the analysis of all
reservoirs within a given gas field, the reserve team leader phoned the field
team supervisor and reix)rted both associated and non-associated reserve esti-
mates on a reservoir-by-reservoir basis while in the presence of a company rep-
resentative. The NGRS summarized the procedure as follows :
"The field team Supervisor, compared the indei^endent field reserve estimates
with reserves estimates from the A.G.A. At his discretion, he could call for a re-
check if the work of a resei've team or a re-examination of the data by a reserve
team of his choice. A final reserve estimate for each field was transmitted to
the Independent Accounting Agent."
Minutes of the May 10, 1972 Meeting of the Statistical Validation Team record
the following description of the process and the reaction of SVT members :
"To determine the magnitude of errors within the reserve team estimation
procedure, Mr. Miesch (USGS) suggested that for a sample of gas fields two
reserve teams be independently sent to estimate reserves. (The Supen'isor)
noted that the reserve teams notify him of the estimated reserves within a field
by telephone. If these estimates differ significantly from AGA reserve estimates,
tiie reserve team must check their calculations. Other validation team members
pointed out that this was not necessarily equivalent to the independent estimates
suggested l>y Mr. ^Miesch."'
Thus, the above comments suggest that the field team supervisor received the
reserve estimatefi by phone and, after comparing them with AGA estimates,
aggregated the reservoir-by-reservoir estimates and tran.smitted the field esti-
mate to the Independent Accounting Agent. After receiving the Supervisor's
acceptance of the field reserves estimate, the field teams collected their working
papers and placerl them in a sealed envelope for maintennnce by the FPC.
While this procedure painstakingly guarded the confidentiality of records,
it limited subsequent analysis of reserves since the only individual who has seen
the fieUl-bv-fip1d reserve estimates is the field team Supervisor.
(3) analysis of reserve estimates — In a memorandum to SVT members dated
July 27, 1972 I proposed a statistical procedure based upon regression analysis
which could be employed to explain difference between the NGRS and AGA re-
serve pstimates. While the classical analysis of variance technique used within
the NGRS report eliminated any dependence upon the AGA reserve estimate, the
regression procedure provided additional information which could be extremely
useful in describing the sampling procedures and the relinbility of the sample.
Although this procedure was not included in the NGRS report, the SVT
concluded : , i -u- i,
" some experimental work was done using a regression model which
makes it possible to examine the ratio of A.G.A. reported field reserves to field
team reported reserves, as affected liy size, field discovery data, geographical
region, resen-oir tvpe. team and other pertinent factors . . . The regression
172
analysis method will be examined further and will be the subject of a future
report by the Statistical Validation Team."
In developing the data base for the above-mentioned procedure, the field team
Supervisor provided Mr. William Munroe of the FPC with, among other data,
the ratio of AGKS re&erves estimate to AGA reserves estimate for each gas
field included in the study. In this manner, the actual estimates of reserves
remained confidential.
Preliminary analysis of these data has been conducted by Mr. Munroe. At
an April 4 meeting at the FPC, I requested the base data to continue the analysis.
As a first step, I attempted to summarize the data as shown in Exhibit 3.
Thus, while the NGRS reported associated and nonassociated gas reserves
of 228.5 TCF (a ratio of NGRS reserves estimate to AGA reserves estimate of
.9067), the variability among individual field estimates (once again, as measured
by the ratio of NGRS to AGA reserves estimates) is significant. For example,
33 fields out of the 159 observations resulted in a difference between the FPC
(NGRS) and AGA reserves estimate of more than 100 percent (i.e., ratios
of 0.50 or less than 2.00 or more) ! This compares with only 47 fields which were
within ±10 percent. These significant differences should be reexamined.
As a second step in the analysis, I attempted to determine whether gross
differences existed among estimating teams and whether significant differences
existed between the sample of 50 fields with less than 400 BCF and the complete
population of fields with more than 400 BCF. The results are summarized in
Exhibit 4. As indicated in the previous exhibit, the sample of smaller fields
showed significantly greater variations between the NGRS and AGA estimates.
Perhaps the most surprising result is the significant difference between the
average ratio for those fields estimated by the FPC [.8702] and those reported by
the USGS [1.0507] and U.S. Navy [1.0566] reserve teams. These preliminary
results indicate that the USGS and U.S. Navy estimates that the proved reserves
exceed the AGA estimates by more than five percent; whereas, the FPC teams
found that the reserves in these large fields were 13 percent below the AGA
estimates. It should be noted that the USGS concentrated on those fields in the
Federal Domain, Offshore Louisiana, where they had developed their own basic
raw data and, therefore, did not rely on company-supplied information. In addi-
tion, the U.S. Navy concentrated on Alaskan fields. Both of these locations are
areas in which significant new additions to reserves are expected. In my opinion,
these surprisiag differences among reserve teams should be investigated further.
(4) information released to public — 'Perhaps the most disconcerting aspect of
the NGRS was the lack of data released to the public. The sum total of use-
ful quantifiable information can be summarized in the form of Exhibit 5. Under
the assumption that this direct comparison might compromise the independence
of the study, the NGRS and AGA data were compiled in separate tables (re-
spectively, Table 5 and Table 2 of the SVT report). Little can be gleaned from
this information that would be useful to legislators and regulators other than
the fact that the overall NGRS estimate of proved recoverable reserves as of
December 31, 1970 under 1970 economic conditions were 90.6 percent of the AGA
reported estimate of proved recoverable reserves.
Many more questions could be asked by legislators and regulators — and should
be asked and subsequently answered — as part of the evaluation of legislative
proposals for modifications in the regulation of the U.S. natural gas industry.
For example, three of the most important would be :
(a) What was the total estimated gas-iu-place and the average recovery ratio
used within the NGRS?
(b) What is the implied relationship of the recovery ratio to an increase in
the wellhead price of natural gas?
(c) Were there significant regional differences between the NGRS and AGA
reserve estimates? If so, where?
Responses to these questions could assist in the evaluation of the impact of
price upon gas supply. Unfortunately, this concept was not included in the
NGRS even though the information was gathered to determine the proved re-
coverable reserves as previously described. This shortcoming, coupled with the
failure of the TF-Supply to publish a forecast of future supply, severely limits
the public policy value of both the NGS and the NGRS.
National concern over energy issues should not compel legislators and/or
regulators to seek radical alternatives. Additional information should be col-
lected and analyzed before recommending alternative legislation to the current
Natural Gas Act. This need not imply that existing regulation should not be
modified to reduce present uncertainty.
173
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174
EXHIBIT 1
SUPPLY COMMITTEES MEMBERSHIP BY AFFILIATION (EXCLUDING FPC REPRESENTATIVES)
[In percent]
Affiliation of members (percentage distribution)
Technical
advisory
committee
Tasl< forces
(combined)
Producing industry... --- 40.7
Government J4-8
Corporate (related to producing industry)... .- H. 1
Subtotal 66.7
Corporate (other)
Academic institution
Public interest group..
Subtotal - 33.3
Total 100.0
7.4
22.2
3.7
3.7
59.8
18.7
7.5
86.0
4.7
7.5
1.9
1.9
14.0
100
EXHIBIT 2
1973 WORK SCHEDULE FOR SUPPLY-TAC
Distri-
bution Length
IF report date (pages)
Regulation and legislation -- Mar. 22 304
Reformergas --- Apr. 6 85
Natural gas technooogy Apr. 9 296
Natural gas supply Apr. 26 71
Liquified natural gas (LNG) - --- May 7 181
Snythetic gas- coal May 11 172
Total .-.. - -- 1.109
Supply-TAC summary report' May 18 MS
Final meeting of Supply-TAC. -- May 22
1 It should be noted that the Supply-TAC summary report was not distributed to all members prior to the May 22, 1973
meeting.
- Pages plus attachments.
EXHIBIT 3
DISTRIBUTION OF NATURAL GAS RESERVE ESTIMATES
Sample of fields less than
400 BCF
Fields mih 400 BCF
or more
Ratio of FPC estimate to AGA estimate
Number of
fields
Percentage
Number of
fields
Percentage
Less than 0.50...
0.50 plus to 0.90.
0.90 plus to 1.10-
1.10 plus to 2.00.
More than 2.00..
18
10
10
8
4
36
20
20
16
8
11
39
37
2e
10.1
35.8
33.9
20.2
50
100
1 109
100
> 2 fields were each estimated by 2 different reserve teams; 1 field was misclassified and had no associated or non-
associated reserves (only dissolved).
175
EXHIBIT 4
RATIO OF FPC TO AGA RESERVES ESTIMATES
Statistical measures
Means
Standard
error
Sample of 50 fields witfi less than 400 BCF.-. .9871 1929
109 fields 1 with 400 BCF or more .9001 0319
91 fields estimated by FPC. .8702 .0350
16 fields estimated by USGS teams 1.0507 .0738
2 fields estimated by U.S. Navy 1.0566 . ^92 7
1 2 fields were each estimated by 2 different reserve teams; 1 field was misclassified and had no associated or non-
associated reserves (only dissolved).
EXHIBIT 5
ESTIMATES OF PROVED RECOVERABLE GAS RESERVE
(All volumes in billions of cubic feet]
Size of field
NGRS estimate
AGA estimate
Number
Average
Total
Average
Total
of fields
field size
reserve
field size
reserve
1, 879
2.1
3,910
0.4
723
1, 822
1.3
2,412
2.5
4,546
719
5.7
4,101
7.2
5,194
1,200
15.0
18,019
22.5
27, 048
509
82.0
41,723
96.6
49, 155
121
280.1
33, 891
276.0
33, 396
108
1, 152. 1
124, 429
1,223.2
132, 109
6.358 _
228.484 _
252. 170
0 < Fields < 1..
1 < Field < 5...
5 < Filed < 10-
10 < Field < 50..
50 < Field < 200
200 < Field < 400
400 < Field
Total
Attachment A
Harvabd University,
Graduate School of Business Administration,
George F. Baker Foundation,
Boston, Mass., May 31, 1973.
Dr. Paul J. Root,
Technical Director, National Oas Survey, Federal Power Commission,
Washington, B.C.
Dear Paul: After witnessing tlie May 22, 1973 meeting of the Technical Ad-
visory Committee-Supply and reading its Summary Report, I would lilve to com-
ment upon both subjects from the perspective of a public interest member of
that Committee.
Upon joining the Technical Advisory Committee-Supply (TAC) on May 10,
1972 I assumed its role to be (1) the supervision of the six Task Forces (TF)
and their preparation of I'eports in accordance with the August 20, 1971 specifi-
cation of a work program and (2) the preparation of a summary report which
would both summarize and integrate the findings detailed in the TF reports.
In my opinion, the TAC-Supply has failed to adequately respond to its
assignment.
Perhaps the mo.st disappointing element has been the failure of the TAC
to hold individual Task Forces responsible to their assignments as clearly speci-
fied in the August 20, 1971 memorandum. Quite frequently committee members
suggested that Federal Power Commission "constraints" interfered with the
committee's ability to effectively complete its task. While the FPC legal rulings
often interfered with full industry disclosure, I have not been convinced that
resolution of these legal issues would have eliminated an implicit unwillingness
by industry members to face up to the task required. Let me be specific by pro-
viding examples.
176
EXAMPLE I
From the outset, the Technical Advisory Tasli Force-Supply sought new ap-
proaches to project future gas supplies and for this they should be commended.
Statements to the effect that a compilation of existing studies would not be ade-
quate sounded appropriate amidst promises of innovation. Unfortunately, the
TF-Supply concluded, after completing a fox-ecasting procedure which resulted
in a signilicant number of regional inland gas supply forecasts under varying
price and offshore leasing assumptions :
"Without specified uniform assumptions or knowledge of the different assump-
tions which may have been used by individual forecasters, the Task Force is
of a consensus that it is not in a position to either endoi'se or comment on the
various regional forecasts or the consolidation of them for a total inland U.S.
forecast. For these reasons, this report does not include a forecast of supply."
A historical perspective is required to properly evaluate the merits of this
conclusion.
General procedures for preparing gas supply projections were developed by
the TF-Supply and approved by the TAC-Supply at its September 12, 1972 meet-
ing. Upon approval, specific instructions were distributed to TF members and
J20 regional projections of future gas supplies and their x-elated price and off-
shore leasing assumptions were forwarded to the Technical Director, National
Gas Survey. These instructions make explicit that : "Each Task Force member
should make his forecast entirely independently of any other Task Force
member."
Why then, after the fact, did the TF-Supply conclude that it was not in a
position to either endorse or comment on the various regional forecasts'^ Why did
the TAC-Supply accept the TF report which did not (a) project future gas re-
serves, (ft) project future gas production volumes, (c) develop a technique for
estimating the future average price of natural gas, or (d) project revenue ope?--
ating costs and net capital requirements for the exploration-production
component of the U.S. Natural gas industry?
Perhaps the answer to the first question is reflected in the TF-Supply state-
ment:
"Individual forecasters were left to their own best opinion on several signifi-
cant assumptive items such as (1) future trends in federal policies regarding
taxes and oil imports, (2) industry capital limitations, (3) regional variations
in gas price with respect to the national average, (4) future liquid hydrocarbon
prices, and (5) technological changes."
Yet, before the fact, the TF-Supply clearly specified in its instructions that
each forecaster would be responsible for making his own assumptions regarding
these issues.
To fail to publish the regional gas supply forecasts after clearly specifying the
procedure can only suggest, in my opinion, compelling political reasons for
nondisclosure.
Example 11
There is little doubt that the Supply-Technical Advisory Task Force-
Regulation and Legislation was thorough in its deliberations. Even its vocal
critic. Dr. David S. Schwartz, began his minority opinion by stating : "There
is a great deal of factual and analytical material in the majority report
of the Taslv Force." The three hundred page document does not provide either
an introductory or concluding section ; instead, it spreads its conclusions tJirough-
out the exhaustive report. Unfortunately, the TAC-Supply Sinnmary report as
presented at the May 22, 1973 meeting failed to capture the essence of the
TF's conclusions. Let me try to state those conclusions which are essential to
any discussion of future regulation and legislation :
(1) On pages 87 and <S8 of its report, the TF-Regulation and Legislation
concludes :
"This trend (i.e., demand exceeding supply) has accelerated and now calls
for new approaches for gas pricing which will allow this premium fuel to attain
its market value . . . The supply demand imbalance necessitates an approach
which would allow natural gas to reach its commodity value in a competitive
market."
( 2 ) On page 127, the TF-Regulation and Legislation concludes :
"Deregulation of natural gas producers is uecessarj' to help correct the supply
demand imbalance."
177
Why were these critical conclusions buried in the TF Report? Why were they
not emphasized in the TAC summary report?
Fortunately, two dissenting opinions raised these issues to the surface, so that
the TAC Summary Report mentions, in a casual manner :
"This report had two dissenting opinions on the conclusions that producer
reguhition has been unsuccessful and tliat deregulation of natural gas producers
is necessary to correct tlie supply -demand imbalance. The dissenting opinions
state that effective consumer protection necessitates regulation from the wellhead
to the burner tip and deregulation of natural gas prices could lead to spiralling
wellhead prices which could reach unreasonably high levels."
At a time ^^hen the structure of the U.S. natural gas industry should be under
serious reevaluation, the learned judgement of recognized experts should be a
valuable input to the legislative and regulatory process. In my opinion, the
TAC-Supply report does not adequately meet the criterion of an independent
evaluation of the U.S. natural gas industry due to its failure (a) to require
accountability of its task forces, (b) to properly focus attention upon conclusions
reached by its task forces, and (c) to provide a forum for adequate discussion
of the key policy issues raised. While tiie TAC-Supply is quick to point out that
it '"represents leaders from the producing industry, academia, government, con-
sumer-interest organizations," the overwhelming majority of membei-s are from
the producing industry and/or have been closely associated with the industry in
the past.
The Natural Gas Survey has been in process for more than two years with less
than one month allocated to TAC members for review and comment upon six
lengthy TF reports. In the last year, the TAC-Supply has convened only twice, the
aforementioned September 12, 1972 and May 22, 1973 meetings. With respect
to integi'ative efforts, the committee members were limited to approximately three
hours to collectively review the TAC-Supply Summary Report with ten days
allotted for individual written comments and no time provided for review of
other committee members' opinions. While I appreciate the urgency associated
with energy issues, it is my opinion that the TAC-Supply was hindered in its
ability, to wrestle with some difHcult policy issues ; the option being to minimize
any integrating efforts of the committees.
These are unfortunate conclusions. I would have hoped that the TAC-Supply
could have faced these issues squarely and provided information for tlie analysis
of future industry policies. Instead, the committee decided to avoid its responsi-
bilities, leaving the decision-makers and the public without adequate information
to properly evaluate the radical alternatives under consideration. In this environ-
ment the political pi'ocess, rightly or wrongly, holds the day.
Sincerely yours,
Howard W. Pifer.
Attachment B
National Gas Survey — Supply Technical Advisory Committee — Work
Program
All data items will be developed on a quantity-per-annum basis. Annual his-
toric quantities will be reported for the years 1950, 19.55, 1960, 1965, and 1970
and forecasts will be reported for 1975, 1980, 1985, and 1990.
I. natural gas supply task force
A. Develop a procedure for verifying or auditing the AGA/API gas reserves
data which will be satisfactory to independent experts, government, and natural
gas industry people.
B. Develop historical data on natural gas industry exploration and develop-
ment activities and expenditures, re-serve additions, production and productive
capacity ( deliverability ) .
C. Define the relationship between oil and gas and establish a basis for oil
which will permit the Task Force to direct its primary effort to natural gas.
D. Project future industry gas reserves additions by years using, if such proves
to be appropriate. Potential Gas Committee assessments as a starting point.
Projections should contain enough areal breakdown to facilitate subsequent
"alternate cases" investigations and to provide data essential to the Transmis-
sion Technical Advisory Committee ; the area breakdown used by the Potential
Gas Committee in their report as of December 31, 1970, can probably be adapted
to this need.
178
E. Project future industry gas production volumes and productive capacity
(deliverability) by areas.
F. Develop a technique for estimating the average price of all (new and old,
interstate and intrastate) gas being sold each year during the forecast period.
G. Project overland imports from Canada and Mexico, considering resource
base, local requirements, probable levels of exploration activity and success, and
suflBcient U.S. demand to utilize all available overland imports.
H. Project (a) revenue, (b) capital requirements, (c) operating costs, and
(d) net capital requirements for the Exploration-Production component of the
U.S. natural gas industry.
I. The foregoing would be developed with emphasis on completing estimates
for a "base case" set of conditions. Subsequent cases will evaluate factors affect-
ing natural gas reserve additions, production, and productive capacity including :
1. Government regulations
2. Fiscal policies (including taxes)
3. Prices and costs (supply elasticity)
4. Field compression
5. Federal and state leasing policies
6. Environmental considerations
7. Others as may be appropriate
Federal Power Commission,
Washington, D.C., December 1, 1972.
Dr. Paul J. Root,
FPC Sun^ey Coordinating Reprefientativc and Secretary, Supply-Technical Advi-
sory Task Force — Regulation and Legislation, National Gas Survey, Federal
Power Commission, Washington, D.C.
Dear Dr. Root : In compliance with the arrangements formulated at the Novem-
ber 16. 1972 meeting, I am submitting a minority (dissenting) report to the
majority report of the Supply-Technical Advisory Task Force — Regiilation and
Legislation.
I would appreciate your circiilating the attached report to the advisory per-
sonnel and members of the Task Force to determine whether they endorse the
analysis and conclusions and are willing to join me in signing the minority
report.
Sincerely yours,
David S. Schwartz,
Assistant Chief, Office of Economics.
Enclosure :
minority (dissenting) report
Supply-Technical Advisory Task Force — Regulation and Legislation*
There is a great deal of valuable factual and analytical material in the
majority report of the Task Force. The various sections of the report dealing
with regulatory controls by state and local authorities over independent producer
sales, domestic gas supplies in the lower 48 states, Alaskan gas supplies, imports
(Canadian) and exports of natural gas, and supplemental supply sources (LNG,
coal gasification, nuclear stimulation, and synthetic natural gas) offer a wealth
of empirical analysis and a valuable historical document.
My reserva'tions and the basis for this dissenting statement relate to portions
of the analysis and the ultimate conclusions contained in Section I, Regulatory
Powers of Federal Power Commission Over Natural Gas Sales by Natural Gas
Producers, and Section III. Past and Present Legislative Proposals. The coupling
of these two sections provides the heart of the recommendations of the drafting
team consisting wholly of industry members. In essence, the report concludes as
follows :
1. Producer regulation has been unsuccessful ;
2. Commission disregard of the "commodity value" of gas and adherence to
"arbitrary, imprecise, and subjective cost estimation technique" for ratemaking
has resulted in inadequate gas supply at the lowest reasonable rate ; and
3. Deregulation of natural gas producers is necessary to correct the supply-
demand imbalance.
♦The views and opinions expressed in this Report are entirely personal and submitted
in tlie writer's capacity as a Federal Power Commission representative on the Tasl< Force.
They do not necessarily reflect the views of the Commission Staff or Office of Economics.
179
To assess the validity of these conclusions and recommendations it is neces-
sary to examine the framework of reference in which the analysis unfolds. Once
the four corners of a problem are laid out the bounds are set. Factual materia]
as well as analytical conclusions must tit the mold. Fundamentally, I disagree
with the perspective of the majority report because I think it is premised on a
"private interest"' orientation and not the public interest standard which must
motivate the Commission's regulatory activities under the Natural Gas Act.
The recommendation for deregulation is a mirror image of the persistent pur-
suit of this objective by the industry generally for more than two decades. In
the recent meetings of the American Petroleum Institute (the major oil indus-
try trade association), the first policy statement on energy issued called for the
termination of the regulation of wellhead prices of natural gas as soon as
ix>ssible.^
As an indication of the report's failure to comprehend the Commission's respon-
sibility, and. of course, this is an advisory report to the Commission, nowhere is
there any mention of the responsibility in line with the Supreme Court's CATCO
decision - which charges the Commission to "afford consumers a complete, per-
manent and effective bond of protection from excessive rates and charges." This
is the broad purpose of the Natural Gas Act which delegates to the Commission
the responsibility of prescribing just and reasonable rates. The majority report's
assessment of the landmark Phillips decision^ by the Supreme Court placing
natural gas producer sales under Commission jurisdiction is presented in a nar-
row legalistic context with the major emphasis on the dissenting opinions of a
minority of the Court. Nowhere is there an indication of the broad "public inter-
est" basis for the decision to place independent producers under regulation.
The Court in this case emphasized that the regulation of the sales of independ-
ent producers in the interstate commerce did not differ essentially from the sales
made by an aflBliate of an interstate pipeline company. The Court stressed :
"In both ca.ses, the rates charged may have a direct and substantial effect on
the prices paid by ultimate consumers. Protection of consumers against exploita-
tion at the hands of natural gas companies was the primary aim of the Natural
Gas Act."
The strength and logic to the deregulation argument rests on the assumption that
there is effective competition in the producer industry. If this were a fact, there
would be no logical basis for the original Phillips decision.
The Commission at numerous times has addressed this fundamental issue of
whether the market is adequately competitive. In the first area rate decision
(Permian Basin), the Commission said :
"There are admittedly many producers selling gas to the interstate pipelines
both in the nation as a whole and the Permian Basin in particular, but nothing
in this record suggests that any competition among them in making sales to the
pipelines is in any way adequate to assure that the public will secure gas at just
and reasonable prices in the absence of regulation.
The Commission in Permian further said :
". . . that the supply of gas controlled by the producers is so restricted in rela-
tion to demand that they have economic power to bargain for prices that will
be injurious to the public."
Lastly, they concluded :
"There is no evidence of competition between producers to make new sales
by offering lower prices. On the contrary the primary competition revealed by
the record was among the pipelines to secure new gas supplies at higher prices.
"Whatever the degree of competition which may exist among producers it has
not been effective to afford gas consumers the protection to which they are en-
titled under the Natural Gas Act." *
In the South Louisiana area rate proceeding, the Commission considered the
effectiveness of competition by examining the history of price movements in
South Louisiana. After pointing to the stability of unregulated field prices through
19.50 at levels not exceeding 9<?/Mcf, the Commission pointed to the ever-
escalating prices in this area from 1951 until a peak in 1958 in which the initial
1 "Oil Group Warns of Energy Ills" (William D. Smith), The New York Times, Nov. 14,
1972.
-Atlantic Refining Company v. Public Service Commission of New York, 360 U.S. 378,
3.<5R flO.'iS).
3 Phillips Petroleum Co. v. State of Wisconsin, .347 U.S. 672 (1954).
* Opinion No. 468 issued Aug. 5, 196,5.
180
price of gas reached a level in excess of 244/Met. In the two years between 1951
and 1953, price levels more than doubled. This rise could not be accounted for by
general inflation because the Wholesale Price Index moved downward in the
1951-1953 period. It points directly to market imperfections which challenge the
contention of a "free and competitive market." The Commission in South Louisi-
ana stated that :
"Based upon this analysis we must conclude that there are serious market
imperfections which preclude us from relying upon the free operation of the
market, as evidenced by arms' length bargaining, to protect the ultimate con-
sumer from unreasonable purcha.sed gas rates." ^
The absence of effective competition and the importance of costs as a regulatory
criterion was recognized by the Supreme Court in its affirmance of the Permian
decision when it said :
"The field price of natural gas produced in the Permian Basin has in recent
years steadily and significantly increased. These increases are in part the prod-
ucts of a relatively inelastic supply and steeply rising demand ; but they are also
symptomatic of the deficiencies of the market mechanism in the Permian Basin.
Producers' contracts have in the past characteristically included indefinite
escalation clauses. These clauses, in combination with the price leadership of a
few large producers, and with the inability or unwillingness of interstate pipe-
lines to bargain vigorously for reduced prices, have create<l circumstances in
which price increases unconnected with changes in cost may readily be obtained."
(footnotes eliminated )°
The majority report is too myopic and confining in assessing the importance
of producer regulation. Fundamental to the initial determination to regulate
producers is the awareness that the natural gas producing industry is an integral
part of an essential industry (vested with the public interest) rendering an
important public service. Producers and consumers are interconnected through
a pipeline network and consumer protection can only be achieved by regulating
wellhead prices in the field, rates charged by pipeline transmission companies,
and ultimately regulation of local distribution company charges. Currently,
approximately forty million residential consumers depend upon the use of
natural gas in their hoiiseholds and are firmly tied by reason of their investment
in gas-burning equipment ; therefore, effective consumer protection necessitates
regulation from the wellhead to the burner tip.
The deregulation of wellhead prices would result in serious misallocation of
resources as well as unjustifiably high prices in the short run as well as the
long run. In the immediate future, given the relatively large unsatisfied demand
for gas, deregulation of natural gas prices could lead to spiralling wellhead
prices to abnormally high levels which could be built into long-term sales con-
tracts (the typical pipeline contract for gas is for 20 years) which would be
much higher than the equilibrium price level that would obtain given more
stable conditions in the long term. This is particularly true because there is
evidence that gas supply is relatively inelastic (unre.sponsive to price changes)
in the short run.
To examine the long-run implications of deregulation requires an assessment
of producer industry structure. The rationale for deregulation of the industry
is postulated on the premise that market forces in a workably competitive
structure would bring about the lowest cost alternative and efficient resource
allocation. If, in fact, the industry is not workably competitive and the market
structure reflects institutional imperfections, then the conver.se is true ; that is,
the potential for higher prices than would exist under competition, and excess
profits as well as resource misallocation will result.
One of the key arguments postulated by producers is that concentration is low
and therefore the industry is workably competitive. The latest FPC statistics
indicate that the largest 25 domestic producers (.selling over one billion cubic
feet of gas) in 1970 sold nearly 72% of the gas supplied to interstate markets.''
In contrast to other industry sectors, this degree of concentration, standing alone,
is not especially high. However, the use of the concentration ratio in the gas
producing industry is inappropriate and unreliable as a measure of market con-
duct and performance. Firstly, the current production and sales refiect supplies
under old contracts as well as new gas, of which the major portion is already
5 Opinion No. 546 issued Sept. 2.5. 1&68.
8 Permian ftnftin Area Rate Cnxes. .390 U.S. 747 MftfiS).
''Sales by Producers of Natural Oas to Interstate Pipeline Companies 1970, Federal
Power Commission.
181
committed under long-term purchase contracts. The relevant supply factor to
measure concentration is the amount of new supplies brought to the market.
Obviously, the amount of new gas provided would indicate a much higher con-
centration by the major producers. Secondly, the concentration ratio is deceptive
because in the case of the gas producing industry it ignores the fact that major
producers typically pool their capital in any large and risky undertaking (for
example, offshore). As a result, these large sales of reserves are by combinations
of large and small producers either under a single contract or as cosignatories
under separate but identical contracts. Equally important is the fact that small
producers are dependent uijon the majors for a portion of their financing and
as in oil the majors are the price leaders. In addition, there is the added benefit
from higher gas prices because the interfuel relationship permits producers to
obtain higher prices for oil products which compete with gas in the end-market.
It is the decision of the majors which conditions market strategy and provides
a "community of interest" in presenting a united front in the dealings with pipe-
line companies. More importantly, the institutional arrangements are designed
to provide new reserves as a package to prospective pipeline purchasers and not
as individual supplies by single sellers offering their reserves in competition with
one another. Therefore, independent price action and aggressive price competition
among producers for sales to pipelines is a rarity.
The characteristics of a workably competitive market must embody the prac-
tices and bargnining power of both the buyers and sellers. Today, unlike the
period 1933-1936 depicted in the Federal Trade Commission report as contained
in the majority submission, the bargaining power (particularly in i)eriods of
unavalable gas supply) of the gas producers is greater than the pipeline sector.
In dealing with producers, the pipelines are at a competitive disadvantage be-
cause they require substantial additional reserves to assure continued throughput
and to support their market growth. The pipelines' need for assured supplies for
many years in the future necessitates large-scale forward purchasing which
tends to be centered in major producing areas where other pipelines exist. Gas
supply procurement of new supplies is crucial if pipelines are to maintain deliver-
ability. This must be seen in the context of only a small fraction of each year's
total supply becoming available to new pipeline purchasers. Therefore, piiielines
cannot risk alienating producers by hard bargaining in those areas where they
seek new gas.
The pipeline-producer relationship must be seen in the context of the require-
ment that pipelines must demonstrate procuring a twenty-year supply, in most
instances, in order to obtain financing, achieve operating efficiencies, and sus-
tain profit levels. Moreover, the regulation of pipelines on a cost-of-service basis
permits for recoupment of the higher cost of purchased gas through rate in-
creases, and the recent automatic purchase gas adjustment approval (Order No.
452 issued April 14, 1972) by the Commission will eliminate any lag in recoup-
ment of increased purchase gas costs. It is obvious that minimal pressure exists
for the pipeline to drive a hard bargain and that his capacity to do so is seri-
ously impaired vis-a-vis the strength of the producers.
In light of the potential dislocations in the short run as well as the long run,
the need for intelligent regulation is greater today than at any time in the past.
A legitimate question exists concerning the producer contention that the Com-
mission's disregard of "commodity value" of natural gas and the resulting inade-
quate price policies has caused a supply-demand imbalance. Firstly, this allega-
tion is a non sequiiur because the Commission's rate-making procedure, in fact,
is a determination of "commodity value." Secondly, during the past two years
the Commission has significantly increased new gas prices from an average of
18«f to 24i4<f/Mcf (approximately 33%%). Additionally, the Commission has ap-
proved limited-term certificate sales at 35(f/Mcf. Thirdly, the producer claim is
difiicult to fathom because past Commission rate decisions have not deterred
very substantial bidding for offshore leases with gas potential (the December
1970 sale resulted in commitment of $850 million).
Recent filings and statements by producer representatives indicate the poten-
tial impact of deregulation escalating natural gas prices up to the level of the
cost of alternative fuels which would represent a po.ssible doubling, or tripling,
or greater price increases over the levels approve<l by the Commission. Thi.s
would have a damaging impact on the Administration's desire to control price
inflation and .stabilize the economy.
Lastly, it is difficult to comprehend the a.ssertion in the majority rejwrt that
regulation of producers has reduced gas exploration efforts and resulted in a de-
182
cline of new reserve additions. In the Hugoton-Anadarko and Second South
Louisiana settlements, the majority of the pro<lncers agreed to the prices estab-
lished as supply-eliciting levels. In the South Louisiana settlement, which pro-
vided ,a price of 26^/Mcf for "new" gas, the producers explicitly indicated that :
"Each producer individually represents to the Commission that the ceiling
prices and other provisions contained herein provide incentive for the explora-
tion for and development of gas reserves in the Southern Louisiana Area."
The statement continues :
". . . it is believed that the ceiling prices and other provisions contained herein
will make funds available to the producing industry and create a regulatory
atmosphere which should provide an incentive for a substantial increase in
exploratory and developmental activities and make a major contribution to
bringing forth additional supplies of gas from the Southern Louisiana Area to
meet the demands of all consumers supplied by this area."
At tiie 50th Anniversary Program of the Federal Power Commission, and most
appropriate at this point in time. Chairman Nassikas addressed the question of
deregulation. He assessed the viability of this proposal as follows :
"It has been suggested that the answer to regulatory problems is to deregulate
producer pricing. I do not agree. At a time of a developing national supply crisis
deregulation of producer price controls would be contrary to the national interest.
There is serious question whether natural gas prices would be competitively
determined in the absence of producer regulation, or whether interfuel com-
petition can provide a meaningful restraint on the prices that can be charged
by producers in all markets. While there may be active interfuel competition in
certain industrial and commercial markets, price competition may be seriously
impaired in the residental market. Residential consumers may therefore be sub-
jected to unreasonable prices and producers could receive excessive returns and
windfall profits to the detriment of the consuming public." '
The public interest objective and the success of producer regulation should
provide these essential benefits :
1. A price which is high enough to elicit an adequate supply to meet market
demands but which denies to producers the advantage of their exceptional bar-
gaining position ; and
2. A stable (but not necessarily level) price which will promote orderly markets
and reduce uncertainties for producers in planning future investments for
exploration and development.
To obtain these goals requires innovative and imaginative regulation. In order
to minimize uncertainty and induce the industry to accelerate their efforts to
find and commit new reserves, a new nationwide area rate proceeding should be
promulgated with the objective of establishing just and reasonable rates quickly
and with a view toward reinforcing continued regulation. The Commission should
utilize a nationwide adjustment of area ceilings and terminate area-by-area
adjudication. This will permit for a more realistic and interrelated approach in
determining the necessary supply-eliciting price in all producing areas simul-
taneously. In addition, the Commission should revive the moribund data connec-
tion inquiry in Docket No. RI68-625 — "Data for Continuing Regulation of Inde-
pendent Producer Rates" (issued May 21. 1968). The Commission must have
on a continuing and regular basis empirical data and cost information which
is up-to-date to permit utilization of cost indices and trends, as well as, other
market nformation for effective and rapid rate determinations.
Particularly at this point in time, after more than ten years of area rate
hearings and litigation, the Commission has now crystallized the cost-of-service
methodology along with the alternative noncost components. The underpinning
of the area rate framework on a new nationwide basis can serve as an equitable
format for providing protlucers a supply-eliciting price which will cover their
revenue requirements (including a fair return) as well as providing consumers
the necessary protection against exorbitant rates. The essentials for public
policy were explained by Chairman Nassikas in the aforementioned .50th Anni-
versary address when he stated :
"We must reexamine the relationship of prospective price ceilings to market
conditions — including the price of LNG. Canadian imports, and increasing
quantities of gas sold intrastate — within a regulatory context which recognizes
the realities of a reliable suiiply cui-ve.
8 "An Outline of National Enerpy Policy : Some Personal Reflections," remarl?s of Jolin
N. Nassil<as, Cliairman, Federal Power Commission at tlie Commission's 50tli Anniversary
Program. June .S. 1970.
183
'•Whatever level of rates may be prescribed tliey mii.-^t be just and reasonable
in tbe sense that they will produce an adequate level of return to attract the
necessary capital for investment in the needed facilities for required service
to the consumer."
David S. Schwartz,
Assistant Chief, Office of Economici^,
Federal Power Commission.
December 1, 1972.
Senator H.^nx. Our coticliiding witness today was to have been the
very able chairman of the Xew York State Public Service Commis-
sion. Joseph C. Swidler. Chairman Swidler is tied np today at an im-
portant meetino- with the Governor and the executive committee of
the National Association of Eeorulatory Commissions. In his stead,
and to deliver to the committee the statement that Chairman Swidler
prepared, is ]Mr. Allen J. Roth. Mr. Roth is executive assistant to the
Xew York Commissioner, and I believe has long- held associate chair-
manship. "We welcome you and apologize for the delay.
As was the case with Professor Pifer, I would ask that Chairman
Swidler's full statement be printed in the record and that the staff
questions be directed to Mr. Roth.
If any of the questions are items on Avliich you feel you should con-
sult with the chairman before answering, we will leave the record
open for them.
STATEMENT OF ALAN J. ROTH, EXECUTIVE ASSISTANT TO THE
CHAIRMAN. NEW YORK STATE PUBLIC SERVICE COMMISSION,
ON BEHALF OF JOSEPH C. SWIDLER, CHAIRMAN; ACCOMPANIED
BY GEORGE BONNER, DIRECTOR, GAS DIVISION
^Ir. RoTii. Thank you.
]Mr. Nash. I will try to be very brief. Mr. Roth, considering the late
hour.
Mr. Roth. Before you begin, may I introduce my colleague, George
Bonner, director of our gas division.
]Mr. Nash. Mr. Roth, this morning an extract of page 12 of your
statement was read : ''To the extent the price increases induce com-
mensurate in gas findings, the price increases serve a valid economic
function. "' I would like to know whether you are aware, or the New
York State Public Service Commission is aware of any evidence at all
tendinis to show that higher prices will increase supply, and if so, how
nuich higher ?
Mr. Roth. I am aware of no convincing evidence as to how much of
an increase in supply will be forthcoming at various increases in
prices. We have tested the proposition, among other places, in the
southern Louisiana negotiations; we tried to elicit information from
the producers to learn how much more gas we might expect from the
increased prices proposed in the settlement negotiations. The upshot
was a refusal by the producers, reflected in the often-quoted last para-
graph of that settlement proposal approved by the Commission, a
refusal to indicate how much additional supply would be forthcoming.
In addition, there are various elasticity studies that have been pub-
lished, but I don't find any that has won final acceptance.
27-547—74 — —1.3
184
INIr. Nash. As I understand the coefficients range in elasticity from
0.1 to 0.5.
Mr. EoTH. I heard Chairman Nassikas state that this morning, but
1 am not familiar witli the estimate calculated at 0.5.
Prof. Franklin Fisher of JNIIT, in his 1964 published study in rela-
tion to price increases for oil, indicated 0.3.
Based on my judgment that 0.3 might have been a short term elas-
ticity coefficient.
Mr. Nash. I think it would be helpful for the record if you can dem-
onstrate what is meant by supply-price elasticity, with a concrete
example. What I mean, let's assume prices would rise from 30 cents
to 80 cents per million cubic feet. How much additional supply might
we expect, and what would be the actual price for the additional imple-
ment in relation to the alternatives, such as LNG ?
Mr. EoTii. Let's take the case of a price increase from 30 cents to 80
cents, an increase of 166 or 167 percent. Assuming a supply elasticity
coefficient of 0.5, you might expect an increase of one-half the 166 or
167 percent, that is 83 or 84 percent. If the 30 cents could be associated
with 10 trillion feet of gas and the elasticity coefficient is 0.5, you
might expect an 80-cent price to elicit something like 18.3 or 18.4 tril-
lion cubic feet. The hypothetical at page 16 of Chairman Swidler's
statement surrounds the 18.3 trillion cubic feet with estimates of 15
trillion cubic feet and 20 trillion, a higher and lower elasticity coeffi-
cient than the 0.5.
If an increase to 80 cents would induce an increase in findings to a
level of 15 trillion cubic feet, compared to 10 trillion at 30 cents, the
extra 5 trillion cubic feet would cost $1.80 per million cubic feet, a
higher cost to the consumer. An incremental 10 trillion cubic feet
would cost $1.30, still a high cost alternative.
Mr. Nash. This is based on the assumption of an elasticity of 0.5 ?
Mr. RoTii. It surrounds 0.5. Twenty trillion assumes a higher elas-
ticity coefficiency than 0.5.
Mr. Nash. What might the cost be to consumers if there is a 0.1
elasticity coefficient.
Mr. Roth. Give me a moment to calculate that.
Mr. Nash. INIr. Chairman, perhaps Mr. Roth would like to submit
it in writing.
Mr. Roth. If I may have one moment, I am near completing the
calculation. The extra cost I calculate to be roughly $3.80 ))er mil-
lion cubic feet; 80-cent prices would be associated Avith findings of
11.67 trillion cubic feet or nearly $3.80 for extra million cubic feet
beyond 10 trillion cubic feet.
]Mr. Nash. In summation, I take it this incremental cost is what
Chairman Swidler himself contrasted with LNG at $1.25 ?
Mr. Roth. Yes. It should be compared with the cost of LNG and
other alternatives such as oil.
Mr. Nash. Thank you very much.
Mr. Chttmbris. I liave no questions, INIr. Chairman.
As I told Mr. Roth earlier today, I read very carefully IMr. Swidler's
statement. He has views that differ from the views of Mr. Nassikas,
just as there probably will be Senators on the subcommittee who will
prefer to follow Mr. Swidler, and some who Avill follow Mr. Nassikas.
If we continue under this basis, one group is going to be able to get
185
natural gas at 20 or 30 or 35 cents and another group is going to have
to pay $1.60, $1.80 or $2.00 for a cubic foot. That is somethmg that
will have to be resohed. Thank you very much.
Senator Hart. Thank you.
We will adjourn to resume in the hearing room of the Judiciary
Committee, 2228 of this building, at 10 tomorrow morning.
[Whereupon, at 6:15 p.m., the hearing was adjourned, to reconvene
at 10 a.m., Wednesday, June 27, 1973, in room 2228, Dirksen Senate
Office Building.]
[The following was received for the record. Testimony resumes on
p. li)7.J
MATERIAL PRESENTED ON BEHALF OF CHAIRMAN SWIDLER
Exhibit 1. — Prepared Statement of Chairman Swidler
Statement by Joseph C. Swidler, Chairman, New York State Public Service
Commission, Presented by Alan J. Rotii, Executive Assistant to thb
'Jhairman
Cliairman Hart and members of the subcommittee, pursuant to your invitation
I am happy to present a statement of my views concerning proposals to deregulate
the price of natural gas at the well-head. I have also been asked to state the
rules and practices of the Federal Power Commission at the time I was Chairman
of that Commission from mid-It (61 through 1965 with regard to the handling
and disposing of confidential information submitted to the Commission.
With regard to contidential information, I searched my memory and have
also contacted former General Counsel Richard A. Solomon for any recollections
or materials he or others may have on the subject. He in turn contacted our
former colleagues Joseph Gutride, then Secretary to the Federal Power Commis-
sion, and Harry Trainor. then Executive Director. To the best of our recollection
and without reservation, we had no special rule or practice with regard to con-
fidential materials other tlian the rules that are widely applicable to such
materials, including rules and practices applicable to the handling of documents
classified for national security purposes and the separation and nondisclosure
of employee health records. We iiad no rule or practice calling for the burning
or returning of confidential materials and had no special rule at all for disposing
of confidential documents or any other docnments other than the general archival
rules. We recall no irregular handling.
introduction
•
As you know the Natural Gas Act was enacted in 1938 to fill a gap in the
protection of gas consumers. Philips Petroleum Company v. Wisconsin, 347 U.S.
672. State regulatory agencies cannot effectively protect consumers who rely
on gas if interstate gas companies, which are beyond the jurisdiction of the
state agencies, remain free to impose unrestrained price increases on the local
gas distributors and (through them) on the gas consumers. No one seriously
proposes that the gas distributors should be freed from state regulation or that
interstate pipelines should be freed from federal regulation. The rates charged
by gas producers to the interstate pipelines should likewise remain subject to
regulation unless the field market for gas is somehow self-regulating.
For reasons for which I shall explain in some detail in the remainder of my
testimony, I do not believe that the unregulated market can be counted on to
protect residential and other high priority gas consumers, especially not at this
time of turmoil in the overall enex'gy market, and I urge Congress not to enact
legislation that would deregulate the field sales of natural gas in interstate
commerce. I shall not address mysef to concentration ratios, numbers of buyers
and sellers, and similar data, which sometimes dominate the debates and dis-
cussions about effective competition. I shall speak about the limits and uncer-
tainties of ultimate gas supply, which in my view require continuing regulation
of gas producers. Indeed, Congress should extend federal regulation to the so-
called intrastate market, where it does not now apply, to regulate all field sales
of gas at least with regard to end-use so that this nation may limit and eliminate
the wasteful use of gas for inferior purpo.ses and reserve that gas for high
- priority uses.
186
THE GAS EESOXJECE BASE PROBLEM
1. The V.S!. G<i<! Potential. The summary purpose of deregiilating natural gas,
we are tokl, is that prices must be allowed to rise sufficiently to balance supply
demand by eliminating inferior uses of gas, alternatives which will more directy
and demand. It seems to me that regulatory alternatives are available to reduce
and assuredly reduce waste at lower cost than the proposed deregulation. These
alternatives I shall discuss in a moment. First, however, I should like to explain
why we cannot rely on deregulation to resolve the gas shortage on the supply
side, and indeed cannot rely on natural gas even to maintain its share of the
energy market, with or without regulation.
The National Petroleum Council has estimated that the demand for energy
can be expected to grow at about 4.2% for the period 1971-1985 and about 3.2%
for the period thereafter until about the year 2000. Table I presents (in column
one ) the estimate<l gas consumption in the United States if gas consumption were
to grow at the same rate as the total demand for energy and thus maintain its
share of the energy market. North American imports will accommodate a small
part of the estimated U.S. demand. If the remaining demand (column 4) is to be
met with domestic gas reserves, we shall need to prove up more and more gas
rcsrrves over the years; the specific reserve hgures (column 5) have been cal-
culated on the widely accepted approximation that we need an inventory of
natural gas reserves erpial to at least ten times the volume of annual consumption
in order to assure the deliverability of the gas to be consumed.
TABLE I.— U.S. GAS CONSUMPTION, ASSUMING GAS MAINTAINS ITS PRESENT SHARE OF THE ENERGY MARKET;
U.S. NATIONAL GAS SUPPLY ASSUMING NO CONSTRAINTS
(Trillion cubic feet]
Add extrac-
Findings
Post'jiated
tion loss,
Postulated
required to
U.S. gas
storage Sl
btract net
net U.S.
Required
maintain
consump-
changes, Nc
rth Amer-
gas produc-
gas re-
and
tion
vented and
ican gas
tion (1)+
serves: 10
augment
Cumulative
Year
(dry gas)
flared gas
imports
(2)-(3)
times (4)
reserves
fmdings
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Actual: 1972
22.61
0.85
0.95
22.51
266 .
Projection:
1973
23.56
.89
1.30
24.80
248
6.8
6.8
1974
24.55
.92
1.65
23.82
238
13.8
20.6
1975
25.58
.96
2.00
24.54
245
31.5
52.1
1976
26.65
1.00
2.20
25.45
254
34.4
86.5
1977
27.77
1.04
2.40
26.41
264
36.4
122.9
1978 -.-.
28.94
1.09
2.60
27.43
274
37.4
160.3
1979
30.16
1.13
2.80
28.49
285
39.5
199.8
1980
31.42
1.18
3.00
29. 60
296
40.6
240.4
1981
32.74
1.23
i3.22
30.75
308
42.8
283.2
1982
34.12
1.28
3.44
31.96
320
44.0
327.2
1983
35.55
1.34
3.66
33.23
332
45.2
372.4
1984
37.04
1.39
3.88
34.55
346
48.6
421.0
1985
38.60
1.45
4.10
35.95
360
50.0
471.0
198G
39.83
1.50
4.32
37.01
370
47.0
518. 0
1987 -.
41.11
1.55
4.54
38.12
381
49.1
567.1
1983
42.42
1.59
4.75
39.25
393
51.3
618.4
1989
43.78
1.65
1.70
1.75
4.93
5.20
5.42
40.45
41.68
42.96
405
417
430
52.5
53.7
56.0
670.9
1990
45.18
724.6
1991
46.63
780.6
1992
48.12
1.81
5.64
44.29
443
57.3
837.9
1993
49.66
1.87
5.86
45.67
457
59.7
897.6
1994
51.25
1.93
6.10
47.08
471
61.1
S58.7
1995
52.89
1.99
6.32
48.56
487
64.6
1,023.3
1996
54.58
2.05
6.54
50.09
501
64.1
1,087.4
1997
56.33
2.12
6.76
51.69
517
67.7
1,155.1
1998 ._
53.13
2.19
6.98
53.34
533
69.3
1,224.4
1999
53.99
2.26
7.20
55.05
551
73.1
1,297.5
2000
61.91
2.33
7.40
56.84
568
73.8
1,371.3
SOURCE
Column (1): 1972— U.S. Department of the Interior, News Release, "1972 U.S. Energy Use Continued Upward," March
10, 1973: 1973-85, 4.2 percent annual growth; after 1985. 3.2 oercent annual growth.
Column (2): 1972— Cols. (3) plus (4) less col. (1); 1973-2000, 2.76 percent of col. (1).
Column (3): 1972— U S. Department of the Interior News Release, "1972 U.S. Energy Use Continued Upward," Mar. 10,
1973: !973-f . Walter G. Dunree, Jr. and James A. West, "U.S. Energy Through the Year 2000," December 1972 (U.S. De-
ment of the Interior). Includes Canadian gas and small volumes cf Mexican gas.
Cnlumn(5): 1972— A.G.A., Gas Supply Review, Mav 15, 1973: 1973-)-, column (4) times 10.
Column (6): Required yearend reserves, less beginning of year reserves plus net production [col. (4)j.
187
The cousequent volume of gas findings necessary to replace consumption and
build up the inventory of postulated reserves (column Gj amounts tt» a tremen-
dous volume of gas, more each year than has been found in any year in our prior
national experience. Indeed, the finding rate must exceed 40 trillion cubi(; feet
per year by about 19S0 if we are to satisfy the demand with domestic natural
gas. Within the past 20 years our best finding rate was about 24.7 trillion cubic
feet in 105G, and the best five-year average finding rate was aliout 21 trillion
cubic feet in 1955-1959. The sharp and continuing expansion in domestic finding
would need to take place despite progres.sive exhaustion of underground supplieis.
If we were to achieve such a high level of natural gas findings, the cumulative
findings of gas (beyond the reserves already in our proved inventory of national
reserves) would reach about 283 trillion cubic feet some time in the year 19S1
or before. The Potential Gas Committee, a group of industry, government, and
academic experts, recently estimated that about 2(16 trillion cubic feet of natural
gas remain to be found in known fields. Another 384 trillion cubic feet are esti-
mated for new fields in hydrocarbon provinces that now produce oil and gas.
A final 4!:X3 trillion cubic feet might be found in new provinces that do not now
liroduce hydrocarbons, according to the Committee. Thus, by 1981 we would
need to find the equivalent of virtuall.v all our probable new gas reserves: by
the late 19S0's or earlier we would need to find the equivalent of all pri>l table
and promising natural gas reserves ; and before the end of this century we
would have exhausted the full probable, promising and speculative domestic
natural gas reserves which the Potential Gas Committee thinks may exist.
Perhaps the most salient feature of the estimates I have presented in Table 1
is the annual finding rate that is needed if we are to meet the demand for gas
with the discovery of domestic natural gas reserves. We must assume that over
the years, as total reserves are depleted, it will be more and moi'e difficult to
find gas, absent some exploration breakthrough that we cannot now foresee.
Given the estimated limits on our potential gas reserves, it seems ludikely to
me that we can soon achieve a doubling of past finding rates or. if we succeed
in doubling the finding rate, that we could long sustain such a pace. If we proceed
directly to find all probable gas resers'es, we ma.v be able to meet the domestic
demand for gas into the year 1980. At that point we had better be in position to
rely on substantive alternative sources of gas.
Despite its talk about the importance of market forces to induce new supplies,
the petroleum industry does not itself hold out any prospect for domestic natural
gas sufficiency. The National Petroleum Council has projected tliat "under the
most optimistic supply conditions", including a high rate of growth in drilling
and a high volume of gas foiind per foot drilled, domestic gas production will rise
to only 31.9 trillion culnc feet in 1985, including 4.4 trillion cubic feet from Alaska
and 1.3 trillion cubic feet from nuclear stimulation of tight formations : in the
lower 48 states the optimistic projection calls for an increase in domestic natural
gas production from 22.2 trillion cubic feet in 1972 to only 2(3.2 in 1985. Under
less optimistic assumptions of a medium growth in drilling but a high rate of
gas found per foot drilled, the XPC projects that gas production will reach 27.3
trillion cubic feet in 1985, including 23 trillion culnc feet in the lower 48 states.
The XPC at the same time claims "revenue requirements" in the range of 70c
to 80c for gas from new fields to sustain even these levels of production. Accord-
ing to the XPC, '"revenue requirements" of less than 70-SOc per Mcf could only
be associated with steepl.v declining production.
I do not vouch for the XPC price and production figures. Indeed, it seems
olivious that consumers, who are necessarily remote from this flood of detail,
will want such claims al)Out revenue requirements to he subject to continuing
impartial review and will want to avoid the hopeless strain of bidding up gas
prices beyond their worth in gas supply. I shall return to this point in another
context. 'Sly point is that the data show, and the industry's figures seem to con-
firm, that we cannot rely on deregulation to solve the gas shortage on the supply
side.
2. The Ronthircf:trni Gas Potential. — Virtually all of this X'ation's gas is
produced in the southwestern states and related offshore areas. The Potential
Gas Committee has estimated that potential reserves in the Southwest — includ-
ing probable, possible and speculative reserves — amount to 578 trillion cubic
feet, in addition to already proved Southwestern reserves of little over 200
trillion cubic feet. If the inclustry finds all of the 578 trillion cubic feet of poten-
tial gas in the southwest, which seems unlikely, the area could continue produc-
tion levels of about 23 trillion cubic feet per year for only about 24 years, after
188
wliich remaining reserves would fall below 230 trillion cubic feet and would thus
be unable to sustain production of 23 trillion cubic feet per year (assuming the
validity of the rule of thumb that a reserve inventory of 10 is neeesvsary to produce
one unit of gas). After that, the remaining gas would be played out over many
additional years, at diminishing rates of annual production. As it happens, the
pipeline systems of America have on average a depreciable remaining life of a
little over 20 years, less than the time it would take to exhaust the potential
gas supply estimated for the Southwest at substantially the present rates of
the delivery without growth. Accordingly, if deregulation leads to increased
usage within the Southwest (for example, if Texas consumers buy up the off-
shore gas supplies that now tend to flow to interstate markets), the interstate
pipelines will carry less and less gas, at higher and higher costs per Mcf, and
customers outside the Southwest must turn increasingly to other sources.
3. Additional U.S. Gas Potential. — There may of course be more gas than has
been estimated by the Potential Gas Conunittee. The Committee's estimates of
1,146 trillion cubic feet nationally include offshore territory out to 1500 feet of
water depth and, within that perimeter, drilling depths to 30.000 feet. The
estimate includes the gas in Alaska, which of course is not immediately avail-
able to the contiguous states. The Potential Gas Committee's estimate does not
include roughly 300 trillion cubic feet of gas that might become available by
fracturing tight formations.
In 1972 the U.S. Geological Survey gave a different and larger estimate of
natural gas reserves at 4,418 trillion cubic feet, which would enable us to meet
projected demand for about two decades longer than the gas estimate of the
Potential Gas Committee, if all the estimated gas were found in needed amounts.
I mention this estimate simply to demonstrate that even the most generous
estimate of potential gas reserves does not take us much beyond this century,
assuming that we proceed to find all of the reserves as fast as we need them
accordins to conservation estimates of need (demand).
Obviouslv. we will not proceed directly to find all the estimated gas reserves,
and accordinglv domestic natural gas discoveries will fail to meet the demand for
gas in the United States well before the end of this century. High natural gas
prices may speed up the discovery of gas and will help us find relatively more
of what is potentially available. Even then, price increases can have a favor-
able effect only if they apply with finality and are not subject to such change
and uncertainty as to induce producers to wait until another day when still
higher prices may be negotiated. It seems unlikely in any event, however, that
we will be relieved of the need to turn to other sources of gas, in addition to
domestic natural cas reserves, long before the end of the century.
4 A Caveat about Reserve Data. — I recognize the importance of reliable gas
reserve data and our need to have a reliable estimate of this nation's gas re-
source base. Dr. V. E. McKelvey, Director of the U.S. Geological Survey of the
Department of the Interior, is of course right in his recent call for further studies
to improve our understanding of America's potential for gas and other resources. I
have relied on the available data, however, because the data seem to demonstrate
in all events that this nation does not appear to have gas resources so abundant
that we can afford to drop producer rate regulation in reliance on so-called
market forces.
At the same time. I take no stand about the reliability of published estimates
of proved U.S. gas reserves, whether the industry or the government has under-
estimated the existing inventory of reserves, or the extent to which any under-
estimate has induced the extraordinary recent increases in gas prices asked liy
sellers and offered by buyers.
CONSUMER VERSUS CONSUMER
According to the fact sheet underlying the President's April IS. 1973 Energy
Message, a principal purpose of gas deregulation is to "allow the interstate pipe-
lines to compete with the intrastate pipelines for new gas supplies and lead to
a more desirable distribution and usage of this premium fuel." The competitive
predicament of interstate pipelines is real, but deregulation is not the cure.
Intrastate gas — gas consumed within the state of production — is not now sub-
ject to the Natural Gas Act (unless delivered through an interstate pipeline),
and intrastate pipelines and other local buyers are now free to bid away gas
supplies from would-be interstate buyers, who can only pay federally regu'ated
field prices. In recent years intrastate buyers have in fact virtually monopolized
189
new gas supplies, as the data presented in Table II demonstrates. (The data
excludes Alaska because no gas is shipped from Alaska to other states and ex-
cludes the offshore domain because almost all of that gas is subject to FPC juris-
diction and in effect could be preserved for interstate buyers. ) Sales to interstate
pipelines in the 48 states (excluding offshore sales) increased from 9.3 trillion
euliic feet in 1964 to ll.S trillion cubic feet in 1970 and then declined to 11.4 tril-
Hon cubic feet in 1971 (see column 1 of Table II). Reserve dedications to the in-
terstate pipelines rose from 9.2 trillion cubic feet in 1964 to 11 trillion cubic feet
in 1967 and then declined precipitously to virtually none in 1969-1971 (the most
recent data). (Indeed in 1970 there was a substantial downward revision of re-
serves previously reported by the interstate pipelines.) The data prove that by
1969 the intrastate buyers were acquiring virtually all available onshore gas
reserves.
TABLE ll.-GAS DEDICATED TO INTERSTATE PIPELINES-EXCLUDING OFFSHORE GULF COAST AND ALASKA
[In millions of cubic feet]
Reserve Year-end
Year Production additions reserves
1964. 9,310,159 9,191,195 169,920,344
1965 9,558,469 9,540,624 169,892,499
1966 . 10,129,100 10,494,498 170,220,255
1967 10,530,072 11,058,788 170,748,971
1968. --_ 11,092,657 6,105,081 165,761,395
1969 11,577,968 334,004 154,517,431
1970 _ __ 11.767,848 (2,765,824) 139,983,759
1971 11,419,486 290,413 128,854,686
Source: Federal Power Commission, "The Gas Supplies of I nterstate Natural Gas Pipeline Companies."
The following additional data, taken from testimony introduced in a recent
Permian Basin Area proceeding at the Federal Power Commission (Docket No.
AR7(»-1) likewise demonstrate the capture of new gas by intrastate buyers.
TABLE III.— INITIAL ANNUAL VOLUMES UNDER NEW INTERSTATE AND INTRASTATE CONTRACTS— LARGE
PRODUCERS: PERIVIIAN BASIN AREA, 1966-70
(Billions of cubic feet at 14.65 Ib/in-a]
Year Interstate Intrastate Total
1956... _ _ _,__
1967 . .
1968
1969....
1970(6 months) _
Under the President's propo.sal, gas producers would be free from regulation
of new gas supplies, and thus interstate buyers could bid against intrastate
buyers in the producing states with some possible supply benefits to the inter-
state markets but with sky-rocketing price consequences. To the extent the price
increases induce commensurate increases in gas findings, the price increases
serve a valid economic function. However, to the extent that the increases go
beyond that, they simply reflect the effect of pitting one group of buyers against
anotlier for a static supply. In this situation only the producers gain.
Furthermore, under deregulation the interstate buyers stand to lose some
supply advantages. Under the present Natural Gas Act, the Outer Continental
Self, which is entirely under Federal domain and holds vast potential for gas
reserves, is completely subject to federal regulation. The Federal Power Com-
mi.s.sion could reserve gas found there for the interstate market, as an offset to
the advantage that intrastate buyers now have in capturing local unregulated
gas production. The American Gas Association reports over 3S trillion cubic feet
of proved natural gas reserves in the offshore Gulf area. The interstate pii^e-
lines reported contracts covering about 32 trillion cul)ic feet of the gas reserves
there. See Table IV. The six trillion cubic feet of difference indicates some gas
proved by the producers but not yet dedicated for sale (and may also reflect
some data differences between the two reporting sources). I should note that
149.0
29.0
178.0
60.4
16.8
77.2
20.0
135.1
156.1
29.4
146.4
175.8
10.3
103.1
113.4
190
in recent years the offshore gas secnred by the interstate pipelines lias not offset
the decline in their onshore gas reserves. Yet, the offshore potential remains sub-
stantial and has been a principal hope and objective of the interstate market.
Under the President's proposal for deregulation, buyers from Texas and Loui-
siana would be able to bid up the price for offshoi-e gas reserves, \a hich previously
could have been channeled to interstate buyers, primarily for the residential and
commercial markets, that is, for high priority uses. I do not expect the Federal
Power Commission to attempt to impede the transfer of offshore gas to south-
western markets, because the very purpose of deregulation appears to be the
allocation of supply according to free market price. In sum, tlie interstate
pipelines may well loss far more gas offshore than they could gain onshore under
deregulation.
TABLE IV.— YEAR END GAS RESERVES, OFFSHORE GULF COAST
(In millions of cubic feet]
Year AGA FPC
(1) (2)
1968 35,851,529 29,200,638
1969 35,306,705 33,091,839
1970 37,781.044 33,993,229
1971 _ 38,397,675 32,415,295
Note: The American Gas Association did not separately report offshore reserves prior to 1968. The difference between
cols. 1 and 2 reflects reserves found but not committed to interstate pipelines and may reflect otiier data differences.
K.USING PKICES TO REDUCE WASTE
Apparently, the purpose of dei-egulation is not to pit household users of gas in
Nev»- York and Michigan and California against household users in Texas or
Oklahoma but rather to allow the householders to bid up the price of gas in
competition with the gas-burning industrial market, predominantly in the South-
west and including gas-fired electric utilities in the Southwest and elsewhere.
Much of the boiler fuel use and other low priority use of gas is being wrung
out by regulation at the state and Federal level. New York and other states
served by the interstate pipelines have already established priorities for cur-
tailing existing low priority uses and for confining new service to high priority
users, principally residential users. The Federal Power Commission has also
undertaken to reduce or eliminate the use of gas for inferior purposes in the
interstate market.
These regulatory measures directly and effectively restrict and eliminate the
use of gas for inferior purposes, and federal regulation sliould be extended to
cover the intrastate market to achieve these end-use control purposes. Deregula-
tion of fuel prices for the interstate market would be a slow, uncertain and very
expensive alternative for suppressing inferior uses in the intrastate market. To
begin with, deregulation will not reach or significantly affect gas already dedi-
cated directly to boiler fuel users and other large industrial users in the intra-
state market. Second, higher market prices for new gas in the-field will not di-
rectly suppress the demand of industrial gas consumers served by gas utilities
or similar systems, because old and new .gas supplies and i)rices would be rolled
to.gether by the distributors, an effect recognized expressly by the President in
]-eferring to the regulated market for gas. Finally, even with regard to those
intrastate users which will depend directly and significantly on high priced new
,aas. I do not imagine that such users will yield lightly to competing interstate
buyers. Electric utilities in the Southwest, for example, may be expected to pay
higher prices and resist tlie temptations to turn to coal (or perhaps imported
residual oil) until they can rest assured that they will be able to obtain adequate
long-term supplies of coal and will not be prevented from .securing or burning
the coal because of new coal mining restrictions or air pollution restrictions or for
other reasons. The utilities may nevertheless turn to coal if gas supply becomes
unavailable or unreliable because of regulated end-use controls or for other
reasons.
LEAST COST ALTERNATIVES
Let us assume that a multiplication of prices Avould make available some
additional gas, and let us look at the incremental costs. Suppose that a price of
191
iilKiul 80',' ]iei' thousand cnbie feet would induce the tinding of 10 trillion cubic
feet of natural gas per year but that a price of i<0(f would induce the lindins of
15 trillion cubic feet. The total bill would be $3 billion for the first ten trillion
cubic feet and .$12 billion for the 15 trillion cubic feet, or $9 billion additional for
tlie extra 5 trillion cubic feet — $1.80 per Mcf for tiie increase in findings. If the
^Oc price would indiu-e the finding of 20 trillion cubic feet, the extra 10 trillion
would cost $1.30 per Mcf. I cannot tell you whether these hypothetical supply
a.nd price relationships are realistic, and I am not alone in this difliculty. The
producers will not and probably cannot state, even roughly, what supplies would
be forthcoming at various iirices or what the difference in findings would be at
various differences in price levels. 3Iy point, however, is tiiat prices of 70 or SOc
for new gas may not be cheap or reasonable if gas consumers can obtain much of
the gas supply at 30(- per ]Mcf and satisfy their remaining needs through other
fuels at 80(^ or even $1.00 or more per million per Btu. (One million Btu is ap-
proximately the heating value of an Mcf of natural Gas.) Remember tlie addi-
tional price does not make new gas. but only produces underground reserves more
(luickly than would otherwise be the case if the price increases were stretched
out over time. It is arguable whether our national interest lies in spurring the
most rapid possible exhaustion of U.S. reserves.
Free market economists might nevertheless argue that SOi;' is the right gas
price in temis of the hypothetical case, because the extra profit or "economic
rent" on the first ten trillion cubic feet would be recovered in part through
taxation and lea.se bonuses and the remaining part would constitute a redistribu-
tion of income from consumers to producers, not a true using of economic re-
sources as in the case of SXG. LNG or oil at 80^ or $1.00 per million Btu. As a
liill-paying consumer. I still might prefer the combination of 30(* gas plus $1.00
nil. In any event, with regard to the technical point about resource u.se and allo-
cation, my understanding of the industr.y is that average costs for new gas
tend to follow prices and it is difficult to say whether the producers will get
'"economic rent" (except in regard to previously acquired leases).
I put aside a special category of gas prospects, where the likelihood of finding
gas is very liigh but likely size of the reserve is small enough to make the
prospect uneconomic except at substantially increased prices. Regulation can
easily cope with this category of problems by raising the general applicable rate
ceiling, if that proves necessary, or by granting rate exceptions for this type
of prospect. Deregulation is not necessary to bring in this category of gas.
Finally, time considerations will delay and dilute the significance of price
increase.s under regulation or under deregulation. It takes years of exploring,
leasing and drilling before pi-oduction begins. Even if unre.gulated prices ulti-
mately "clear the market"' by substantially augmenting .supply, in the meantime
slKu-tages would persist and gas prices can be expected to rise significantly and
Itainftdly without present commen.surate supjily Itenefits. The President's own
proposal for deregulation would authorize the Secretary of the Interior to
correct price gouging during the first three years of deregulation, thus proving
the need for continuing regidation.
In all events. I can see no sense in deregulating old gas unon the expiration
of existing contracts. Deregulation of previously dedicated fields will not add to
our Inventory of gas supplies. In these times of shortages, deregidation will
nccomjilish nothing but to add to the profits of established producers who own
Ihe old reserves, as the.v raise prices without limit to buyers who are dependent
on the remaining gas in the old fields. I have heard the argument that raising
old gas prices will add to the cash flow available for further finding efforts. But-
Ihe inducement favors onl.v the established i>roducers. who own the old gas. and
even as to tliem imposes no requirement that the additional revenues in fact
lie expended on further finding efforts.
CONCLUSION
Of course, gas prices should be allowed to rise over time in order to canture all
]'otential gas reserves which are economic to find and produce. Deregnilation in
these time.s of gas shortages, however, is unneces.sary and is likely to lead to
f'xcessive gas prices.
There are mnny steps we must take to confront gas sliortage and otlienvise
resolve tills nation's energy problems, but deregulation is not a step in the right
direction.
192
First, we must significantly increase the scope and niagnitiide of our energy
researcli and development programs botli in government and in industry.
Second, we must initiate promising energy conservation programs at the fed-
eral, state and local level to reduce energy waste and achieve improved energy
efficiencies in buildings, in appliance and apparatus, in transportation and in
industry — not alone by appealing for the voluntary cooperation of consumers or bv
depending upon price increases to restrain waste but also by positive measures to
improve building codes, support mass transit systems, restrict the size of auto-
mobiles, and establish minimum requirements for energy efficiency in appliances
and apparatus sold in interstate commerce.
Third, environmental and other restrictions must be reevaluated and, if neces-
sary, adjusted so that we may achieve a responsible balance of our environ-
mental, economic, national security and other important social objectives. The
flight from coal to oil and gas must be arrested by a combination of technologi-
cal improvement and the removal of any unjustified restraints.
Finally, this nation must develop its domestic oil, gas, coal and uranium
resources, through measures including expedited and improved leasing practices
by the Department of the Interior, and must accommodate the buildhig of ade-
quate fuel refining, storage and transportation facilities as well as electric power
facilities, including nuclear power plants and coal-fired power plants, subject to
reasonable but not arbitrary environmental and safety restrictions, in order to
assure reliable energy supplies and avoid the costs and risks of overdependeuce
on foreign energy sources.
Exhibit 2.— Paper Entitled "Energy and the Environment"
Energy and the Environment : A National Policy — A Regional Response
(A talk by Joseph C. Swidler, Chairman, New York State Public Service
Commission)
(May 1, 1973)
The President's long awaited energy message covers in one way or another
most of the energy problems and provides a convenient focus for discussion of the
primary energy issues. It is a landmark in several ways^in the recognition of
the seriousness of the problem, of the need to marshall this country's govern-
mental and private resources to solve it, and in relating energy and environ-
mental issues. For the first time, I believe, there is a commitment' in principle to
limit the growth in energy use.
On the other hand, it is a disappointment because it does not go far enough.
The recommendations are out-of -scale of the dimensions of the problem. Even
the full implementation of tlie measures recommended by the President would
not go far towards curing this country's energy malaise. There are some helpful
recommendations, some which either move in the wrong direction or do not go far
enough to be eifective, and a number of omissions on key issues.
Of course, I cannot mention all these matters, and on some of them I do not
yet have a strong opinion. Naturally, I shall devote most of my limited time to
matters I believe deserve further thought, but first let me mention the positive
elements of the energy message. The chief items on which I strongly agree are to
mandate a broadening of the Interior leasing program on the Outer Continental
Shelf, and the expressed determination to resolve the Alaskan oil impasse. These
measures should serve to stabilize and perhaps augment domestic oil and gas sup-
plies. The encouragement of geothermal development and shale oil recovery in
the public domain fall in the same category of adding at least potentially, to
domestic energy resources.
I endorse the President's proposal for reconsideration of secondary air pollu-
tion standards. As he rightly points out, we must look more and more to coal to
meet this country's energy requirements. We cannot afford the luxury of ruling
out the use of coal where there is no clear environmental gain.
I favor also his recommendation for federal power plant siting legislation. The
bill introduced in the last session of Congress seemed to me to be defective and
probably unworkable. Perhaps the changes to which he referred and which I have
not yet seen will produce a workable measure.
The message reflects the unfortunate fact that there is no way to prevent large
increases in oil imports. The elimination of the oil import quota program should
improve the ability of oil importers to buy necessary oil supplies on a more fav-
orable basis than would otherwise be possible, and should be especially helpful
in rationalizing the market for refined products in the next few years. I commend
also the proposal f(jr Federal licensing of tanker terminals, which are essential
193
to handle the rising volume of imports, and encouragement for the construction
of additional domestic reflning capacity, which will improve the Nation's secu-
rity position.
When we look on the other side of the picture, there are many matters where
the President seems to me to have erred in his judgment or where he has failed
to come to grips at all.
Perhaps the most controversial of his recommendations is for the deregulation
of field prices on new gas supplies and on flowing gas sold under new contracts.
I recognize that deregulation has broad support not only from natural gas pro-
ducers but also from many disinterested citizens, including most of the academic
economists. The argument is two-fold, that regulated prices are artifically low
and thus encourage wasteful use, and that the high prices which would follow, if
"the competitive forces of the market system" dictate the price, will stimulate
production and help relieve current shortages.
As to the encouragement of uneconomic use, there seems to be no prospect
that underground gas supplies will be available to the interstate market in
quantities beyond those essential for primary needs of customers who have no
economical alternative. End-use controls in almost every state dependent upon
the interstate market already assure the utilization of available gas supplies
for their best purposes.
As to the effect of deregulation in encouraging additional production, the case
is yet to be proved. No industry spokesman has ventured even a rough estimate
of the amount of gas which they would produce at 50 cents or $1 an Mcf, or $2
per Mcf, which they would fail to produce at 35 cents, to pick more or less
arbitrai-y parameters. The reliance on "market forces" I find incomprehensible
in the light of the economic environment and resource position of the domestic
petroleum industry. "Market forces" seem to me to be beside the point when
total reserves are small in relation to potential demand ; when a large part of
the findings are related to exploration for oil rather than gas; when oligopoly
pricing prevails ; and when, in the absence of regulation the price will be
determined not by domestic supply costs, but by imports which entail the com-
bined costs of buying gas in far corners of the world at prices dictated by a
cartel of the producing countries, bringing it to a port by pipeline, converting
the gas to a liquid (LNG) by cryogenic processing, transporting the LXG half-
way around the world in special cryogenic vessels, transferring and storing the
material at dockside, and ultimately regasifying the LNG for delivery to the
domestic market. Are these what the President means by market forces? Dereg-
ulation will ultimately mean additional costs to con.sumers of hundreds of
billions of dollars. It should not be undertaken without some better reason to
think it will contribute substantially to increased supplies.
What is certain is that supply cannot catch up with demand in the foresee-
able future at any conceivable price, that consumers have no effective bar-
gaining position, that even the price of artificial alternatives is now dependent
upon imports of LNG and feedstocks for artificial gas from countries which
Iiave organized a tight cartel, and that the prices imposed by alternative supplies
of imports and production of artificial gas confer stupendous windfalls on pro-
ducers in relation to their finding and producing costs for domestic gas.
Some of you may know that I had some responsibility for developing the
system of regulation of gas prices, and I could not object if you doulited my
capacity for total objectivity. Nevertheless, I must say what I think. Field price
regulation can serve the national interest if it is administered firmly and sym-
pathetically, and if present statutes are modified in light of present shortage
conditions. If natural gas regiUation were extended to the so-called intrastate
market, and if the Federal Power Commission fixed natural gas prices at gen-
erous levels in relation to the costs of finding new gas. the country v.-ould
enjoy .sulistantially as great gas supplies as under deregulation, without con-
ferring astronomical windfalls upon the producers. I assume, of course, the
same encouragement for exploration on the Outer Continental Shelf and in
Alaska which the President has incorporated in his energy message, as well
as one or two other sources of encouragement which I did not mention.
There is a self-defeating feature in the president's message. The message
deplores the use of gas by industries and utilities, which might better use coal
or oil. By releasing gas from regulation by the Federal Power Commission,
however, the President makes it possible to escai)e end-use controls and to
permit the diversion of new gas supplies to boiler fuel and refinery uses, for
which the otlier fuels are available. The recommended FPC rate control for
194
iiidiistrial sales would not in-event this diversion. Moreover, under present law,
the discoveries on the Outer Continental Hhelf could be reserved for the Inier-
state market, to offset the exemption of intrastate sales. Under dere.giilation
the producer states could bid for his gas for inferior uses, and with their
advantage of lower tranportation costs, could corner an even larger share
uf production than at present. Thus his program may result in less rather than
more gas for the American householder.
I am ;\ware of an essential dilemma. The members of the Federal Power
Commission as presentl.v constituted have expressed themselves as disbelieving
in the feasibility of their charge to regulate gas prices. In the circumstances it
is not si range that they cannot make regulation work. I will say, however, that
under present shortage conditions the regulatory responsibility may be impos-
sible to discharge as long as the producer states are free from any controls.
The cure is to eliminate the discrimination.
The proposal that the Interior Department be granted authority to fix a ceiling
price for gas if necessary I tind hard lo understand. "Why are Interior price
ceilings better than FPC price ceilings in their effect tm market forces? In any
case, the history of temporary price stabilization ceilings provides little re-
assurance to gas consumers.
liCt me mention briefly what I regard as a few of the other major deficiencies
in the energy message :
1. This country's energy position does not permit the massive amount of waste
which is embedded in Un.ited States enei-gy practices at almost every level and
type of use. The President recommended tightening of PTIA insulation standards,
and energy efficiency lalielling. which are good as far as they go. but any one or
two conservation steps can only cover a small part of the problem. For the rest
the President relies on hortatory eiforts by a new office to be lodged in the
Department of the Interior. He said nothing about the most conspicuous area of
waste, in automobile transportation. Xo program was laid out for reduction of
use f<u" heating, lighting and cooling. The problem of waste in industry was
ignored. What is essential in this country is a dnistic reduction in the rate of
energy growth.. Voluntary programs have their place. l>ut the retpiired degree
of conseiwation caiuiot be achieved by tokenism, or by .jawboning alone.
2. Similarl.v, there was general endorsement of research, but no commitment
of the necessary resources f(n- an adequate program. If the energy problem is as
serious as the Pi'esident now recognizes, if it is truly bound up with que>:tions
of national security and survival, we must somehow find the money and dedicate
the research capal)ility to develop new energy sources and to make better use
of the ones we already enjoy. Senator Jackson has called for a $2 billion a year
research program, almost three times as much as the President has recommended.
Accepting the President's aiipraisal of the seriousness of the energy problem,
the .Tackscni program is none too big.
3. The mes.sage mentions without elaboration that the President has instructed
the DepartmeTit of State to develop a program for international cooperation to
develoj) "international mechanisms for dealing with energy (piestions in time of
shortage." The I'resident does not say. but I hope he means, tltat the role of the
nuiltinational oil companies will receive careful scrutiny to determine their
future role and continuing usefulness as the In-okers between the oil surplus and
oil deficit nations of the world. It may well be tliat the consuming nations must
l)rovide a supplement for their activities, because it is at least a fair hypothesis
that their interests and those of the consuming nations no longer coincide.
4. This country operates on an effective 30-day reserve of oil. whicli was ade-
(piate before we were dependent on imports, but which is ridiculously hazardous
as our import dependence increases. I had looked for a firm recommendation liy
the President for a security reserve, l)ut the message recommended <jnly further
study.
."). Tlic President has recommended more leasing of land for petroleum explora-
tion, but he has said nothing a!>out the Ixmus bidding system or the need to
change the Interior Department lease forms to assure accelerated development
on leased lands. Cash bonus bidding limits the number of bidders to the large
com))anies. and diverts to the Treasury money which should be used for explora-
tion and development. There are many better systems, and the Administration
should pick one. Also, there is good reason to think that under current leasing
practices many oil companies have sat oti their leases to await the higher in-ices
which the Federal Power Commission and other official spokesmen have virtually
assured them were coming. Consumer organizations have Tirged reform in both
these areas for a number of years, but have yet to hear either a reasoned justifi-
cation for the present situation or a conunitment to change.
195
G. The President has not called for the b,asic reconciliation of environmental
and energy values which is necessary if we are to protect the vjiihlic interest by a
policy mosaic which assures that the twin goals of environmental proleciion and
energy adequacy are considered jointly and in relation to each other. For example
it is time to challenge the arbitrary, unworkable and perverse requirements for
zero water pollution and total non-degradation of the atmosphere. These are
stilling to the economy and make the energy problem totally insoluble.
7. The plight of the independent oil distributors and gasoline marketers de-
serves a word. The first impact of shortages has been for the majors to cut their
sales to many indei>endents in order to conserve their supplies for thfir own
retail outlets' I fear that without prompt action by the federal government to
allocate supplies to the independents, much of the independent industry will
not survive the summer. The independent marketers have played an important
role in tempering the pricing practices of the petroleum oligopoly, and the con-
sumers of this country will miss them when they are gone.
THE NATURAL GAS INDUSTRY
(Competition and Concentration)
WEDNESDAY, JUNE 27, 19T3
U.S. Sexate,
SuBCOMlNnTTEE ON ANTITRUST AND MONOPOLY
OF THE Committee on the Judiciary,
Washington, D.O.
The subcommittee met. pursuant to notice, at 10 a.m., room 2228,
Dirksen Office Building, Hon. Philip A. Hart presiding.
Present : Senator Hart.
Staff present: Charles Bangert, general counsel; Bernard Nash,
assistant counsel ; Peter Chumbris, chief counsel for the minority ; and
Charles Kern, minority counsel.
Senator Hart. The committee will be in order.
I am delighted to Avelcome the Chairman of the Federal Trade Com-
mission, a distinguished employee and very able man, Lewis A. Eng-
man.
STATEMENT OF HON. LEWIS A. ENGMAN, CHAIRMAN, FEDERAL
TRADE COMMISSION
Mr. Engman. Thank you, Mr. Chairman. It is a great pleasure for
me to be here with you this morning to review our activities at the
FTC concerning the energy industry.
I will be followed this morning by two members of the staff of the
Commission who are with me, Mr. James Halverson, the director of
our Bureau of Competition, and Dr. H. Michael Mann, director of the
Commission's Bureau of Economics.
My remarks will cover the genesis of the Commission's energy in-
vestigations and summarize our efforts to date.
I will also outline the staff resources which are being devoted to
these various studies and investigations.
I do want to make one point, and that is that I am not in a position
to discuss the substance of these ongoing investigations in detail. To
do so would raise the possibility that my participation might be chal-
lenged in some later adjudicatory proceedings which may come before
the Commission. For this reason, I request that the questions you may
have regarding the details of these investigations be reserved and ad-
dressed to Mr. Halverson or Dr. Mann.
Senator Hart. I think the request is proper.
(197)
198
]Mr. ExGMAX. I would like to ask, Mv. Cliairiiian, that I be excused
after giving my statement and responding to any questions you might
have, so we would further eliminate possible problems.
Senator Hart. We had intended that.
Mr. ExGMAX, In his prepared statement, Mi'. Ilalverson will dis-
cuss the investigation pertaining to the competitive situation of the
petroleum industry, gasoline marketing practices, and the reporting
of natural gas reserves. Dr. ]\Iann will discuss the Bureau of Eco-
nomics energy studies.
STRUCTURE OF THE PETROLEUM INDUSTRY
The current investigation of the competitive situation in the petro-
leum industry was authorized by the Commission late in 1071. Sub-
penas to several major oil companies were issued early in 1072. Some
were subsequently withdrawn due to strong company' resistance; how-
ever, several useful responses were received.
Because of the initial resistance to the Commission's subpenas. an
additional investigative strategy was employed. The staif of the Bu-
reau of Competition sent detailed questionnaires to the larger inde-
pendent crude producers, petroleum refiners, and gasoline r.uirketer.5
in the United States. A followup search of their files and numerous
personal interviews were conducted. From August 1972 until the first
part of April 1973, the stafl' contacted and obtained information from
over 30 independent petroleum companies. In general, these inde-
pendent companies voluntarily complied with the staff's requests for
information and documents.
The staff' olitaiued substantial information on the petroleum indus-
try from published public and governmental sources. A wealth of
relevant and reliable information on the structure of the industry is
available from these sources. The staff collected further valuable in-
formation from the Department of Interior, the Oil Import Appeals
Board, the Interstate Comuierce Commission, and other Federal agen-
cies. Various State taxing authorities and several State agencies sucli
as the Texas Railwav Commission were contacted. These o-overnmental
agencies were cooperative in providing the requested information.
To supplement the staff's understanding of the structure and opera-
tion of the oil industry, the Federal Trade Commission, on April 20,
1973, again issued subpenas — this time, ad testificandum subpenas to
corporate officials of the uiajor oil companies. Rather than merely to
subpena documents, an effort was made to develop the factual infor-
mation through testimony of petroleum company executives, to iden-
tify releveiit documents and to make on-the-record requests for sub-
mission of such documents to the Commission. These investigative
hearings began May 21, 1973, and every effort is being made to ex-
pedite them in light of the current gasoline supply situation. I have
requested that a full report be submitted to me no later than July 1,
including results of this investigation and any appropriate recom-
mendations.
On December 22, 1970. on the basis of a letter from Senator Hart,
complaints from gasoline marketers and the public, and otlier in-
formation concerning anticompetitive gasoline marketing pi-actices,
199
tlie Conimission directed an iiivestig-ation into the marketing practices
of the major oil companies.
In elannary and February of 1972, the Commission conducted pre-
liminary investigations in Florida, Missouri, Ohio, Michigan, and
Wisconsin, and opened other investigations of some of the largest
marketers of gasoline. The Connnission opened formal investigations
of the Standard Oil Co. of Ohio in May 1971, and a formal investi-
gation of the Phillips Petroleum Co. in April 1971.
On January IS, 1973, the Commission issued a complaint against
the Standard Oil Co., and its subsidiary Sohio, charging tliat it had
violated the provision of the Federal Trade Commission Act.
On May 15, 1973, the Commission issued a complaint against Phil-
lips Petroleum Co. The complaint resulted from an investigation of
Phillips concernnig the use of lease coercion and limitations on prod-
ucts offered for resale.
The Bureau of Competition has also initiated several investigations
in Detroit. In those investigations, the Bureau of Competition has
issued several subpenas for documents to two major oil companies.
On April 12, 1972, the Bureau issued an extensive subpena to one
major oil company, which resisted the subpena until ordered by the
Commission to submit the documents. The company still has not sub-
mitted all of the requested information. The Bureau staff has held
hearings, taken testimony from executives of this company in Detroit
and AVashing-ton, and has conducted extensive interviews of present
and former gasoline service station dealers of this company.
The Bureau initiated an investigation of another major oil com-
pany in Milwaukee in February 1972 regarding retail pricing policy.
That investigation has now been shifted to Detroit. In March and
April of 1973, the staff subpenaed documents and testimony from
several executives of this corporation regarding their marketing prac-
tices in Detroit and other parts of the country.
In total, the Bureau of Competition has received thousands of pages
of testimony, over a quarter of a million documents, and much other
information in its investigation of these major gasoline marketers.
After analysis of this wealth of data, the staff will recommend to
the Commission such action as it deems appropriate.
REPORTING OF XATURAL GAS RESER\'ES
By a letter dated September 1, 1970, Senator Hart wrote to Com-
missioner Maclntyre indicating that there were numerous allegations
that natural gas producers were collectively withholding information
on new discoveries of natural gas for the purpose of obtaining higher
rates from the Federal Power Commission which regulates wellhead
prices of gas passing into interstate commerce. He recommended that
the Commission conduct an investigation in this area to determine
whether there was a withholding of gas reserves and to determine
whether such withholding and delay was attributable to a combination
or other conduct violative of section 5 of the Federal Trade Commis-
sion Act.
A Commission minute dated October 20, 1970, authorized and di-
rected the commeiicement of an investigation focusing principally on
the reporting, estimation and deployment of reserves b}' the natural
27-547 — 74 14
200
gas industry in one selected area of the country. Southern Louisiana
was chosen as the sul)ject of this inquiry, and on June 3, 1971. the
Commission approA-ed the use of compulsory process.
After extensive negotiations with the attorneys for the American
Gas Association, the field-by-field estimates of each southern Louisiana
subcommittee member for the years 1966 through 1970 were delivered
to the offices of Price Waterhouse & Co. in October 1971. This was the
first time that the individual field-by-field estimates used by the
American Gas Association to compile their annual report Avere re-
vealed to any agency. Because of their confidentiality, a third-party
arrangement was agreed upon whereby the documents would remain
at Price Waterhouse. but Bureau of Competition attorneys would
have possession of and access to the field-by- field estimates.
With information gained from numerous depositions and inter-
views, a comprehensive subpena was drafted and issued on November
24, 1971, to the heads of the following companies : Shell. Gulf, Texaco.
Continental, Union. Mobil, Superior. Pennzoil. Standard Oil Co.
(California) , Standard Oil Co. (Indiana) . and Standard Oil Co. (New
Jersey, now Exxon). The subpena focused on offshore Louisiana.
All of the companies filed motions to quash with the last motion to
quash filed on February 11, 1972. On June 27, 1972, the Commission
issued its opinion denying all the motions to quash. On July 28, 1972,
two of the companies filed petitions for reconsideration of the Com-
mission's order denying the motion to quash, and three additional com-
panies filed motions to stay the Commission's denial until the Commis-
sion ruled on the petitions to reconsider.
After the Commission's denial, extensive negotiations explaining
the specifications of the subpena were conducted with most of the
companies. ]SIotions to quash were finally denied. In September, three
of the companies agreed to produce the documents required by the sub-
pena. These companies were Gulf Oil Corp., Union Oil of California,
and Continental Oil Co. On November 15, 1972. the Commission au-
thorized the General Counsel to request the Department of Justice to
enforce the subpenas against six of the noncomplying companies. In
December of 1972, negotiations broke down with the remaining two
companies, and one of the companies that had previously agreed to
submit documents in response to the subpena, elected partially to with-
hold some of the data called for by the subpena. On January 18, 1973,
the Commission authorized the General Counsel to request action
against these three com]:)anies. In ISIarch, the enforcement papers were
transmitted to the Justice Department. On June 1-t, 1973, the Justice
Department filed suit in district court for the enforcement of these
subpenas.
I might add here, Mr. Chairman, we do not have the authority to
enforce our own subpena and must, therefore, refer them to Justice.
Senator Hart. What is your opinion as to the policy which requires
the -Justice Department to enforce your subpenas ?
Mr. Engman. We have requested the Congress, Mr. Chairman, to
grant us the authority to enforce our subpenas. I have testified on that
before Congressman ISIoss' subcommittee in the House. We are hope-
ful that legislation which would permit us to do this will be enacted
by the Congress this year.
201
Mr. Halverson Avill be commenting more specifically on some of the
I)reliminary results of the natural gas investigation Avhich I understand
the Bureau of Competition is now formulating,
STRUCTURE OF THE EXERGY INDUSTRY
The background of the Bureau of Economics' commitment to studies
in the energy sector has been fully presented in a document made pub-
lic, titled "Commission Study Alternatives in the Energy Sector: A
^Memorandum to the Commission b}' the Office of Policy Plamiing and
Evaluation, April 22. 1971." This submission to the Commission de-
tailed for study areas for the Bureau which received approval of the
Commission in INIay 1971, and which are over and above the studies
to which I have been referring. These are :
1. An inquiry into whether the four primary fuels — oil, natural gas,
coal, and uranium — constitute one, or four, separate markets.
2. A second investigation begun in the spring of 1972, seeking to
analyze the impact of oil company mergers on the potential decline in
concentration resulting from the increasing substitutability among the
primary fuels. The Bureau expects to submit this study to the Commis-
sion in the very near future.
8. An examination of the possible impact which structural changes
resulting from oil-nonoil mergers might have on pricing behavior. Be-
cause the Bureau of Economics Avas not confident that there is any
somid analytical means for making such a determination, the Com-
mission decided last November not to proceed further with this study
at that time.
4. An inquir}' seeking to determine the link, if any, between struc-
tural changes and the pattern of E. & D. on new technologies which
may transform coal into oil. The Bureau plans to begin this stud}- in
the fall of this year.
STAFF RESOURCES DEAOTED TO VARIOUS STUDIES AND INVESTIGATIONS
With respect to the study of the structure of the petroleum industry,
the Bureau of Competition estimates the total cost to date at approxi-
mately $300,000. The study now requires the efforts of 2 assistant
directors, 10 attorneys, 4 law clerks, and 9 economists, at a pro-
jected annual cost of about $1 million — $700,000 more than was
anticipated. Present plans call for the full-time assigiiment of about
15 atorneys to this project in fiscal year 1974. However, this figure will
be substantially larger if the Commission should decide to conduct
litigation m this area. Given the fact that litigation is possible (al-
though the Commission has made no determination yet) and the pos-
sibilit}' of a major report to Congress in the event of enactment of S.
1570, the annual cost associated with the petroleum industry activity
could be as high as $1,500,000 during fiscal year 1974.
The total cost of the Bureau of Competition''s inquiries into gaso-
line marketing practices to date is estimated at $200,000. Six head-
quarters attorneys and one economist are presently assigned to these
matters. One of the dealer cases is being handled by the Cleveland
Regional Office, and is staffed by several attorneys. Projections for the
future indicate that requirements will continue at approximately the
present levels, or at a dollar cost of about $200,000 annually.
202
Tlio totul cost of the natural ft-as iiivestig-atiou to date is estimated
at $170,000. C'urrently. two attorneys, one economist, and one law
clerk are assio-ned to' the project. Projected requirements for fiscal
year 1974 are estimated at four attorneys, with the likeliliood that as
many as six attorneys will be required by fiscal year 1975 in the event
that'^the Commission decides on the basis of information developed
from the recently developed subpenas that a litigated case would be
appropriate. In rough dollar costs, this would amount to about $-iOO,-
000 annually.
The Bureau of Economics estimates that its work to date in analyz-
ing the structure of the energy industry has cost approximately $100,-
000. Three economists are presently working full time on this project,
and costs are expected to continue at a rate of about $70,000 per year
for at least another year.
I am pleased to have the opportunity to be liere this morning and
to appear before this subcommittee, particularly before you, Mr.
Chairman, since you are one of the Senators representing my home
State.
I would be happy to answer any questions which you might have.
Seiiator Hakt. Thank you, Mr. Chairman.
Senator Hart. Fii'st. and bearing, I think, on the general subject
Init seemingly remote : Any time an appropriation or budget request
is up, unless it is the Defense Department or some monstrous inhaler
of Federal money, the addition of $2 or $3 million sounds like a lot
of money and encounters considerable resistance.
On pages 10 and 11 of your testimony you project staff resources
devoted to the energy area for 1974 as about $2 million.
Yesterday the Senate Appropriations Committee did approve or
request an additional $2 million, $2.6 million. The Appropriations
Committee has added $2 million, which would pi-ovide about 50 more
lawyers and economists to the FTC for a special task force on energ;/.
Of course, my purpose in asking for that additional money was to
assist you in your work and speed it up; I ho])e it will. But I Avonder
whether youi" otiier resources are adequate. What is your opinion now
that you have been in the Commission for a period of time as to the
adequacy of your staff funding?
yiv. ExcnrAN. Mr. Chairman, we very much ap])reciajte your i^iterest
in our funding and the special effort you took to communicate that
interest to Senator McGee on the Appropriations Committee.
With respect to these matters it is difficult to be j^recise Avith res]iect
to what our needs may be in any given area. If it should happen that
in one of these areas the staff should recommend to the Commission a
major action sometime this summer and the Commission should deter-
mine that a major legal action of some sort should be brought, this
could have a substantial impact on the manpower which will be
needed.
Xaturall3% Ave would like all of the money we can have, but we
don't want to use it injudiciously, and I believe the amount appro-
priated by the Appropriations Committee should be ample for this
area of the energy industry. If we find ourselves in^-olved in
a great deal of litigation, we may need additional funds to pursue the
matter. If that should happen, I would like to come back to the
Congress.
203
Witli respect to the other resources available to tlie Commission,
we were one of the few agencies granted a slight increase in personnel
and money by the 0]MB. The House committee saw tit to take action
whicli reduced some of this increase but I Jiote that tlie Senate Appro-
priations Committee has restored the full amount of the increase
wliicli was approved by OMB.
We would, of course, urge that tlie Congj-ess maintain the fiscal year
1071 budget whicli we submitted in its full amount.
Se]iator Hart. "We can't ask you to do a job unless we give you the
money. I ho]:)e you will be prompt in letting us know if you believe
you will need additional money down the road.
That gets us to the business of the Office of Management and
Budget. Did the O^H^) clear the testimony that you are giving us this
morninii:?
^Ir. ExGMAX. Xo: it did not. I follow the practice, ]Mr. Chairman,
of not clearing with OMB testimony which I give as chairman of an
independent regulatory agency. We have on occasion in the past sub-
mitted information copies to the OMB, but I don't know whether or
not my stafl' did so in this instance.
Senator Hart. I recall the position 3'ou toolc in 3'our discussion with
tlie Commerce Committee at the time of your confirmation. You felt
tliere was an independence that had to be respected, and you would
proceed as you saw fit. whatever the OMB might think; that is good.
Was vour testimony cleared with anyone in the White House?
Mr. ExGMAx. Tt was not cleared with anyone in the White House.
Tlie only individuals avIio cleared my testimony were the three fellow
memljers of the FTC. Connnissioner Maclntyre is not participating
this Aveek in our deliberations since he is resigning.
Senator Hart. That is the way all independent agencies should
operate ; I am glad you are.
Xow, with respect to the Bureau of Economics' concentration in the
energy business, as I read Dr. Mann's statement, apparently a decision
was made to obtain informati6n from the public records and not from
companies by way of the 6-B questionnaire or by subpena.
So o years after Congress has requested this study, what we are
going to receive. I take it, is a distillation of public data. That will be
the basis of the report.
Xow. the public data does not tell the full story. If it did, there
woidd be no quarrel with that approach. But as we have learned over
the last several years, the control of reserves, whether we are talking
about petroleum or uranium or coal or gas or whatever, will ultimatelj^
deterniine who controls the energy industry.
I take it that your study will not contain that information.
Mr. Exgmax. I must confess, first of all, Mr. Chairman, these
mattej-s took place before I was chairman of the Commission. There-
fore. I don't have firsthand information. I have not seen the proposed
report and I would like to defer my personal judgment on that report
until I have had an opportunity to review it. I expect we will have it
next month. I think the Commission itself will take the same approach
and we will want to be certain in our own minds that the report is a
\alid report.
204
I have no reason at this point to surmise that it may or may not be
based on valid data, but I do appreciate yonr comment that on some
occasions rejDorted data may not be totalh' accurate.
Senator Hart. Let me make one other comment.
Dr. Mann sets out production concentration ratios in the oil and
natural gas production field. He comes up with a figure in the general
area of 25 percent of concentration ratios.
Chairman Xassikas of the Federal Power Commission gave us some
tables and we have had testimony from power economists. They point
to four-firm area-by-area concentration of natural gas as approximat-
ing 95 percent. This discrepancy is dramatic both in terms of justi-
fication and also importantly in the situation. I think this illustrates
the need for the Trade Commission structure study to get the real
data directly from internal company documents.
"\^niat do you think j^our chances are of doing that ?
Mr. Engman. I suppose that due to the extent to which we meet re-
sistance we will have to go tlirough the subpena route once again.
I would like to say, Mr. Chairman, tliat the concentration ratios are
important, but as you know, numbers can be developed and utilized
in a number of different ways.
The fact there sometimes is more than one I'atio may be justifiable
in that those ratios are being used for different purposes.
If we are looking at the possibility of whether a certain approach
should be taken to, saj^, mergers between two segments of an industry,
it is then necessary to look and see whether that industry uses two
kinds of fuels. Where Ave are looking at some other aspects for other
purposes, it might be appropriate to use a concentration ratio or mar-
ket definition which is somewhat different. At this point, I would pre-
fer not to comment on the approach taken thus far.
I can assure you that we are going to be very concerned about get-
ting accurate information and information which will and can provide
a meaningful basis for such action as may be appropriate.
Senator Hart. But the need to have available the reserves is critical.
We are in agreement on that.
Mr. Engman. I don't think there is any disagreement.
Senator Hart. In the search for the truth here you may run into
delaying tactics, you may have subpena problems, you may have 0MB
problems clearing questionnaires and so on. I know that we are going
to add time to the development of the report, and yet I think that the
sooner we can make the turnaround and go after the true figures the
better, and the published report based on published production data
is important.
I would just as soon delay the report until it is in a position to reflect
the true figures.
If the task force appropriation clears the Senate and there are no im-
pediments to 3^our getting the information for this study from the
company, is it possible that you will be able to report by January 1,
1975? That is the date we built into tlie task force appropriation.
Mr. Engmax. I see no reason at this point to believe we would not
be able to report by that date. Mr. Chairman. I might be contradicted
by our staff people. However, I think it is good to have a club over their
heads.
205
I should sa}' that I think with the amount of investigation which is
ah'eady proceeding and the amount of information that has been and
is being obtained, we sliould be in a position to move very promptly
in this area. I would certainl}^ think since it is oiie of the critical issues
which faces this country today, we must give it a very high priority.
Senator Haet. Your actions since you have been in office reflect that
position.
I want to talk at least about some housekeeping aspects of the in-
vestigation of the reserves reported by the American Gas Association.
Because you are going to have to judge that, I do not intend to get
into substance and if any of ni}- questions appear to involve substance,
just say so.
As you know, our interviews of your staff have spelled out the con-
trolling and have specifically suggested that an 11-month delay re-
sulted from delay within the office of your general counsel. Your
own testimony indicates that the Commission authorized the general
counsel to request subpena enforcement by the Justice Department in
Xovember of 1972.
As we understand it, that request was not even transmitted to the
Justice Department until some 4 months later. Is that the formal
procedure ?
Mr. ExG3iAx. First of all, I don't know that one could characterize
anything as a formal procedure, Mr. Chairman. This is a very difficult
area, and there may hav^e been some difficult legal questions involved.
However, I don't think this kind of delay is justifiable in an instance
where there is a critical need for the facts. As I indicated in my com-
ments, I have instructed our staff, and particularly the Bureau of
Competition, that all resources and manpower that we have should be
devoted to move this as rapidly as possible.
Senator Hart. "Were matters in connection with this study handled
by several people in the counsel's office or was the responsibility that
of one person ?
Mr. ExGMAX. It would have been the responsibility of a group of
people. During this period of time we had some compliance and the
situation changed to some extent. One of the companies which in-
dicated it would comply subsequently did not comply totally, and in
two other instances, as my statement indicated, there w^re some
changed circumstances. It does illustrate, I think, the difficulty of the
present procedure : If the Commission had had the authority to en-
force its own subpenas, we would have moved immediately forward
rather tlian taking additional time to prepare the material for Justice,
and then bringing their people up to date on what the problem was.
Senator Hakt. As I pursue this, I want to make clear that, in the
judgment of the subcommittee, the performance by the Commission
itself — you as Chairman an.d your Commission members — has been
breakleg.
We are trying to find out why down below in your staff there is
'Sir. Engmax. I think they now have the word.
Senator Hart. Your testimony indicates that the Commission au-
thorized the investigation on October 20. The com})ulsory process was
approved in June 19T1.
206
Tlien the Bureau of Competition felt tliat the AGA response was
inadequate and that the subpenas should lie issued and that recom-
mendation. I take it. was rejected ; is that correct ?
Mr. Engmax. Which particular recommendations are you referrino-
to. Mr. Chairman?
Senator Hart. My notes say that the recommendations for subpenas
were rejected. The start' tells me that is not the point and I will ask
Mr. Bangert to develop
Mr. Bangert. Mi-. Chairman, it is our understandino- that there
was a recommendation made to the Commission to close the case on
the basis of the AGA response, but the Commission, in fact, decided
that it would not close the case but would go forward with it using
compulsory process.
If you could provide us with a chronology of what happened be-
tween October 20, 1970. and the date when the compulsory process was
authorized, including the names of the various staff members that were
involved in the project. I think that will help us in our housekeeping
aud clear up the record.
Mv. Engmax. We will be very happy to do that. I want to state it
is my understanding that at no point in this process has the Commis-
sion taken any action which would have turned off or changed or
slowed down the course of its investigation.
[For the information requested, see exhibit 6 at the end of Mr.
Hal verson's testimony.]
And since I have l)een personally aware of what was going on that
has ])een the case.
Mr, Bangert. That happened, I believe, before you became Chair-
man.
Mr. Engman. I don't know what happened in 1070. but we will
provide that information to the subcommittee.
Senator Hart. Thank you.
Would you review the files to determine whether there were any
instan<"es or occasions Avhen any personnel from the Federal Power
Commission sought to curtail or persuade you to close down your
investigations?
Mr. ENG]\rAN. We will be ha]")py to provide that information. You
may he able to address that question with more specificitv to Mv. Hal-
verson, who has a little longer tenure with the Commission than I.
[For the information requested, see exhibit 6 at the end of Mr.
Hal verson's testimony.]
Senator Hart. Yesterday the Power Commission Chairman repeated
his ]-)osition that we deregulate the price of wellhead gas with respect
to new gas.
We have read your analysis which opposes deregulation. Has the
Commission acted on this recommendation? If you have, would it
require a submission again to 0MB ?
^[r. Engman. Xo, anv statement which the Commission would
present to the Congi-ess would not require O^MB clearance.
The Commission has not actually received the recommendations in
that area from the staff' at this point.
T would say that to the extent there is information contained in
some of the ongoing investigations which may have a liearing upon
207
that, I would bo cautious about expressing an opinion per 5onally or on
belialf of the Commission.
Senator Hart. Tliat is good enough. I have one other thing which
reaches way out.
Since 1965 the Trade Commission has been investigating the distri-
bution of automobile replacement parts. Since 1068 this subcommittee
has been urging the Commission to come to some kind of conclusion
one way or tlie other. Are there, or are there not anticompetitive prac-
tices associated with captive crash parts, and are there more subpenas
outstanding that the automobile companies are moving to quash I I
am talking about an 8-year-old investigation. Please check on the
progress when you get back and tell me if that is as expeditious a
movement as possible or whether something can't be done to make
it move more expeclitiousl}'.
Mr. Engmax. You raise an interesting point, ]Mr. Chairman. One of
the difficulties I have had to adjust to in coming to work for the Gov-
ernment is that there are many delays that seem to be intolerable.
As a matter of fact, on this subject I talked to our general counsel
last week and raised the question as to what was the progress in this
area. I have scheduled a meeting for this afternoon with the director
of our Bureau for a com])lete i-eport as to what the problems are and
wliat the timing will be in the future.
Senator Hart. That is a happ}" coincidence and we will await your
word.
[For the information requested, see exhibit 0 at the end of Mr.
Halverson's testimony.]
Mr. Chumbris.
Mr. Chumbris. Chairman Engman, it is a pleasure to welcome you
here this morning. I am sorry none of the minority membere were able
to be here, and I am sure they would offer you their welcome also.
Mr. Exgmax. I understand there are some other matters going on
currently which require their presence.
!Mr. Chumbris. In light of your comment that you would not submit
to the O^MB statements for hearings in which your Commission tes-
tifies, I think it is a good time again for us to bring up a point which
has been a sore spot in many of our other hearings.
I think it is significant now that you are starting a new practice
that perhaps you can lead the way in this, also.
It is really a very difficult thing for a committee to hold a hearing
on a subject matter as important as this one, and to have to consider
four statements; one is 106 pages, another is 60 pages, another is
75 pages. It is very difficult for us to receive those statements after a
full day-s hearing which ended at 6 rl8 last night, and then to have to
go home and read 240 pages and make any sense out of it and be able
to discuss it thoroughly. We have talked about this many times. I
hope that your Commission will lead the way in seeing that when a
statement is going to be presented before this subcommittee, not only
will it follow the 24-hour rule that we have, but perhaps follow a 72-
hour rule. This really should be invoked so that all of the Senators
as well as their staff can go through these statements very, very
carefully.
If we are going to get to the nitty-gritty of this big issue, we can't
do it on the happenstance of getting a statement ancl not having the
208
opportunity to digest it and ask the questions that we should be asking
and not have to go back to the industry or the agency.
I laiow it is not a nice thing to say here, but we have said it over and
over again. I am going to recommend to my ranking member — and we
have done this in the past— that if we do not get a statement within
24 hours of the witness' appearance, he is going to be required to wait
another day. We have done that during several hearings.
As a matter of fact, Chairman Nassikas was threatened with that
the Last time he appeared before us.
I think it is something that has to be mentioned, and you have set
a good example by the fact that you are not going to submit it to 0]\IB,
because Government agencies have used the O^IB as a reason for not
getting their statements in on time. I want everyone who hears my
voice and reads the record to know that I am going to exercise that
24-hour rule, and if we have anything to say in the next executive
session, I think we are going to have to increase it to 72 hours.
Xotice is given for some of these hearings almost a month before
we It old the hearing. I can't see any reason why Ave can't have that
statement ahead of time.
]Mr. Engmax. I api)reciate your statement. I only hope the record-
shows that the 106-page document is not ours.
]Mr. Cmr^rBRis. It is not yours.
Senator Hart. "We are just bouncing off you a point that bothers
us all of the time.
I am in the process of trying to prepare for a 1-hour debate on the
floor on an entirely different matter and I Avish Ave had different
proredures all the way around.
Tliank yon A-ery much for a A-ery frank and open and instructive
statem-^'nt.
INIr. Engmax. Thank you Aery much. I am A^erj?^ happy to have been
here.
[The folloAvino; Avas receiA'ed for the record. TestimouA" resumes on
p. 223.]
MATERIAL RELATING TO THE TESTIMONY OF CHAIRMAN ENGMAN
Exhibit 1. — FTC Response to Senator Hart's Request for Reports
Federal Trade Commission.
Office op the Gexeral Counsel,
Washington, D.C.. June 19, 1913.
Hon. Philip A. Hart.
C'hainnan, ,'<i(bcom)7iittce on Antitrust and Monopoly, Committee on the Judiciary,
U.S. Senate, Washington, D.C.
Dear Mr. Chairman : This is in response to your letter of .Tune 5, 1973 to
Chairman Eugman requesting reports from the Federal Trade Commission
conceniing :
1. The Bureau of Competition's investigation of the natural gas reserve
reporting practices of the American Gas Association and the oil and gas
comiianies ;
2. The Bureau of Economics' energy industry structure study :
3. The Bureau of Competitions' investigation of gasoline marketing practices ;
and
4. The Bureau of Competitions' investigation of the competitive situation in
the petroleum industry.
Pursuant to discussions with your staff, the enclosed reports are in re.sponse to
that re^iuest and are submitted as background material for the Committee and
not for public release.
209
On tlie basis of discussions between your staff and Federal Trade Commission
staff, tliose sections of one of the reports that would be in appropriate areas for
interrogation of Federal Trade Commission witnesses in your planned hearings
Jiave been bracketed with red pencil. Only such material that would reveal the
strategy of the Commission in developing its investigation or contain detailed
information taken from competitively sensitive company documentation have
been so bracketed.
Sincerely,
Ronald M. Dietrich,
General Counsel.
Enclosures : (3)
Enclosure 1
Response to Senator Hakt — Federal Trade Commission Investigation op
Reporting of Natural Gas Reserves
This report is in response to a June 5, 1973, letter from Senator Philip A.
Hart to Chairman Lewis A. Engman. That letter requested information on all
the energy investigations being conducted by the Federal Trade Commission.
This memorandum specitic^iUy relates to the Bureau of Cami>etition"s investiga-
tion into the reporting of natural gas reserves which is styled In the Matter of
The American Gas Association, ct at., File No. 711 0042. Senator Hart asked
for :
1. A detailed chronology of all actions taken from receipt of my letters to date,
showing the progress of each investigation or study, each step taken, and the
reasons for any delays encountered.
2. A detailed description of the study or investigatory methodologies and
techniques used in each of these studies or investigations, i.e., was material ob-
tained from companies, governmental agencies, public sources, etc., and the
reasons for the methodologies and techniques selected.
3. A detailed description of the working relationships between the FTC and
all other ft-deral agencies or departments having knowledge or information
bearing on these areas, i.e., the extent of assistance sought and cooperation
received from the Geological Survey, the Federal Power Commission, etc.
4. Most imiwrtantly, your preliminary conclusions, or those of the staff, with
respect to each of the studies and investigations undertaken should be provided
based upon the work completed to date.
The I'eport consists of three sections; (I) The History and Purpose of the In-
vestigation. (II) Analysis of Documents Received in Response to the Subpoena,
and (III) Preliminary Conclusions.
I. history and purpose of the investigation
By a letter dated September 1. 1970 Senator Hart wrote to Commissioner
r^Iaelntyre indicating that there were numerous allegations that natural gas
producers were collectively withholding information on new discoveries of
natural gas for the purpose of obtaining higher rates from the Federal Power
Commission which regulates wellhead prices of gas passing into interstate com-
merce. He recommended that the Commission conduct an investigation in this
area to determine whether there was a withholding of gas reserves and to de-
termine whether such withholding and delay was attributable to a combination
or other conduct violative of Section 5 of the Federal Trade Commission Act.
On October 13, 1970 the Secretary of the Commission replied that "in order
that the possibility of collusion or other unlawful conduct in this field may be
more fully explored, we have today directed our staff to commence an investiga-
tion which will focus principally on the reporting, estimation, and deployment
of reserves by the Natural Gas Industry in one selected area of the country." A
Commission minute dated October 20, 1970 authorized and directed such an
investigation to commence. Pursuant to this minute, a memorandum initiating
investigation was filed on November 4, 1970 charging American Gas Association
et al. with collusive action in the solicitation and reporting information per-
taining to reserves in violation of Section o of the Federal Trade Commi.ssion
Act.
In the early part of the investigation, it was learned that the American Gas
Association, through its Committee on Natural Gas Reserves was the only
agency n porting proved reserves of natural gas for the entire United States.
Ten subcommittees had been ci'eated by this Committee to report proved re-
210
serves of natural gas for the various producing regions in tlie United States.
Because of the large potential reserves In the South Louisiana area and because
there had been several allegations disputing the accuracy of the reported re-
serves for the South Louisiana area, it was decided to conduct a "pilot"' investi-
gation of the actual oi>eration of the South Louisiana Area Subcommittee. A
letter was directed to Mr. John C. Jacobs, Jr., Chairman of the AGA Committee
on Natural Gas Reserves on December 24, IDTO requesting detailed information
concerning the operation and procedures of this SnlJcommittee. Partial responses
were received from tliis initial letter of inquii-y indicating that the Subcommittee
was composed of 11 membei"s, all of whom were full-time employees of major
natural gas producers.
Because the Subcommittee was composed of employees of major producers and
because responses to the Bureau of Competition's inquiries were inadequate, it
was decided that the soundest procedure would be to issue investigational
subpoenas. On March 10, 1971, the Bureau of Competition requested an approval
from the Commission for a resolution directing tlie use of compulsory process.
On April 8, 1971 the Bureau of Competition was directed to advise the Commis-
sion as to whether the information to be developed from the use of compulsory
process was necessary to the public interest and whether the individuals were
likely to refuse to testify or provide such information on tlie basis of the privilege
against self-incrimination. The Commission was concerned lest they be in-
advertently granting immunity under Title II of the Organized Crime Coiitrol Act
to either of the individuals or the companies involved. After these objections were
met the resolution was approvetl by the Commission minute dated June ?>, 1971.
Depositions v;ere taken in order to facilitate the drafting of a subpoena. It
was learned that eacli Subcommittee member was assigned fields in wliich his
employer was the major producer. This member v,-ould comiiile re'-erve estimates
for the fields assigned to him by the Chairman of the Subcommittee. The only
review of each member's estimates is by fellow Subcommittee members. Even
this review is limited in the .sense that Subcommittee members only see the
final estimate for any particular field and they do not see the underlying data
and hence are not in a strong position to judge accuracy. The Subconnnittee
Chairman aggregates these estimates into a regional total and then submits
that total to the main committee. The Committee on Natural Gkis Reserves for
the American Gas Association compiles the regional totals from each Subcom-
mittee and then annually publishes the total jii'oven natural gas reserves for the
United States.
During this period of the investigation, the various Federal Power Commission
proceedings concerning the South Louisiana area were also reviewed. In Sep-
tember. 1968 the Federal Power Commission set rates for South Louisiana which
were based on cost plus a fair rate of return. These cost-based rates were ccni-
siderably lower tlian those sought by industry. In its September 1968 decision
the Federal Power Commission invited petitions to reconsider rates applicable to
Offshore South Louisiana. In January of 1969 certain producers requested that
the South Louisiana rate proceeding be reopened to receive additional evidence
regarding changes in supply-demand relationships. On March 20. 1969. the FPC
ordered an investigation and proposed rulemaking, styied AR69-1, into rates
for Offshore South Louisiana. Tlie FPC made it clear that the supply of reserves
would be used in their decision. In May of 1969 the AGA reported an unprece-
dented event — an actual decline in proven reserves, occurring in 1968. This was
the first AGA report to follow the FPC decision setting low rates in South
Louisiana. The AGA report did not reflect declining reserves in South Louisiana,
during 1968, however. The FPC staff implemented the March 20. 1909 Order
by issuing a questionnaire on August 14. 1969 requiring detailed information
on reserves in Offshore South Louisiana. The producers resisted answering
this questionnaire. On December 1~). 1969 the FPC extended AR69-1 to all of
South Louisiana but limited the March 20, 1969 Order as it related to staff
investigation of reserve data to "jiroducer data as to volumes of reserves in the
Offshore area not committed to interstate pipelines." In ^lav 1970, the AGA
issued a report covering 1969 reserves — this time both total United States and
total South Louisiana reserves declined from the levels of the previous years.
Reserve figures beyond 1969 was not considered in AR69-1. On July 16. 1971 the
Federal Power Commission issued its Opinion in AR09-]. sulistantially increasing
the rate allowed. In finding a shortage of gas supply to justify increasing the
rate, the Opinion replied principally on AGA reserve data which it held to be
"reasonable reliable for the puiiwses used herein." The Federal Power Commis-
sion also .said :
I
211
'Our duty is to take all action we believe necessary to reverse the down trend
of tlie exploration and development effort, thereby to increase the likelihood of
.augmenting the national inventory of proved reserves for natural gas. We would
be derelict — we can think of no softer word — if we were to be guided by the
legalisms of the past in seeking solutions to the problems that have grown like
l>arnacles as this case has aged and its size has mounted."
After extensive negotiations with the attorneys for the American Gas Asso-
ciation, the field-by-tie!d estimates of qach South Louisiana Subcommittee mem-
ber for the years 1960 through 1970 were delivered to the offices of Price-Water-
house & Company in October of 1971. This was the first time that the individual
field-by-field estimates used by the American Gas Association to compile their
annual report were revealed to any agency. Because of their extreme confi-
dentiality a third-party arrangement was agreed upon whereby the documents
would remain at I'llce-Waterhouse but Bureau of Competition attorneys would
have possession of and access to, the field-by-field estimates.
By letter of July '22. 1971. an attempt was made to secure certain reseiTe in-
formation pertaining to South Louisiana that was contained on Form 15 Reports
filed with the Fetleral I'ower Commission. Form 15 Reports are filed annually
by interstate natural gas pipeline companies and reflect the remaining recover-
able saleable gas reserves committed to, controlled by, or possessed by the report-
ing pipeline company. The Fonn 15 was designed to aid the Federal Power
Commission in the iirocessing of certificate applications made by the pipeline
companies and to maintain surveillance of the gas supply of the pipeline com-
panies. Because the General Counsel of the FPC had on December 1, 1970 re-
(piested the FTC attorneys to infonn him in writing of any request for data or
interviews, this letter was written to Mr. Gordon Gooch. Mr. Gooch responded
by letter of August 9, 1971 stating inter alia.
"The estimated cost for the manual portion to respond to your request is in the
range of $25,000, exclusive of the cost of programing, computer time, and related
verification- We would need appropriate assurances from your Executive Direc-
tor that the Federal Trade Commission would reimburse us for all costs incident
to the study before undertaking it."
The request of July 2"J. 1972, in retrospect and out of fairness to IMr. Gooch,
,asked for much detailed information that would indeed have been difficult to
provide.
During the course of this investigation, the Bureau of Competition did obtain
through other sources certain data from Form 15 Reports. A comparison between
the AGA field-by-field figures and data from these Form 15 Reports disclosed
numerous instances in which companies have reported reserves on Form 15's
that are twice the qixantities of reserves reported for such fields by the AGA.
With information gained from numerous depositions and interviews, ;a com-
prehensive subpoena was drafted and it was issued on November 24, 1971 to the
heads of the following companies : Shell, Gulf, Texaco, Continental, Union, Mobil,
Superior, Pennzoil, Standard Oil Company (California), Standard Oil Compiiny
(Indiana), and Standard Oil Company (New Jersey) (now Exxon). The sub-
poena focused on Offshore South Louisiana and revolved around one central
premise which is that natural gas producers, for a variety of reasons, make esti-
mates of proven gas reserves. Companies make estimates of proven natural gas
resert-es in situations such as (1) bidding on or nominating leases, (2) deciding
whether to erect a permanent platform, (3) compiling or inventorying total com-
pany reserves or supply (4) negotiating or contracting for the s;ale of natural
gas, or for the joint or common exploration, development, production, purchase
or sale of acreage, or for obtaining bank loans, and (5) filing depreciation ex-
pense schedules with Internal Revenue Service to name just a few of the
situations. Specification G was therefore written to cover documents either i-e-
ceived or written by the natural gas producers between January 1, 1962 and
December 31, 1970 which contained estimates of the volume of natural gas
present. Documents containing estimates for all of South Louisiana, documents
containing estimates for all of Offshoi-e Louisiana, and documents containing
estimates for specific fields, portions of fields, leaseholds and portions of lease-
holds in Offshore Louisiana were called for by Specification G. The subpoena's
11 other specifications were designed to provide a comprehensive picture of each
company's various oi>erations in the South Louisiana are^a and to provide a
means to verify the estimates submitted.
The theory of the investigation is to compare the reserve estimates used by the
companies in their internal purposes with the estimates submitted to the
American Gas Association that were relied on by the Federal Power Commission.
212
In other words the investigation was not attempting to make new estimates of
the proved reserves in South Louisiana but was instead attempting to get at
reserve estimates already prepared. The various independent surveys of natural
gas reserves conducted by the Federal Power Commission and others have always
sought data from the natural gas producers in order to compile original reserve
estimates of the various fields. These types of surveys could be successful if it
were possible to obtain either all the data from the various companies or if it
were possible to obtain data from other sources. It was our experience that raw
data necessary in order to make original estimates of natural gas reserves cannot
be obtained outside of company sources and that reliance on company sources
to provide all the raw data needed is misplaced.
After the subpoenas were issued on November 24, 1971, various extensions in the
20-day time period allowed to respond or to file motions to quash the subpoena
were granted. All of the companies filed motions to quash with the last motion
to quash filed on February 11, 1972. On February 17, 1972, the Bureau of Com-
petition's attorneys on the case submitted a memorandum to the General Counsel
of the Federal Trade Commission recommending denial of the motions to quash.
On June 12, 1972 the General Counsel submitted its recommendations to the
Commission to deny the motions to quash the subpoenas. On June 27, 1972 the
Commission issued its opinion denying all the motions to quash. All of the
companies were informed of the denial and were given 20 days to respond to the
subpoena. Two of the companies, on July 28, 1972, filed petitions for recon-
sideration of the Commission's order denying the motion to quash and three
additional companies filed motions to stay the Commission's denial until the
Commission ruled on the petitions to reconsider. The last motion filed was
August 11, 1972. An August 2o, 1972 the Commission without opinion denied the
various petitions for reconsideration.
After the Commission's denial, extensive negotiations explaining the specifica-
tions of the subpoena were conducted with most of the companies. In September,
three of the companies agreed to eventually produce the documents required
by the subpoena. These companies were Gulf Oil Corporation. Union Oil of
California and Continental Oil Company. In mid-Octobei', 1972, it was felt that
six of the remaining eight companies would not comply with the subpoena with-
out a court order. Accordingly, on October 26, 1972, the Bureau of Competition
submitted a memorandum to the General Counsel of the FTC requesting enforce-
ment of the subpoena against these six companies. On November 15, 1972 the
Commission authorized the General Counsel to transmit the enforcement papers
to the Department of Justice. In December of 1972 negotiations broke down with
the remaining two companies and one of the companies that had previously agreed
to subniit documents in response to the subpoena elected to partially withhold
some of the data called for Ijy the siilipoena. Sul)poena enforcement action were
then recommended by the Bureau of Competition against these three companies.
On January 18, 1973, the Commission authorized the General Counsel to transmit
these enforcement papers to the Department of Justice. On March 2, 12, 14, 1.5, 16,
and 22, 1973 the enforcement papers were transmitted to the Consumer Affairs
Section of the Anti-trust Section of the Justice Department. On June 14, 1973 the
Justice Department filed suit in the District Court for the enforcement of these
subpoenas.
Between the time the Justice Department received the enforcement papers and
June 14, 1973, attorneys representing the resisting companies held three meetings
with the Justice Department. The attorneys for the producers cited the case of
Gnignqn v. FTC (C.A. 8 1968), 390 F. 2d 323, as authority for their proposition
that the Justice Department must consider the merits of the case before authoriz-
ing the filing of enforcement papers in District Court. The attorneys then pre-
sented the same reasons for denying enforcement as they had pre.sented to the
FTC a year and one half ago. One reason, which has been advanced consistently
since the issuance of the subpoena, relates to the Federal Power Commission's
National Gas Survey. Part of this survey entitled "National Gas Reserves Study"
was finally released on Thursday, May 16, 1973. Even after the subpoena enforce-
ment action was filed, a motion was received by the Secretary of the FTC asking
for a stay of the investigation due to issuance of this study.
The National Gas Reserve Study presented an estimate of the proved reserves
of natural gas in the United States as of December 31, 1970. In ai'riving at this
estimate, each field in the United States was not independently estimated. Fields
that were reported by the American Gas Association to contain more than 400
BCF of gas, defined as the "certainty sample," were each examined but field."*
213
reported by the AGA as less than 400 BCF were stratified in six classifications
for limited random sampling.
Our review of AGA estimates has indicated that the only fields reported as
containing more than 400 BCF of gas are those that have been on production
for a long time. It has also revealed that the fields reported to contain relatively
small amounts of reserves are quite often the fields that are most seriously under-
reported. The procedure for identifying those fields that belong in the certainty
sample and those fields that belong in the six random sample classification is
stated on page 21 of Appendix V of the study.
•'Assign sample fields to the same strata as originally assigned according to
its AGA reserves. That is, the AGA reserve figure defines the strata regardless
of the independent reserve estimate."
Reliance on AGA figures places those fields that are most likely to be under-
reported into the random sampling category. These fields were thus much less
likely to be examined. '
The distinction between AGA figures and FPC figures is further blurred by
the fact that employees of producers also had a large input and influence in the
study. The full extent of industry participation in making the estimates used
in these studies is still unknown but the extent to which industry participated
in setting up the procedures for making up the estimates is known in part.
By Order of April (5, 1971, the FPC established three advisory committees.
The relevant one for this discussion is the Technical Advisory Committee —
Supply. This committee is headed by Myron A. Wright, Chairman of the Board
of Humble Oil Refining Company (now Exxon USA) with Dr. Paul J. Root,
Technical Director National Gas Survey, serving as the FPC's Coordinating
Representative and Secretary. On December 21, 1971 a Supply — Technical Ad-
visory Task Force — Natural Gas Supply was announced by Order of the FPC.
This Task Force is organizationally i-esponsive to the Technical Advisory Com-
mittee— Supply. The Task Force Director is Ralph W. Garrett, Exploration
Analysis Manager, Humble Oil and Refining (now Exxon USA). The Deputy
Director is Worthy Warnack, Geologist, Humble Oil and Refining Company (now^
Exxon USA). Task Force members include employees of Phillips Petroleum
Company, Union Oil Company of California, Gulf Oil Corporation, Texaco In-
corporated (California), Mobil Oil Corporation, Shell Oil Company, Atlantic
Richfield Company, Amoco Production Company, and United Gas Pipeline Com-
pany. Dr. Root is also the Coordinating Representative of this group.
This Task Force and the Advisory Committee — Supply were responsible for
formulating the procedures used in the Study. Although the Task Force was
first authorized on December 21, 1971, the minutes of an October 21, 1971 meet-
ing of the Executive Adivsory Committee indicate that the Task Force on Supply
had its first meeting on September 15, 1971. The Task Force had an indeter-
minate number of meetings between September 15 and December 21, 1971. At
least one of these meetings was held in Humble's Ofiice in Houston. No minutes
are available for these meetings.
By another order, also on December 21, 1971, the Commission announced the
procedures of the Study. The third paragraph is particularly important, "The
Task Force on Natural Gas Supply to the Survey's Supply Technical Advisory
Committee recommended procedures for such a survey and analysis at its
December 14, 1971 meeting." Thus, in addition to this September 15 meeting,
there was a December 14 meeting. There are no minutes available for the Decem-
ber 14 meeting of the Task Force and so it is impossible to tell whether the
FPC had any input into the procedures as adopted.
In addition to these general criticisms of the survey, it is noted that the FTC's
investigation covers from 1962-1970 where the FPC's study only deals with 1970.
The significance of the FTC's time period is that trends can be noted. Compari-
son between company documents containing estimates and the AGA estimates
from the year 1963 to 1970 have already revealed that although there has always
been a discrepancy between the figures, this discrepancy significantly increased
in 1968 and 1969, the crucial years in our study because of the reliance by the
FPC upon 1969 AGA data in their area rate case for South Louisiana.
Another reason why the study is irrelevant to our investigation is that there
are over 200 fields in Offshore South Louisiana and the FTC's investigation is
seeking documents showing company reserve estimates for each one of these fields.
The FPC's study sought raw data for 24 Offshore South Louisiana fields. 20 of
which were fields in the certainty sample. As discussed above, these fields are
the least likely to be under-reported. Only four of the remaining fields were ran-
214
domly selected. The Bureau of Competition requested the Federal Power Com-
mission to supply the reserve estimates it arrived at for the 24 fields. To date, no
definitive response has been received. Although we would welcome these esti-
mates as an aid to our investigation, it must be reemphasized that the Federal
Trade Commission is not seeking to make original estimates of these fields. AVe
have asked inter alia for those company documents containing reserve esti-
mates Naturally, to insure that we will receive all the pertinent documents, we
have also asked' for the raw data behind these estimates. The FPC, on the other
hand has attempted to make their own estimates. 2dakiug an independent esti-
mate places one at the mercy of the producers because only the producers have ac-
cess to the raw data and it is very difl^cult to determine the completeness of the
raw data disclosed for each field.
U. ANALYSIS OF DOCUMENTS KECEIVED IN RESPONSE TO THE SUBPOENA
On November 20, 1972 Gulf Oil Corporation submitted over 12.000 documents
in response to the subpoena. These documents were examined in detail and on
March 20 and March 21, 1973 various witnesses from Gulf Oil Corporation came
to the Federal Trade Commission for a return hearing. During this recorded hear-
ing, questions concerning the adequacy of the search and the meaning of the
documents submitted were asked of the various witnesses. On February 27. 197:'.
Union Oil Company of California submitted in excess of 14,000 documents in
response to the subpoena and on May 8 and 9, 1973 a return hearing way held. On
April 25, 1973 Continental Oil Company submitted over 28,000 documents in par-
tial response to the subpoena. These documents have not as yet been completely
examined and the return hearing is schdeuled for July 31 and August 1, 1973.
The documents received from Union and Gulf do not, of course, provide a
complete picture of the reserve reporting procedures of the American Gas As-
sociation. A complete assessment is difficult to make until all the responses have
been received from the other companies subpoenaed. Several preliminary indica-
tions, applicable to the Offshore area, have however become apparent.
It wiis found that proved reserves is a term used industry-wide and that the
definition for proved reserves utilized by the AGA is also the definition employed
by the industry. It was also found that the submitting companies utilized esti-
mates of proved reserves for many purposes. One such piiii>ose is for making an
annual report of proved reserves in the South Louisiana area for the use of cor-
porate headquarters. The estimates of proved reserves that appear on in-house
annual reports of this character are sometimes called "book" reserves and are
usually broken down into estimates of the various leases the company owns.
There are many other uses of proved reserves other than for in-house corporate
reporting. In fact it was found that producers usually make a separate estimate
of proved reserves for a particular field, lease, well, etc., even if an estimate for
that particular field is available in the annual in-house reports. Apparently pro-
ducers rarely, except for tax purposes, go to the estimates contained in their in-
iKMise annual reports. For instance, when a producer has drilled a well on a par-
ticular trace and is considering spending millions of dollars to place a platform
on the tract, this expenditures quite naturally has to be fully justified so a new
estimate of the reserves in that tract is made. This estimate often is broken
down into several categories of reserves with proved reserves being one of the
categories. Another example is when a company wants to sell reserves in a cer-
tain lease to a pipeline company. The contmct that has been used for such a sale
sets a certain minimum and maximum daily quantity that a piiieline company
agrees to take and that a producer agrees to provide. These quantities are often-
times determined by a formula that is dependent uix)n the amount of proved re-
serves that are estimated in that lease. Documents commenting on these esti-
mates break down into great detail the amount of testing done on each well to
come up with estimates of proved reserves. Another use of proved reserves in at
least part of the time period between 1962 and 1970 is for what is known as carved
out production payments. In general terms, the carved out production payment
is a method for producers to anticipate income from a given lease. The future
production for a given time period is in effect sold, usually to a bank in return for
needed capital. Estimates of the proved reserves in the particular lease are re-
quired by the various banks.
*******
The estimates of proved reserves for a given lease that are refiected in the in-
house annual reports have been found to be lower than estimates of proved re-
215
serves that are used for other iu-house purposes. Sometimes the difference is very
sigiiilioaut amounting to over '200%. Both because of tliis trend, and because of
the tax-related purposes of the in-house compilation of reserves, it has been
surmised that at the very least the iu-house corporate compilation of proved or
•book" reserves are conservative.
Notwithstanding the conservative nature of these estimates, (Comparison be-
tween these in-house compilations of lease-by-lease estimates of proved reserves
with estimates submitted by members of the very same companies to the South
Louisiana Subcommittee of the American Gas Association has releaved very
signiticant discrepancies between the estimates. The estimates of proved reserves
submirted to the South Louisiana Subcommittee of the AGA have been found to be
signiticantly lower than the estimate of proved reserves reflected in the cor-
porate compilation. Some of the estimates are approximately equal, but no cor-
porate estimate has been found to date that is lower than the estimate sub-
mitted to the Subcommitee. * * *
The Bureau's investigation has also uncovered numerous instances in which
apparently substantial amounts of proved reserves of natural gas have been dis-
covered in the Federal Offshore area and not produced. * * '^■
III. PRELIMINABY C0NCLUSI0^^S
Complete responses from all the companies subpoenaed would" provide a more
accurate assessment of the reserves reporting procedure of the American Gas
Association. From the documents received and the investigation to date it appears
that there has been serious under-reporting of proved natural gas reserves. Al-
though no conclusive evidence has been found as yet of an actual conspiracy to
luider-report reserves, the investigation has revealed that the procedure for
reporting reserves through a subcommittee composed of employees of major pro-
ducers could be conducive to such a conspiracy.
Enclosure 2
Response to Senator Hart — Federal Trade Co-Mmissiox Energy Industry
Structure Study
The background to the Bureau of Economics' commitment to studies in the
energy sector has been fully presented in a document made public, titled "Com-
ndssion Study Alternatives in the Energy Sector,"' a memorandum to tiie Com-
mission by the Office of Policy Planning and Evaluation, April 22, 1971. This
submission to the Commission detailed four study areas for the Bureau which
received approval of the Commission in May, 1971. These are :
(Ij An inquiry into whether the four primary fuels, oil, natural gas, coal, and
uranium, constituted one, or four separate, markets. The study was essential to
a determination of whether the oil company mergers with nonoil fuel producers
were horizontal or conglomerate in nature. It took six months and concluded that
the primary fuels, at least as inputs to the electric utility sector, constituted a
single market and therefore, "'. . . mergers between petroleum companies and firms
producing or owning reserves of other fuels should be considered horizontal acqui-
sitions." ' This conclusion indicated that the level of concentration in the energy
sector would decline unless the major firms in one of the primary fuels were ac-
(luiring the dominant companies in the other fuels." This is the focus of the second
study.
(2) This investigation, begun in the spring of 1972, sought to analyze the im-
pact of the oil company mergers on the potential decline in the concentration
resulting from the increasing substitutability among the primary fuels. It will
be transmitted to the Commission next month with a recommendation for publi-
cation. It will l>e discussed in more detail below.
(3) The third effort would attempt to relate the structural changes resulting
from oil-nonoil mergers on pricing behavior.
(4) The fourth inquiry would seek to determine the link, if any, between the
structural changes and the pattern of R«&D into new technologies which may
transform coal into oil.
These studies were undertaken in seciuence. The first was published in Feb-
ruary 1972. The second is nearly ready for Commission consideration. There are
two salient points aboixt the second .study. Fii-^t, tUe decision was made to esti-
^ Interfuel Suistitutability in the Electric Utility Sector of the U.S. Economy, p. 82.
2 7b(d.,Table48, p. 84.
27-547—74 15
216
mate concentration levels and trends in terms of production rather than reserve
data. Second, this decision meant that the study relietl almost entirely on pub-
lic data,^ and therefore is subject to several caveats. These two issues will be dis-
cussed in tuni.
A complete discussion of the issues concerned with the measurement of con-
centration in terms of production as opposed to reserves is contained in the
ahove-cited memorandum (pp. 11-29). Measurement on the latter basis is clearly
preferable in circumstances where current production does not, as in the pri-
mary fuels, translate on a one-to-one basis into reserve ownership. The future
c(»mi>etitive posture in the primary fuels depends upon who has the reserves.
As the memorandum indicates, measurement of concentration on the basis
of reserves would certainly require the use of 6(Ii) questionnaires. Such a
massive survey, seeking very sensitive data from individual companies, would
severely sti-ain Commission resources.^ The 6(b) questionnaires requires prepara-
tion, clearance by 0MB, and compliance by the respondent companies. The last
would not come easily, but only after l-^ngthy court battles, often requiring en-
forcement by the Department of Justice. It is not unrealistic to say that had
the second energy study gone this route, we would be fortunate to have sufBcient
compliance two years from now to begin our anal.vsis.°
There was a ix>tential short-cut, at least with respect to th-e reserve data in
the uranium sector. As the Director. Bureau of Economics, testified before the
Subcommittee on Special Small Business Problems of the House's Sele<?t Com-
mittee on Small Business,^ he and staff met with representatives of the AEC to
determine whether the Bureau could obtain production and reserve data for
firms active in uranium mining and milling. Tliey were told that both data items
were svibmitted voluntarily to the AEC ". . . witli the understanding that it [the
data] would not be released to anyone else." They were to'ld that they would
l)e given production data if the companies agreed, but that it was very im-
probable that they would get permission to obtain reseiTe data. They then sought
permission from the companies to obtain the production data which they re-
ceive<i. In their desire to move on with the study, the judgment was made that
it was not worthwhile to try to obtain reserve data. This judgment, we believe,
has been supported by the FTC's experience in the collection of reserve data for
natural gas.
We did state that :
". . . it seems anomalous to me that the Atomic Energy Commission, which is
critically involved in the energy sector, and will probably be more critically in-
volved in the future as uranium possibly increases its impact on the energy
sector, that the Atomic Energy Commission apparently must get data from com-
panies voluntarily. It does not have, apparently, the legal power to get data,
which it would seem to me it is rather important to have for the Atomic Energy
Commission, let alone for us in our attempt to understand what is hapiiening
in this industry and what is going on." '
I still find this situation anomalous, if not scandalous.
The al>ove discussion explains the decision to proceed with the measurement
of concentration on a production basis, for which there exists publicly available
data. Unfortunately, these data are flawed so that our computed concentration
ratios are not precise.^ Each of the primary fuels will be discus.sed in turn.
Oil. — Concentration was measui-ed in terms of production by barrels of oil.
This measure ignores variations in the quality of the oil and excludes royalty
oil.^ An adjustment was made for the latter from previous estimates of the per-
centage of royalty oil to total production. This percentage was api>lied to all
firms' production. The result for 1970 :
3 The siibstitntability study did also, which constrained the analysis to the electric
utility sector. This was partly because there did not exist ". . . relativel.v reliable data
on fuel cost and use" for other sectors. Ibid., p. 17.
* The FPC's National Gas Survey received a first year budgetary allocation of 22 people
and some $.340,000.
^Litton Industries, one of the respondents in the Conglomerate Merger Performance
Sfufhi, did not lose its fisht concerninfj compliance with the Bureau's 6(b) until September
1972. three years after the investigation began. And the 6(b)'s for this study did not have
to go through 0MB because less than 10 firms were involved.
« Concentration lii/ Competing Raw Fuel Industries in the Energy Market and Its
Impact on Small Business, 1971.
~Ihid.,p. 23.
*> The production data could be improved by the use of 6(b) questionnaires. The
the owner of land from which the oil is recovered.
» This is oil produced and controlled by the firm in question, but legally belonging to
the owner of land from which the oil is recovered.
217
Production
Adjusted for
royalty, oil
4 firms .
27.7
31.0
8 firms
43.0
49.1
Coiiceutratioii has risen since 1955 when tlie respective figures were 18.6
percent and 30.4 percent. Although tlie levels are still relatively low/" some
factors suggest that the rise of the last decade will continue ". . . because the
major petroleum companies appear to be obtaining the majority of oft'.shore and
Alaska oil and gas leases."'
t'oal. — The chief difficulty with coal statistics is that coal varies with respect
to quality. Therefore, company figures and the resultant national totals are
combinations of uonhomogeneous commodities — the apples and oranges problem.
Using these figures, the 1970 4- and 8-firm concentration ratios were 30.7 per-
cent and 41.2 percent, respectively. If captive pi'oduction is excluded. "^ the per-
centages are 36.0 and 47.6, respectively. Inclusion of the cai)tive production
makes economic sense since this supply can enter the open market if price and
supply developments so warrant and since this production is not really distin-
guishable from production tied up in long-term contracts, which is included in
the industry's statistics.
The trend in concentration is upward : the 4- and 8-firm concentration ratios
in 1955 were 17.8 and 25.4, respectively. This rise appears to be the product of a
variety of economic forces, most notably the economies of scale in strip mining,
a method which is increasingly accounting for more and more of coal production.
In terms of the adjusted figure, concentration has risen from 1955 when 4- and
8-firm concentration percentages were 21.2 and 35.9 respectively.
These concentration ratios, even with an upward trend, are at best moderate.
However, concentration levels are not fully indicative of the state of competi-
tion because :
( 1 ) Concentration is higher at other stages of the industry ;
( 2) The majors control pipeline flows ;
(3) There exist many joint ventures, particularly in the bids for oil and gas
leases, which are not reflected in concentration ratios ;
(4) The Government has, through a variety of arrangements, helped cartelize
the industry.
Xatural Gas. — Concentration was measured from published company sources
on marketed production for the U.S. and Canada combined (total gross amount
of gas withdrawn from a reservoir minus the amount flared or returned to the
reservoir). The data are not available on a cons.istent basis: some firms report
gross production, others net (gross minus return to the reservoir and "shrink-
age") ; some report combined U.S. and Canadian production, otherse not; some
exclude royalty productions, others not ; some include natural gas liquids, others
not. In some instances, then, we are adding together apples and oranges.
The result for 1970 is, nevertheless :
4-Firm 24.4%.
8-Firm 39.1%.
Uranium. — The statistics for this sector are those reported by the AEC. with
the permission of the companies, or by the companies directly. They are l>ased on
the amount of uranium oxide (Us Os) recovered by the integrated mining and
milling companies. In 1970, the 4 and 8 largest integrated milling companies
produced 55.3 and 79.8 percent of Us Os, respectively.
1" John W. Wilson has testlfiPd that the top 4 firms accounted for 68.4 percent and
the 8 firms S.^.O percent of estimated first year volumes (1972 contract dates) for new
Long-Term OfHshore sales of Natural Gas in Louisiana. See : Testimony of John W. WMlson,
Office of Economics. Federal Power Commission, Exhibit 3.3 in Dockets C173-293, C173-33o
and C173-3.36, March 1973.
Such concentration ratios are relevant only if the present total supply is committed
in a way which precludes a buyer from bidding for it. It is our understanding that this
is not tiie case. Since Wilson's concentration ratio is based on new contract sales in Off-
shore Louisiana of 201.8 billion cubic feet, his new contract figure amounts to only about
0.9 percent of total U.S. production for 1972. As a result, Wilson's computation tells us
little about concentration in natural gas production. See : U.S. Department of the In-
terior. Bureau of Mines, "Natural Gas — Fourth Quarter 1972," prepared in Division of
Fossil Fuels, Feb. 28. 1973.
i'^ Captive production refers to production of coal by mines which are wholly owned
subsidiarifs of other companies (such as steel companies) and do not ordinarily sell any
coal on the open market.
218
However, these companies are uot fully Integrated. There are some independ-
ent mines. lu 1970, the top 15 milling companies mined 95.5 percent of tlie
uranium ore. Applying this percentage to the above figures on Us Os production,
we obtain an estimate of the percentage of Us Os mined by the top 4 and top 8
milling companies : 52.8 percent and 76.2 percent, respectively.
We have not computed a trend because the role of independent mines was
much larger in the past. Since we cannot obtain their production directly, we
can only report at best the amount produced by 4- and 84argest milling com-
panies, using the same kind of procedure as above. Such a figure probably under-
states concentration because some independent mines were larger than the cap-
tive mines of the milling firms. Therefore, we have no exact idea of the change
in concentration over time.
Furthermore, it is only recently that uranium has entered as a competitive
fuel to supply energy. In the past, the ore went into bombs or stockpiles. It is,
therefore, unclear whether past concentration is comparable to present con-
centration because there were two very different industries in terms of end use.
Concentration at present is substantial and suggests that the degree of com-
petition would not be intense. Furthermore, concentration is higher at upstream
stages and joint ventures characterize the milling stage. Moreover, there are sul)-
stantial barriers to entry to mining-milling, the combined operation an apparent
necessity. The economies of scale are substantial ; and the AEC has in a variety of
ways, and will continue to do so, influenced the degree of concentration.
SUMMARY
Concentration levels appear to be relatively low in oil. natural gas. and coal,
biit rising markedly. In uranium, the level is substantial and has probably risen.
The increased fuel intersubstitutability, however, acts as a deflationary force on
concentration levels, unless the major firms are coming under common owner-
ship. The extent to which such an exent is inhibiting declines in concentration is
the subject of the last chapter.
Enclosure 3
Response to Senator Hart — Federal Trade Comjiission Investigations of
Gasoline Markeeting Practices and the Competitive Situation in the
Fetroleum Industry
This report is in response to Senator Hart's letter of June 5, 1973, to Chair-
man Engmau regarding the Federal Trade Commission's studies and investiga-
tions in the energy industry. Their report specifically relates to the Bureau of
Competition's investigations of gasoline marketing practices and the competitive
situation in the petroleum industry.
Investigations of Gasoline Marketing Practices
Pursuant to a letter from Senator Hart, complaints from gasoline marketers
and the public, and other information concerning anti-competitive gasoline mar-
keting practices, the Commission directed an investigation on December 22, 1970,
into the marketing practices of the major oil companies.
I. investigations
The Commission conducted preliminary investigations in Florida, Missouri,
Ohio, Michigan, and Wisconsin and opened other investigations to some of the
largest marketers of gasoline in January and February of 1972. The Commis-
sion opened formal investigations of the Standard Oil Company of Ohio in
May. 1971 and a formal investigation of the Phillips I'etroleum Companv in
April. 1971.
The Commission issued a complaint against the Standard Oil Company (and
its subsidiaries Sohio) on January 18, 1973, charging that it had violated the pro-
visions of the Federal Trade Commission Act. Sohio. in the course and conduct
of its business, actively comi^etes with other petroleum companies throughout
the Unite<l States in the purchase for resale of petrolemn products, tires, batter-
ies and accessories. Sohio is also engaged in direct retail sales of petroleum
products, tires, batteries and accessories, through the use of company operated
retail outlets, in competition with its retail service station dealers with other
219
petroleum companies and their dealers, and other retailers of such products in
the various states of the United States.
The Commission's area of concern is Sohio's policy of granting to certain of
its retail service station dealers tempor'ary competitive allowances credited to
the regular tankwagon price of its gasolines. The granting of such allowances
generally occurs in market areas where there is a price disturbance usually in the
nature of a local or area price wai'. The aforementioned policy was put into effect,
maintained, and carried out on or ahout March, 1970 and at different times
thereafter.
The Connuission issued its complaint against Sohio on the grounds that Sohio,
acting together and in combination with certain of its retail service station deal-
ers, and as both a supplier and a competitor, agreed to fix and maintain, and did
so fix and maintain, the retail price at which gasolines were sold or were to be
sold at said retail service stations, and further agreed to, and adhered to. cer-
tain discounts, reliates, allowances, terms and conditions iipon which the gaso-
line would be sold to retail service station dealers and to the purchasing public.
The case is presently in the pre-trial stage and is being conducted by the Cleve-
land Regional (Jffice. The Cleveland office has held extensive investigational hear-
ings to take the testimony of gasoline service station operators and company
executives and has subpoenaed documents from 8nhio.
On May 15, 1973, the Commission issued a complaint against Pliillips Petroleum
Company. The complaint rei?ulted from an investigation of Phillips concerning
the use of lease coereicm and limitations on products offered for resale. The Phil-
lips investigation was conducted in order to determine whether or not Phillips
was in violation of Section .") of the Federal Trade Commission Act. Practice.s
investigated included :
(1 ) dealer coercion under a short term lease ;
(2 ) arbitrary lease cancellations :
(3) illegal tie-ins ;
(4) market foreclosure to competitors ;
( .">) requirement of a minimum purchase amount :
(6) inspection and surveillance as a means of controlling business operations;
and
(7) no etpiitable procedures for the resolution of legitimate dealer-company
disputes.
The short term lease was the focal point of the investigation because it was the
basis of the practices enumerated above. I'hillips exercised control of lessee deal-
ers through contractual agreements that restricted their retail marketing activi-
ties. It thereby curtailed competition. The Commissicm staff has been negotiating
with Phillips and may settle tliis case if it can achieve the goals of the Commis-
sion without a prolonged and expensive trial.
In its investigations in Detroit, the Bureau of Competition has issued several
subpoenas for documents to two major oil companies. The Bureau issued an
extensive sulipoena to one major oil company on April 12. 1972. and the com-
pany r'esisted compliance with the sul>popna until so ordered by the Commission
to submit the docinnents. The company still has not submitted all of tlie requested
information. The Bureau staff has held hearings, taken the testimony of the
executives of this company in Detroit and AVashington. and has conducted exten-
sive interviews of present and former gasoline service station dealers of this
company.
The Bureau initiated an investigation of another major oil company in Mil-
waukee in February of 1972 regarding retail pricing policy. Said investigation
has now been shifted to Detroit. In March and April of 1973. the staff subpoenaed
documents and testimony from several executives of this corporanon regarding
their marketing j)ractices in Detroit and other parts of the country. In total, the
Bureau of Competition has received testimony, over a quarter of a million docu-
ments and other information in its investigation of these major marketers of
gasoline. After analysis of this information, the staff would recommend ajipro-
priate action on the'^e investigations.
Iir. INVESTIGATIVE TECHXIQX'ES
All of these gasoline marketing investigations have employed similar investi-
gative technicjues which include :
(1) collection of information from injured gasoline station owners:
(2) testimony of oil comjiany executives :
(3) documents from majtjr marketers of gasoline ; and
220
(4) the employment f>f data processing teclinology to assist in the analysis
of the vohiminous documents snlipoenaed — a new development.
The preliminary conclusion of the staff of the Bureau of Competition in these
investigations is that a significant number of the major marketers of gasoline
employ marketing techniques which tend to stabilize and support retail gasoline
prices which may be higher than would exist if these companies abandoned these
techni(|ues. The Commission will continue to investigate marketing practices of
major marketers to determine whether a particular company may be employing
marketing techniques which tend to encourage high retail gasoline prices and
which may violate Section 5 of the Federal Trade Commission Act.
Investigation of the Structure of the Petroleum hidHxinj History of Investigation
The current investigation was autliorized by the Commission late in 1971.
Subi)oenas to several major oil companies were issued early in 1972. They were
drafted to obtain a limited number of documents cf)ncerning the companies'
activities in production, transportation, refining and marketing of petroleum
products. There were clear and immediate indications that the companies would
resist the subpoenas and in light of previous experience with subpoena enforce-
ment delay, they were withdrawn.
Methodology
Because of the resistance to the Commission's sulipoenas. a new investigative
strategy was employed. The staff of the Bureau of Competition sent detailed
questionnaires to tlie larger independent crude producers, petroleum refiners
and gasoline marketers in the United States. A follow-up search of their files
and personal interviews were conducted. From August, 1972 until the first part
of April. 1973, the staff contacted and obtained information from over thirty
independent petroleum companies. In general, these independent companies
voluntarily complied with tlie staffs' re(|uest for information and documents.
The staff obtained substantial information on the petroleum industry from
published public and governmental sources. A wealth of relevant and reliable
information on the structure of the industry is available from these scmrces. The
staff collected further valuable information from the Department of Interior,
the Oil Import Appeals Board, the Interst;ite ('(mimerce Commission, and other
federal agencies. Various state taxing authorities and several state agencies such
as the Texas Railway Commission were contacted. These governmental agencies
were cooperative in providing the requested information.
In April and May of 1973. with the assignment of additional lawyers, econo-
mists and para-legal personnel, the Commission staff analyzed the information
it had received.
To supi)lement the staff's understanding of the structure and operation of the
oil industry, the Federal Trade Commissiftn once again issued subpoenas ad
testifienndtim to corporate officials of the major oil companies. Rather than merely
sul)i)oena documents, the strategy was to develop the factual information through
testimony of petroleum company executives, identify relevant documents and
make on-the-record requests for submission of such documents to the Commis-
sion. These investigative hearings began May 21, 1973 and every effort is being
made to expedite them in light of the gasoline supply si taxation.
Preliminary Finding Ahoiit The Structure Of The Petroleum Industry
A. Imyortance of the non-integrated sector
The independent marketers of petroleum have played a vital role in keeping
the petroleum markets competitive, flexible and dynamic. They have brought
competition into an industry that is highly concentrated and have pi<meered in-
novations in methods of petroleum distrilmtion. The non-integrated sector has
traditionally lead the way in translating increased eflBciencies into lower consmner
prices. They have exerted a beneficial influence upon oil industry competition
that is disproportionate to their numbers.
Any substantial weakening of the independent sector of the oil industry would
be disastrous for competition. In the long run. the result would probably lie
increased unresponsiveness to market conditions, a deterioration in product qual-
ity and service characteristic of non-competitive markets. Even in the short run,
it is likely that consumer prices would rise sharply.
221
B. Factors affecting viability of non-integrated sector
1. Independent marketers of petroleum hare been unable to obtain a reliable
supply of refined gasoline.
a. Concentration of the oil refinery industry. — The independent marketers, in
recent years, have obtained most of tlieir gasoline from independent refining
companies and small integrated oil producers. The latter have not had developed
marketing techniques and as a result have sold their surplus gasoline to the
independents.
The major oil companies, who are also this nation's major crude oil producers
and importers, have increased their influence over the amount of crude oil avail-
able to independent refiners. The supply of crude oil was limited in the 1930's
by state prorationing programs and in 1959 by a stringent mandatory import
quotas. The independent refiners, thus, were limited in their ability to obtain
supplies of crude from abroad or through increased domestic production. As a
result, they came to depend upon the major oil companies for adequate supplies
of crude oil.
In response to this increased dependence, the independent refiners patterned
their market behavior after that of the integrated oil firms. Tliey showed in-
creased caution in dealing with independent marketers and in some cases ex-
hibited great reluctance in selling refined product to marketers who were aggres-
sive in setting prices.
The independent refiners, either f(jrmally or informally, have occasionally con-
cluded processing agreements with the major oil companies. The agreements
provide that an independent refiner will receive needed crude oil from a major
company in exchange for a commitment to supply refined gasoline to the major
company's retailers. The effect of these agreements is to restrict the availability
of the independent refiner's gasoline to indeijendent marketers.
Exchange agreements between major oil companies have the effect of exclud-
ing crude oil from independent refiners. Under these agreements the companies
trade crude oil with one another irrespective of the needs of independent refiners.
Presently, the major companies dominate oil refining in the United States. In
the eastern and gulf coast regions of the cf)untry where almost fifty percent of all
gasoline is consumed, the eight largest integrated refineries have more than sixty-
five percent of all refinery capacity.^
Beyond that, the control of refinery capacity and pipelines by the major oil
companies has contributed to the present plight of the independent marketers
and constitutes a major competitive problem in the oil industry.
b. Barrier to entry in the independent refinery market. — One would expect
the increased demand for gasoline to attract new independent refineries, but there
are severe limitations to entry in this market. First, the capital costs of build-
ing a minimally efficient refinery (approximately 1()0.0()0 barrels per day) are
enormous. It is estimated that the cost of a new and efficient refinery would
be $250,000,000.-'
Second, it appears that a combination of high crude oil prices and low refined
oil prices has kept margins which refiners can expect to earn at such a low level
that new independent entry into refining has not been encouraged. Indeed, the
oil depletion allowance creates an additional incentive for the major oil com-
panies to keep crude prices high and maintain small refinery margins since a
dollar of refinery profit will always be taxed at a higher rate than a dollar of
crude oil profit.
Despite the fact that the demand for gasoline has almost doubled in the last
23 years, tliere has lieen virtunlly no new entry into the industry. In fact, in
the eastern region of the United States, only one independent refinery with a
en pacify of 2.000 barrels per day has been constructed since 1950. No independent
refinery with capacity in excess of 10,000 barrels per day has been built in the
Gulf Coast Region (Districts) since 1950.
2. AdTcrsr Impact of Gorernuient Regulation
Specific government regulations in the petroleum area, although aimed at sig-
nificant long-term goals, have had some detrimental effects on competition. Pro-
rationing was institute<l to conserve and maintain orderly production of crude ;
it has. however, restricted supply. The depletion Allowance has supposedly en-
^ U.S. Department of Interior. Bureau of Mines, Mineral Industry Surveys Petroleum
Refiners in the U.S. and Puerto Rieo. .Tan. 1, 1972, pii. 4-12.
= Wall Street Journal, Apr. 17. 107.3, p. 15.
222
cournged crude oil exploration : it has. however, tended t<i discourage new entry
at the refining level. The crude oil import quota system was rationalized as
necessary to protect the nation from dependency on foreign crude sources : it has
however, curtailed supply sources for independent reflners and marketers and
encouraged higher prices.
Preliminary Conchisioiis
The staff of the Bureau of Competition has preliminarily concluded that the
structure, conduct and performance of the petroleiun industry raises serious anti-
trust issues. The industry is highly concentrated at the refineiy level and the
harriers to entry at that level are overwhelming. Further analysis of the informa-
tion olttained from the independent crude producers, petroleum refiners, gasoline
marketers and major oil companies is necessary. By .Tuly 1, 1973. the staff of the
Bureau of Competition will have made recommendations to the Commission
as to appropriate means for resolving these issues.
Exhibit 2 — Article From the Washington Post Concerning FTC Report on Oil
Firms Probe
[From the Washington (D.C.) Post. Jnne 6,197.3]
FTC Report Near — Oil Firms Probed
(B.v Bailey Morris)
A year-long government probe of the role of tlie major oil companie.s in the
current fuel shortages will l)e completed by July 1 under new orders issued by
the chairman of the Federal Trade Commission.
The final date for completion of the report was disclosed in a letter to Con-
gress at the same time agency spokesmen reported that the FTC has gone to
court to extract key information from the major oil companies.
For more than one year, the FTC has been investigating the "structure, con-
duct and performance" of the oil industry as part of a three-pronged investiga-
tion of the causes of the energy crisis.
In a letter to Sen. Henry Jackson. D.-Wash.. FTC Chairman Lewis A. Engman
said the petroleum industry study is nearly complete and will be sent to him
"no later than July 1."
Last Friday, Jackson and Sen. Hubert Humphrey. D. Minn., urged the FTC
to find out whether a "contrived effort" by the oil companies is behind the dwin-
dling supplies of fuel.
Engman told Jackson the information he seeks will l)e provided "as soon
as possible" after completion of the oil probe which has been given top priority
at the FTC.
Executives of all the major companies were sTibpoenaed for hearings in Wash-
ington which began May 21 and will run until the last week in June, an FTC
spokesman said.
He said the FTC had met with stiff resistance from the oil companies before
deciding to subpoena the executives directly.
In another development, the U.S. Attorney's Office filed suits against all but
two of the major oil companies on Monday, ordering them totestify and pro-
duce documents in connection with the natural gas study.
Gulf Oil Co. were the only two firms which had comjilied with the original
subpoenas for documents issued on behalf of the FTC in November 1971.
Nine other oil companies were ordered to show cause why they should not
comply with the original subpoena in petitions filed in U.S. District Court here.
Sen. Jackson, in asking the FTC for information, said the major oil companies
appear to be squeezing independent operatoi-s out of business at the same time
they are forcing up the price of gasoline and other petroleum products.
Congressional concern over other reecnt developments in the .$lS-billion-a-year
energy industry prompted the FTC to begin its massive investigation more than
a year ago.
The FTC was asked to determine, among other things, whether oil companies
which control large coal properties are stalling technological developments such
as the conversion of coal to oil.
In addition. Congress asked the agency to find out what percentage of the
entire energy industry is now controlled by the oil companies.
223
Mergers have brought some 20 percent of existing coal deposits under the
fontrni of the oil industry, congressional hearings revealed, and four of the
largest oil comiianies are said to control 23 percent of domestic coal production,
congressional aides said.
The FTC study started slowly with only a few staff people assigned to it. But
after public alarm over diminishing energy supplies increased, the study was
stepped up dramatically.
In recent weeks, FTC officials and former agency bureau heads have indicated
that the commission staff has given serious consideration to what, if any, anti-
trust action should he taken against the major oil companies based on its
findings.
Senator Hart. As indicated, we will now hear from Mr. Halverson
and Dr. ]\Iann.
Gentlemen, you may proceed in whatever order you would like.
STATEMENT OF JAMES T. HALVEESON, DIRECTOE, BUEEAU OF
COMPETITION, FEDEEAL TEADE COMMISSION
Mr. Halverson. Thank yon. Mr. Chairman. I am James T. Halver-
son. and seated to my left' is Dr. H. Michael Mann. I have a prepared
statement which I would like to read into the record, and I will be
very happy to answer any questions you may have.
Senator Hart. All riiilit.
Mr. Hal\^rson. At the outset. Mr. Chairman, I would like to thank
you for the opportunity to a[)pear before this connnittee and discuss
the Bureau of Competition's investicrations of the energy industries.
Chairman Eno-nuin has provided you with a chronology of all Com-
mission efforts with respect to its various investigations of the energy
industries. I will discuss the facts developed by the Bureau of Com-
petition to date, and our plans for further action.
I watit to state at the outset that my remarks are wholly my own
and do not constitute an official statement for the Federal Trade Com-
mission or any Commissioner. The Commission has neither reviewed
nor approved my testimony.
Because the Bureau has proceeded simultaneously on several fronts,
my remarks will cover in turn : The investigation of natural gas reserve
reporting practices, the investigation of gasoline marketing practices,
and the competitive situation in the petroleum industry.
To date, the Bureau has experienced considerable difficulty in ol>
taining responses from most of the companies subpenaed in the natural
gas investigation. The necessity of resorting to time-consuming subpena
enforcement proceedings has residted in signihcant delay. However, on
the basis of documentation already in the Bureau's possession, it is ap-
parent to us that :
1. Serious underreporting by the natural gas pi-oducers to the Fed-
eral Power Commission of natural gas reserves has existed and con-
tinues to exist ;
'2. The procedure of reporting reserves through a subcommittee of
the American Gas Association composed of employees of major ju-o-
ducei's could provide the vehicle for a conspiracy among the companies
involved to underreport gas reserves, but more information is needed
in this area.
The American Gas Association, through its committee on natural
gas reserves, is the only agency reporting proved reserves of natural
gas for the entire United States. Ten subcommittees had been created
224
by this committee to report proved reserves of natural gas for the vari-
ous producing reoions in the TTnited States.
Because of the large potential reserves in the south Ix)uisiana area
and because there had been several alleoations disputing the accuracy
of the reported i-eserves for the south Louisiana area, it was decided
to conduct a pilot investigation of tlie actual operation of the south
Louisiana area subcommittee.
It was learned that each subcommittee member was assigned fields
in which his emj^loyer was the major producer. This member would
compile reserve estimates for the fields assigned to him. The onlv re-
view of each member's estimates is by fellow subcommittee members.
Even if this review is limited in the sense that sul:)Committee members
only see the final estimate for a particidar field and they do not see
the underlying data. The subcommittee chairman aggregates these
estimates into a regional total and then submits that total to the main
committees.
The committee on natural gas i-eserves for the American Gas As-
sociation compiles the regional totals from each subcommittee and an-
nually publishes the total proven natural gas I'eserves for the United
States.
To verify the published AGA reserve figures, an attempt was made
by the Bureau of Competition to secure certain reserve information
pertaining to south Louisiana that was contained on form 15 reports
filed with the Federal Power Commission. Form 15 reports are filed
annuallv by interstate natural gas pipeline companies and reflect the
remaining recoverable, salable gas reserves committed to, controlled
by, or possessed by the reporting pipeline company.
Although we were not able to obtain this information from the
FPC, the Bureau of Competition did obtain tlirough other sources cer-
tain data from form 15 reports. A comparison between the AGA
field-by-field figures and data from these form 15 reports, disclosed
several instances in which companies have reported reserves on form
15's that are twice the quantities of resel'^•es reported for such fields by
the AGA.
This discovery, in turn, led the Bureau to draft, a comprehensive
subpena directed to the major producers. The theory of the investiga-
tion was to compare the reserve estimates used by the companies for
internal purposes, with the estimates submitted to the American Gas
Association that were relied on by the Federal Power Commission in
substantially increasing the rate for south Louisiana, Ijased on an
alleged shortage of gas supply.
The investigation was not attempting to make new estimates of the
proved reserves in south Louisiana but was instead attempting to
obtain reserve estimates already prepared. It was our experience that
raw data necessaiy to make original estimates of natural gas reserves
cannot be obtained outside of company sources and that when the
Federal Power Commission relies solely on the company to provide all
the raw data, without independent audit, that reliance is misplaced.
Furthermore, comparison between company documents containing
estimates which the staff has obtained and the AGA estimates from
the year 1962 to 1970 have already revealed that although there has
always been a discrepancy between the figures, this discrepancy signifi-
cantly increased in 1968 and 1969, the crucial years in our study be-
225
cause of the reliance by the FPC upon 1969 AGA data in their area
rate case for south Louisiana.
The documents received from the companies whicli have partially
responded to the subpenas do not, of course, provide a complete pic-
ture of the reserve reporting procedures of the American Gas Associa-
tion. A complete assessment is difficult to make until all the responses
have been received from the other companies subpenaed.
However, several preliminary indications applicable to the south
Louisiana offshore area have become apparent.
It was found that proved reserves is a term used industrywide and
that the definition for proved reserves utilized by the AGA is also the
definition employed by companies. Estimates of proved reserves are
used for many purposes. However, the estimates of proved reserves for
a given lease that are reflected in in-house annual reports (that is. an-
nual reports kept inside the company which were primarily used for
tax purposes) have been found to be lower than estimates of proved
reserves that are used for other in-house purposes such as decisions
whether to build a drilling platform on a tract or to sell reserves to a
pipeline company.
Sometimes the difference is very significant — amounting to over 200
percent. Both because of this trend, and because of the tax-related pur-
pose of the in-house compilation of reserves, it has been surmised that
at the very least the in-house corporate compilations of proved or book
reserves are conservative.
Xot withstanding the conservative nature of these estimates, com-
parison l>etween these in-house comjiilations of lease-by-lease estimates
of proved reserves with estimates of the South Louisiana Subconmiit-
tee of the American Gas Association has revealed verv significant
discrepancies between the estimates.
The estimates of proved reserves submitted to the South Louisiana
Subcommittee of the AGA have been found to be significantly lower
than the estimates of proved reserves reflected in the corpoiate com-
pilations. Some of the estimates are approximately equal, but no cor-
porate estimate has been found to date that is lower than tlie estimate
submitted to the subcommittee.
I w^ould like to supplement my prepared statement and add some-
thing here. At times the estimate for a given field as reflected by com-
pany do<"uinents is as much as 10 times the estimate submitted for that
same field at the same time to the American Gas Association. The Bu-
reau's investigation has uncovered numerous instances in which appar-
ently substantial amounts of proved reserves of natural gas have been
discovered in the Federal offshore areas and not produced.
By that I mean that they have actually been found to exist bv drill-
ing a well but the tract has not been produced. These are proved, as we
understand the meaning of the word "proved," but are not reported or
are only nominally reported.
Tracts in the offshore area, usually nominated by producers, are
offered for lease to the highest bid by the U.S. Geological Survey. If
a company finds hydrocarbons and places these on production within
a 5-year period, it pays 12i/2-percent royalty on the amount produced
and holds the lease indefinitely as long as production continues.
However, under current regulations there are w^ays to extend the
5-year term without going into production. A company within the
226
5-year primary term can select one of the ^vells drilled and have a pro-
duction test witnessed by the I^SGS. If they determine this well is
capable of producing in paying quantities, they may grant a 1-year
suspension on production.
One company's submission indicates that 14 of their leases in the
offsliore area have l)een granted a suspension of production. Some of
these suspensions of production have extended the term of the lease
5 years beyond the jn-imary term. One of the reasons given by the pro-
ducei-s to the I^SGS for the suspensions of production is that the com-
]^anies have spent a fortune for the lease and should not forfeit the
lease. In summary, they are not in production, but have been dis-
covered, and are only nominally or not at all reported.
Complete responses from all the companies subj)enaed woidd ])ro-
vide a more accurate assessment of the reserve reporting j^rocedure of
the American Gas Association. From the documents received and the
investigation to date, it appeai-s that there has been serious under-
reporting of proved natural gas reserves. Although no conclusive evi-
dence has been found as yet of an actual conspiracy to under report
reserves, the investigation has revealed that the procedure for report-
ing reserves through a subcommittee com]iosed of employees of major
producers might provide the vehicle for such a conspiracy.
Pending enforcement of the Commission's subpenas by the Depart-
ment of Ju'^tice, the staff is reviewing approximately 8fi,000 documents
produced by one company in pai'tial comjdiance with the subpeua. A
retui'n hearing is set for July 31 and August 1. at which time company
officials will be questioned regarding the documents produced.
Hojiefully. the remaining sub]:>enaed documents will be obtained
from all the companies involved as a result of the court enforcement
proceeding. After reviewing this evidence, the Bui'cau of Competition
will then be able to assess whether there is reason to believe the com-
panies have violated the law and to recommend to the Commission
whether complaints should be issued against tliem.
Tlie Commission opened formal investigations of the Standard Oil
Co. of Ohio in May 1971, and a formal investigation of the Phillips
Petroleum Co. in April 1971. The Commission issued a complaint
against the Standard Oil Co. and its subsidiary. Soldo, on Januarv IS,
1973, charging that it had violated the provisions of the Fedei'al Trade
Commission Act.
The Commission's area of concern in Sohio's jiolicy of granting to
certain of its retail sei-vice station dealei-s tem])orary competitive
allowances credited to the regular tankwagon price of its gasolines.
The grantina* of such alloAvances o-enerallv occurs in market areas
where there is a price disturbance usually m the nature of a local or
area price war.
The Commission's complaint charges the Sohio, acting in combina-
tion with certain of its retail service station dealers, agreed to fix and
maintain the retail pi-ice of gasoline. The case is presently in the pre-
trial stage and is being conducted by the Cleveland Eegional Office
in consultation with my office.
On ]May 14, 197o, the Commission issued a complaint against Phil-
lips Petroleum Co. The complaint resulted from an investigation of
Philli]>s concerning the use of lease coercion and limitations on prod-
ucts offered for resale. Practices investigated include :
227
1. Dealer coercion under a short term lease ;
2, Arbitrary lease cancellations ;
3. 11 left-al tie-ins;
4. Market foreclosures to competitors ;
5. Requirement of a minimum purchase amount ;
6. Inspection and surveillance as a moans of controlling business op-
erations; and
T. Xo equitable procedures for the resolution of legitimate dealer-
company disputes.
The short-term lease was the focal point of the investigation because
it was the basis of the practices emuncrated above. Phillips exercised
control of lessee dealers through contractual agreements th;it re-
stricted their retail marketing activities.
I might add at this point that we have under investigation two other
companies in the Detroit and Milwaukee areas for the use of arbitrary
zoning for competitive allowances to force retail price maintenance at
the lower level. We have had several thousand documents produced in
the course of these investigations and recommendations may result
from those.
Since late 1971. the Commission's stati' has been conducting a broad-
scale investigation of the structure and the competitive problems of
the petroleum industry including investigational hearings at which
top officials of major oil companies were required to testify under oath.
While this investigation is not quite complete, we can identify some
of the sources of competitive problems and some reasons why the bur-
den of the present gasoline sliortage is falling with disproportionate
severity on the independent sector, that is refiners. Avholesalers, job-
bers, and retailers who are not vertically integrated into the major oil
companies.
Based upon the facts developed in this investigation to date, the staff
has arrived at several preliminary conclusions. Our investigation sug-
gests that activities by the major integrated petroleum companies have
b-ad significant anticompetitive effects. Their control of refinery ca-
jxacity and pipelines also constitutes a significant competitive problem
in the oil industry and contributes to the independents" present diffi-
culty.
Independent marketers of petroleum have played a vital role in
keeping petroleum markets competitive, flexible, and dynamic. They
have brought price competition into an industry that is highly con-
centrated and have pioneered innovations in methods of petroleum
distribution and marketing.
The nonintegrated sector has traditionally led the way in translat-
ing increased efficiencies into lower consumer prices. They have exerted
a ijeneficial influence upon oil industry competition that is dispropor-
tionate to their numbers.
Any substantial weakening of the independent sector of the oil in-
dustry would })e disastrous for competition. In the long run. the result
would probably be increased unresponsiveness to market conditions
and a deterioration in products, quality, and service.
Since early this 3'ear, the Bureau of Competition staff has been re-
ceiving, with increasing frequency, reports of independent marketers
Avho have been forced to close some or even all of their stations. W^e are
concerned that unless something is done quickly, irreparable harm
may result.
228
As is clear from the present shortage, the major problem of the inde-
pendent marketer is his inability to develop reliable sources of refined
gasoline. A preliminary analysis of a survey conducted during our in-
vestigation indicates that independent gasoline marketei-s receive only
about 2 percent of their supply from the eight largest integrated oil
companies. Consequently, the independent marketei's in recent years
have been forced to rely on the smaller integrated companies and, the
independent refineries.
Even those sources of supply for the independent marketer are not
outside the influence of the majors. The major integrated oil companies
are the country's major sources of crude oil. both as producers and as
importers, and they have increased their influence over the amount of
crude oil available to independent refiners. As such, they are essential
to the smaller integrated firms and even more so to independent re-
finers. State prorationing pi-ograms, now modified to allow 100-percent
well operation, and, until recently, mandatory import quotas, also have
limited the ability of the independent refiner to obtain supplies of
■crude. Given these facts, it is not surprising that some independent re-
finers have adopted the behavior patterns of the majors so as not to
jeopardize their crude supplies. In particular, they have been reluctant
to deal with independent marketers, particularly independent mar-
keters wlio are aggressive competitors.
Any shortage, of course, makes this condition worse. In addition,
processing arrangements between major and independent refineries
have limited the amount of gasoline available to independent market-
ers. Under these processing agreements, a major supplies or consigns
crude to the refiner in exchange for i-efined gasoline. The efl'ect of these
agreements is to restrict the availability of gasoline produced to the
independent marketers.
The exchange agreement is another device used by the major's which
lias the effect of limiting the amount of ci'ude oil available to independ-
ent refineries. Although arguments can be made for exchange agree-
ment on the basis of efficiency in allocation of crude within this coun-
try, by these agreements crude is often kept off the open market where
it might be bought by the highest bidder and is instead exchanged by
a major with another major which has crude of its own although per-
ihaps not geographically close by.
Again, the supply of crude for the nonintegrated refiner is restricted
to the extent that his participation in these exchanges is limited dur-
ing the period of shortage.
Another source of major concern is the fact that the demand for inde-
pendent marketers for refined product has attracted only very limited
independent refining capacity into the market. The reasons for this are
several. First, the capital cost of building a minimally efficient refinery,
approximately 100,000 barrels per day, is enormous. A major oil com-
pany has i-ecently estimated that the cost of a new and efficient refinery
would be $250 million.
Second, it appears that a combination of high crude oil prices and
low prices of refined products has kept margins which refiners can
expect to earn at such a low level that new independent entry into this
refining has not 'been encouraged. Indeed, the oil depletion allow-
ance creats for the majors an additional incentive to keep crude prices
high and maintain small refinery margins, since a dollar of refinery
229
profit will always be taxed at a higher rates than a dollar of crude oil
profit.
Presently, the major integrated oil comiDanies dominate oil refining
in the United States. The situation in the eastern and gulf coast regions
of the United States, PAD districts 1 and 3, where almost 50 percent
of all gasoline is consumed, is such that the eight largest integrated
refinei-s have more than 65 percent of the refinery capacity.
Since 1950, despite the fact that the demand for gasoline has ahnost
doubled, there has been virtually no new entry into the industry. As a
result, concentration has remained practically unchanged.
This, of course, runs contrary to expectations. Rapid growth in an
industiy is usually accompanied 'by rising profits which attract new
firms. This process should reduce concentration and the market power
of the leading firms. In the eastern region, district 1, however, only
insubstantial independent refinery capacity has been built since 1950 ;
one such refinery was a small 2,000-barrei-a-day refinery in Florida.
I might add that that refinery is now being used for asphalt refining
and not for gasoline refining. No independent refinery with capacity
in excess of 10,000 barrels per day has been built in the gulf coast
region, district 3, since 1950.
We have good reason to susi:)ect that the available statistics under-
state the majors' dominance over refining. First, it is usually true that
major oil companies operate nearer 100 percent of capacity than do
independent refiners, so that if concentration could be measured in
terms of actual production rather than capacity, the share of the
majors in districts 1 and 3 would probably be greater than 65 percent.
Second, at least some of the production of independent refiners is
controlled by the majors through direct and indirect processing agree-
ments so that their market position is enhanced by this factor as well.
I have explained the operation of the agreements by which crude is
supplied to the independent refinery. So, if you include those figures
that Avould increase the control of refined products by the majors in
districts 1 and 3, even when crude was in relative abundance, the in-
de)iendent marketer Avas limited in the share of the market he could
obtain because of the limited number of independent refiners available
to supply him refined products. Thus, since the development of the
in-esent crude shortage, the problem of the independent has become one
of survival.
On the basis of these facts, developed during the course of this in-
vestigation of the structure of the petroleum industry, the staff of the
Bureau of Competition has preliminarily concluded that the struc-
ture, conduct, and performance of the petroleum industry raises ser-
ious antitrust issues. The industry is highly concentrated at the refinery
leA^el, and the barriers to entry at tliat level are overwhelming.
Furthermore, the effect of the industry structure and conduct in
coml)ination with the recent oil shortage has been to stabilize and sup-
port liigh retail gasoline prices. Further analysis of the information
obtained from the independent crude producers, petroleum refiners,
gasoline marketers and major oil companies is continuing. By July 1,
1973. the staff of the Bureau of Competition expects to have formulated
recommendations to the Commission as to appropriate means for re-
solving these issues.
230
This concludes mj^ prepared remarks. I will try to answer any ques-
tions any of the members of the Committee may have regarding our
investigation of the energy industries.
Thank you.
Senator Hart. Thank you.
Tliere are questions, but as I understand your testimonv, what you
are telling tis is tliat the gas reserve information which the FPC has
obtained is basically worthless for determining whether there is a
natural gas shortage. Have I arrived at a fair conclusion?
Mr. Halverson. On tlie basis of the information which we have
completely reviewed as of this date, it appears to us there has been a
substantial under-reporting of gas reserves when we compare in-house
data with the data comjiiled by the AGA.
Senator Hart. "\^lien we talk about increased price to the consimier,
is the data which you are suggesting is inadequate an essential and
critical element in the prognosis of what kind of price you have ?
Mr. Halversox. That is the way I understand it, Mr. Chairman.
Senator Hart. As I understand the reserve study, according to Dr.
Paul Root, wlio is technical director of the gas study, there was a 100-
percent sampling of the 108 fields. Those were the large established
fields. There was a less than 1-percent sampling of the other 50 fields
and there were discrepancies up to 800 percent in reports received from
those 50 fields.
Xow, is or is not this type of field sampling valid to determine inde-
pendently what natural gas reserves are ?
Mv. Haeversox. I am not sure which study you are talking about.
Senator Hart. I am talking about the natural gas reserve study
which is the Power Commission's undertaking.
]Mr. Haeverson. I believe I can answer tliat. To the extent that tlie
selection process is made so that the most mature fields, which are
the oldest and the most depleted and have the most experience, are
chosen — which we think has happened in the FPC study of south
Louisiana— you will hare the estimates based on those fields where the
reporting of information has been the most accurate. With respect to
the other fields, where the experience has been least, the reporting of
information tends to be less accurate ; hence, basing estimates on the
fields where you liave the most experience and where most of the pro-
duction lias already taken place could be misleading.
Senator Hart. To check the AGA figures you would have to check
the 50 fields, Avouldn't you ?
]Mr. Chumbris. Mr. Cliairman, before you leave this point, may I
interject ?
Dr. Root says that there may be a miscalculation as high as 800 per-
cent. That in itself is tremendously misleading. That might be just one
instance out of I don't know how many samplings. We have been argu-
ing for 3 years about the fact that there is an 800-percent difference
between the $1 billion cost of oil import programs and John Baline's
$2 million.
We give credence to the $7.2 billion during the course of our hear-
ings. In one instance, we give credence to the 800-percent discrepancy,
but now we take issue that this 800-percent discrepancy may be one
out of I don't know how man}- samples.
231
We liave to come to some kind of conclusion : Is there an energy
sliortage or is tlieie not ? How much reserves do we have, or how much
reserve do we not have ? Frankly, from reading your statement, if you
went across the board and made a study of each one, you may find out
that the inconsistency is the other way.
Mr. Halversox. I am saving that on the basis of our study of natural
gas reserves reporting, we are concerned that there is consistent under-
reporting by the AGA to the FPC.
^Ir. Chumbris. You don't know how much underreporting there is,
do you ?
]Mr. Hala^ersox. It depends on which field you are talking about. It
has never been overreported on the data we have so far — ^that is, com-
paring in-house data with data submitted b}' AGA.
]Mr. CiiuMiJRis. It does not clarify anything as far as the record is
concerned.
Senator Hart. What he is saying is that he never discovered any
overreporting.
Mr. Hala'erson. Yes.
Mr. Chumbris. Where are you getting your data from ?
Mr. Halatrsox. We are getting it from submissions by three com-
panies, one of which we have not yet completely reviewed. It is in-house
data. In south Louisiana, we had 11 subpenas. The rest of the com-
panies have not complied with our subpenas.
Mr. Chumbris. Somewhere along the line somebody is going to have
to supply some statistics to convince Congress or the FPC, which has
the administrative responsibility to change its course of action as to
whether we should regulate or deregulate, or whether if we are going
to regulate you are going to increase the price or whether you are
gomg-
Senator Hart. It is 20 minutes after 11 and we are in the process of
getting the data.
]Mr. Chumbris. Mr. Chairman, you look at it one way and I look
at it another way.
Senator Hart. I can hear it only one way— ^the way the witness told
us. He told us it ranges from what percentages ?
Mr. Hal\t.rsox. As high as 10 to 1.
Senator Hart. All you are doing is underscoring the dramatic con-
sistency of underreported reserves.
Mr. Chumbris. ^Ir. Chairman, I am not impressed with whether
we are underscoring the inconsistency. I am interested in what the
record is going to show and let the chips fall where they may.
Senator Hart. Let us get on with getting the chips.
One other point bears on your statement regarding the structure of
the petroleum industry. It shows that your staff feels that the struc-
ture is anticompetitive, and you are going to make a recommendation
to the Commission on July 1. That is Monday. Are you in a position to
confirm what I read in the paper today ? More specifically, can you
give us a preview of your recommendations '.
Mr. Halversox. ^Ir. Chairman, that i-econimendation is now obvi-
ously in draft form.
I think my statement gave you a pretty good summary of what prob-
lems'we have identified. I would prefer not to describe the specific
recommendations we are going to make, because I feel that may make
27-547—74 16
232
it more difficult for the Commissioners to take an objective and inde-
pendent look at this. I feel they should have an opportunity to review
the recommendations and I would rather withhold more specific
comment.
Senator Hart. I don't want to ask a sinole question that might dis-
turb what appears to be the course of events.
ISIr. Halverson. I don't know where that headline came from. It
didn't come from me.
Senator Hart. I know it didn't. It didn't come from us.
Mr. Bangert.
Mr. Bangert. I have one question I Avould like to ask Mr. Halver-
son. Yesterday, the FPC was in and they advised us they felt they
have been extremely cooperative with the FTC on the AGA reporting
investigation. I gather from your statement that the Commission has
attemj)ted to get information from the Power Commission and has
apparently been denied this information. I think that the record
should fully reflect the kind of cooperation which was received.
Specifically, it is our understanding that FTC wanted field-by-field
reserve estimates collected in the natural gas study. The Federal Trade
Commission wanted information which the Power Commission had
on pipeline firms and thev were told it would cost them $25,000 to get
tliat. As I understand it. did you then go and get tliat same information
from another source presumably at a bargain price?
FTC was refused access to FPC staff unless General Counsel or
representatives of General Counsel's Office w^ere there, T am wondering
in general what kind of cooperation you received from the Power
Commission in this investigation.
Mr. Hal^t^rson. First, let's discuss the form 15 request of 1971.
Mr. Gooch, who I believe was General Counsel at that time, gave us
an estimate that it would cost them $25,000 to supply us with the
data we had requested.
I was not with the Commission at that time, but I understand
that the staff didn't feel at that point in the investigation that it
could authorize a $25,000 expenditure. Therefore, that avenue of in-
quiry was killed and they had to go somewhere else to try to get
that kind of data.
Mr. Bangert. Do you have any idea whether you spent more than
$25,000 in staff time trying to get that kind of data from other
sources ?
]Mr. Halverson. As a matter of fact, the form 15 data was only
one part of all of the data we wanted to get from the companies.
"Wlien we decided to go with the broad subpena. we decided to aban-
don that request which would have cost us $25,000, according to the
FPC. Our subpenas will pick up all of that data anyway.
Mr. Bangert. How about the field-by-field reserve estimates?
Mr. Hal\t:rson. We made that request on June 5, 1973, and we
have had no response to it to date.
Mr. Bangert. Yesterday, both Chairman Hart and Senator Ken-
nedv indicated to Chairman Nassikas they w^ould like a copy of the
replies to your letter, so presumably we will be getting it some time
soon. Did 'the fact that the FTC staff couldn't talk to FPC staff
unless General Counsel or a representative was present inhibit your
investigation in any way?
233
Mr. HAL^^:RSON■. Evidently that is FPC policy. It was the policy
they stated to us.
Mr. Bangert. Did your investigators feel that inhibited them?
Mr. Hal\t:rson. I am told that they feel having General Counsel's
stall' present does have some inhibiting effect.
Mr. Bangert. Could this have caused their original opposition to
this investigation?
Mr. HAL,\T:RS0]sr. I didn't know that they opposed this investigation.
jNIr. Bangert. If you could make a general statement, just what
kind of cooperation was received and what kind of communications
were sent back and forth between the FTC and FPC ?
Mr. IIal\t:rson. If you would like — and I think this may be better
done by a written response supplementing the record — ^we will de-
termine what oral communications took place and relate them to you
in writing.
]\Ir. Bangert. Thank you very much. I have no further questions.
[For the information requested above, see exhibits 1 and 6 at the
end of Mr. Halverson's testimony.]
Senator Hart. Mr. Chumbris.
jSIr. Chumbris. Thank you, Mr. Chairman.
I won't get involved in this fight between you and the Power Com-
mission. I have enough prol^lems with my own fights.
Sometimes, in carrying out the duties of this subcommittee, I will
call the FTC or some other agency and they tell me that they can
help us. At other times they tell me they are sorry, but we have to go
through channels. This means I have to commit it to the chairman, and
you get the letter, and submit it to your chairman, and he decides
whether or not we can have the information.
Mr. Halverson, my bosses over the years have been very touchy about
statistics and trying to keep them as accurate as possible. When we
start talking about 2 to 1 or 3 to 1, you run into fantastic figures. We
have had hearings where cost matters or pricing matter's were blown
out of proportion. I seem to be touchy on the subject, but it has been
my responsibility for 17 years, and even though there is a little derid-
ing laughter in the audience, it doesn't deter me one bit from asking
those questions.
]Mr. Hal%'erson. Surely.
[The following was received for the record. Testimonv resumes on
p. 275.]
MATERIAL RELATING TO THE TESTIMONY OF JAMES T. HALVERSON
Exhibit 1.— Correspondence Relating to FTC's Attempt to Get Information from
FPC on Natural Gas Reserves
Federal Trade Commission Ixterview Report
Name and official position : Tliomas H. Jenkins, Director, National Gas Survey :
William Webb, Director Office of Public Information; Willard Savov, Assistant
Director Office of Public Inf.
Firm name and address : Dr. Paul J. Root, Technical Director, National Gas
Surve.v. Federal Power Commission.
Place of interview: Washington. D.C., April 6, 1973.
On Friday, April 6, 1972, I called Thomas H. Jenkins, Director of the Federal
Power Commission's National Gas Survey. I identified myself and the fact that
I was working on a Federal Trade Commission investigation into the reserves'
reporting by 11 oil companies and the American Gas Association. I explainetl to
Mr. Jenkins that although we had some information on the National Gas Survey,
234
we desireil to update this iuformatiou. He had told me that most of the material
I would probably need was available in the Federal Power Commission's Office
of Public Information. He referred me to :Mr. William Webb, Director of Puldic
Infonnation. I then asked Mr. Jenkins if a date had l^en set for the release
of the survey. Mr. Jenkins said that no date was set but it vi^ould certainly not
be complete until at least some time in late sununer. He also stated tliat no
jiarts of the National Gas Survey would be released i»rif)r to the release of the
entire report. I thanked him for the information and told him I would go to
the Federal Power Commission's Office of Public Information.
I went to the Office of I'ublic Information and asked for tlie pul)lic files relat-
ing to the National Gas Survey. These files purportedly include all releases and
Federal Power Commission Orders dealing with the National Gas Survey. In
addition these files include minutes of the various meetings of the various forces
conducting the survey.
Briefly, a Federal Power Commission Order of February 23, 1971 provides
for the establishment of three Advisory Committees. (Attachment A) An Order
of April 6, 1971 estal>lislies inter alia, a "Technical Advisory Committee —
Supply." (Attachment B) The head of this Committee who is called a vice chair-
man is Myron A. W'right, Chairman of the Board. Humble Oil and Refining
Company (now Exxon USA). The Federal Power Conunission representative on
the Committee is Dr. Paul J. Root, who is also the Technical Director of the
National Gas Survey. By Order of December 21. 1071 the Federal Power Com-
mission established inter alia, a '"Supply — Technical Advisory Task Force —
Natural Gas Supply'' which would work in connection with the "Technical
Advisoi-y Committee — Supply." (Attachment C) The Task Force Director is
Mr. Ralph W. Garrett: Exploration Analysis Manager, Humble Oil and Refining
Company (now Exxon — I'SS). Its Deputy Director is Worthy Warnack who is
a geologist with Huml)le Oil and Refining Company (now Exxon — USA).
In addition to the December 21, 1971 Order establishing a task force on
Natural Gas Supply, the Commission also issued an "Order directing study and
analysis of Natural Gas Reserves and prescribing procedures for the Natural
Gas Survey." This Order was also issued on December 21, 1971. (Attachment
D) In Appendix A of this Order, the Commission outlined the procedures to be
followed in arriving at an "independent estimation of proved recoverable re-
.serves of natural gas of the United States (p. 1 of Appendix A) The definition of
proved reserves conforms exactly to the definition used b.v the American Gas
Association. On Page 3 of Appendix A, Roman Numeral II sets out some security
considerations. The first sentence is pertinent here. "Individual companies must,
for competitive reasons, protect highly confidential information in competitive
areas such as Offshore Louisiana." One of the means arrived at to protect this
information is set out in II, A which states that no worksheets will leave the
producer's offices. The final product of this National Gas Survey as indicated
on i>age 9 of Appendix A wotild be the estimation of Gas Reserves in the United
States as of December 31, 1970.
In the third paragraph of the first page of the second Order of December 21,
1971 (Attachment D), the Commission states that procedures for conducting
this survey were recommended by the Task Force on Natural Gas Supply at its
December 14, 1971 meeting. Through further research I liave found that
appended to the minutes of an October 21. 1971 meeting of the Survey's Execu-
tive Advisory Committee is a siunmary of the Task Force on Supply's apparent
first meeting which was held on September 1.5. 1971. The December l-i, 1971 meet-
ing of the Task Force on Natural Gas Supply referred to in the Federal Powei-
Commission's Order of December 21, 1971. appears to be the sixth meeting of
this Task Force on Supply. The first sentence of the third paragraph on Page
One of this Order says, "A report presenting a preliminary draft for procedures
concerning a survey and analysis of natural gas reserves was received by the
National Gas Survey Coordinating Committee on October 12. 1971. and by the
National Gas Survey Executive Advisory Committee on October 21. 1971." The
Task Force on Natural Gas Supply had prepared the i)rocedures and outline
of the survey and had presented them first to the National Gas Survev Co-
ordinating Committee and then to the National Gas Survey Executive Ad-
visory Committee. The task Force on Natural Gas Supply tlien formallv rec-
ommended these procedures in their December 14, 1971 meeting. The Commis-
sion's Order states, that. "Tliose procedures, as reviewed and modified bv the
Commission, are attached as Appendix A." At any rate, although the Commis-
sion established the task force on December 21, 1971. it had been meeting from
235
September 15. 1971. There is no public record of these meetings except for the
brief summary contained in the minutes of the National Gas Sun-ey Executive
Advisory Ccnnmittee meeting on October 21, 1971. There are in fact no minutes
of the December 14, 1971 meetins- which is referred to in the C<:»mmission s
Order. So it is impossible to find out the degree to which the proposals of the
Task Force were actually modified by the Commission.
After the procedures for the survey were recommended, a number of other
representatives have been nominated to the Task Force Conuuittee.
I looked through all the releases pertaining to the survey and I found refer-
ences to Julv 29. 1971 : Fel)ruary 17. 1972 : April 11. 1972 ; May 25, 1972 ; July 12.
1972: January 16. 1978: Felu-uary 20. 1973: Marsh 1. 1973: and March 28. 1973
meetings of the Task Force on Natural Gas Supply. Certain minutes of these
meetings are missing.
I was able to find the January 16. 1973 minutes, the July 12, 1972 minutes and
the April 11. 1972 minutes. The January 16. 1973 minutes are attached^ and tiie
comments of Dr. Paul J. Root on Page 3 of these minutes are of particular im-
portance. Dr. Root, the Technical Director of the National Gas Survey, serves
as the Federal Power Commission's Coordinating representative and secretary
on the "Supply— Technical Advisory Task Force — Natural Gas Supply." Dr.
Root indicated, "that no forec-asts were received covering regions IN and
North Alaska and regions 2A. 6A. and llA. the Gtfshore regions all of which
are generally considered to be the key to domestic supply capabilities. Only in
regions 3. 4^ 5. 6, 7 and 11 were the responses adequate in order for standard
statistical techniques to be used for averaging the projections. Dr. Root stated
that this coupled with the lack of information for the Offshore region.s represent
a considerable deviation from the i>roposed program and makes a re-asse.ssment
of the Ta.sk Force plans a matter of urgency." In July 12. 1972 minutes there is a
reference made to the fact that the worksheets worked up by Task Force
members indicating reserve estimates might have to l>e submitted to the Fed-
eral I'ow'er Commission. This would represent a deviation from the proce-
dure set out in the December 21. 1971 Appendix A wherein it stated that worlv-
slieets were to remain in the prducer's offices and were to be destroyed after the
estimates were made. Tiie minutes of the July 12. 1972 meeting state that .sev-
eral members of the Task Force ol)jected to the request for papers to be de-
liverefl to the Federal Power Commission. These members stated' that if they
were required to submit their material to the Federal Power Commission they
would only use Public Information to make the estimates.
Because some of these minutes were missing and because minutes for the
three latest meetings were not as yet included in the public file, I asked the
As.sistant Director of the Office of Public Information, a Mr. Willard Savoy
whether he had any further minutes of this Task Force's meetings. The Assistant
Director suggested that I go up to Dr. Paul Root's office because Mr. Savoy felt
certain that Dr. Root would have additional copies of these minutes. Both the
Assistant Director and the Direc-tor of tlie Office of Public Information did not
know when the survey was to be completed. Mr. Savoy, in fact, told me to tell
him if I found out. At any rate the best estimate they were able to give me was
late .summer.
I called on Dr. Paul J. Root. Technical Director of the Natural Gas Survey.
I identified myself and the nature of my assignment and the fact that I was
referred to him by the Office of Piiblic Information. Dr. Root stated that he
would have to call the General Counsel's Office before he could talk to me. Mr.
Edward Minor of the Federal Power Commission's Office of General Counsel
agreed to come to Dr. Roofs office. Dr. Root did state in the meantime, that he
did not expect the survey to be published until late summer and that no part
of the survey would be released separately.
When Mr. j\Iinor arrived, I explained that I wanted a complete set of minutes,
for the meetings of the Task Force on Supply. I told them that several minutes
were missing in the Office of Public Information and that it would greatly
expedite my investigation if they could provide me copies. In addition, I told
them that I had a few general questions regarding the procedures of the survey
and one specific inquiry which was to ascertain the names of the fields in Off-
shore South Louisiana that were audited and estimated by the survey. Mr.
Minor responded that if I would put my requests in writing they would study
the request and possibly honor it subject to the limitation that the Office of
Public Information would have to be searched first for this material.
' Attachment E.
236
I thanked them for tlieir indication of future cooi>eration and went back to the
Office of Public Information. Copies of all tlie minutes of the Task Force tliat the
Office of Public Information has are now being made and should be received
shortly along with copies of certain recent orders pertaining to the survey.
Respectfully submitted,
Theodore L. Lytle, Jr.,
Attorney, Bureau of Competition.
Memorandum
April 19, 1973.
To : File.
From : Theodore L. Lytle, Jr., Bureau of Competition.
Subject : Supplementary to Interview Report of April 6, 1973.
On April 17, 1973 the undersigned sent a letter to Mr. Edward Minor which is
attached. On May 7, 1973 Mr. Minor teh^ihoned the writer and stated that part
of the survey was going to be issued prior to June 1. 1973. I informed him tliat
this was the first time that tlie FPC had informed me that the survey was going
to be issuetl in separate parts. Mr. Minor then stated that because part of the
sui'vey was to be issued soon, he did not wish to anticipate the survey by providing
me with the names of the Offshore South Louisiana Fields that were actually
surveyed. In response to my question, he indicated that a list of the fields surveyed
would be included in the soon to l)e issued report.
In regards to my first question wliich sought a list of the meetings of the
Supply — Technical Advisory Task Force — ^Xational Gas Supply, Mr. Minor stated
that meetings of this Task Force were held on February 17. 1972. May 2r», 1972,
July 12, 1972, January 16. 1973, March 1, 1973, and March 2S, 1973. I then asked
Mr. Minor whether there were any other meetings of the Task Force [>rior to
February 17, 1972. He stated that to his knowledge there were no formal meetings
prior to this time. I then mentioned tlie various references in the Public Record to
meetings of this Task Force. He then stated that because the FPC was moving into
new headquarters, records prior to 1972 were packed into cartons and presently
unavailable to him. I then requested that a list of the meetings, formal or othei'-
wise, be supplied to me as soon as the cartons were unpacked.
Respectfully submitted,
Theodore L. Lytle, Attorney.
April 17, 1973.
Edward A. Minor, Esq.,
Office of General Counsel,
Federal Power Commission,
Washington, D.C.
Dear Mr. Minor : Subsequent to our meeting on April 6, 1973, I was able to
obtain certain information regarding the National Gas Survey from the Office
of Public Information of the Federal Power Commission. In addition to this
information, I would appreciate receiving the following information not avail-
able at that office: <1) a list of all the meetings of the Supply — Technical Advis-
ory Task Force — Natural Gas Supply and (2) a list of the fields in Offshore South
Louisiana that were selected to be surveyed.
As I explained to you and Dr. Root on April 6, this information is requested
in connection with a Federal Trade Commission investigation styled In the
Matter of The American Gas Association, File No. 711 0042. Your cooperatioti in
this matter will be appreciated.
Sincerely yours,
Theodore L. Lytle, Jr.,
''^'~ Attorney, Bureau of Competition.
Edward A. Minor, Esq.,
Office of General Counsel,
Federal Power Commission,
Washington, D.C.
Dear Mr. Minor : The recently released Federal Power Commission's National
Gas Reserves Study lists the ma.ior Offshore and smnller Offshore fields sur-
veyed. Twenty of the 22 major Offshore fields listed and four out of five of the
237
smaller fields listed are fields located iu Offshore South Louisiana. As you
kuow, the Federal Trade Commissiou's Investigationd styled In the Matter oj
the American Gas Association, File No. 721 0042 inter alia is attempting to
compare Offshore South Louisiana field-by-field estimates submitted to the
A.G.A. With Offshore Louisiana tield-by-field estimates used by the various
comi>anies for internal purposes. In this connection, the A.G.A. field-by-field
estimates for Offshore Louisiana have been obtained as have certain company
documents. The Federal Power Commission's estimates for the 24 South Lcniisiana
Offshore fields .selected for their survey are needed to provide another means
of verification and cross reference. In our interest to be as thorough as possible
the Federal Power Commission's re.serve estimates for tliose Offshore Louisiana
fields listed in Table 4, p. 22 entitled "Major Offshore Fields in the statistical
sample" (see attachment A) and in Table 6, p. 24 entitled ''Smaller Offshore
Fields in the statistical sample" (see attachment B) are hereby requested.
Thanking you in advance for your cooperation.
Sincerely yours,
Theodore L. Lytle, Jr.,
Bureau of Competition.
Federal Power CoMMissiojy,
M'lishiiKjton, D.C., August 9, 197.',.
Donald K. Tenxey, Esq.,
AxTHOXY J. DePhillips, Esq.,
Federal Trade Commission,
Washington, D.C.
Gentlemen : Receipt is acknowledged of your letter of July 22, 1971, request-
ing that we furnish certain infoi-mation concerning one production area in
Southern Louisiana from our Form 15 reports. Specifically, question 1 requests
the total volume of remaining dedicated reserves by reservoir and the type of
gas f<ir each reservoir for Form 1.5 reporting years 1965. 1066, 1967, 196S and
1969 for the fields listed in the attachment to your letter. Additionally, you request
the annual revisions, additions and annual gas volume withdrawn and also a
breakdown of the actual reserve ownership by producer interest and/or by pipe-
line company.
Not all of this infomiation can be obtained from the Form 15 rei)orts. Schedule
No. 3 will .show by reservoir the original recoverable reserves, the annual
revisions and additions, the cumulative production, the remaining recoveralile
reserves and the type of gas. It will not show the annual production by reservoir
but only the total production from all reservoirs in the field. The production by
reservoir can be derived by taking the year end remaining reserves for the
previous year, adjusting for revisions and additions during the current year
and subtracting the year end reserves for the current year.
The above data can either be extracted manually from the Form 15 reports or
from the magnetic tapes that are prepared annually from the Form 15 filings.
Deriving annual production by reservoir can only be done manually. Extracting
complete Schedule No. 3 information from the magnetic tape is ditficult principally
due to the reservoir name changes and reservoir consolidations for reiwrting
purposes.
The Form 15 does not break out natural gas reserves by individual producer
contract. Schedule No. 3 does show what portion of the total field reserve dedica-,
tion is company owned by the pipeline and what portion is from the total of
producer contracts, but not by each producer.
The FPC Form 2 will show the annual volume of gas that the reporting pipe-
line company purchases from the given producer operator in a given field area.
FPC Form 301-A or 301-B reports are filed by the producers to report sales to
the individual pipeline.s. Form 301-A is a annual form filed by all producer
operators reporting total annual sales. Form 301-B is filed only by producer
operators with sales in excess of two-billion cubic feet annually and the sales are
broken down by individual contract rate schedules. In both cases the forms are
filed by the producer operator with any signatory party to the gas purchase con-
tract having the option of filing his interest separately.
Neither of these forms give a complete breakdown of production by the in-
dividual interest owner. Also, neither of these forms report the natural gas
reserves belonging to each individual interest owner.
238
Form 15 wa.s designed to aid in the processing of certificate applications made
It.v tlie pipeline companies and to maintain surveillance of the gas supply of the
pipeline companies. When we make an analysis of reserves dedicated to a pipeline
in a field or reservoir we are concerned with the total reserve dedication, not
which part is dedicated by each producer interest owner.
Subject to scheduling so as to avoid interference with their regularly assigned
responsiliilities, the Gas Supply Section of the Bureau of Natural Gas could
jirovide the information requested that can be obtained from Schedule 3 of the
Form l.j. There is no data in Form l.l responses that would enal)le us to apportion
dedicated natural gas reserves data by reservoir to individual producers. Indeed,
determining individual interest ownership and participation is as much a legal
problem as an engineering problem.
The estimated cost for the maiuuxl portion to respond to your request is in
the range of .$2.".000, exclusive of the cost of programming, computer time and
related verification. We would need appropriate assurances from your Execu-
tive Director that the Federal Trade Commission would reimburse us for all
costs incident to t^ie study befoi-e undertaking it. If the Federal Trade Com-
mission has it own computers, and computer personnel, you may prefer to pur-
cliase the tapes containing the Form li> data and perform your own study. You
also may prefer to do your own manual calcidations. and we will be happy to
show you how to do this. However, a qualified individual is essential for the
manual phase of the work.
Que>ti<m No. 2 relates to "nondedicated reserves". We do not. of course, have
the i)ipeUnes report re.serves that are not dedicated to them, and thus we cannot
supply any assistance in this regard.
You also ivcjuest that Mr. Wald designate an economist to whom you may have
access whenever the need arises. In further conversation with Mr. DePhillips. it
appears that you do not wish an economist but instead need an expert from the
g;is supply section. In either event, as I have previously stated, appropriate
technical personnel will be made available to you for consultation upon request
to me. I suggest that it will save you time, and us time, too, if you will advi.se
me in each in.stance of the subject matter of your inquiry and leave to me the re-
sponsiitility for providing an expert in the area of your particular inquiry.
At our previous meeting, you re(iuested assistance in comprehending the tech-
niijues of contesting reserve data in connection with a pipeline certificate ca.se.
Kenufdy Richardson, one of our lawyers, is responsible for trying such a case
at this time. You should contact him directly to arrange an appointment to
review the Northern Natural case. After that meeting, if you wish any sup-
plementai-y information, we will be happy to supply it.
Very truly yours,
GoRDox GoocH, General CoinifiPl.
Federal Trade CommIvSsion Interview Report
Nauit^ and offir-i;il position: Gordon Gooch. General Cmin.sel: Stephen Wake-
field. Attorney: Edward Albares. Bureau of Gas: Lawrence R. Mangen. Super-
vising Natui-al Gas Eng.
Finn name and address: Federal Power Commission, 4th & 6 Sts., Washing-
ton. D.C.
Place of interview: Same as above, December 1, 1970.
In tlie matter of Area Rate I»roceeding (So. La. Area-FPC Docket AR 60-1),
the FI*C ordered producers to reiiort certain reserve data by separate question-
naires for the Onshore and Offshore Areas in Southern Louisiana. At this in-
teiwievv. the reported data for year-end 1969 was discussed.
Mr. Mangen. at this interview and in te.stifying at the hearings, said the pur-
])ose was to obtain, reserve data and do a sample audit of these data as they
pei'tain to usiconiinitted reserve figures reported by the producers.
Tiu» questionnaire was sent to all the producers in the Southern Louisiana
area. Federal Domain and the On-Shore Area. Attached hereto. Exhibit No. 7,
D(K-k(>t AR 69-1 shows the names of all the producers in tlie.se areas which
respondefl. Mr. Mangen said that those who didn't either have any uncommitted
resei-ves or were small producers. In the latter ca.se. the effect on reserve data
would be negligible.
The data were gathered by B. L. Sledge, of Huml)le Oil Refining Company.
The data were then compiled and audited by Arthur Young & Co.. Certified
Public Accountants.
239
The FPC then i<ent an audiliui;- team to several of the compauies to evaluate
data to determine the accuracy of those submitted. :Mr. Mangen said that all
could not be audited because of a deadline in tlie proceedings. He said, however,
he believetl the sjimiiling procedures decided upon would provide an accurate
indication of the validity of the figures submitted.
The short of it. Mr. INIangen advised, the audit showed that the fig-ures sub-
mitted by the producers were accurate. Although the FPC staff audit noted dif-
ferences these were within permissible limits since determinations of reserves
are not made on a basis of exact .scientific equations.
As a result of this survey, the FPC determined that producers were not with-
holding i-eserve data in the uncommitted shut-in gas completion area in 1909.
As a further check, a search was made of the records of United States Geologi-
cal Survey and Louisiana Department of Conservation well data to determine
if any company which had not reported any uncommitted reserv^es had com-
pletecl a discovery gas well in So. La. in tlie past ten years and cross-checked
against documents of the La. Dept. of Conservation to determine the status of
the discovery gas wells. The result: FPC was unable to find any discovery wells
for which the gas was neither committed nor covered by the uncommitted re-
serves questionnaires. (See Testimony of Lawrence R. ilangen nnd Victor H.
Zabel )
The inquiry turned toward the question of whether producers could withhold
reserve data relating to expendable or stratigraphic wells. These are tests which
for the most part do not culminate in the construction of a full scale well. The
penetration is not as complete as a full scale well, but one. nevertheless, which
may resiilt in finding some gas accumulations.
The question was asked where one could obtain a census of such wells. Mr.
Magen said the Louisiana Dept. of Conservation would have such data in its
records. It woiild however, take a long time to go through the records. Moreover,
the recoi'ds do not always clearly differentiate a stratigraphic well test from
other well tests.
Mr. Mangen. and Victor Zable, also of the FPC staff, testified in AR 69-1
as to the validity of the procedures used in auditing tlie uncommitted reserves
for the area. Comparable data was also verified in AR 69-1 as to shut-in gas
completions in the P^'ederal Domain. This latter data was sul)mitted at producer
request to show that only a few wells were uncommitted (that most of the
shut-ins were already committed to contract.)
Messrs. Mangen and Albares indicated that producers do not make individual
reserve estimates for AGA purposes. Rather, the Subcommittee makes the re-
serve estimates from data furnished by the producers. The FPC obtains reserve
estimates prepared l>y pipelines on Form 15.
Finally, it was emphasized that individual producer reserves, as well as in-
dividual exploratory drilling activity, is zealously guarded by the producers. In
most cases, there is a desire to keep such information secret for competitive
reasons ; in other words, they have a strong "proprietary interest".
Mr. Gooch was advised that the undersigned may seek out other personnel in
the FPC for further discussion. :Mr. Gooch, though formally cooperative, mani-
fested a definite coolness toward the undersigned and their efforts to obtain
information. He said that he must be informed in writing of the person sought
to he interviewed and the date.
Respectfull.v submitted.
William P. Diener,
AxTiioxY J. DePhillips.
Attorneys, Bureau of Competition.
Exhibit 2.— Response of Gulf Oil Corp. to the Testimony of James T. Halverson
Gulf Oil Corp.,
Governmental Relations Deparment.
W(i>i]iiiif/ton. D.C. July 12, JH7.1.
Hon. Philip A. Hart.
Chairman, Antitrust and Monopoly Suhcomniittre. Russell Offlee Building, Wash-
in ffton, D.C.
Dear Senator Hart: I am attaching hereto a copy of a statement being
filed with the Antitrust and Monopoly Subcommittee by Warren M. Sparks
representing Gulf Oil Corporation in the capacity of Regional Attornev which
expresses the views of our Corporation with respect to the statements made
before your Subconunittee on natural gas reserves.
240
This statement is being furnished to the Subcommitee with the request that
it be made a part of the proceedings of the Natural Gas Industry hearings
held on June 27 and 28.
Very truly yours,
Claude C. Wild, Jr.
Response of Gulf Oil Corporation to the Testimony of James T.
Hal\"eeson, Director of Bureau of Competition of the Federal Trade
Commission With Regard to Reporting Natural Gas Reserves to the
American Gas Association
Gulf Oil Corporation's response to the testimony of James T. Halverson is
directed primarily at his charges that the documents Gulf furnished the FTC
in response to a subpoena ^ reflect that estimates of proved reserves submitted to
the South Louisiana Subcommittee of the AGA were significantly lower than
the estimates of proved reserves reflected on the Company's reserve records.
It will be the principal purpose of this response to show that the documents
furnished the Federal Trade Commission do not support this conclusion or others
of similar import.
the impropriety of the procedures used
Before discussing the merits of Mr. Halverson's testimony. Gulf wishes to
protest the "star chamber" manner in which these charges have been brought
against it. The procedure by which the charges were made is, itself, an anomaly.
Mr. Engmau, Chairman of the FTC, stated that he was "not in a position to
discuss the substance of these investigations" because to do so would "raise
the possibility that my participation might be challenged in any related adjudi-
catory proceedings which may come before the Commission." (Tr. 196) He left
the matter to Mr. Halverson. Thus, the Chairman of the Commission eschewed
any responsibility for the accusations to be made by Mr. Halverson.
Mr. Halverson, on the other hand, made it plain that "my remarks are wholly
my own, and do not constitute an oflScial statement by the Federal Trade Com-
mission or any Commissioner. The Commission has neither reviewed nor ap-
proved my testimony." (Tr. 223) The documents on the basis of which Mr. Hal-
verson charges Gulf with "serious under-reporting" of natural gas reserves
were furnished to the Commission in response to an investigatory subpoena in
FTC Investigatory File No. 711-0042.
Section 4.10 of the FTC's Procedures and Rules of Practice provides :
"(a) The records of the Commission which are exempt from availability for
public inspection and copying pursuant to the provisions of § 4.8 include :
*******
"(6) Investigatory files complied for law enforcement purposes except to the
extent available by law to a private party, * * *
*******
"(c) * * * Except to the extent that the disclosure of information contained in
the confidential records -of the Commission is specifically authorized by the rules
in this chapter or liy the Commission, or to the extent that its use may become
necessary in connection with adjudicative proceedings, it may be disclosed, di-
vulged, or produced for inspection or copying onlv under the procedure set forth
in §4.11."-
The i>rooedure provided in Section 4.11 was not followed here. In fact it could
hardly liave lieen complied with, since Mr. Halverson. l)y his own admission, made
the revelations in his testimony on his own behalf and without the foreknowledge
of the Commission.
Section 10 of the Federal Trade Commission Act (15 TJSCA 50) provides :
"Any officer or employee of the commission wlio shall make pulilic any informa-
tion obtained by the commission without its authority, unless directed by a court,
shall be deemed guilty of a misdemeanor, and, upon conviction tliereof, shall be
punislie<l by a fine not exceeding .$5,000. or by imprisonment not exceeding one
year, or by fine and imprisonment, in the discretion of the coiirt." "
1 In thp FTC's InvpstiRation of Repnrtins of Natural Gas Resprvps. File No. 711-0042.
= Spp Federal Trade ConnnListion v. Green, 2.52 F.Supn. 15.^ (SD NY Iflfifi).
3 Spetion 4.10 of tliP FTC's Procprlures and Riilps of Practice rcitprates the statutory
prohibition and penaltips ajrainst disclosure of the Commission's confidential records
"without its authority, unless directed by a court."
241
Nevertheless, Mr. Ilalver.soii, on his own responsibility, revealed facts allegedly
contained in these confidential records of the Commission. He made serious ac-
cusations of wrongdoing on the basis of records which were not only required by
statute to be held in conlidence but are not available for testing by cross-examina-
tion or otherwise in the hearing before this Subcommittee. It was on the basis
of this testimony that the Chairman of the Subcommittee closetl the hearing and
stated that he was "almost sorry that we had to hear testimony from * * * the
Trade Commission * * * that in all cases investigated by them the AGA figures
were an imder-statement of natural gas reserves that were carried on the com-
iwnies' own records, and you can't take comfort in that kind of news." (Tr. 52T-S)
The Chairman directed the Subcommittee Staff to "develop an early draft report.''
(Tr. 528)
Apparently, at least in the eyes of tlie Chairman of the Subcommittee, Gulf
has been tried and found guilty of serious charges without the benefit of cross-
examination of its accuser on a record which is not before the Subcommittee, and
e\en before it was given an opportunity to answer the charges. Gulf challenges
the legality of the procedure used by the Federal Trade Commission at this
hearing.
THE staff's lack OF EXPERTISE LED IT INTO ERROR
Regardless of the impropriety of the disclosures, the adverse publicity given
the charges, necessitates a reply to them on their merits. Gulf does not contend
that Mr. Halverson's testimony is intentionally misleading, although it is diffi-
cult to comprehend some of his statements in the light of the documents fur-
nished the FTC. We suspect that for the most part Mr. Halverson's conclusions
were more the result of a lack of knowledge of the technical aspects of reserve
determinations and of the manner in which Gulf makes and uses reserve esti-
mates, than of intentional misstatements. For example, the FTC Staff's Report to
the Sulicommittee dated June 1973, on which Mr. Halverson's testimony is ob-
viously based, lists the purposes for which estimates of proved reserves are
made :
"Companies make estimates of proven'^ natural gas reserves in situations such
as (1) bidding on or nominating leases, (2) deciding whether to erect a perma-
nent platform, (3) compiling or inventorying total company reserves or supply
(4) negotiating or contracting for the sale of natural gas, or for the joint or com-
mon exploration, development, production, purchase or sale of acreage, or for
obtaining bank loans, and (5) filing depreciation expense schedules with Internal
Revenue Service to name just a few of the situations." °
One would think that even the uninitiated would know that a reserve estimate
made in connection with bidding on a lease would not, and in fact could not. be an
estimate of "proven" reserves. Such estimates are of "potential" reserves which
could not be "proven'' under any definition of the term until wells are drilled.
If the reserves were known before wells were drilled, most of the risks of oil
and gas production would be eliminated. It is this mixing of oranges and apples
by Mr. Halverson and the FTC Staff which has led them into many of their
errors. The second category of reserve estimates listed above, to decide "whether
to erect a permanent platform." is another illustration of the point. After an
offshore lease is purchased, an exploratory well is normall.v drilled from a float-
ing drilling vessel or a movable rig. If oil or gas is found, the lessee has more
information than he had when he bid on the lease, but by no means enough to
determine the "proven" reserves on leases normally containing 5,000 acres. He
ma.v have to drill more than one exploratory well before he will have sufficient
geologic information to make an estimate, not of "proven" reserves, but of the
"potential" reserves, which would justify the expenditure of the several million
dftllars necessary to build a permanent platform.
The Staff report does reflect that some comprehension that reserve estimates
made for building a projected platform are not estimates of "proven" reserves.
Page 13 of the Report states "* * * when a producer has drilled a well on a par-
ticular tract and is considering spending millions of dollars to place a platform on
the tract, this expenditure quite naturally has to be fully justified so a neir
estimate of the reserves in that tract is made This estimate often is broken doicn
into several categories of reserves ivith proved reserves being one of the cate-
gories."
Mr. Halverson in his testimony apparently overlooked this distinction between
categories of reserves when he undertook to compare "proven" ledger reserves
* All pmnhasis adderl except where otherwise notert.
5 Staff Report, p. 7.
242
with "higher estimates" for "other iu-house piu-poses such as decisions whether
to build a drilling platform on a tract or to sell reserves to a pipeline com-
pany. Sometimes the difference is very significant — amounting to over 200%."'
(Tr. 227-S) It is hardly surprising that the potential reserve estimate to justify
erection of a platform miglit be 200% of the proven reserves at the time. The
purpose of the platform is to tind out by drilling wells whether the potential
reserve estimate is correct or not. When a permanent platform is constructed,
it may requii'e the drilling of numerous wells before the proven reserves will be
known. What has been said of reserve estimates for building platforms is also
true of estimates with regard to the sale of gas to a pipeline. Normally, when a
gas sales contract is negotiated with a pipeline only part of the acreage has
been drilled, i.e., only part of the potential reserves are proven. Possible addi-
tional reserves may or may not be proven by additional drilling.
All of these factors enter into the determination of whether a particular reserve
estimate can be considered to be an estimate of "proved" reserves. This is the
reason for the precise language in the American Gas Association's definition of
"proved reserves." To make this language readily available we have excerpted
the definition from the AGA-API 1971 Reserves Report, and attached it as
Appendix A hereto."
Every step in the exploratory process requires an estimate of potential
reserves to justify the risk of the investment under consideration. If potential
reserve estimates for drilling exploratory wells, or building offshore platforms,
or for conti-acting for the sale of gas were reported to the AGA as ''proven'
reserves, the results vrould be highly misleading. This is illustrated by the fact
that 0 out of 10 wildcat wells are dry and find nothing at all and only one out of
38 discover an accumulation of hydrocarbons with an ultimate reserve in exce.ss
of one million barrels of oil or its gas equivalent, by no means a large field.' It
should be obvious to all that to report reserve estimates upon which exploratory
expenditures are based to the AGA as "proven" reserves would be the rankest
kind of misinformation. The old adage that "If wishes were horses then beggars
would ride." might be one way ot distinguishing potential and proven reserves.
Mr. .Justice Jackson stated the proposition in somev.hat more dignified language
nearly forty years ago, when he said: "* * * The service one renders to society
in the gas business is measured by what he gets out of the ground, not by what
he puts into it. and there ist little more relation heticeen the investment and the
result than in a fiame of poker." ^
Perhaps Mr. Halverson's failure to understand and properly interpret the
various types of reserve estimates furnished to the Commission in response to the
subpoena is due to the fact that apparently no one with the technical training
necessai-y to evaluate these documents has been assigned by the FTC to the
natural gas investigation. Mr. En.sinan. Chairman of the FTC, testified that "cur-
rently, two attorneys, one economist and one law clerk are assigned to the proj-
ect." ° The Staff Report^" reflects that in response to the subpoenas. Gulf, on
November 20. 1972. sulmiitted 12.000 documents : Union Oil Company of Cal-
ifornia, on February 27. 1973. submitted in excess of 14.000 documeirts : and Con-
tinental Oil Company, on April 25. 1973. submitted over 28,000 documents. It
passes understanding that four people, wholly nntrai)ied in the complex techni-
calities of reserve estimates and their utilization, could, in so short a time, have
reached such firm conclusions with regard to such a mass of data.
THERE WAS NO "SIGWIFICANTLY LOW^ER" REPORTING OF RESERVES BY GTILF
The Staff Report states :
"Notwithstanding the conservative nature of these estimates, comparison
]>etween these in-house compilations of lease-by-lease estimates of proved reserves
with estimates submitted by members of the very same companies to the South
Louisiana Siibcommittee of the American Gas Association has revealed very
>ii(jnifieant discreponeies between the estimates. The estimates of proved reserves
submitted to the South Louisiana Subcommittee of the AGA have been found to
be signifieantly lower than the estimates of proved reserves reflected in the cor-
8 The dpflnitior has bepii snbst.Tiitiallv nnchancpfl at Ipast sinpp inCi.i.
"Bnllptin of The American Association of Petroleum Geologists, Vol. 56, p. 1147,
.Tnlv 1972.
5 Federal Power Commission v. Hope Natural Gas Companij, .320 U.S. 591, di.ssontins
opinion at r,40 (1044).
fi Statpmpnt p. 11.
i"Pasre 12.
243
lioi-ate compilation. Some of the estimates are approximately equal, but no cor-
p'lniti c.stitnate ha,s been fouinl to (hitc that is Joirrr than the c^titnotc submitted
to the Subcommittee. At times, the estimate for a given field, as refleced by com-
pany books, is as much as ten times the estimate submitted for that same field in
the same period to the Subcommittee."
Apparently on the basis of this report, Mr. Halverson testified :
"The estimates of proved reserves submitted to The South Louisiana Subcom-
mittee of the AGA have been found to be significantJy loicer than the estimates
of proved reserves refiected in the corporate compilations. Some of the estimates
are approximately equal, but no corporate estimate has been found to date that is
lower than the estimate submitted to the Subcommittee."
In his oral testimony Mr. Halverson stated that there was under-reporting of
reserves "as high as ten to one" (Tr. 243).
These statements are demonstrably incorrect as applied to Gulf. To some extent,
they are the result of a misunderstanding of the manner in which Gulf's reserve
ledgers are kei>t, so that the comparisons made are not comparable. On the other
hand, some of the statements simply do not square with comparable data avail-
able to Mr. Halverson and the Staff.
Some understanding of the manner in which natural gas reserves are compiled
by the American Gas Association and the American Petroleum Institute is neces-
sary to understand both the reserves furnished the AGA and Gulf's reserve
ledgers. In the first place, it should be understood that the AGA does not estimate
reserves of dissolved gas. '"Dissolved" gas, commonly known as "casinghead gas","
is so-called because in the reservoir it is dissolved in the oil and separates from
the oil only upon production. Subcommittees of the API, similar to those of the
AGA, estimate tJie reserves of oil. Since the volume of the dissolved gas in the oil
is directly related to the oil reserves, the members of the API subcommittees also
estimate the dissolved gas reserves on a field-by-field basis. A single figure reflect-
ing the total dissolved gas reserves for each area, such as South Louisiana, is
furnished by the API reserve subcommittee chairman to the chairman of the
AGA Reserve Subcommittee for the area involved. The AGA Subcommittee in-
cludes that figure in the total reserves he furnishes to the AGA General Reserve
Committee for the area. In other words, the reserves furnished the AGA, on a
field-liy-field basis by the members of the AGA subcommittee, including the Gulf
employee on that committee, do not include any reserves of dissolved gas. They
only include estimates of non-associated and associated gas in the various fields
assigned to the persons on the Subcommittee. "Non-associated" gas is gas which
is in no way associated with oil in the reservoir. "Associated" gas is gas in a gas
cap in contact with oil but not dissolved in the oil.
Many fields in South Louisiana have multiple reservoirs, some of which con-
tain only non-associated gas ; others contain oil and dissolved gas ; still others
may contain oil. dissolved gas and assciated gas. For fields which contain both
dissolved and associated gas. the responsibility for reserve estimates is divided
between the AGA and the API, with the AGA Subcommittee estimating the re-
serves for associated gas and the API Subcommittee estimating the reserves
for dissolved gas and reporting such reserves to the AGA Subcommittee, not on a
fleld-by-field liasis but as a total figure. These procedures for dividing the re-
sponsibility betv\-een the API and the AGA for the collection of natural gas
reserves should have been well known to the Staff. They were explained in detail
in the statement by Mr. B. B. Gibbs, Chairman of the AGA South Louisiana Gas
Reserves Subcommittee, taken by the Staff on August 5. 1971. and in the deposi-
tion of Mr. Jack Jones, Chairman of the API South Louisiana Reserves Subcom-
mittee, taken March 1, 1972. It was his failure to comprehend these facts which
led Mr. Halverson into his most grievous errors.
Different fields are assigned to each AGA Subcommittee member for his esti-
mate of reserves of associated and non-associated gas on a field-by-field basis.
Gulfs member on the South Louisiana AGA reserves subcommittee is Mr. CuUen
LeBlanc, an experienced reservoir engineer who has l)een an employee of Gulf in
Louisiana for 20 years. He prepares his reserve estimates for the AGA from data
in Gulf's files and other data available to him. without consultation with other
reservoir engineei's employed by Gulf who participate in the preparation of the
proven reserves carried on Gulf's letlgers. During the period involved, Mr. Le-
Blanc was assigned the duty of preparing reserves for 15 fields in the offshore
Louisiana area. His estimates of associated and non-associated reserves in each
of these fields were furnished the AGA Subcommittee and entered into its deter-
^ Also sometimes referred to as "solution" gas.
244
mination of such reserves for the South Louisiana area. His estimates included
no dissolved gas reserves.
Gulf prepares book reserves on a lease-l».v-lease basis. They cover only that
portion of a field which is covered by Gulf -owned or operated leases. I\ir. Le-
Blanc's estimates for the AGA, on the other hand, covered the entire field,
regardless of lease ownership. In 9 of the 15 fields rejxjrted by Mr. LeBlanc, GiTlf
owned or operated leases covering only a part of the field, and therefore Gulf's
reserve ledger refiects only the reserves under its leases, rather than reserves for
the field as a whole. Obviously, no comparison can be made between Gulf's re-
serves for its leases in such fields and Mr. LeBlanc's reserve estimates for the
entire fields. For example, in tlie Vermilion Block 71 Field, Gulf's associated and
non-associated gas book reserve estimate for its leases in the field as of Decem-
ber 31, 1970, was 25,518 million cubic feet (MMcf), while Mr. LeBlanc's reserve
estim;ate of associated and non-associated gas furnished the AGA for the entire
field was 154,469 MMcf. In the West Cameron Block 45 Field, Gulf's hooks show
266.997 MMcf, while the reserve for the Field furnished the AGA was 597,769
MMcf."
Gulf's reserve ledger does reflect the reserves for each of the six remaining
fields which were reported by Mr. LeBlanc to the AGA. Prior to 1967 the reserves
for these fields on the resen-e ledgers furnished the Commission reflected oyihi
the associated and non-associated gas reserves, and they are therefore compar-
able to the resen-es furnished the AGA Sul)Comniittee by ^Ir. LeBlanc. There is
attached hereto, ,as Appendix B, a table which reflects a comparison of the re-
serves shown on Gulf's reserve ledger, and those furnished the AGA by fields,
by years, for the period 1963 through 1966. Conti-ary to the statement of Mr.
Halverson that •'* * * no corporate estinxate has been found to date that is
lower than the estimate sulmiitted to the Subcommittee" (Tr. 228). for all fields
in every year but one, the Table shows that the reserves reix)rted to the AGA
were somewhat higher than those on Gulf's resei^e ledgers furnished the FTC.
In 1967 Gulf changed the manner in which it keiit its reserve ledgers to in-
clude dissolved gas with non-associated gas. This change is explained in Docu-
ment Nos. 8002, 8074. 8170. 8271, 8393, 8556, 8715, 8866 and 9041. furnished the
FTC. Althoiigh the Staff took the depositions of five Gulf employees on March 20
and 21, 1973. and asketl numerous questions concerning the documents furnished,
at no time during the depositions, before, or since, has the Staff made any in-
quiry with regard to the comparability of Gulf's ledger reserves and the reserve
estimates furnished the AGA. altliough there was a dramatic change in sucli
relationship in 1967, based on the numbers alone. The following tabulation indi-
cates this change.
Reserves (million ft.^at
14.65 psia)
Reported
Year Gulf Ledger to AGA
Ship Shoal block 154:
1966 _ 4,769 4,884
1967 _ 16,589 4,884
1969 17,604 4,884
South Timbalier block 131:
1966 3,846 3,940
1967 35,265 17,764
1969 63,507 41,493
South Timbalier block 135:
1966. 37,044 37,83?
1967 282,153 166,837
1969 437,801 282,465
It should have been obvious to the Staff, aside from the explanation in the
documents furnished, that Gulf had made some change in the manner of keeping
its records. In any event, in all fairness, Staff should have asked Gulf to explain
the change which occurred. Instead, Mr. Halverson testified that "* * * although
there has always been a discrepancy between the fi.gures, tJiis discrepancy sub-
stantially increased in 1968 and 1969, the crucial years in our study because
12 In each instance the dissolved gas has been eliminated from the total reserve ledger
figure to make the comparison comparable. This non-comparability factor will be dis-
cussed infra.
245
of the reliance by the FPC upon the 1969 AGA data in tlieir Area Rate Case for
South Louisiana." (Tr. 227) He chose to assume that the change was the result
of some Machiavellian scheme by Gulf to induce the Federal Power Commission
to raise prices, without giving Gulf even the opportunity to explain the change.
The facts are quite simple. These fields contain nonassociated. associated and
dissolved gas, in addition to oil. Since the dissolved gas reserves were included
on Gulf's ledger for the first time in 1967, there was a dramatic change in the
relationship between the book reserves and those reiwrted to the AGA. The dis-
solved gas reserves in these fields are reported on a field-hy-fleld basis to the
API Reserves Subcommittee which, in turn, included them in the total dissolved
gas reserves for the area rejwrted to the AGA. lliei/ arc included by the AGA
in its total gas reserve estimate for Sovth Louisiana. By failing to make a simple
inquiry, the FTC Staff has not only subjected Gulf to unwarranted accusations
before this Subcommittee, but to unfavorable publicity, which no retraction
could erase. It is submitted that if the FTC had seen fit to assign one person
knowledgeable in the field of reserve determinations and reporting, these out-
rageous charges would never have ben made.
GULF HAS ^fO SUBSTANTIAL UNCOMMITTED GAS RESERVES
On June 25, 1973. the Chief of the Bureau of Natural Gaf. of the FPC issued
a revised Staff Report of "A Nation-wide Investigation of Large Pnxlucer Gas
Reserves Available for Sale" (Docket R-405)." The Report is a compilation of the
uncommitted reserves reported to the FPC by the 79 largest producers in the
United States, including Gulf. In response to a subpoena from this Subcommittee,
Chairman Nasikkas of the FPC has furnished the Subcommittee with a copy of
each of these reports, including that of Gulf. Dr. .lohn W. Wilson. Chief of the
Division of Economic Studies of the FPC included, at page 17 of his statement
filed with the Subcommittee, a Table which purports to reflect the concentration
of these luicommitted reserves in the four and eight large producers, for each
of the various areas, and for the United States as a whole.
Since Gulf is the fourth largest seller of gas to interstate pipeline com-
panies," according to Table I of the FPC's 1971 Report of Sales by Producers
of Natural Gas to Interstate Pipeline Companies, it was concluded by some of
the news media, and perhaps by members of this Subcommittee that Gulf was
one of the companies having the largest volumes of uncommitted reserves. Such
is not the case.
As of June 30, 1972. the total uncommitted reserves for the 79 producers for
tlie lower 48 states '^ were 3,410.064 MMcf. Gulfs report to the FPC (including
Warren), a copy of which is in the hands of this Subcommittee, shows that on
that date Gulf had a total of 10.406 MMcf of uncommitted gas reserves. This is
only three-tenths of one per cent of the total for the 79 producers. Gulf's report
to the FPC also reflects that as of December 31, 1971. it had 61.704 MMcf of
uncommitted gas reserves. Between that date and June 30, 1972. Gulf com-
mitted 5/6ths of its uncommitted reserves. This can hardly be said to be an
indication of any withholding of uncommitted reserves by Gulf in anticipation of
increased prices.
Table I of the Staff Report also reflects that the 79 largest producers had
uncommitted reserves of 1.474.437 MMcf of natural gas in offshore South Louisi-
ana. Gulf's Report to the FPC shows that it had only 4.4.52 MMcf of uncommitted
reserves, or 0.3% of the total uncommitted reserves offshore South Louisiana.
When it is considered that the total uncommitted reserves for the lower 48
states of 3.4 trillion cubic feet is only 1.4.5% of the total proven reserves of 234.63
Tcf, and that Gulf's uncommitted reserves were only 0.3% of that 1.4.5%, or
.0000435 of the total, Gulf's uncommitted reserves are placed in proper
perspective.
The Staff Reiwrt contains the following statement :
"The Bureau's investigation has also uncovered numerous instances in which
apparently substantial amounts of proved reserves of natural gas have been dis-
covered in the Federal Offshore area and not produced."
The Report then describes, somewhat inaccurately, the manner in which the
United States Geological Survey grants suspensions of production after a dis-
covery of oil or gas has been made. The Report continues :
13 Tliis Report reflected minor adjustiiients to a Report issiiecl Sept. 10. 1972.
" Actually. Gulf ranks second when the sales of Warren Petroluem Company, a division
thereof, are included.
15 Table I of the Staff Report.
246
'"Our investigtion has revealed that many tracts in the (3fi:shore have been
granted frequent suspensions of production. Documents from one company's
submission indicate that I'i of their leases in the Offshore area, ichich is a very
significant proportion, hare been granted suspensions of production. Some of these
suspensions of production have extended the term of the lease seven years beyond
the primary five-year term." ^'
The Bei>ort deos not identify Gulf as the company having the 14 leases which
have been granted suspensions of production. Nevertheless, Gulf has assembled
the inforuiatiou with regard to all of its leases in this category, for the benefit of
the Subcommittee. During the period involved in the FTC investigation, Gulf had
interests in 19 leases which at one time or another were granted suspension of
production permits by the USGS. A lease by lease analysis of the suspensions
granted, the reasons therefor, and the current status of the lease, is contained in
Appendix "C", attached hereto. Appendix C can be summarized as follows :
Nine of the 19 leases which were granted suspensions for lack of a market,
are now on production, markets having ultimately been secured. Three leases have
been released and abandoned. Two additional leases will be released on August 31,
1973, and another one on September 24, 1973.
Some additional explanation should be made of the four remaining leases.
OCS Lease No. 1256 has only 4.46 billion cubic feet of reserves which will not
justify the expenditure required to place the well on production, nor the cost of
laying an 11.000-foot line to reach market facilities. No pipeline purchaser has
been willing to make the expenditures necessary to purchase this gas. OCS Lease
No. G-llOO has one shut-in gas well, with a reserve of approximately 1.167 Bcf.
The platform was destroyed in hurricane Betsy. This reserve will not .justify
the expenditures necessary to rebuild the platform and place it on production.
Eft'orts to farm out the lease have been unsuccessful. Eleven oil wells were drilled
on OCS Lease No. G-1609. The platform was extensively damaged by hurricane
Camille, and the wells had to be plugged and abandoned. The oil reserves are in-
sufficient to justify the large expenditures necessary to replace the platform and
redrill the wells. The gas reserves are inadequate for lease fuel. If a new platform
were built and new wells were drilled, there would still be no gas to sell. There
is one shut-in oil well on OCS Lease No. G-1620, which contains a gas reserve of
less than one billion cubic feet. The reserve will not justify the additional ex-
penditures necessary to put the well on production.
It should be obvious that Gulf has not withheld gas from the market and that
it has no substantial uncommitted gas reserves. The analysis in Appendix C of
the sjisi)ensions of production granted Gulf by the USGS from time to time make
it clear that the assertion in the Staff Report that substantial proven reserves
"have b^'en discovered in the Federal Offshore Area and not produced." at least
as applied to Gulf, is simply not correct.
THE INNKEISTDO OF A CONSPIRACY IS IXCORRECT
Mr. Halverson, in his testimony, concluded :
"2. The procedure of reporting reserves through a subcommittee of the Ameri-
can Gas Association composed of employees of major producers could provide
the vehicle for a conspiracy among the companies involved to under-report gas
reserves, but more information is needed in this area." (Tr. 224)
He conceded that •' * * * u^ conclusive evidence has been found as yet of an
actual conspiracy to under-report reserves * * *." (Tr. 230) He referred to no
evidence, conclusive or otherwise, in support of his conclusion that the procedures
of reporting reserves "could" provide a vehicle for a conspiracy. This is damna-
tion by innuendo. As far as Gulf is concerned, there has been no conspiracy,
through the subcommittee of the AGA or otherwise, to under-report reserves.
CONCLrSION
The Staff Report and Mr. Halverson's testimony are examples of uninformed
conclusions reached without adequate knowledge of the subject matter and
without making any real investigation to ascertain the true facts. Even a casual
inquiry at the depositions, or at any other time, would have revealed the Staff's
error, at least as to Gulf, of concluding that there has been "serious under-
reporting^ proved natural gas reserves." " It is submitted that there is no basis
of the^tranSfpT" P^''^P'^^''>^^'^ "^^ Staff Report in his testimony at pages 229 and 230
1" Tr. p. 230. '
247
upon which this Subcommittee could accept any of the charges made in the Staff
Keport or by Mr. Halversou.
The issues of an energy shortage, particularly with regard to natural gas, are
too fundamental to the well-being of the Nation to be clouded by the unsupported
charges and innuendos contained in the Staff Report and Mr. Halverson's
testimony.
Respectfully submitted,
Warren M. Sparks,
Regional Attorney, Gulf Oil Corp.
VERIFICATION
The undersigned, Warren M. Sparks, Regional Attorney for Gulf Oil Corpora-
tion at Tulsa, Oklahoma, prepared the above and fofegoing Response, with the
assistance of other Company personnel, and states that to the best of his knowl-
edge and belief, the facts stated therein are true and correct.
Warren M. Sparks.
Subscribed and sworn to before me, this 12th day of July, 1973.
R. Jackson. Notary Public.
My Commission Expires : May 15, 1976.
Appendix A
[From "Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the United States
and Canada and United States Productive Capacity as of Dec. 31, 1970."]
Natural gas liquids reserves are classified on the basis of the type of occurrence
of the gas in the reservoir ; that is non-associated and associated— ^dissolved.
PROVED RESERVES
The Committee's definition of proved reserves defines the current estimated
quantity of natural gas and natural gas liquids which analysis of geologic and
engineering data demonstrate with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under existing economic and operating
conditions. Reservoirs are considered proved that have demonstrated the ability
to produce by either actual production or conclusive formation test.
The area of a reservoir considered proved is that portion delineated by drilling
and defined by gas-oil, gas-water contacts or limited by structural deformation or
lenticularity of the reservoir. In the absence of fluid contacts, the lowest known
structural occurrency of hydrocarbons controls the proved limits of the reservoir.
The proved area of a reservoir may also include the adjoining portions not
delineated by drilling but which can be evaluated as economically productive on
the basis of geological and engineering data available at the time the estimate is
made. Therefore, the reserves reported by the Committee include total proved
reserves which may be in eithei-' the drilled or the undrilled portions of the field
or reservoir.
In general, the definitions of proved reserves contained in Technical Report
No. 1, "Definitions for Petroleum Statistics", of the A.P.I, have been followed in
this report. It should he noted that in order to maintain a consistent continuing
series, gas in underground storage is included in the total gas reserves in this
report. Anyone desiring a value for gas in storage may obtain such by subtraction.
Attention is called to the fact that natural gas is a mixture of hydrocarbon
compounds and small quantities of various non-hydrocarbons. In most cases the
quantities of non-hydrocarbons are de minimis and do not affect the marketability
of the gas. In such cases no reduction in volume for the theoretical removal of
such non-hydrocarbons has been made herein. In any reservoir where the quantity
of non-hydrocarbons is sufficient to render the particular gas unmarketable an
appropriate reduction in the reservoir gas volume has been made to cover the
exclusion of such non-hydrocarbons.
ultimate RECOVERY OF GAS RESERVES
Ultimate recovery of gas and natural gas liquids resei'ves are estimates of the
total quantity of such proved reserves which will ultimately be produced from a
reservoir as determined by the interpretation of current geological and engi-
27-547—74 17
248
neering information and under prevailing economic and operating conditions.
Adjustments to estimates of ultimate recoveiT of gas resen-es brought about by
new information from additional drilling or resen-oir production performance
are recorded under extensions and revisions in the reserves reporting. The cur-
renl estimate of ultimate recovery of gas reserves is the sum of the cumulative
production and the remaining recoverable reserves.
DISCOVERIES
Discoveries are defined as proved reserves in newly discovered fields and newly
discovered reservoirs in old fields. New reservoir discoveries include proved
reserves in new segments of resei-voirs that are separated from the previously
proved productive area by faulting, lenticularity of the reservoir, or other sub-
surface discontinuity. Reserves of multi-reservoir fields, included in the new field
discovery category, reflect the reserves of all reservoirs proved during the dis-
covery year of tlie field. New discoveries seldom are delineated or fully developed
during the year of discovery. Thei'efore, the year-end reserves estimates of dis-
coveries generally represent only a part of the reserves that ultimately will be
assigned.
EXTENSIONS TO RESERVES
A discovery in one year normally is delineated by the drilling of both extension
and development wells during subsequent years. Drilling usually continues until
the productive limits of the field or resei*voirs are defined. Increases in the proved
area of reservoirs result in appropriate adjustments to estimates of recoverable
reserves and such changes are recorded under extensions. Changes resulting from
a reduction in the estimate of the proved area are recorded under revisions.
REVISIONS TO RESERVES
The drilling of additional wells in a reservoir not only delineates the productive
area but also provides additional basis geological and engineering data. Estimates
of porosity, interstitial water, pay thickness and other reservoii- factors may be
revised by new data. Analysis of the producing history of a reservoir, including
production of oil, gas and water, and pressure performance results in more
accurate concepts concerning the producing mechanism, recovery efficiency and
the performance of the reservoir. The composite of this new and improved
information will yield more precise estimates of the ultimate recoveries and
remaining reserves and result in revisions to previous estimates. Changes in
reserve estimates brought about the application of cycling or other recovery
techniques are included in the revision to reserves. Also, changes in reserves
resulting from a reduction in the estimate of the proved area are included in
revisions.
NATURAL GAS AND NATURAL GAS LIQUIDS PRODUCTION
Gas production as defined by the Committee is net production which constitutes
the total volume of natural gas withdrawn from prodiicing reservoirs less the
volume returne<l to such reservoirs in cycling, repressuring of oil reservoirs and
conservation operations. Net production as reported by the Committee is cor-
rected for shrinkage I'esulting from the removal of the liquefiable portions of the
gas and excludes non-hydrocarbon gases where they occur in sufficient quantity
to render the gas unmarketable. Marketed gas volumes are not comparable to
net gas production as a portion of the gas withdrawn from reservoirs is con-
sumed in field operations as lease and plant fuel. Also, some gas is vented.
It is recognized that in many instances the production statistics for natural
gas are available only on a total produced basis including all or a part of the
liquefiable portions. In such cases the individual Subcommittee makes the appro-
priate adjustments to conform to the Committee's definition of gas production.
The compilation of gas production for reserve determinations involves the
correlation of reported production witli the specific fields or reservoirs which
have been credited with proved resei'ves. Gas well gas production is usually
reported to conservation commissions by individuil wells and casinghead of oil
well gas production is reported on a total lease basis. To determine production
by fields or reservoirs requires that such production statistics be analyzed and
specific volumes identified as to their source.
Reported production of natural gas liquids includes liquids recovered by field
separation facilities on an individual lease basis and liquids recovered by plant
facilities on a total plant basis. In cases where plants process gas from more than
one field, plant yields are allocated to gas production and reserves of fields con-
nected to such plants.
249
Appendix B
comparison of recoverable reserves reported to the aga with gulf ledger recoverable reserves
YEARS 1963 THROUGH 1966 i
[Million ft2 at 14.'65 psia]
Comparative fields
AGA report
Ledger
AGA versus
Gulf (plus
or minus)
Difference,
percent
of Gulf
Dec. 31, 1963;
West Delta block 27...
Ship Shoal block 154..
S. Timballer block 131.
S. Timbalier block 135.
Total _..
Dec. 31, 1964:
WfcSt Delta block 27...
Ship Shoal block 154..
S. Timbalier block 131.
S. Timbalier block 135.
Total...
Dec. 31, 1965:
West Delta block 27...
Ship Shoal block 154..
S. Timbalier block 131.
S. Timbalier block 135.
Total
Dec. 31, 1966:
West Delta block 27...
Ship Shoal block 154..
S. Timbalier block 131.
S. Timbalier block 135.
Total
4, 906, 314
4,884
3, 213, 142
4,769
1,693,172
115
31,434
4,942,632
4,906,314
4,884
228
31,907
4, 892, 115
4,884
3,940
32, 190
4,642,115
4,884
3,940
37, 836
30, 649
785
3, 248, 560
1, 694, 072
4, 697, 104
4,769
228
31,122
4,943,333 4,733,223
4, 683, 267
4,769
3,846
31, 398
4,933,129 4,723,280
4, 683, 057
4,769
3,845
37, 044
4,688,775 4,728,716
209, 210
115
785
210, 110
208, 848
115
94
792
209, 849
(40, 942)
115
94
792
(39,941)
+52.7
+2.4
+2.6
+52.1
+4.5
+2.4
+2.5
+4.4
+4.5
+2.4
+2.4
+2.5
+4.4
-0.9
+2.4
+2.4
+2.1
-.8
> The S. Timbalier block 5 and Eugene Island block 238 fields were developed subsequent to this period.
Appendix C
west cameron, b 163, ocs 0750
5000 acres : Acquired, 5/1/60 ; Bonus, $3,115,000 ; 5-year term ; Rental, $3/ Acre ;
1/6 Royalty Mobil .333 Operator, Exxon .333, Gulf .334. Original 5-year term
expiration date: 4/30/65.
Well No. i.— Comp. 11/25/60, shut in gas well, 2895 MCF 14 BCPD.
U.S.G.S. letter 3/31/65: "attempting to establish market to gas-suspension of
production granted through 4/30/66 — minimum royalty $15,000".
U.S.G.S. letter 4/11/66: "attempting to establish market — suspension of pro-
duction granted through 4/30/67 — payment of minimum royalty $15,000".
U.S.G.S. letter 3/16/67: "'suspension through 4/30/68 — minimum royalty
$15,000".
Mobil Letter 3/8/68: "Transco proposed to extend pipeline to Block 163 and
289; but on 8/25/67 withdrew proposal — negotiating with Roy H. Bettis of
Dallas to purchase and transport gas for resale onshore."
U.S.G.S. letter 4/16/68 : "suspension through 4/30/69" minimum royalty.
First Production No. 1 February, 1969. Gas Pipeline "Tidal System : producing
facilities."
Well No. 1 — Shut in 1/31/70, water production.
Well No. i.— 6/30/70, to be plugged.
C & K Offshore Company farmout well plugged and abandoned 5/15/70.
W.C, B 163 dropped August, 1970.
WEST CAMEEON, BLOCK 176, OCS 0762
5000 acres, acquired 5/1/60; bonus $6,167,010, 5-year term; rental, $3/acre,
1/6 royalty ; Mobil .333 operator. Humble .333, Gulf .334, Original 5-year term
expiration date 4/30/65. (located in East Cameron B64 Field.)
Well No. i.— Dry 10/16/60.
250
Well No. 2.— Completed 10/25/63 I.P. 204 BCPD & MCFGD ; 2-D I.P. 237
BCPD & 5155 MCFGD.
U.S.G.S. letter 4/5/65 : "Well No. 2 capable of producing in payable quantities-
no market for gas — suspension of production granted through 4/30/66 — minimum
royalty $15,000".
U.S.G.S. letter 4/1/66: "suspension of production granted through 4/30/67 —
minimum rovaltv payment".
Wtll No. .3.— S/6G comp. 168 BCPD 5608 MCFPD shut in.
U.S.G.S. letter 3/6/67 : "2 well shutin — a line capacity problem of Tenu. Gas
Transmission delays putting wells on production — suspension of production
through 4/30/68 — minimum royalty payment."
U.S.G.S. letter 4/18/68: "negotiation for gas sale continuing — su.spension of
production granted through 4/30/69 — minimum i-oyalty.
First Production 1/4/69. Tenn. Gas Transmission Pipeline.
WEST CAMERON, B 289: W. CAMERON, B. 16." FIELD, OCS 0752
5000 acres acquired 5/1/60; bonus, $3,115,005, 5-year term; rental, $5/acre.
1/6 royalty: Mol)il .333 operator. Humble .333. Gulf .334. Original 5-year term
expiration data 4/30/65.
Well No. J.— Comp. 11/25/60, shut in gas well I.P. 2807 MCFGD.
Well No. 2.— Comp. 3/30/61, I.P.5BCPD & 2315 MCFGD.
IMobil letter 3/29/65: "unsuccessful in arranging gas sale due to limited re-
serves".
U.S.G.S. letter 3/31/65 : "attempting to establish gas market — suspension of
production granted through 4/30/66 — minimum royalty — $15.0(X)".
T'.S,(t.S. letter 3/16/67 : "suspension of production — minimum royalty — through
4/30/67."
l\S.G.S. letter 3/16/67 : "suspension of productimi — minimum royalty — through
4/30/68".
Mobil letter 3/18/68 : "Transco proposed extension of pipeline ; but withdrew
proposal 8/25/67."
U.S.G.S. letter 4/16/68: "suspensi(m granted — minimum royalty through
4/30/69."
First Production March 1969. Gas Pipeline "Tidal System : Facilities."
No. 1 well.^i/lO, 7 BCPD 2238 MCFGD 60 RWPD— Off 12/12/70— unsuccess-
ful workover 1/24/71.
No. 2 well. — 9/69, shut in excessive water productif)n.
No. 3 icell.—i/70. r^ BCPD 5330 MCFGD 91 BWPD— Off 8/6/70. excessive
water — plugged back and recomp 4/7/71 22 BCPD 3670 MCF producing to date.
BAST CAMERON BLOCK 1258/ 2 (OCS 0528)
Gulf has a i/if, working interest in 2500 ac. which were acquired from Spencer
Chemical Company in %4. Kerr McGee is the operator with i%6 working
interest.
Kerr McGee completed as a shut in gas well the # 1 O'CS 0528 on May 1, 1960.
On IP from perforations 9723-38 : 9740-50 and well made 7000 MCFG on 14" ch.
with TP 6800#. On July 11, 1961 Kerr McGee made application to Director.
USGS, for Suspension of Production under provision of 30 CFR 250.30 on the
grounds of lack of transportation facilities for disposition of the gas.
In letter of July 31, 1972 the USGS requested a plan of development for addi-
tional wells by February 1973. Due to the lack of commercial reserves, it was
impossible for Kerr McGee and Gulf to establish a plan of development and it
was decided to attempt to farm out thie lease. This plan was unsuccessful due
to the unattractiveness of the prospect and it was finally decided to let the
lease expire in Augvist 1973.
SOUTH MARSH ISLAND, BLOCK 8, OCS G-1179
3146 acres, acquired 3/1/62: bonus, $3,104,200, 5 year term; 100% Gulf;
Rental, $3/acre, 1/6 Royalty ; Original 5 year term expiration date 2/28/67.
No. i.— Dry and abandoned 7/7/62.
No. 2. — Dry and abandoned 7/31/62.
No. .?.— Dry and abandoned 6/4/64.
No. 4.— TA 6/23/64.
No. .5.— St'd out of No. 4 1/20/65.
251
Xo. 6. — Dry and abandoned 2/27/65.
No. 7.— Completed 3/23/65 FARD 36 BCPD and 2400 MCF TP 2250 #S.I.
Xo. S.— P&A 10/10/67.
U.S.G.S. letter 2/2/67 ; "No. 7 completed — paying quantities — no market for
gas granted suspension of production through 2/2t)/68-pay minimum rovaltv
$9441. •• Well Xo. 8 P&A 10/10/67.
I'.S.G.S. Letter 2/17/69: "Suspension of production through 2/28/70".
U.S.G.y. Letter 1/21/70: "Gulf effort for joint interest well unsuccessful re-
viewing full interest risk well — can not negotiate suitable market for small gas
reserve — suspension of production granted through 2/28/71".
T\S.G.S. Letter l/2r)/71 : "Gulf's lease program is review rather than ex-
ploratory— should not request another suspension without lease activity.
l'.8.G..S. Letter 2/29/71 : "Possibility of drilling deep test — susijension granted
for 6 niontlis. through 8/28/72".
Gulf Letter 7/10/72 : "Negotiating farmout to Ocean Drilling and Exploratory
Company hold 1/12 ORR— well to 16,500'."
I'.S.G.S. Letter 8/2/72: "Farmout to Odeco for No. 9 well — susjiension through
2/28/78".
Odeco OCS 1179 No. 9 Drv 9/1/72.
S.M.I. Block 8 dropped 2/22/73.
SOUTH MARSH ISLAND. BLOCK 16. OCS 1184
Acquired .5/1/62 : Bonus. .$5,115,500 ; 5 year term : Rental. $3/acre. i,'; royalty ;
Gulf .50. Moldl ..~)0 Oi>erator. Original 5-vear term expiration date: 4/30/67.
Mobile Well Xo. /.—Dry. 8/5/62.
Gulf assigned its interest to Dixilyn Corporation. Sid Richargson Carbon Com-
pany. LL & E and Amerada and retained 1/24 ORR or a % W.I. 11/7/65.
BiJ-ihin TT'cZ7 Xo. 2.— Completed and shut in 3/8/66.
No. 2 LP. 168 BOPD.
No. 2-D LP. 48 BCPD. 3000 MCFGPD.
Gulf elected to retatin a 1/24 ORR. 6/1/66.
Gulf elected to retain a 1/24 ORR. 6/1/66. Mobile elected to participate.
First Production OCS 1184, 1/10/71. Sea Robin Pipe Line Company.
SOUTH MARSH ISLAND BLOCK 29 (OCS 1189)
Gulf acquired its interest in OCS 1189 from British-American in .July 19G6. At
the time of acquisition Gulf ow^ned i/4 interest down to 14.405' with the remaining
interest being % being owned by Atlantic Richfield and ^2 owned by Shell. Below
14.405' the lease was owned jointly by Gulf and Atlantic Richfield.
Shell was holding the lease by virtue of a suit in oil well, the #3 OCS 1189.
Gulf had a %2 override in this well.
In .June. VtWyS) Gulf, Shell, and Atlantic Richfield farmed out to Tenneco their
interests in the lease. Tenneco drilled and completed their #A-4 wt'l in Feb.
1971 as a gas well. Gulf now has a %2 woi'king interest down to 14,405' and 5€%
below this depth. Through April 1973 the A-4 well has produced 4.12 Itiliiou CF
of gas. Sold by contract 7/29/71, production began 1/8/72.
SOUTH MAESH ISLAND, BIX)CK 48, OCS #078G
OCS-0786 Lease is owned equally by IMobil Oil Corporation and Gulf Oil
Corporation and is operated by Gulf. The lease is dated May 1. 1960 with a five
year primary term, % royalty, and covers the entirety of Block 48 comprising
approximately 5.000 acres.
Well No. A-2 was completed as the initial producing well on March 25, 1961. It
produced on test at the rate of 12 barrels of condensate per day with a gas con-
de'J^ate r:itio of 151,0(M^> cibic feet of gas per barrel of condensate.
During 1961 and 1962 wells A-1, A-ID, A-2 and A-4 were drilled v,i\ the lease
and completed as capable of producing gas and condensate.
During this same period well Nos. 1, 2. 3 nnd 3-A were drilled and ;i 'candor ed.
A gas sales contract was entered into with Transcontinental Gas Piiieline dated
April 4, 1961 for the gas reserves underlying OCS-0786 in South ilarsh Island
as well as reserves in otlier fields. Anticipating that the pipeline construction
would be complete and operative. Transco committed itself to take a minimum
of 4400 MCF of gas per day effective .January 1. 1965. Wlien thpir line wa^ not
complete to South March Island Block 48 by January 1, 1965. Gulf and Mobil
252
agreed for them to transfer ttie miuiinum take to South Marsh Ishand Block 23
Field leases also jointly owned by Gulf and Mobil. When Transco failed to take
the required minimum they submitted to Gulf payment based upon minimum
take requirements. Gulf then srubmitted the royalty due the U.S.G.S. by check
No. 4484.
Transco extended its lines to platform "A" and "B" on the subject lease in
December, 1965 and January, 1966. Deliveries were not begun immediately be-
cause of down hole mechanical problems on certain wells on the "B" platform
and drilling operations in progress on the "A" platform.
We were able to begin deliveries to Transco on May 23, 1966 at the rate of
approximately 50 million cubic feet per day.
The requests for su.spension of production to the U.S.G.S. were submitted be-
cause the lease could not be placed on production until a gas pipeline v\"as laid to
it and this could not be accomplished until adequate reserves were discovered, a
gas contract entered into and the line was physically in place. It should be re-
membered that though the primary term of the lease was up on April 6, 1965,
that a firm contract had been executed in 1961 for gas from the lease to be taken
effective January 1, 1905, and through the pipeline did not reach the lease until
the end of the year, take or pay money was paid to the interested parties for the
yeai- 1965.
EUGENE ISLAND, BLOCK 237, OCS G-0981
OCS G-0981 Lease, dated June 1, 1902 provides for Vg royalty (.16667) a 5 year
term, covers the entirety of Block 237 containing approximately 5000 acres and
is owned by Gulf Oil Corporation.
The subject lease was established as a productive lease by the completion of
well D-1 as an oil producer on August 25, 1965. Wells D-2, D-8. D-4 and D-6
drilled on this lease did not encounter commercial production and were
abandoned. Since no other wells were productive on the "D" platform, a mud line
completion was made on Well D-1 to permit the platform to be used in another
ar^-n aiul to await other development in the area.
Well E-2 was directionally drilled from another lease (OCS G-0982) to test
another portion of the lease. It encountered gas sands which were tested. Opera-
tions on E-2 were suspended on May 28, 1966 to await additional development
and the installation of a gas line in the field.
Of the first 6 wells drilled on this lease, five were from platform "D" and one
was from platform "E" located on an adjacent block. Four wells were abandoned,
one was completed as capable of producing oil and one was completed as capable
of producing gas. It was not economically feasible to establish producing facil-
ities for the oil well which was not located in the same area as the gas well. The
gas well could not be produced because there was no gas line in the vicinity.
During the early years of production these were unsufticient reserves to justify
the cost of laying a gas line to the field.
A gas sales contract was executed with Sea Robin Pipeline on August 19,
1971. They completed the laying of a line into the area of platform "E" and re-
ceived their first delivery on January 29, 1972. Well E-2 was connected and
began delivery of gas and condensate to the system.
Additionnl drilling during 1972 to further extend the limits of the gas pro-
ductive area of the lease was unsuccessful.
EUGENE ISLAND, BLOCK 238, OCS G-0982
OCS G-09S2 Lease, dated June 1, 1962, provides for % royalty (.16667), a
5 year primary term, covers the entirety of Block 238. which contains approxi-
mately 5000 acres and is owned by Gulf Oil Corporation.
Well A-1 was completed as a commercial oil producer on this lease on Feb-
ruary 29. 1964. Additionally wells A-2, A-3, A^ S.T., A-5, A-6, E-1, E-3, E-4, E-5,
E-6. F-1. F-2 and Well No. 2 were drilled on this lease. By December 1, 1967, all
wells on "A" platform had ceased to produce and no other production had been
established. Subsequent workover operations did restore A-4 and A-2 to produc-
tion which continued until 1971.
Additional production was encountered when E-6 was drilled in 1971 but it
could not produce since there was no gas pipeline available. Additional reserves
were encountered upon the drilling in 1972 of F-1 and F-2 wells in another part
of the lease. Efforts to extend this productive area between the "A" and "E"
platform in 1972 were unsuccessful.
A contract was executed on August 19. 1971 with Sea Robin Pipeline. Their
pipeline reached Gulf's "A" and "E" platforms and production was begun on
January 29, 1972 from the gas wells on these platforms.
253
SHIP SHOAL, BLOCK 176; OCS 0589
OCS-0589 Lease, dated September 1, 1955, provides for % royalty (.16667), a
5 year primary term, covers the entirety of Block 176 comprised of approximately
5000 acres and is owned equally by Gulf Oil Corporation and Exxon Company
and operated by Gulf.
On September 7, 1956 a joint operating agreement was entered into among
Gulf and others which pooled 40 acres out of 4 blocks with a common corner,
which included OCS-0589, to form a 160 acre square for tlTe purpose of drilling
a test well to approximately 14,000 feet located on tract 176 (OCS-0589).
Well A-1 was drilled and completed as a gas well on February 4, 1957.
Well No. A-2 was drilled and abandoned. A farmout agreement from Gulf to
Humble Oil and Rehning Company (Now Exxon Company, U.S.A.), except as to
the above referred to 40 acres, was executed on March 31, 1967 which provided
that Humble would conduct certain drilling operations on the lease. Humble
was designated operator of the lease on March 29, 1967 and completed a dry hole
May 30, 1967. Gulf resumed operation of the lease.
This lease was maintained in effect past its primary term by the U.S.G.S.
granting annual suspension of production authority because the discovery gas
well on the lease could not be produced due to lack of marketing facilities.
Gulf entered into a gas purchase contract with Tennessee Gas Pipeline Com-
pany on May 29, 1969 covering gas production from this lease.
AVhen began delivering gas to Tennessee in January 27, 1971.
SOUTH TIMBALIER, BLOCK 123, OCS G-1560
OCS G-1560 Lease, dated July 1, 19GT. provides for % royalty (.16667) 5 year
primary term, contains 2.148.46 acres and was owned by Gulf Oil Corporation.
Gulf released all the acreage in this lease on June 25, 1973.
The subject lease was tested by directionally drilling Well 1-7 from Platform
'•!" located on Grand Isle Block 85. The well was completed as a shut-in gas well
on October 22, 1967 pending additional development.
The second well on the lease. No. 1, was spudded on October 20. 1967, and was
drilled to a total depth of 13,353 feet. It was non-productive and was abandoned
on November 25, 1967. A small producer with very limited reserves, a dry hole
plus detailed study of seismic data in the area, and development in adjacent
blocks did not justify further operations on the lease. Therefore, since the re-
serves encountered in Well 1-7 would not economically justify the installation
of the facilities required to produce the well, the lease was released.
OCS 0458
2148 acres, S/T Blk 132, Gulf WI 100%, Lease date 1-1-55.
7-17-59 : Well B-2 was completed as an oil well and tested at the rate of 233
BOPD and 84 MCFD on a 2 hour test.
11-2-59 : "Production Relief" granted by USGS because producing and storage
facilities were not economically feasible. Extensions were granted each year
through 1962.
Sept. 1962 : Lease placed on production after "C" Platform was installed and
Well No. C-8 was completed as an oil well.
Aug. 1972 : Last producing well No. C-8 sanded up and the lease went off
production.
July, 1973: All plugback and workover operations have failed to restore lease
production. Farmout to Union Oil Co. of California was dry hole. Lease will
terminate Sept. 24. 1973, unless drilling operations are commenced or produc-
tion restored. Cumulative lease production : 259,186 bbls oil, 7,003,783 MCF gas.
OCS 0459
5000 acres, S/T Blk 1.33. Gulf WI 100%, Lease date, 1-1-55.
9-3-59 : Well B-3 was completed as an oil well and tested at the rate of 196
BOPD and 120 MCFO on a 2 hour test.
11-2-59: "Production Relief" granted by USGS because producing and storage
facilities were not economically feasible. Extensions were granted each year
through 1962.
Sept. 1962 : Lease placed on production after "C" Platform was installed and
four additional wells were completed.
254
June 1970 : Lease went off production.
9-28-70: USGS granted "Production Relief" while additional platform and
reservoir evaluations were completed.
2-21-71 : Well No. C-IOD restored to production.
Oct. 1972 : Lease off production.
July 1973: A workover at Well No. C-IOD and the installation of gas lift
facilities has the lease back on production. Well test 6-12-73 175 BOPD, 70
BWPD. Cumulative production to 6-1-73 : 1,231,942 bbls oil, 1,146,052 MCF gas.
DCS 125G
5000 acres. S/T Blk. 172, Gulf WI 100%, Lease date, 6/1/62.
2/12/65 : Well No. A-1 plugged and abandoned.
4/5/65 : Well No. A-2 completed as a commercial gas well flowing at the rate
of 2.555 MCFD.
4/12/67 : "Production Relief" granted by USGS because no gas market was
available.
12/8/67 : S/T Block 172 was one of 6 leases presented to U.S.G.S. as a proposed
Federal Unit. The USGS would not recommend a unit which included Blk. 172.
6/7/6S : "Production Relief" extension granted by USGS because no gas
market available. Extensions were granted each year through May 1, 1973.
6/2/72 : Well No. A-3 plugged and abandoned after finding no commercial
shows.
S/9/72 : Ocean Drilling and Exploration Company farmout. Well No. 1 aban-
doned with no commercial shows.
9/9/72 : ODECO Well No. 2 was abandoned -with no commercial shows.
4/11/73 : "Production Relief" extension granted by USGS to allow time for
review of geophysical and geological data.
July 1973 : The limited gas reserves of 4.460 MMCF assigned to Well No. A-2
vdll not justify the additional expenditure required to place the well on produc-
tion, even though the well tested 2.555 MCFD on completion. It would be
necessary to lay approximately 11,000' of 8" line to reach the Exxon market
facilities. Three dry holes have been drilled on Block 172 in an unsuccessful
attempt to establish additional reserves. Attempts are now being made to farm
out the south half of the lease.
OCS G«-1100
5000 acres, West Delta, Blk. 116, Gulf W.I. 100% ; Lease date, 6/1/62.
8/24/64 : Well No. B-3 plugged and abandoned as a dry hole.
4/11/65 : Well No. B-8 completed as a shut-in gas well after flowing at the
rate of 36 BOPD and 1750 MCFD. Reserve about 1.167 BCF.
5/10/67: "Production Relief" granted by USGS. The "B" platform was lost
as a result of hurricane "Betsy" which caused well No. B-8 to be temporarily
abandoned as a mud line completion.
6/6/68 : "Production Relief" extension granted by USGS. West Delta Blk 117
was being developed to aid in the evaluation of Blk. 116. Extensions were
granted by the USGS through April, 1971, while Blk 117 was developed.
5/12/72: Production Relief granted by USGS through May 31, 1973. All
attempts to extend the productive limits of several sands from Blk 117 onto
Blk 116 have been unsuccessful.
7/24/72 : Well No. 1 was drilled in Blk 116 and abandoned dry.
5/23/73 : "Production Relief" granted by USGS. Approximately IS miles of
seismic exploration was conducted by Gulf for further evaluation of Blk 116.
Gulf is attempting to develop the lease by negotiating a farmout that will pro-
vide for the drilling of a well within 90 dnys.
July-1973 : No farmout has been obtained to date. The limited reserves which
have been assigned to the B-8, temporarily abandoned gas well, will not justify
the additional expenditures necessary to recomplete the well and place it on
prodiiction.
OCS G-ie.09
5000 acres: South Pass, Block 61; Gulf W.I. 100%; Lease date, 7-1-67.
8-14-68 : Well No. A-1 completed as a shut in oil well after testing 192 BOPD
and 79 MCFD on a one-hour test.
255
8-17-69: Hurricane Camllle destroyed "A" platform and forced abandoment
of till wells drilled from the platform.
2-3-72 : "Production Relief" granted by USGS because of loss of production
platform.
6-19-73: USGS granted extension of "Production Relief" through 6-30-74.
Eleven wells drilled from the "A" Platform had to be plugged and abandoned
after the platform was extensively damaged by "Camille". In order to produce
the lease a new production platform would have to be set and high angle direc-
tional wells drilled. There are indications of unstable bottom conditions which
would increase the cost of the platform installation. An evaluation of the lease
indicates the 5 million barrels of oil reserves assigned to the lease will not
justify the large expenditures which will be required to put the lease back on
production. We have recently contracted for seismic services which will aid in
the final evaluation of the lease. Gas reserves inadequate for lease operation.
If new platform were built and more wells drilled there would be no gas to sell.
OCS G-1620
3540 acres ; South Pass, Block 94 ; Gulf W.I. 100% : Lease date 7-1-67.
8-26-70 : Well No. 1 completed as a shut in oil well after a review of the well
logs indicated the well would be capable of producing hydrocarbons. Gas reserve
less than 1 BCF.
9-24-70 : Well No. 2 plugged and abandoned as dry hole.
5-10-72 : "Production Relief" granted by USGS to wait on Humble test to be
drilled on Block 93. The proposed location is only 330' east of Block 94 and will
aid in the evaluation of Block 94.
7-25-72 : Humble OCS Lease 1619, well No. 2, plugged and abandoned as non-
commercial. Gulf contributed $200,000 to be drilling of this offset to Block 94.
6-8-73: "Production Relief" extension granted by USGS through 6-30-74 to
wait for exploratory test by Exxon on their diagonally adjacent lease OCS
G-2188.
.Tuly 1973 : The limited reserves assigned to Well No. 1 will not justify the
additional expenditure necessary to put the well on production. One dry hole
drilled on the lease and one dry hole drilled 330' from the lease have failed to
increase lease reserves. Now waiting evaluation of proposed Exxon exploratory
test.
EAST CAMERON, BLOCK 161 w/2 (OCS 0544)
Gulf has .031 interest in 2343.75 ac. with Phillips and Kerr McGee. The in-
terest was acquired from Spencer Chemical Co. in September 1964. Phillips is
operator with a .625 interest and Kerr McGee is a partner with .344 interest.
Phillips completed as a shut in gas well the #1 OCS 0544 on May 1, 1960.
Gulf has no interest in this well as Spencer did not choose to participate in the
completion of the well which had one thin gas sand of approximately 14 net feet.
Phillips and Kerr McGee completed the well from perforation 9912-16 for an
IP of 43 BCPD plus 2228 MCFG on 7/64" ch., TP 6431#, GOR 51,574/1 and
gravity 52.6.
On August 9, 1960 Phillips made application to Director USGS for suspen-
sion of Production on the grounds of lack of transportation facilities for dispo-
sition of the gas.
In April, 1971 Gulf and Phillips farmed out their interests in Block 161 to
Kerr McGee who drilled their #2 OCS 0544 well as a dry hole in .July, 1971. In
August 1971 Kerr McGee relinquished their right under the farmont agreement.
In .Tuly 1972. Phillips attempted to farm out interests in OCS 0544 to Consoli-
dated Gas. However, due to the obvious small size of gas reserve it was im-
possible to interest Consolidated or any other operator in a farniout proposal.
Since Phillips, Kerr McGee. and Gulf have been unsuccessful in finding any-
one interested in taking a farmont of this lease, although it hps been shopped^
extensively, it was decided in March, 1973 to plug the well, and proceed with
the abandonment of the platform and relinquishment of the lease on August 31,
1973.
256
Exhibit 3.— Letter to Claude C. Wild, Jr., from Chairman Engman, FTC, In
Response to Views of Gulf Oil Corp. on Testimony of James T. Halverson
August 29, 1973.
Claude C. Wild, Jr.,
Vice President,
Gulf Oil Corp.,
Washington, B.C.
Dear Me. Wild : Tbis is in response to the statement of Warren M. Sparks
dated July 12, 1973, a copy of which you forwarded to me on the same date.
That statement expressed the views of Gulf Oil Corporation with respect to the
statements made on natural gas before the Senate Antitrust and Monopoly Sub-
committee by Mr. James T. Halverson, Director of the Bureau of Competition,
and me in June of this year. I have requested that Mr. Halverson respond to those
aspects of Gulf's statements which take issue with statements and interpreta-
tions made by Mr. Halverson in the course of his testimony. I expect that you
will be hearing from him in the near future.
I trust that you understand that Mr. Halverson and I testified at the specific
request of the Subcommittee. Whenever such a request is made at a time when
the Commission or its staff is examining the possibility of law enforcement activ-
ity, the Commission is faced with a dilemma in attempting to balance our obli-
gation to Congress to respond to reasonable requests for information with our
obligation to the public to enforce the antitrust laws vigorously and fairly. In
this case, as in similar cases, I believe an effort was made to strike the best
balance in the public interest.
I would also like to respond to two points raised in Mr. Sparks' statement.
Pirst, he objects to the Commission practice of having FTC officials appear before
congressional committee stating that their remarks are their own and not those
of the Commission. Let me make it clear that, in fact, Commission officials do
often appear before congressional committees and present an official Commis-
sion position. However, there are other occasions when, because related matters
are under investigation or in adjudication, it is felt desirable to have Commission
staff personnel testify on behalf of the staff and not officially for the Commission.
Testimony by staff introduced by such a disclaimer has been a common practice
of virtually all independent federal regulatory agencies for nia-iy years. T; is
necessitated by the fact that while an agency's appointed Commissioners are
the only persons with authority to issue or authorize official position statements,
they must also function in an adjudicatory capacity. When specific cases come
before tbe Commissioners for review following the rendering of initial decisions
by Administrative Law Judges, they are required by law to consider the issues
solely on the basis of the record, in an unbiased way. Staff members, by contrast,
are under no such constraints.
Any requirement that an official Commission position be propounded before
a congressional committee on any matter under investigation by or in adjudica-
tion before the Commission could have one of two undesirable results. If the
official position set forth stated or even suggested conclusions concerning si^ecific
facts, the Commission could be faced with the charge that it had prejudged
those issues and should therefore be disqualified to hear a case involving those
issues. The same problem faces an individual Commissioner wbo propounds his
position on specific facts at issue. The same threat of disqualification can arise
because of questions posed or comments made to a Commissioner by the members
of the congressional committee, and this is an additional reason why it is dvsir-
able for staff personnel to testify on their own when the subject matter of the
congressional inquiry involves a matter before the Commission. If staff members
could not testify on their own, the alternative to running the risk of disqualifica-
tion would be no testimony at all on matters under investigation or in adjudica-
tion before tbe Commission. The first alternative would severely cripple the
Commission's system of administrative justice while the matter would dei.rive
Congress of needed expertise on proposed legislation. On balance, therefore, we
believe the public policy requires the continuation of our present procedures.
I trust that you will understand that Mr. Halverson's disclaimer was not in-
tended to indicate that he was testifying in the capacity of a private individual.
Rather he was speaking officially as a knowledgeable and responsible member
of the Commission's staff, and on behalf of the Bureau of Competition.
Secondly, Mr. Sparks stated that he felt a serious question was raised as to
whether Mr. Halverson's testimony constituted a violation of confidentiality
257
imposed by Section 10 of the Federal Trade Commission Act. I wish to em-
phasize that in his statements and responses before the Subcommittee, Mr^
Halverson was careful not to disclose any specific data of any particular com-
pany which could be construed to be in contravention of Section 10 of the Fed-
eral Trade Commission Act. Moreover, although the Commission did not review
or approve Mr. Halverson's specific testimony, an informational copy of his
prepared statement was furnished to each Commissioner in advance of Mr.
Halverson's appearance before the Subcommittee and he appeared with full,
knowledge of the Commission.
Sincerely,
Lewis A. Bngman.
Exhibit 4. — Response of James Halverson to Gulf Oil Corp.'s Response to His
Testimony of June 27, 1973
Federal Tbade Commission,
Btjreau of Competition,
Washington, D.C., February 1, 1974.
Warren M. Sparks,
Regional Attorney, Gulf Oil Corp.,
Tulsa, Okla.
Dear Mr. Sparks : The purpose of this letter is to respond to the salient points
raised in Gulf Oil Corpoi-ation's •'Response" to statements made by me on
June 27, 1973 before the Senate Antitrust and Monopoly Subcommittee. In re-
sponding to you I am requesting that Senator Hart make a copy of this letter
a part of the record of the Subcommittee's hearings into competition in the
energy industry. This response reflects my own views only, and does not con-
stitute an official statement by the Federal Trade Commission.
As background to my statements before and the information submitted to the
Subcommittee, I note that Chairman Engman received a letter from Senator
Hart on June 5, 1973. This letter requested a detailed report on all Commission
investigations relative to energy including an investigation, styled In the Matter
of the American Gas Association et al.. File No. 711 0042, which relates to the
reporting of natural gas reserves. I am enclosing a copy of Senator Hart's
letter. Chairman Engman directed me and I directed members of the Bureau of
Competition to prepare a report as requested by Senator Hart. This staff
response was transmitted to the Subcommittee on June 19, 1973 and I shall
henceforth refer to it as the Staff Memorandum of June 19.
Senator Hart also requested that Chairman Engman, I and certain staff mem-
bers appear on June 27 before the Subcommittee to testify and answer questions
regarding pending Commission energy investigations. In preparing the Staff
Memorandum of June 19, and in the preparation of my testimony, care was taken
to avoid any disclosure of information protected by either the Commission's
Rules of Practice or by the "Commitment of Confidentiality" extended by the
Commission to any company in connection with File No. 711 0042.
Notwithstanding this care, Gulf alleges in its response that my appearance
before the Subcommittee on June 27 was "star chamber" in manner and violative
of Sections 4.10 and 4.11 of the Commission's Rules of Practice and Section 10
of the Federal Trade Commission Act (15 USC 50). Because Chairman Engman,
by his letter to Mr. Claude C. Wild, Jr., Vice President of Gulf, dated August 29,
1973, has responded to Gulf with regard to these matters, it is unnecessary for
me to comment further except that I shall append a copy of his letter to this
letter.
Turning to the substantive allegations made by Gulf, the company at page 5
of its Re.sponse quotes from the Staff Memorandum of June 19. The quote sets
forth five situations (of many possible situations) in which estimates of proved
reserves are made. Gulf then contends that in three of these situations only
potential as distinguished from proved reserves can be estimated. The three
situations cited by Gulf are "bidding on or nominating leases" ; constructing
platforms for field development: and gas sales. In support of its contention,
Gulf appends an AGA definition which permits reserves to be classified as proven
only when the rock structure in which they are situated is drilled and tested
successfully.
As you know, a rock structure containing producible hydrocarbons does not
always respect lease lines and may extend into unleased land. I understand that
the AGA definition of proved reserves is sufficiently flexible to cross lease lines, the
258
test data permitting. This could occur if successful test results were obtained
from drilling on leased land that is near unleasert land. Accordingly, proving out
reserves at least as to portions of unleased land, whether that land was being
nominated for bid sale or put up for bid. is distinctly possible. Staff explained
this to Gulf prior to Gulfs producing any of its bid flies. I am surprised that Gulf
now contends otherwise.
With regard to reserve estimates in connection with constructing platforms,
it is submitted that platforms rarely if ever are constructed prior to exploratory-
drilling and testing and that proved reserves can and are estimated based upon
such exploratory drilling and testing. Gulf appears to admit as much when it
approves of staff language (Response, page G) that an estimate prior to platform
construction "is broken down into several categories of reserves with proved
reserves being one of the categories:'' Similarly, any question as to whether
proved reserves are estimated in connection with sales of gas appears to be put
to rest by Gulfs own admission at page 7 of its Response: "Xormally. when a
gas sales contract is negotiated with a pipeline only part of the acreage has been
drilled, i.e. only part of the potential reserves are proven'' (emphasis added).
It thus appears that Gulf does not seriously contend that proved reserves can-
not be estimated in the various enumerated situations. Rather, the real concern
of Gulf appears to be that because both proved and potential reserves may be
and have l)een estimated in given situations, did staff exercise due care in dif-
ferentiating between the two. as distinguished from comparing apples with
oranges? Gulf states that "If potential reserve estimates for drilling exploratory
wells, or huilding offshore platforms, or for the sale of gas were reported to the
AG A as •proven' reserves, the results would be highly misleading" (Response,
page 7 ) .
I wish to assure Gulf that in comparing various reserve compilations appear-
ing in Gulf documents, staff did not compare potential reserves with proved
reserves. In comparing AGA estimates with Gulf book reserves and other esti-
mates, only those estimates wliich Gulf lal>eled as "proved" were compared. Ac-
cordingly, the concern exjiressed at page'^ S and 9 of Gulfs Response over staff
inexperience in handling reserve figures is unwarranted.
Beginning at page 9 of its Response and continuing until the top of page 16.
Gulf takes issue with my conclusion that based on a review of submitted book
reserves. AGA estimates of proved reserves have been found to be significantly
lower than such book reserves. The principal points raised by Gulf are that (1)
a producer often does not have an interest in an entire field reported by AGA
and therefore in those instances its liook reserves cover h ss tlian the entire field.
(2) AGA field by field estimates do not include dissolved gas while booked
reserves may. and (3) Gulf figures refute certain of my conclusions made before
the Senate Antitrust and Monopoly Subcommittee.
As to tlie first point, it is true that the AGA purports to report proved reserves
for entire fields, while producers book reserves only for those i)ortions of fields
in which they have an interest. This l)eing so. when a producer does not have an
interest in an entire field, AGA figures for that field should overstate, not under-
state, proved reserves relative to the booked reserves of that producer. To avoid
conclusions based on comparing a whole with less than a whole, my conclusions
as to AGA under-reporting liave been based upon comparisons involving fields
in which the producer has an interest in the entire field and hence would liook
reserves for the entire field. It should be noted, however, that staff has detected
instances in which the AGA reported less for an entire field than a producer has
booked for a portion thereof.
As to the second point, Gulf notes that AGA field by field estimates do not in-
clude dissolved gas. while from 1967 on. Gulf book reserves have. AGA defers to
the American Petroleum Institute (API) for compiling field by field estimates of
proved reserves of dissolved gas. Failure to have comprehended these facts is
said to have led me into my "most grievious errors" (Response, page 12). Ob-
viously, if staff had not added API estimates of dissolved gas to AGA field by
field estimates, any comparison of AGA estimates with Gulf h^ok reserves from
1967 on would be untenable. Staff in fact did perform such addition. Further, in
1966 whpu both book reserves and AGA field by field estimates excluded dis-
solved gas. staff determined dissolved reserves from producer documents and
API estimates and added these resiiectively to book reserves and AGA field by
field estimates. Once again, oranges were compared with oranges and the re-
sults concerning AGA under-reporting turned out as I reported them to Senator
Hart.
259
The third point raised by Gulf relates to certain tables appearing as Appendix
B and at page 14 of its Response. The chart in Appendix B compares certain book
and AGA reserves figures for four specific years over the period 1963-1966. In
thirteen of fifteen comparison, the AGA figures are higher than the book reserve
figures. Staff comparisons, upon which my conclusion that in no instance to date
have book reserves been found to be lower than AGA estimates, were made for
the period 1966-1970. Further, they were based on remaining recoverable re-
serves, as again.'^t the ultimate recoverable reserve figures appearing in Appen-
dix B and at page 14.
Remaining recoverable reserves measure the proved reserves recoverable as of
the date of estimate, while ultimate recoverable reserves measure proved re-
serves that would be recoverable if no production of the field had ever occurred.
Plainly, "remaining recoverable reserves" are more germane to the current state
of supply than are ultimate reserves. They, not ultimate recoverable reserves,
were used by the Federal Power Commission to measure supply in AR69-1, the
South Louisiana rate case. Remaining recoverable reserves tell a different story
than does Gulf's Appendix B as to the relationship between AGA and book re-
serves in the fields in question in 1966. They disclose that in each field book re-
serves were higher then AGA proved reserves.
In comparison AGA and book reserve figures, staff selected 1966-1970 because
1968 and 1969 AGA figures were relied upon by the Power Commission in de-
ciding the South Louisiana rate case. The years 1966, 1967 and 1970 were in-
cluded because tliey immediately precede and succeed 1968-69. Obviously, if one is
investigating whether a plan existed to understate AGA reserve figures, investi-
gation to determine whether there was such a plan should emphasize those fig-
ures, 1968-69 figures, from which rate mileage was extracted. Ratios between
AGA and book reserves for 1963-1966 are not relevant in themselves but only
in relation to such ratios occurring after 1966.
Gulf has included a chart at page 14 of its Response which on its face dis-
closes a precipitous drop, commencing in 1967, in the number of AGA reserves
relative to book reserves in three fie'ds. The AGA figures exclude dissolved gas
and hence any conclusion based upon the figures in the chart that AGA reserves
were significantly lower than book reserves would be unwarranted. I have dis-
cus.sed the importance of comparing oranges with oranges and apples with apples
elsewhere. The point Gulf avoids in commenting on this chart is that when API
dissolved gas figures are added to the AGA figures, thereby permitting comparison
with book reserves, the book reserves in all cases remain either higher than the
enriched AGA figures or significantly higher.
One portion of my testimony needs correction. At page 228 of the transcript, I
am quoted as saying, "At times the estimates for a given field as reflected by
company books is as much as ten times for the estimates submitted for that same
field at the same time." In the interest of accuracy and syntax, the transcript
should read '"At times the estimate for a given field as reflected by company docu-
ments is as much as ten times the estimate submitted for that same field at the
same time to the American Gas Association." I have requested the Subcommittee
to amend the oflicial transcript accordingly.
At page 17 of its Response, Gulf states that its answer to a recent Federal
Power Commission Questionnaire showed that it only had 0.3% of the total un-
committed reserves in Offshore South Louisiana. If Gulf seeks through the use
of this percentage to refute my contention that proved reserves have been found
to exist on non-producing leases that are either not reported at all or are only
nominally reported to the AGA, it wholly misses the point. This is because my
testimony refers to reserves reported to the AGA, and not to reserves reported
to the FPC. The FPC Questionnaire asked for proved reserves "available for sale"
v,'hich the Questionnaire defined as those proved reserves "which are not covered
by gas purchase contracts and are not reserved for direct industrial contracts,
not company use-warranty gas or not company use-fuel and feedstock." All proved
reserves, whether or not "available for sale," should be reported to the AGA.
Thus, proved reserves committed contractually or otherwise considered to be
available for sale would not be reported in response to the FPC's Questionnaire,
but should be reported to the AGA. It is interesting to note that even proved re-
seiTes existing on an as yet non-producing lease, may be committed contractually
several years before the lease is in production, hence not subject to the FPC
Questionnaire, but of course still subject to being reported to the AGA. In addi-
tion, testimony regarding a pi*evious FPC Questionnaire raises some doubt wheth-
er uncommitted proved reserves existing on a lease that has no transportation
260
facilities are considered by producers to be "available for sale.'' If so, these re-
serves would also not be reported in response to the FPC Questionnaire, but still
should be reported to the AGA.
At pages 18 through 20, Gulf discusses the various reasons why it chose to
apply for a suspension of production on the leases listed in Appendix C of the
Response. One of the reasons I raised the issue of extending the primary term of
a lease was because of our finding of instances in which proved reserves on non-
producing leases have not been reported or only nominally reported to the AGA.
Aside from this reason, I wish to emphasize in my testimony that Federal Regula-
tions allowing an extension of a lease term without actual production can allow
a producer's expectations of higher prices to postpone production.
Gulf alleges (Response, page 20) that no evidence was adduced concerning a
conspiracy to under-report reserves. It is important to note that all my testimony
did was to raise the possibility of a conspiracy, given the fact that there existed
a vehicle. In that light, my testimony (Transcript, pages 224 and 225) outlining
the organization of the AGA and its subcommittees and detailing the methods
by which employees of private oil and gas companies estimate reserves for the
AG A supports the statement that the "procedure of reporting reserves through a
subcommittee of the American Gas Association composed of employees of major
producers could provide the vehicle for a conspiracy among the companies in-
volved to under-report gas reserves."
In conclusion, I wish to assure Gulf that staff has been painstaking in sifting
documents and in defining terms ; diligent in comparing proved reserves with
proved reserves ; in making certain the re.^ei-ves for entire fields are compared :
in ascertaining that dissolved gas is included in all comparisons dealing with
total proved reserves ; and judicious in selecting relevant data upon which to
base conclusions.
Very truly yours,
James T. Halverson,
Director, Bureau of Competition.
Exhibit 5. — Response of Continental Oil Co. to the Testimony of James T.
Halverson and Chairman Engman
Continental Oil Co.,
High Ridge Pakk, Stamford, Conn., July 6, 1973.
Hon. Philip A. Hart,
Chairman, Antitrust and Monopoly Subcommittee, Senate Committee on the
Judiciary, Senate Office Building, Washington, D.C.
Dear Senator Hart : We have reviewed the testimony given to your sub-
committee by Mr. James T. Halverson, Director of the Bureau of Competition,
Federal Trade Commission, on June 27, 1973. Enclosed are three copies of a
letter which we have sent to the Chairman of the Federal Trade Commission
concerning this testimony.
We respectfully request that this letter be made a part of the record of your
hearings on this subject and we are confident that, pursuant to your policy
of objective fairness in conducting your hearings, such letter will be made a
part of the record.
Sincerely yours,
Howard W. Blaxjvelt.
Enclosure.
Continental On. Co.,
High Ridge Park, Stamford, Conn., July 6, 1973.
Hon. Lewis A. Engman,
Chairman, Federal Trade Commission,
Washington, D.C.
Dear Mr. Engman : This letter is written concerning the testimony given by
you and Mr. James T. Halverson before the Senate Antitrust and Monopoly
Subcommittee in June of this year. In view of the publicity given to such testi-
mony, and particularly to certain conclusions drawn by Mr. Halverson, we wish
to correct the record.
Continental emphatically denies that it has deliberately understated its natural
gas reserves or is a part of any conspiracy to understate such reserves. Turning'
specifically to Mr. Halverson's testimony, we want to clear up some of his
misunderstandings and misinterpretations.
261
First, his testimony stressed apparent differences between reserves furnished
to the American Gas Association by subcommittee members and "in-house"
reserve estimates for the same leases. We state categorically that the employees
of Continental who serve on such industry subcommittees are conscientious,
professional engineers or geologists. They discharge their duties without control,
direction, instructions or guidance from Continental or any of its other person-
nel. In addition, it is naive of Mr. Halverson to assume that estimating hydro-
carbon reserves is an exact science. Api>arently he ignores the fact that engineers
and geologists are attempting to evaluate the amount of hydrocarbons deep with-
in the earth and that professions of similar qualifications frequently differ as
to their conclusions.
Mr. John Kerr, the employee of Continental presently on the AGA subcom-
mittee for South Louisiana, is coineidentally a member of our reserve group and
the reserve figures he furnished to the AGA on Continental's own interest leases
for 1969 and later years conform to our oflBcial booked reserves. The reserve
estimates furnished the AGA by Mr. Kerr did not include the volume of "dis-
solved" gas attributable to these same leases, since this volume of gas was fur-
nished to the AGA by the American Petroleum Institute. It is possible that in the
past other employees of Continental serving on this subcommittee, who did not
have access to our corporate booked reserves, may have estimated reserves differ-
ently from such corporate booked reserves. In all instances, however, personnel
of Continental serving on such a subcommittee must evaluate the reserves of
leases ownied by other companies on the basis of all data then available to them.
Continental has nothing to hide with respect to its reserve computations, and
we have submitted all of the relevant material requested by the Federal Trade
Commission. However, we sincerely believe that testimony such as given by Mr.
Halverson without a complete investigation and without informed knowledge as
to the nature of the various company records submitted, has unfairly penalized
our company in following our long-standing policy of cooperation with the FTC.
Second, a point was made of the difference between in-house reserve estimates
for items such as the "building of a drilling platform" with the official coi-porate
reserve records. We believe it is apparent to anyone familiar with our industry
that estimates of reserves for the purpose of building a drilling platform would
be prepared by representatives of a division of the company seeking
cori:>orate funds in competition with other divisions of the company. Accordingly,
reserve estimates for this purpose are iinderstandably presented on an optimis'tic
basis. In this situation the reserve estimates include "possible" as well
as "probable" reser^'es in undrilled locations. A high degree of risk is necessarily
involved when determining future locations to be drilled. Clearly, such estimates
or predictions are not accepted as corporate "proved" reserves until such reserves
are in fact producing or "liehind the pipe" after extensive drilling.
We are sure that review of the gas reserve documents for South Louisiana
submitted by Continental may disclose other instances where optimistic estimates
of recoverable hydrocarbons — including "possible" reserves — have been projected
by various operating employees to obtain approval for the reworking of wells,
drilling of additional wells, etc. Exploratory reserA'e computations, by definition,
represent estimates of reserves by our geological group of either
undeveloped or partially undeveloped tracts. In most cases, such computations
would be higher and more optimistic than the "proved" reserves maintained
by our reservoir engineers who use in their computations producing or "behind
the pipe" reserves after bore holes have penetrated a reservoir. Geological es-
timates include in most instances both "probable" and "possible" reserve figures.
The misinterpretation and misuse of these different reserve estimates may well
have been the reason that most of the gas producers were reluctant to furnish
the data subpoenaed by the FTC. Mr. Halverson's testimony has confirmed the
worst fears of the industry, i.e., that uninformed amateurs would draw false
or erroneous conclusions from the thousands of internal documents which might
be submitted.
Third, Mr. Halverson placed emphasis on the tax-related aspects of in-house
reserve computations. It should be noted that reserve estimates are completely
irrelevant with respect to percentage depletion under our tax laws. Reserve es-
timates are only used when cost depletion is being claimed for income tax
purposes. In Continental's case, the amount of cost depletion as compared to
percentage depletion is negligible. For instance, for the year 1969 which was
highlighted as a significant year for the Federal Power Commission in its area
rate case for South Louisiana. Continental had only eleven leases in this area
262
where cost depletion was claimed. The total in cost depletion claimed by Con-
tinental for these leases for 1969 was $36,673. In view of our worldwide opera-
tions, certainly you will agree that this amount of cost depletion was negligible
and hardly operated as an incentive for the "juggling of reserves com-
putations" by Continental, as might be implied from Mr. Halverson's testimony.
Furthermore, and even more important, the reserve figures used for these leases
in our tax reports were our actual book reserves maintained by our company
group responsible for our official corporate reserve figures.
We would like to be understood that our liasic policy has been that of coopera-
tion with the Commission when it has sought data from us. For example, we
recently authorized the API to release to the FTC all raw data Continental had
supplied the API for use in certain statistical reports on refinery cai>acity,
throughputs, etc. However, when we are falsely accused in the press based on
data supplied to the FTC under a confidentiality order, we are led to the con-
clusion that non-cooperation may be the more prudent approach.
We believe the whole idea of an FTC official going before Congressional com-
mittees with a disclaimer that the remarks he is about to make "'are wholly
my own and do not constitute an official statement for the Federal Trade Com-
mission or any commissioner" is entirely inappropriate. You know as well as we
that no high level official of a federal agency can seperate himself in .such
testimony from the agency he is employed by and that almost always
whatever he says is attributed to the agency. We believe this practice should
stop and call on you to take the necessary action to stop it within the Federal
Trade Commission.
We also deplore the fact that Mr. Halverson would make sweeping conclusions
of "serious underreporting" of gas resei'ves and charges of a "vehicle for a con-
spiracy," while otherwise admitting in his testimony that the documents "do
not. of course, provide a complete picture" and that "no conclusive evidence
has been found as yet of an actual conspiracy."
In this connection we believe a serious qiiestion is raised as to whether Mr.
Halverson's testimony constitutes a violation of confidentiality imposed either
by our agreement with the FTC, or by law. As you are aware. Section 10 of
the Federal Trade Commission Act makes it unlawful for any officer or employee
of the Commission to make public any information obtained by the Commission
without its authority unless directed by a court. In light of the disclaimer by
Mr. Halverson that the Commission has neither reviewed nor approved his
testimony, we are constrained to inquire as to what authority Mr. Halverson
had to disclose the information which he testified was received by him in the
course of a pending investigation. This is doubly disturbing inasmuch as you
introduced Mr. Halverson to the committee and invited the committee to direct
any questions to him regarding the details of these investigations.
It is our belief that those who allege without proof that a natural gas shortage
does not exist, and that shortages are the result of a conspiracy to drive up
prices do a disservice to the nation. Such statements mislead, confuse and delay
a pul)lic commitment to the positive programs so essential to adequate energy
supplies. Facts leading to understanding, not bureaucratic and political rhetoric,
are what this nation sorely needs at this critical point in its history.
Very truly yours.
By HowAED W. Blauvelt.
Exhibit 6. — Response of Chairman Engman to Response of Continental Oil Co.
Response to testimony of James T. Halverson and Chairman Engman
Federal Trade Commission,
Washington, B.C. August 29, 1913.
Hon. Philip A. Hart,
Chairman, Antitrust and Monopoly Suhcommittee, Senate Committee on the
JndiGiary. U.S. Senate, Washington, B.C.
Dear Mr. Chairman : On July 12, 1973. I received a letter from Howard W.
Blauvelt. Executive Vice President of Continental Oil Company, concerning
testimony given by IMr. James T. Halverson and me before the Senate Antitrust
and Monopoly Subcommittee in June of this year.
Since, by separate correspondence to you, Mr. Blauvelt has requested that his
correspondence be made a part of the record of the hearings, I have enclosed a
copy of my response to Mr. Blauvelt.
263
In addition, on July 20, 1973, you transmitted to me a statement by Warren
M. Sparks of Gulf Oil Corporation dated July 12, 1973. concerning the same testi-
mony. Tliis statement had been previously sent to me by Gulf Vice President
Claude C. Wild, Jr., and 1 have enclosed a copy of my response to Mr. Wild.
Sincerely,
Lewis A. Engman.
August 29, 1973.
Mr. Howard W. Blauvelt,
Executive Vice President, Continental Oil Company,
Stamford, Conn.
Dear Mr. Blauvelt : This is in response to your letter of July 6, 1973, concern-
ing the testimony given by Mr. James T. Halverson and me before the Senate
Antitrust and Monopoly Subcommittee in June of this year. I have requested
that Mr. Halverson respond to those aspects of your letter which take issue with
statements and interpretations made by Mr. Halverson in the course of his
testimony. I expect that you will be hearing from him in the near future.
I trust that you understand that Mr. Halverson and I testified at the specific
request of the Subcommittee. Whenever such a re(]uest is made at a tiuie when
the Commission or its staff is examining the possibility of law enforcement ac-
tivity, the Commission is faced with a dilemma in attempting to balance our ob-
ligation to Congress to I'espond to reasonable requests for information with our
obligation to the public to enforce the antitrust laws vigorously and fairly. In
this case, as in similar cases, I believe an effort was made to strike the best
balance in the public interest.
I would also like to respond to two specific points raised in your letter. First
you stated that you felt that the Commission practice of having FTC oflBcials
appear before congressional committees stating that their remarks are their o\^^l
and not those of the Commission is entirely inappropriate. Let me make it clear
that, in fact, Commission officials do often appear before congressional com-
mittees and present an oflBcial Commission position. However, there are other
occasions when, because related matters are under investigation or in adjudi-
cation, it is felt desirable to have Commission staff personnel testify on belialf
of the staff and not oflicially for the Commission. Testimony by staff introduced
by such a disclaimer has been a common practice of virtually all independent
federal regidatory agencies for many years. It is necessitated by the fact that
while an agency's appointed Commissioners are the only persons with authority
to issue or authorize official position statements, they must also function in an
adjudicatory capacity. When specific cases come before the Commissioners for
review following the rendering of initial decisions by Administrative Law
Judges, they are required by law to consider the issues solely on the basis of the
record, in an unbiased way. Staff members, by contrast, are under no such
consti'aints.
Any requirement that an official Commission position be propounded before
a congressional committee on any matter under investigation by or in adjudica-
tion before the Commission could have one of two undesirable results. If the
official position set forth stated or even suggested conclusions concerning specific
facts, the Commission could be faced with the charge that it had prejudged
those issues and should therefore be disqualified to hear a case involving those
issues. The same problem faces an individual Commission who propounds his
position on specific facts at issue. The threat of disqualification can arise because
of questions posed or comments made to a Commissioner by the members of the
Congressional commmittee, and this is an additional reason why it is desirable
for staff personnel to testify on their own when the subject matter of the congres-
sional inquiry involves a matter before the Commission. If staff members could not
testify on their own, the alternative to running the risk of disqualification would
be no testimony at all on matters under investigation or in adjudication before
the Commission. The first alternative would severely cripple the Commission's
system of administrative justice while the matter would deprive Congress of
needed expertise on proposed legislation. On balance, therefore, we believe the
public policy requires the continuation of our present procedures.
I trust that you will understand that Mr. Halverson 's disclaimer was not in-
tended to indicate that he was testifying in the capacity of a private individual.
Rather he was speaking officially as a knowledgeable and responsible member
of the (-'ommission's staff, and on behalf of the Bureau of Competition.
27-547 — 74 18
264
Secondly, you stated that you felt a .serious question was raised as to whether
Mr. Halverson's testimony constituted a violation of confidentiality imposed
either by Continental Oil's agreement with the Federal Trade Commission or
by Section 10 of the Federal Trade Commission Act. I wish to emphasize that in
his statements and responses before the Subcommittee, Mr. Halverson was care-
ful uuL to disclose any specific data of any particular company which could be
construed to be in contravention of any agreements of confidentiality or of Sec-
tion 10 of the Federal Trade Commission Act. Moreover, although the Commis-
sion did not review or approve Mr. Halverson's specific testimony, an informa-
tional copy of his prepared statement was furnished to each Commissioner in
advance of Mr. Halverson's appearance before the Subcommittee and he ap-
peared with full knowledge of the Commission.
Sincerely,
Lewis A. Engman,
Chairman.
Exhibit 7. — Response of James T. Halverson to Continental Oil Co. letter of
July 6, 1973
Federal Trade Commission.
Bureau of Competition,
Washington, D.C., February J, 1974.
Howard W. Blauvelt,
Executive Vice President, Continental Oil Co.,
Stamford, Conn.
Dear Mr. Blatwelt : Chairman Engrafin has asked me to respond to your letter
of July 6, 1973, concerning your objections to my testimony of June 27, 1973,
before the Senate Antitrust and Monopoly Subcommittee. In responding to you.
I am requesting that Senator Hart make a copy of this letter a part of the record
of the Subcommittee's hearings into competition in the energy industry. I note
that this response reflects my own personal views and does not constitute an
official statement by the Federal Trade Commission.
So that you have a greater understanding of the genesis of my decision to
testify before the Subcommittee, you should be advised that Chairman Engman
received a letter from Senator Hart on June 5, 1973, requesting a detailed report
together with "preliminary conclusions" on all Commission investigations rela-
tive to energy including an investigation, styled In the Matter of the American
Gas Association et al.. File No. 711 0042, which relates to the reporting of natural
gas reserves. I am enclosing a copy of Senator Hart's letter. Mindful of the need
fur information to evaluate legislative proposals under consideration, Chairman
Engman directed me and I directed members of the Bureau of Competition to pre-
pare a report as requested by Senator Hart. This staff response was transmitted
to the Subcommittee on June 19. 1973.
Senator Hart also requested that Chairman Engman. I and certain staff
members appear on June 27 before the Subcommittee to testify and answer
questions regarding pending Commission energy investigations. In' preparing the
June 19 Staff Memorandum, and in the preparation of my testimony, scrupulous
care was taken to avoid any disclosure of information protected by either the
Commission's Rules of Practice or by the "Commitment of Confidentiality" ex-
tended by the Commission to any company in connection with File No. 711 0042.
Near the beginning of your letter, you state that I have assumed that "estimat-
ing hydrocarbon reserves is an exact science" and that when your employees
evaluate the amount of hydrocarbons deep within the earth, tlieir opinions "fre-
quently differ. Please be assured that I and staff members of the Bureau of
Competition are and have been fully aware of the many variables and difficulties
which prevail in hydrocarbon reserve estimation and of the fact that profes-
sional opinions in this regard can and do differ to some extent.
At the time of my appearance before the Subcommittee, documents submitted
l)y two producers had already been examined in detail. This examination revealed
that evaluations of proved reserves transmitted by producers to the ACA were
not higher but often significantly lower than the producers' own in-house evalu-
ations. This pattern defied the random differentials that can be expected when
comparing the work of one individual with that of another. Indeed, this examina-
tion disclosed that some of the low AGA estimates were prepared by the same
individual who prepared the higlier in-house estimates.
265
Your letter further states that Continental Oil's "booked reserves" for South
Louisiana and the proved reserves that it has reported for this area to the AGA
have beeii identieal sinct- litGU. At this point in time we are not in a position to
agree or disagree with this assertion because our staff has not completed a full
review of the documents which your company has submitted. Our stafE has had
to concentrate during the past several months on the Commission's subpoena
enforcement actions against several of the natural gas producers. Therefore,
a complete review of Continental's documents has been held in ;U)eyance although
it is expected to be completed shortly. You will recall that in the course of my
prepared remarks. 1 made no direct reference to Continental Oil's reporting of
proved reserves and specifically stated (Transcript, p. 230)
". . . the staff is reviewing approximately 3(3,000 documents produced by
one company in partial compliance with the subpoena. A return hearing
is set for July 31, and August 1 . . ."
Although "Continental Oil" was not specifically mentioned in the above quota-
tion, it is obvious that I was referring to your company because as you or yoiu-
staff know. Continental Oil had returned approximately 36,000 documents and
at the time of my statement Continental Oil employees were scheduled to be
questioned on July ol and August 1. The above quotation further indicates that
the documents were in the process of being reviewed, i.e., that review was not
complete. The June 19 Staff Memorandum (p. 12) to the Subcommittee expressly
states this :
"[Continental Oil's] documents have not as yet been completely examined
and the return hearing is scheduled for July 31 and August 1, 1973."
Accordingly, your company's documents did not at the time of my testimony
constitute a basis for my statement concerning low reporting of proved reserves
to the AGA.
However, notwithstanding the express language of my prepared statement
and the June 19 Staff Memorandum, referred to above, my reading of the rough
transcript of the question and answer session following my proposed remarks
indicates that on two occasions I referred to information obtained from "three
companies" in a context which could fairly be construed to indicate that in-
formation from each ami all three companies formed the basis for my state-
ment concerning low reporting of proved reserves to the AGA. Let me assure
you that since we had not fully reviewed Continental's documents at the time,
it certainly was not my intention to convey the impression that information from
Continental in addiiton to the other two companies formed he basis for my
aforesaid satement. Recognizing, however, that the matter should be clarified,
I have requested the Subcommittee to amend the record so that the official
transcript of my two refcrfnced responses will be read as follows (brackets refer
to deletions and italics i-efers to additions) :
"Senator Hart. Thank you.
There are questions, but as I understand your testimony, what you are
telling us is that the gas reserve information which the FPC has obtained
is basically worthless for determining whether there is a natural gas short-
age. Is that a fair conclusion that I have arrived at?
Mr. Halverson. [I think I am saying] On [on] the basis of the informa-
tion which we have [from three companies to] completely reviewed as of
thip date, it appears to me here has been a substantial under-reporting of
gas reserves, when loe [I] compare in-house data with the data compiled by
the AGA." (Transcript, p. 239)
* * *
"Mr. Chumbris. Where are you getting your data from ?
Mr. Haxverson. Submissions by three companies, one of which we have
not yet completely reviewed [themselves.]. In-house data. In South Louisi-
ana, we had 11 subpoenas. The rest of the companies have not complied with
our subpoenas." (Transcript, p. 242)
In addition, you will note that a copy of this letter is being sent to Senator
Hart for insertion in the record.
Regarding the comment on page 2 of your letter concerning the fact that
"dissolved" gas estimates were not included in reserve estimates furnished by
Mr. Kerr to the AGA. please be advisd that staff when comparing total proved
reserves has from the very outset and will continue to add API estimates of
dissolved gas to AGA field by field estimates so that accurate comparisons can
be made.
266
At pages two and three of your letter you comment on the value of certain
in-house reserve estimates. Wlien you state that reserve figures made when deter-
mining whether to build drilling platforms are estimated "on an optimistic
basis," I assume that you mean that such estimates encompass both potential
(probable or possible) and proved reserves. If this is your meaning, then permit
me to assure you that staff, in comixxring these estimates with any other estinuites
of i)roved reserves, did not include potential reserves in its comparisons. If, how-
ever, by "optimistic basis" you mean that proved reserves (not including poten-
tial reserves) estimated in determining whether to build platforms are usually
overstated, then I di.-agree. I would tind it surprising if conscientious profession-
als in your company would deliberately overstate their estimates when to do so
would be to jeopardize millions of dollars of investments. Furthermore. I under-
stand that precisely the same standards govern the estimating of pr(jved reserves,
irrespective of the situations for which the estimates are made.
Likewise, you indicate that in most cases exploratory reserve computations
tend toward the optimistic. My resiMinse to this is the same as I made with regard
to reserve computations in detei'mining whether to build platf(n-ms. Tims, staff
did not include potential reserves when comparing proved reserves. Further, for
the very reasons stated in connection with computations made prior to the build-
ing of platforms, there are no grounds for believing that exploratory reserve com-
putations, as regards the proved re.serves complement, tend toward overstate-
ment
In my remarks before the Senate Antitrust and Monopoly Subcommittee, I
l)ointed out that book reserves tend to be conservative. One reason for this is that
they may be used for tax puriioses. Low reserve estimates can serve to increase
depreciati<>n allowances for tan.gible physical assets and serve to increase cost
depletion allowances. Such increased allowances lower federal income tax liabil-
it.v. Thus to fail to state book reserves conservatively could be to invite higher
federal income taxes.
You seek to minimize this principle as applied to Continental Oil by stating
that Continental Oil resorts principally to percentage depletion and that reserve
estimates are irrelevant in computing these allowances. You do acknowledge,
however, that ('ontinental Oil does use book reserves in connection with cost
depletion : that it does cost deplete on occasion : and you neglect to respond to
the fact that book reserves are an important factor in computing depreciation
allowances on tangible physical assets for tax purposes. It seems apparent that
tlie extent to which Continental Oil may realize tax savings from utilization of
book reserves in computing depreciation allowances would have an important
bearing on this point.
On page 4 of your letter you question a practice of Commission staff members
to j>reface their testimony before Congressional Committees with a disclaimer
to the effect that they are not speaking for the Commission or any individual
Commissioner, and you express dissatisfaction with m.v statement that "my re-
marks are wholly my own and do not constitute an ofl5cial statement for the
Federal Trade Commission or any Commissioner" (Transcript p. 223). You also
raise the possibility that I may have transgressed either Section 10 of the Fed-
eral Ti-nde Commission Act or the "Commitment of Confidentiality" extended by
the Commission in this matter. Because Chairman Engman. by his letter to you
dated August 20. 1973, has responded to you with regard to these matters, it is
unnecessary for me to comment further, except that I .shall append a cop.v of his
letter to this letter.
In conclusion, I entirel.v agree with you that positive programs with regard to
energy supplies are needed. I submit that this Bureau's investigation into whether
AGA statistics are deliberately or otherwise under-reported is such a positive
program. Continental Oil's cooperation in submitting documents pursuant to this
investigation is an important contribution to this program. I trust that Continen-
tal Oil will see fit to submit voluntarily the relatively few remaining documents
called for by the Commission .subpoena issued to it.
Very truly yours,
James T. Halverson,
Director, Bureau of Competition.
Enclosures.
267
Exhibit 8. — Response to Continental Oil Co. to letter of James T. Halverson
Dated February 1, 1974
Continental Oil Co.,
Stamford, Conn., February 19, 197Jf.
Mr. James T. Halverson,
Director. Bureau of Competition,
Federal Trade Coniniission,
Washington, D.C.
Dear Mr. Halverson : Your February 1. 1974 reply to my letter of July 6, 1973,
was received on February 5, 1974. I note that it lias taken you virtually seven
months to make your response.
Your acknowledgment that on two occasions you referred to information
obtained from three companies in a context which could fairly be construed to
indicate that infonn;;tion from each and all three companies formed the basis for
your statement concerning low reporting of proved reserves to the AGA is a
constructive step forward. However, that acknowledgment and the technical cor-
rections to the record of tlie Senate Subcommittee at this late date can hardly
repair the damage to the reputation of our Company caused by the news media
reports of your comments at the time they were made. This acknowledgment
would have been more useful had it been promptly made and reported in the news
media.
The references to reserves in your letter merely serve to verify my impression
that you do not yet understand the difference between reserves calculated on an
historical basis with respect to existing fields and reserves calculated on a
purely speculative basis before committing capital investments and exploration
expenses, which it is hoped in the future will result in finding and developing
liydrocarbon reserves. The one is determined by well established reservoir engi-
neering methods based on large amounts of data. The other is speculation from
geological and geophysical data and can only be proven or disproven by drilling
holes in the ground.
On page six of your letter, you state "■. . . you neglect to respond to the fact
rliat b(.ok reserves are an important factor in computing depreciation allowances
on tangiltle physical assets for tax purposes. It seems apparent that the extent
to which Continental Oil Company may realize tax savings from utilization of
liook reserves in computing depreciation allowances would have an important
bearing on this point." W>u are completely in error. Continental Oil Company does
not use the unit of production method in calculating depreciation deductions for
tax purposes. The relevant assets are depreciated strictly on a time basis over
their useful lives.
In your concluding paragraph, you state, "I trust that Continental Oil will see
fit to submit voluntarily tb.e relatively few remaining documents called for by
the Commission subpoena issued to it." Y'ou are again in error, as we will not
submit the reciuested documents unless required by proper judicial procedures
to do so. You are already well aware of one of the reasons, which is that the
requested infftrmation is of competitive value, and it would be damaging to our
stockholders to sulimit it. Tlie second reason is that the improprieties already
evidenced by you in handling the information that we did submit voluntarily
give us no comfort whatever that you will not continue to repeat tlie procedure.
You indicate in your letter that a copy of it is being .sent to Senator Hart for
insertion in tl;e recf)rd. I also note that you have not requested that my letter of
July 6. 1973. be inserted in the record nor, as far as I know, has that action with
respect to it l)een taken. Xeither do I expect that you nor anyone clf^e will see
that this current letter is inserted in the record. I suggest to you that if you wish
to makf a record you should make a full and complete record so that interested
parties can have all that is available to them and not merely your version of it.
Very truly yours.
Howard W. Blauvelt,
Executive Vice President.
268
Exhibit 9. — Information Requested During Testimony of Chairman Engman and
Mr. Halverson
Federal Trade Commission,
Washington, B.C., September 14, 1913.
Hon. Philip A. Hart,
Chairman, Subcommittee on Antitrust and Monopoly, Committee on the Judiciary,
U.S. Senate, Washington, D.C.
Dear Mr. Chairman : This will provide part of the supplemental information
requested at the June 27, 1973, hearing on energy studies before your
Subcommittee.
Four items were requested during the course of the hearing in order to sup-
plement the testimony of Chairman Lewis A. Engman and Mr. James T. Halver-
son. The first three requests, involving the Federal Trade Commission's in-
vestigation In the Matter of the American Gas Association, File No. 711 0042,
were for information on :
(1) The events between October 20, 1970, and June 3, 1971 (T. 217) :
(2) Whether any Federal Power Commission personnel sought tr. curtail
or close the investigation (T. 217) ; and
(3) The oral communications between the Federal Trade Commission and
the Federal Power Commission (T. 247).
The fourth request involves another Federal Trade Commission investigation
styled, "Crash Parts," File No. 721 0053. This request is for information on the
current status of the "crash parts" investigation (T. 219). A response to this
request will Ije forthcoming shortly under separate cover.
I. EVENTS BETWEEN OCTOBER 20, 1970, AND JUNE 3, 1971
The Commission by minute dated October 20, 1970, directed the staff to com-
mence an investigation into the reporting, estimation and deployment of re-
serves by the natural gas industry. On October 26, 1970. Justice Department
clearance was obtained and on November 4, 1970, an investigation was initiated
to determine whether there was reason to believe that American Gas Association
and others had engaged or were engaging in collusive action in the solicitation
and reporting of information pertaining to reserves in violation of Section 5
of the Federal Trade Commission Act. On November 6, 1970, Attorneys Anthony
DePhillips, William T. Diener, and Brockman Home were assigned to the case
with Mr. DePhillips having the primary responsibility and reporting to Assistant
Director Owen Johnson.
On December 24, 1970, a letter was directed to Mr. John C. Jacobs, Jr., Chair-
man of the AGA Committee on Natural Gas Reserves requesting detailed infor-
mation concerning the operation and procedures of the South Louisiana Sub-
committee on Natural Gas Reserves. Partial responses were received to this
letter. In addition to these responses, the staff gained information through
interviews of numerous personnel, including people from National Economic
Research Associates, Inc., United States Geological Survey, the Federal Power
Commission and the Antitrust and Monopoly Subcommittee.
Based on evidence gathered from these sources, one of the attorneys assigned
to the case. Mr. William T. Diener, recommended that the case be closed for
lack of evidence of collusion among members of the AGA South Louisiana area
Subcommittee. This recommendation, contained in an undated memorandum
prepared sometime between December 25, 1970, and April 11, 1971, was submit-
ted to Owen Johnson, Assistant Director, Bureau of Competition. This memoran-
dum clearly stated that it was only the author's personal belief that the file
should be closed. No action was taken by the Assistant Director on this
recommendation.
On March 16, 1971, Mr. DePhillips and Mr. Dinner requested the Commission
to autliorize the use of compulsory process. On April 8. 1971, the Bureau of
Competition was directed by the Commission to advise the Commi'^sion as to
whether the information to be developed pursuant to the use of compulsory proc-
ess was necessary to the public interest and whether the individuals who might be
subpoenaed were likely to refuse to testify or to provide information on the basis
of their privilege against self-incrimination. The Commission was concerned
whether the issuance of subpoenas would inadvertantly result in the granting of
immunity under Section 6004 of the Organized Crime Control Act.
269
On April 9, 1971, Mr. William Diener resigned from the Federal Trade Com-
mission and joined the staff of the Federal Power Commission. On April 20, 1971,
Attorneys DePhillips and Home submitted a memoi-andum to the Commission
advising the Commission that the information to be develop through the use of
compulsory process was necessary to the public interest and also advising the
Commission that they had no information that any of the oflScials of the com-
panies named in the resolution for compulsory process would be likely to refuse
to testify or provide information on the basis of the privilege against self-in-
crimination. On April 26, 1971, the General Counsel submitted a memorandum
to the Commission in which, after considering the possibility of immunity being
granted inadvertently and deciding that it was not a problem in this case, he
recommended approval of the resolution authorizing the use of compulsory
process.
On May 4, 1971, a Commission minute reflects that the resolutions submitted by
the Bureau of Competition wdth a memorandum of March 16. 1971, were approved.
This approval was, however, sub.iect to the Chairman's report to the Commission
on the Chairman of the Federal Power Commission's thoughts as to the use of
compulsory process. On May 11, 1971, a Commission minute indicates that the
Chairman of the Federal Power Commission expressed no objection to the Federal
Trade Commission's proceeding by way of compulsory process. This minute,
therefore, aflirmed the Commission's action on May 4, 1971. On May 21, 1971,
Attorneys DePhillips and Home requested approval of a resolution broadening
the previously approved resolution. On June 3, 1971, the Commission approved
the amended resolution.
II. WHETHER ANY FEDERAL POWER COMMISSION PERSONNEL SOUGHT TO CURTAIL OR
CIX)SE THE INVESTIGATION
The Commission is unaware of any attempt by the Federal Power Commission
to close its investigation. Material relating to cooperation of Federal Power Com-
mission personnel has been previously submitted to this Subcommittee.
III. THE ORAL COMMUNICATIONS BETWEEN THE FEDERAL TRADE COMMISSION AND THE
FEDERAL POWER COMMISSION
Various oral communications with the Federal Power Commission are docu-
mented in information already submitted to the Subcommittee. This information
includes the June 1973 Staff Report, the various memoranda and interview reports
submitted to the Subcommittee, and the testimony of Mr. Halverson. Other than
the oral communications reflected in the above, the staff advises that it has had no
significant oral communications with the Federal Power Commission regarding
this matter.
By direction of the Commission.
Charles A. Tobin,
Secretary.
Exhibit 10. — Response of William E. Simon to the Testimony of James Halverson
Hon. Lewis A. Engman,
Chairman, FTC,
Washington, D.C.
Dear Mr. Chairman : I have read with concern the statements by James
Halverson, Director of the Bureau of Competition, before the Senate Judiicary
Committee and the Senate Committee on Commerce, in which he discusses the
structure of the petroleum industry. I understand that in the subsequent ques-
tioning, :Mr. Halverson suggested the breakup of integrated oil companies by
divestiture of refining or producing operations from marketing. This proposal
gives me a great deal of concern because of its implications for domestic energy
suppl.v in the next few years.
In the first place, I find it difficult to accept the concept that the petroleum
industry is not comijetitive. While Mr. Halverson singles out eight major oil
companies, there are, as you know, at least fifteen to twenty other very large
oil companies with integrated operations in addition to the hundreds of inde-
pendents who do not have integrated operations or are partially integrated.
The so-called "independent" operations sprang up in the last twenty years
principally because of surplus crude and refining capacity. The independents
270
bought marginal stocks at relatively low prices. They were able to charge low
prices because of this and also because they did not have to incur the substantial
capital investment needed by the major oil companies.
This surplus capacity is now gone and with it the primary source of inde-
pendent's position in the industry. Far from being a result of deliberate anti-
competitive actions by the integrated oil companies, it seems to me to be the
result of the inability of domestic supply to keep up with demand. This in turn
has been a result of many factors, especially past public policies that have dis-
couraged new refinery construction and exploration and drilling.
Since the President's Energy Message on April 18, a number of companies,
indei>endents and majors, have announced plans to build new refineries or ex-
pand existing refineries for a total new capacity of nearly 2.5 million barrels
per day. Some of these companies are now having second thoughts. Besides
causing critically needed refinery expansion plans to be delayed or cancelled,
the possible divestiture of refineries from integrated oil companies is making it
difficult for several independent marketers who have announced plans to build
refineries to carry through their plans. Statements by FTC Staff are, ironically,
contributing to the difficulties of the independent segment of the industry.
We are. as I am sure you are aware, in the midst of a national energj- crisis.
We simply do not have sufficient refining capacity to produce the gasoline and
heating oil that we are going to need in the next decade. We will have to build
the equivalent of 60 new refineries in the next 12 years at a cost of about $250
million each, for a total of $15 billion. Thus far, refinery construction has been
stallefl, in part, because of inadequate financial incentives and active opposi-
tion of environmentalists to new refinery sitings. We must also accelerate drill-
ing for oil, primarily on the Outer Continental Shelf. Drilling on most parts of
the OCS is expensive and outside the financial capabilities of the nonintegrated
independent oil companies.
As Chairman of the Oil Policy Committee, I would like to meet with you to
discuss this matter further and also provide you with our complete comments
on the FTC staff recommendations before final Commission action.
Sincerely yours.
William E. Simon.
Exhibit 11.— Response of Robert E. Lewis, FTC, to Letter to Chairman Engman
from William E. Simon, re testimony of James Halverson
Federal Trade Commission,
Office of the Chairman,
Washington, D.C., August 10, 1973.
Hon. William E. Simon,
Tlir Dcputii tieerctarij of the Treasury, the Department of the Treasury, Wash-
ington, D.C.
Dear Mr. Simon : This will acknowledge your letter of .July 30, 1973, to Chair-
man Engman concerning the statements made by James Halverson, Director,
Bureau of Competition, before the Senate Judiciary Committee and Senate Com-
merce Committee regarding the petroleum industry.
The Commission, on July 17. 1973. issued a formal antitrust complaint against
eight major petroleum companies. Now that this matter has progressed from the
investigative to the adjudicatory phase, any discussion by any Commissioner of
the complaint or its underlying legal or factual bases could give rise to charges
of impropriety or unfairness or the appearance thereof. The issues which you
raise regarding competition in the petroleum industry and the appropriateness
of certain relief are questions basic to the action presently being prosecuted by
Commission staff.
Therefore, since it would not be appropriate for the Chairman in his judicial
capficity to discuss the specific issues which you have raised, I have forwarded
your letter to Mr. Halverson for further response. I have also forwarded a copy
of your letter to the Secretary to be placed upon the public record and to be
f(>r\\ar(led to the parties in the proceeding pursuant to our Rules of Practice and
Procedure (16 C.F.R. § 4.7) and Commission policy concerning communications
received by Commissioners while matters are in litigation.
If you have any further questions concerning this matter, please contact our
General Counsel, Calvin J. Collier.
Sincerely,
Robert J. Lewis,
Assistant to the Chairman.
271
Exhibit 12.— Response of Frank C. Allen to Testimony of James Halverson
Federal Power Commission,
Washington, D.C., July 27, 1973.
Hon. Philjp A. Hart,
U.S. Senate,
Washington, D.C.
Dear Senator Hart : With your permission I sliould like to submit the follow-
ing comments in order to minimize any misiuiderstanding which may arise as a
result of the testimony of James Halverson, Director, Bureau of Competition,
Federal Trade Commission, before the Senate Subcommittee on Antitrust and
Monopoly of the Committee on the Judiciary, 93rd Congress, 2nd Session on
June 27, 1973.
So that the record may be complete, the Subcommittee should be informed that
the use of American Gas Association (A.G.A.) data in area rate proceedings
before the Federal Power Commission is limited and remains today the same as
it was in the Commission's first area rate proceeding involving the Permian
Basin Area decided in 1965. Reserve data prepared by A.G.A. was not then and
is not now used by the Commission in making its cost calculations involved in the
flowing gas rate. The costs supporting the flowing gas rate are related to actual
volumes of production, not resen^es.
The use of A.G.A. reserve data by the Commission in ratemaking is typified
in the most recent Southern Louisiana decision. Opinion No. 598 and 59<S-A,
affirmed bv the United States Court of Appeals for the Fifth Circuit, sul) nom
Placid Oil Co v. F.P.C., F. 2d (CAS 1973). There A.G.A. reserve
data is used in costing "new gas" under contracts dated on or after October 1,
1968, under a formula adopted by the Commission in 1965 in its Permian Basin
decision which was approved by the Supreme Court in 1968 as within the Com-
mission's discretion. Tliat formula seeks to derive a unit cost for finding and
producing each Mcf of new gas by dividing nation-wide average annual gross
reserve additions into nationwide costs of finding and producing gas. Specifi-
cally, productivity is computed by relating A.G.A. reported reserve additions
of non-associated gas to gas well footage drilled. The Federal Power Commission
considered the arguments raised by some parties concerning the use of A.G.A.
data in costing of new gas in the Southern Louisiana Area Rate decision and
concluded that if all arguments concerning the use of A.G.A. data by those parties
were accepted as valid that the effect of new gas costs would be less than 1 cent
per Mcf. (Opinion No. 598-A, page 8). For the reason indicated above there
would be no effect on flowing gas rates. In City of Chicago v. F.P.C., 458 F. 2d
731 (CADC 1971), the court commented on the use of extra record evidence
consisting, in part, of AG. A. data, .stating at p. 747 :
"Interpretation of, and assignment of weight to. data such as these is a task
which particularly calls for expert judgment. In interpreting such data and in
making predictions based on them, the Commission must be expected to make
use of the experience it has gained through years of dealing \^ith the problem
of the supply of natural gas."
In response to questioning by "Slv. Bangert. XiV. Halverson responded in a
manner which could lead to the erroneous impression tliat tlie Federal Power
Commission has denied certain Form 15 data to the Federal Trade Commission
(TR 244-246). Chairman Xassikas. responding to questioning l)y Senator Ken-
nedy, indicated that the Federal Power Conmiissiou's cooperation with the Fe<l-
eral Trade Commission was documented in a hearing before the Senate Com-
mittee on Commerce (TR 153-154). Howevei-, since the testimony of Chairrran
Nassikas was given before that of the Federal Trade Commission, no oppor-
tunity to respond to specific points raised by ]Mr. Halverson has been aiforr^ed.
In reading the testimony of Mr. Halverson. it is possible for one to conclude that
the Federal Power Commission had failed to provide data, or access to datn. re-
ported in Form 15 to the Federal Trade Commission. Your Subcommittee should
be advised that copies of Form 15 (reported by each pijieline) are kept on onen
shelves in the Office of Public Information and are available during normal
business hours for inspection and reproduction by the public at lars-e. Commer-
cial Xerox machines are available for immediate use at a charge of ten cents per
copy. In addition, the Office of Public Information provides a service to the
public whereby material may he reproduced at eight cents per copy. This service.
howev<!r, requires approximately one week to process.
272
The $25,000 figure alluded to by Mr. Bangert is the estimated cost of certain
manual processing of portions of Form 15 data as requested by the Federal Trade
Commission. At transcript page 245 Mr. Bangert propounds the following ques-
tion to Mr. Halverson :
"Tlie Federal Trade Commission wanted information from pipeline firms
which the Federal Power Commission ktid and they were told that would cost
them $25,000 to get that, and as I understand it then you did go and get the
same information from another source, presumably at a bargain price?"
First, it should be noted that the requests for this information was from certain
members of the Staff of the Federal Trade Commission to Staff members of the
Federal Power Commission, At no time was a request from the Chairman or
Commissioners of the Federal Trade Comnussiou received. lu response Mr. Hal-
verson does not comment on the reasonableness of tiie e.-llninted cost of producing
the calculations requested. Instead, he indicates that this and other information
is being sought by issuing subpoenas to some of the producers. At the time the cal-
culations from Form 15 were requested our best estimate of the cost of perform-
ing such calculations was $25,000. I now reaffirm that the cost to the Federal
Power Commission to provide the information requested is not less tlian $25,000.
Furthermore, the fact that the Federal Trade Commission, exercising its subpoena
power, may shift the cost of providing such information from the Federal Power
Commission to affected companies in no way discredits our estimated cost, and
in no way indicates any unwillingness on our part to cooperate fully with the
Federal Trade Commission or its Staff.
I would appreciate your including this letter in the record of this hearing. Like
Mr. Halverson, I express my personal views only and this does not constitute an
official statement of this Commission.
Respectfully submitted,
Frank C. Allea^
Acting Deputy Chief, Bureau of yatural Gos.
Exhibit 13. — Response of James T. Halverson to Letter of Frank C. Allen re
Testimony of Mr. Halverson
Federal Trade Commission,
BtTBEAtr OF Competition,
Washington, D.C., Fedruary 1, 197^.
Frank C. Allen,
Acting Deputy Chief, Bureau of Natural Gas, Federal Power Commission,
Washington, D.G.
Dear Mb. Allen : This will acknowledge receipt of and respond to a copy of
your letter to Senator Hart dated July 27, 1973, in which you comment on remarks
made by me on June 7, 1973, before the Senate Subcommittee on Antitrust and
Monopoly. In replying to you, I am requesting that Senator Hart make a copy
of this letter a part of the record of the Subcommittee's hearings into competition
in the energy industry. This response reflects personal views ; it does not consti-
tute an official statement by the Federal Trade Commission.
A cursory reading of your letter might lead the reader to conclude that
reserve data prepared by the American Gas Association (AGA) is used in FPC
area rate proceedings solely "in costing 'new gas'." As you know, the FPC ap-
proved overall rates (including "flowing gas" rates) for the South Louisiana
Area only after an intensive review of the adequacy of the supply of natural
gas. It was strongly urged to undertake this review by the Fifth Circuit Court
of Appeals — see Southern Louisiana Area Rates case v. FPC, 428 F.2d 407, at
439, 440 — referred to hereinafter as the Austral case. That the FPC heeded this
directive is apparent from its Opinion (at page 6, slip opinion) in AR69-1, the
South Louisiana rate decision : "Our duty is to reverse a downward trend of the
exploration and development effort, thereby to increase the likelihood of aug-
menting the national inventory of proved reserves of natural gas."
At pages 19-31 (slip opinion, AR69-1), the FPC considered the evidence
relating to gas supply. At page 30, the Power Commission stated, "The eviden-
tiary fact which most concerns us is not in dispute : the traditional trend lines
for measuring adequacy of supply, namely, reserves to production (R/P) and
findings [of reserves] to production (F/P) ratios, are in a declining mode."
As the charts on pages 28 and 29 of the opinion indicate, R/P ratios are deter-
mined by dividing reserve figures derived from Form 15s and from the AGA
by production figures.^ However, as the FPC indicates, at page 27, Form data
1 While the charts do not disclose this, the F/P ratios are determined in the same
manner.
273
represents over 70% of domestic proved reserves . . ." Thus, the only truly na-
tional figures for determining the evidentiary fact of most concern to the FPC
were admittedly AGA figures.
As regards reliance on these figures in this context, the FPC stated the follow-
ing at page 21 :
The Committee on Natural Gas Reserves of the American Gas Association
compiles estimates of reserves which are published in an annual report en-
titled "Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the
United States and Canada." This report has been published annually since
1945 and has been extensively relied upon by the industry, the government,
banks, and other financial institutions, and this Commission, (emphasis
added)
The FPC staff (see page 7 of Initial Staff Brief in AR69-1) was equally
candid :
The most critical issue in these proceedings is that of the adequacy of
gas supply and the related issue of the adequacy of service to consumers.
There is at the present time an acute shortage of natural gas in the field
available lo interstate markets . . . Clear evidence of the deteriorating gas
supply situation came with publication of the American Gas Association's
report on gas reserves for year 1968. This report published in May 1969
showed that the new supply gas brought forth by the industry during
1968 was only 12 Tcf [trillion cubic feet], or about 62 percent of 1968
production . . . This situation was repeated in 1969, when reserve addi-
tions amounted to only 8.3 Tfc as compared with production of 20.6 Tcf . . .
This trend continued in 1970. Preliminary AGA figures for 1970 indicated. . . .
Thus, AGA figures were relied upon by the FPC in determining the critical
issue of whether a supply ].»roblem existed requiring a general increase in area
rates. Having concluded that such a supply problem did exist, the FPC sub-
sequently turned to costing.
You note that AGA reserve data is not used in costing "flowing gas".- While
such data is not used as a part of the costing formula, your statement over-
looks the fact that the FPC's detei-mination of a supply problem played a direct
role in the costing of "flowing gas" rates in South Louisiana.
Before the FPC rendered its decision in AR69-1, it was cautioned by the
Austral court :
We think our opinion, and indeed probably the circumstances themselves,
will notify the Commission that it cannot in the future set prices by cost
considerations in a vacuum."
* * * if the supply is not too plentiful and the price is not sufficient in-
centive to exploit it and fails to bring forth the quantity needed the price
is unwisely low, even if it does not square perfectly with somebody's idea
of return on a "rate base" [footnote omitted] *
The following excerpts from paragraphs 151, 155 and 156 of AR69-1 disclose
that the admonitions of the court were heeded by the FPC, thereby indicating
that fear of supply shortages, based as we have seen in part on AGA statistics,
played a direct role in the costing of "flowing gas" :
153 . So the significant argument is whether flowing gas realizations should
bear a part of the responsibility for assuring a cash flow to meet the needs
for a heightened exploration and production effort. We believe they should.
155. By recommending a flowing gas price higher than that arrived at in
Opinion No. 546, using the same methodology (except for the substitution
of the direct assignment method for calculating exploration and develop-
ment costs), and then further recommending acceptance of the settlement
at a still liigher level, again without change in methodology or adjust-
ment of any of the computations. Staff was candidly and correctly making
the floicinff gas cost hear a part of the responsihility for further exploration — ■
in other words, it was looking to the total rate design, (emphasis added)
1.56. * * * We find it unlikely that producers, already involved in the
Southern Louisiana area, will decide not to expand their exploratoiy and
drilling effort. Moreovex', the incentives we establish herein, for flowing gas
rates, are designed to elicit an industry re.sponse of dedications of new gas
reserves to the jurisdictional market.
- "'Flowing ?as" as concerns South Louisiana Is gas whicb was contractetl for (for
subsequent deliverv to interstate pipelines) prior to October 1, 1968.
8 428 F. 2d 407, at 439.
* Id, at 44,3.
274
As you point out near the beginning of your letter. AGA statistics are used
in costing "new gas." ^ The following language in the Initial [FPC] Staff Brief
in AR6!)-1, at pages 61-62, indicates the precise role assigned to AGA figures in
determining this costing :
The American Gas Association's Committee on Natural Gas Reserves
reports annually certain reserves and production statistics for the natural
gas industry in the United States. These annual reports show, in-ter alia.
the volumes of gas reserves which were found or added during the report
year in four categories designated extensions, revisions, new fields, and new
reservoirs, [footnote omitted] The total of reserves reported in these four
categories is sometimes referred to as "gros.s additions,"' "new supply,"
"reserves added" (emphasis added) or simply "findings.'' The AGA gas
resen-es data are relied on extensively in evaluating trends in gas supply
and demand, [citations omitted] Pursuant to the methfids and procedures
established l)y the Commission they are also used in detennining the cost of
finding gas.
In determining the current finding cost of non-associated gas, average
annual expenditures made in the search for non-associated gas are spread
over the average volume of nonassociated (/as reserves addfd (emphasis
added) as reported by the AGA. The cost result is stated in cents per Mcf
of resen-es added. AGA reserves thus constitute the denominator of the cost-
ing ratio. All current ctist estimates submitted in these pi-oceedings rely on
the annual AGA reports for necessary gas reserves infoi-mation.
Tour principal point with regard to the use of AGA figures in AR69-1 for
costing "new gas" appears to be that if all criticisms of the AGA figures were
accepted as valid, that nevertheless, "the effect of new gas costs would he less
than 1 cent per ;Mcf." It is traie that the FPC, in Opinion 598-A, considered
eliminating 1969 AGA data altogether, and concluded (at page S) that if it did
so "the productivity factor in the costing of new gas would net a result of less
than 1 cent, well within the 4-5 cents per Mcf zone of reasonalile costs." How-
ever, the FPC then went on to state "if we were to assume that AGA reserve-
additions were under-estimated, we could add the ten trillioji cvhic feet pur-
ported discrepancy — or even doul)le that figure — and the result would still be
well within the zone of reasonable costs." *'
First, it is noted that if two cents per Mcf were tacked on to all "gas reserves
added" in 1970, as these were reported by the AGA, the market value of these
resei"\"es woxild l)e increased by $734,927,180. More to the point, it is quite possiltle
that Soiith Louisiann "gas reserves added" were under-reported in both 196S and
1969, and by a margin exceeding the 10-20 Tcf assumed by the FPC. Further, it
is also quite possible that such under-reporting occurred in other producing
areas as well. The AGA admission that it under-reported Alaskan gas by 26 Tcf
in 1968,' together ^ith the sizable differences in new field discoveries reported in
1968 and 1969 by the American Association of Petroleum Geologists as against the
AGA,* lend credence to this possibility. Thus, even if the use of AGA fisrures in
AR69-1 had been limited to the costing of "new ga.s" (and of course this was
not the case), any assumption that the maximum under-reporting by AGA in
1968 and 1969 was in the 10-20 Tcf range and hence could not affect costing by
more than 1-2 cents per Mcf appears to lie highly unwarranted.
The balance of your letter deals with cooperation between our agencies and
specifically with whether it can be concluded from my remarks (Tr. 244—4.5) that
the FPC refused FTC staff access to certain Form 15 data that is on computer
tape. Inasmuch as I specifically stated that the FPC offered such data to our staff
at a charge of $25,000, I do not l>elieve that mv remarks are susceptible to the
interpretation that you suggest. "While I do not comprehend the relevance of your
statement that the reque.st was by FTC staff and not by its Commissioners. T
accept without reservation your statement that the cost to tlie FPC of furnishing
the data would be no less than .$25,000.
Very truly yours,
.Tames T. Halversox.
Director. Bureau of Competition.
5 "New jras" as concerns Ronth Louisiana is ?as which was contracted for on or after
October 1. lOfiS. for delivery to interstate pinelines.
8 Assinninf an additional 20 trillion cubic feet in reserve additions from 1946-1967,
the rfsnlt. fi.'^S ^fcf. would affect new jras costs about two cents per Mcf.
•^ While this under-reportins was of associated sas and hence irrelevant to the costing
formuln for non-associ.nted pas. it iroes to the accuracy of AGA reportincr and is directly
relevant to the critical issue of adequacy of sunplv.
s The AAPG reported new field discoveries for 196R of 6 Tcf ajrainst the 1.4 Tcf reported
hy the AFA and in 1969 reported 4.5 Tcf against the AGA's 1.7 Tcf.
275
Senator Hart. Our next witness is Dr. Mann, director, Bureau of
Competition, FTC.
STATEMENT OF DR. H. MICHAEL MANN, DIRECTOR, BUREAU OP
ECONOMICS, FEDERAL TRADE COMMISSION; ACCOMPANIED BY
JOHN MULHOLLAND AND DOUG WEBBINK, STAKF MEMBERS
Dr. Manx. I wish to emphasize that my remarks have not been
cleared or reviewed by the Commission.
I have with me John ^Sfnlholhind and Doug AVebbink of my staff,
wlio may be able to answer any (juestions of detail which may arise.
Since copies of my statement are available and the statement will be
published in the record, I would like to sliift to the latter part of my
statement which is concerned with the public j[)olicy implications of this
second energy study.
I wish to focus on the latter i)art of my statement, because I would
like its message to come through loud and clear.
I have two connnents about our etr'orts whicls T believe raise serious
l)ublic policy issues. The first conceiiis the necessity to rely upon pro-
duction data for the construction of concentration ratios. In circum-
stances where current production does not, as in primaiy fuels, trans-
late on a 1-to-l basis hito reserve owner-ship, the future competitive
}>osture of an industry is unknown. If the level of concentration in re-
serves is markedly higher than for production, if the reserve concen-
tration trends are upward, and if oil companies have been or are be-
coming major owners of reserves, the previously stated conclusions
are too modest. The difficulty is that there exist no data in the public
domain on company-iby-company reserve ownership. This is particu-
larly curious since Federal agenices, the AEC, the Bureau of Mines,
and the FPC are responsible for gathering data about the primary
fuels. As I have stated on another occasion with respect to the first
of these agencies :
It seems anomalous to me that the Atomic Energy Commission, which is criti-
cally involved in the energy sector, and will probably be more critically involved
in the future as uranium possibly increases its impact on the energy sector, that
the Atomic Energy Commission api)arently must get data from companies vol-
untarily. It does not have, apparently, the legal power to get data, which it
would seem to me is rather important to have for the Atomic Energj^ Commis-
sion, let alone for us in our attempt to understand what is happening to this
industry and what is going on.
Before going on. I would simply underscore those remarks by stat-
ing tliat one of the attractions of being Bureau Director at the Federal
Trade Commission was my belief when I left academia that I vrould
have access to data of a much higher quality than exists in the public
domain. The quality of research in the academic community has dete-
riorated rapidly in the last decade, in my judgment, because of the
quality of data we have available to us to test various hypotheses. I
have found after 2 years, that the FTC is a little better off than aca-
demic institutions. I am appalled by the kind of data with which the
Federal Trade Commission has to try to make its important decisions
in the antitrust and consumer protection areas.
Mr. Chtjmbris. Then you can understand how we feel when we
get that data and have to sift through it.
276
Dr. Mann. In fact, as I testified before Senator Xelson in March,
tlie Bureau of Economics has had to abandon one of its more impor-
tant projects — an attempt to estimate the degree of overcharge, the
cost to consumers of various kinds of pricing behavior that exist
across a large number of industries. The data are not sufficient for us
to continue that project. So now, 2 years hiter, it is no longer anoma-
lous; the kind of data that are available is scandalous to me.
My second comment concerns the Commission's 6(b) power. For
economic and statistical surveys, a 6(b) questionnaire requires clear-
ance by the Office of Management and Budget, which includes review
and comment by the Business Advisory Council on Federal reports.
If there is a failure to comply after issuance, enforcement is the respon-
sibility of the Department of Justice.
This means that two agencies of the Executive lie between the
Commission and the gathering of economic information. This means
that liad vre sought to collect data on reserves, we would have nothing
to report now and proliably for the next couple of years. And even if
the Commission had traveled the long and tortuous route to complete
compliance with the 6(b), it is not clear that the courts would not
consider reserve data a trade secret, exempt fi'om public disclosure
under section 6(f) of the Federal Trade Commission Act. If exempt,
the data on reserves would have had to be published in an aggregative
form, a result which is less informative than a more detailed presenta-
tion.
The Bureau's economic report on conglomeiate merger performance,
released in January 1973, illustrates tliis in tv\'o ways.
First, one of the respondent companies, Litton Industries, did not
lose its fight concerning compliance with the Bureau's 6(b) until Sep-
tember 1972, 3 years after the investigation began. Ea'cu then, com-
pliance was not complete because we were near the end of the study
and did not insist on everything we were originally after. Further,
tlie 6(b)'s for this study did not have to go through 0MB because less
than 10 firms were involved. In short, collection of information with
the 6(b) is not a rapid or easy process.
Second, chapter 5 of that report had to present what I consider its
most important findings in an aggregative foi-mat. This requirement
resulted from the hard choice of whether to pursue nine firms through
the courts for complete compliance or to compromise in order to speed
the completion of the study. The foj-mor strategy would have probably
meant that the report would have taken another 3 or 4 years. The
compromise did mean a less informative report than might have been
because the readers could not observe directly and in detail the in-
lormadon loss arising from the suppression of financial data for highly
diverse operations into consolidated statements.
I think it is clear that the Commission's 6(b) power does not appear
well suited to a timely collection of essential information with which
to investigate particular industries, or companies, or the economy in
general. I think (\ ingress may wish to reexamine the necessity for
OMB review of and Department of Justice compliance enforcement
of 6(b) questionnaires. Further, it is my judgment that the Commis-
sion should determine whether the courts would consider reserve data
and financial information for disaggregated lines of business as trade
secrets. If so, Congress may want to strengthen the 6 (b) power.
277
In conclusion, Mr. Chairman, I feel so strongly about the points I
have made and ihe frustration the Bureau of Economics had had in
trying to do T'esearch to inform the Congress and the public, that I will
recommend publication of our concentration study because this mes-
sage will be brought out in that study. Long after these hearings are
concluded and long after the energy crisis may have passed, I want
this message to be on the public record. It is going to be clear in this
second report. Thank you.
Senator Hart, Thank you for your candidness. That conglomerate
report did strike me as a one-handed operation. If the study you are
now talking about is going to be shot down as a poor job. are you will-
ing to state and jeopardize your professional standing in order that
all of us can understand the completely woeful inadequacy of the
means of informing Congress and the country of what we have and
Avhere we are headed ? I take it that is what you are saying.
Dr. ]SLvxx. That's correct, sir.
Senator Hart. We have been told that future competitive positions
in the primary fuels depend on who has the reserves. AVhat is your
professional judgment ?
Dr. ]Maxn. I would agree with that. We recommended early that
had we been able to havereserve data we would have been able to give
a better jncture, particularly with respect to the future in the energy
sector. W realize that seeking such data through an economic survey
Avould have meant you probably would not have seen a report until
tlio late seventies, and might have seen it under circumstances similar
to the conglomerate merger report; that is, we would have been con-
strained as to the amount of detail we could have revealed. _
Senator Hart. You tell us in your statement that there is no data in
the public domain on company-by-company resei-ve ownership; that
is on page 8. You indicate thatthe Atomic Energy Commission has to
get data from companies on a voluntary basis as far as uranium is con-
cerned, and it lacks the legal power.
Have you attempted to get whatever information tlie ABC has ob-
tained on a voluntary basis ?
Dr. Maxn. We did the following. Senator: My stall' met with the
staff of the Atomic Energy Commission and asked about what data
we could obtain from the AEC with respect to our studies. We were
told all of the data which it receives, whether involving production or
reserves, it receives on a voluntary basis from the companies in the
uranium industry. They said they would be glad to give us production
data if the companies agreed. They further told us that in their judg-
.Mient thfro was little point going after reserve data, because reserve
data is highly sensitix c It was their judgment, if they turned either
production or reserve data over to us, the companies would stop sub-
mitting data to them.
We then wrote the companies who were supplying data to the AEC
and asked whether they would grant permission to the AEC to give us
data, the data which was submitted to them on a production basis. Per-
mission was so granted. We did not seek reserve data, relying on the
AEC's judgment that such data would not be given and that we would
have to go after it by 6(b). Since we were anxious and hoping to pro-
duce a report in a much shorter time period than the 6 (b) process re-
278
quires, and hoping that it would not misrepresent the competitive situ-
ation in the energy sector, we remained wnth the production data.
I would respectfully suggest that the Bureau of Competition's ex-
l>erience with respect to collecting natural gas reserve data, which is a
legal enforcement effort in which 0MB clearance is not required, but
Department of Justice compliance is, bears out the Bureau of Eco-
nomics. My judgment is tliat 6(b) power has many characteristics of
a "paper tiger."
Senator Hart. Do you get the feeling that the Government is sort
of a paper tiger ^
Dr. Maxn. In certain respects. I am not sure with respect to the oil
industry that I would call the Government a paper tiger. I think
there are clear indications from the oil industry's point of view that
the Government has been less than a paper tiger in supporting ar-
rangements that have contributed to many of the problems about
which we are concerned today. With respect to having data available
which can be analyzed, the answer is yes.
Senator Hart. Again, we appreciate your statement. In our com-
ments now and later on in the study, you will understand we are not
being critical of you ; we do understand the constraints under which
you had to make this study.
Mr. Chumbris.
Mr. Chumbris. All I have to say, Mr. Halverson and Dr. Mann,
is that if your two departments have anything to do with further state-
ments, make sure that you don't hold the chairman up by not submit-
ting the papers on time.
Mr. Halverson. He has already told us that.
Senator Hart. Gentlemen, thank you very much.
Dr. Mann. Thank you very much, sir.
Mr. Hal%^rson. Thank you.
[The following was received for the record. Testimony resumes on
p. 335.]
MATERIAL RELATING TO THE TESTIMONY OF DR. H. MICHAEL MANN
Exhibit 1.— Prepared Statement of Dr. H. Michael Mann
Statement of Dr. H. Michael Mann, Director, Bureau of Economics,
Federal Trade Cohmission
concentration in the energy sector
Mr. Chairman and members of this Committee, it is a pleasure to participate
in these important hearings. This is my personal statement and has not been
cleared with the Commission.
I have with me Mr. Joseph MulhoHand and Dr. Douglas Webbmk who are
the senior economists in charge of our second energy study, which is an analysis
of the impact of the oil company mergers on the potential decline in concentra-
tion resulting from the increasing substitutability among the primary fuels.
The focus of this investigation arises from our finding in the first study :
Interfuel Substitutability in the Electric Utility Sector of the U.S. Economy. Our
report concluded that the primary fuels, at least as inputs to the electric utility
sector, constituted a single market and therefore, ". . . mergers between petro-
leum companies and firms producing or owning reserves of other fuels should
be considered horizontal acquisitions." ' The importance of this conclusion is that
horizontal mergers will offset the negative impact on concentration which comes
from the joining of separate markets. The reason lies in the fact that suppliers
which were once operating in separate lines of business find themselves, as their
1 Thomas Duchesneau, Interfuel Substitutability In the Electric Utility Sector of the
U.S. Economy, February 1972, p. 82.
279
lines come to serve the same end use, competing with one another. The number
of independent competitors has increased. However, if horizontal mergers bring
the dominant companies under common ownership, there may well be no decline
in concentration. This is illustrated in the Table attached to this statement.
How serious this development might be depends upon the levels of concentra-
tion in the formerly separate markets and the trends in those concentration
levels. Our second investigation has determined the levels and the trends, with
the exception of uranium, in concentration for primary fuels and has arrived
at a tentative determination of the impact of the acquisitions of nonoil fuel pro-
ducers by oil firms on concentration in the overall primary fuel market. It should
be understood that we have used publicly available data which are flawed. Never-
theless, we do not think that the data misrepresent the situation by any signifi-
cant degree at tlie production stage.
It should also be understood that I am repoi'ting some findings which may
change before the final submission to the Commission. Each of the primary fuels
will be discussed in turn.
0(7. — Concentration was calculated in terms of each producer's net production
of crude oil. This measure ignores variations in the quality of the oil and excludes
royalty oil.^ An adjustment was made for the latter from previous estimates
of the percentage of royalty oil to total production. The percentage was applied
to all firms' production. The result for 1970 :
Production
Adjusted for
royalty, oil
4 firm.
27.1
31.0
8 firm
43. 0
49.1
In terms of the adjusted figure, concentration has risen from 1955 when 4-
and 8-firm concentration percentages were 21.2 and 35.!) respectively.
Natural Gas. — Concentration was measured frum published company sources
on marketed production for the U.S. and Canada combined (total gross amount
of gas withdrawn from a reservoir minus the amount flared or returned to the
reservoir). The data, are not available on a consistent basis: some firms report
gross production, others net (pross minus return to the reservoir and "shrink-
age") ; some report comMned U.S. and Canadian production, others not; some
exclude royalty produ'tion, others not. In some senses, then, we are adding to-
getiier apples and oranges.
The result, nevertheless, is for 1970 :
Percent
4-Firm 24. 4
8-Firm 39. 1
Concentration has risen since 1955 when the respective figures were lS.f> percent
and 30.4 percent. Although the levels are still relatively low, some factors suggest
that the rise of the last decade will continue. One important factor in this trend
is the success of the major petroleum companies in obtaining oil and gas leases
offshore and in Alaska.
CoflZ.— The chief difficulty with coal statistics is that coal varies with respect
to quality. Therefore, company figures and the resultant national totals are com-
binations of nonhomogeneous commodities— the apples and the oranges problem.
Using these figures, the 1970 4- and S-firm concentration ratios were 30.7 percent
and 41.2 percent, respectively.^
The trend in concentration is upward: the 4- and 8-firm concentration rftios
in 1955 were 17.8 and 25.4 respectively. This rise appears to be the product of a
variety of economic forces, among them the economies of scale in stiip mining, a
method which is increasingly accounting for more and more of coal production.
Uranium. — The statistics for this sector are those reported by the AEC, with
the permission of the companies, or by the companies directly. They are based on
- Royalty oil Is produced and controlled by the company but belongs legally to the
owner of the land under which the oil resides.
3 If captive production, that is, production by mines which are actually owned sub-
sidiaries of other companies such as steel companies, and which does not ordlnarMy enter
the open market, is excluded, the percentages ore 36.0 and 47.0 respectively. However,
inclusion of the captive production makes economic sense since this supply can enter
the open market if price and supply developments so warrant and since this production
IS not really distinguishable from production tied up in long-term contracts, which is
included in the industry's statistics.
27-547—74 19
280
the amount of uranium oxide (U:;08) recovered by the integrated mining and
milling companief^, because data are only for integrated milling companies, and
not for independent mining companies. In 1970, concentration in milling for the
4 and 8 largest integrated milling companies was 55.3 and 79.8 percent resiiec-
tively.
While there are some independent uranium mining companies, the milling com-
panies control most of the mining. In 1970, the 15 milling companies mined 95.5
percent of all uranium ore. Applying that percent to the above milling concentra-
tion ratios, we estimate that the top 4 and 8 milling companies mined at least
52.8 and 76.2 percent respectively of UsOs in 1970.
AVe have not yet computed a trend in uranium mining because the role of in-
dependent mines was much larger in the past. Since we cannot get their produc-
tion directly, we can only report at best the amount produced by 4- and 8-largest
integrated milling companies, using the same kind of procedure as above. Such
a figure may understate concentration because some independent mines may have
been larger than the captive mines of the milling firms. Therefore, we have no
exact idea of the change in concentration over time.
Furthermore, it is only recently that uranium has entered as a competitive
fuel to supply energy. In the past, the ore went into bombs or stockpiles. It is^
therefore, unclear whether past concentration is fully comparable to present
concentration because there were two very different industries in terms of end
use.
To summarize, concentration levels appear to be relatively low in oil, natural
gas, and coal, but rising markedly. In uranium, the level is substantial. The in-
creased fuel intersubstitutability. however, acts as a deflationary force on con-
centration levels, unless the major firms are coming under common ownership.
OVERALL FUEL MAKKET
"When the four fuels are combined together using a common measure of heat
content (British Thermal Units), concentration is lower than when measured
separately for each of the 4 fuels. In 1970, the top 4 and 8 energy firms produced
19.0 and 31.6 percent respectively of all energy.* Although those concentration
ratios ai"e low, they have risen significantly since 1955 when the top 4 and 8 firms
accounted for 12.6 and 22.0 percent respectively."
Although several petroleum companies have acquired interests In coal and
uranium since 1955. those acquisitions have had little impact on production C!»n-
centration in 1970.* If we assumed that all coal and uraniimi production by the
largest 30 petroleum firms was produced by independent non-peti-oleum firms, the
top 4 and 8 energy companies would account for 18.7 and 30.1 percent respec-
tively, insignificantly different from the percentages reiwrted above, which in-
cluded the coal and uranium production by the largest 30 petroleum firms.
PUBLIC POLICY
I have two comments about our effort which I believe raise serious public
policy issues. The first concerns the necessity to rely upon production data for the
construction of concentration ratios. In circumstance!--, where current produr-tion
does not, as in primary fuels, translate on a one-to-one basis into reserve owner-
ship, the future competitive posture of an industry is unknown. If the level of.
concentration in reserves is markedly higher than for production, if the reserve
concentration trends are upward, and if oil companies have been or are becoming
major owners of reserves, the previously stated conclusions are too modest. The
difliculty is that there exists no data in the public domain on reserve ownership
company by company. This is particularly curious since federal agencies, the
AEC, the Bureau of Mines, and the FPC are responsi)ile for gathering data about
the primary fuels. As I have stated on another occasion with respect to the first
of these agencies : '
... it seems anomalous to me that the Atomic Energy Commission, which is*
critically involved in the energy sector and will probably be more critically in-
■• Tbi? is the fraction of enprcy containecl in the production of only those four fuels.
Other enercry sources such as hydroelectric power, anthracite coal and geotliermal energy
have been excluded from this measure,
6 Thpsp figures for 19.55 exclude all uranium production on the assumption that uranium
was not part of the energy marl^et in that year.
^ It shonM he noted that o vnership of coal and uranium reserves by the 20 largest
petroleum firms may be far higher in percentage terms than Is their percent of current
prodiirtioTi.
" Concentration by Comnetinc Raw Fuel Industries in the Energy Market and Its
Impact on Small Business, 1971, p. 23.
281
t
volved in the future as uranium possibly increases its impact on the energj^'
sector, that the Atomic Energy Commission apparently must get data from
companies voluntarily. It does not have, apparently, the legal power to get
data, wiiich it would seem to me is rather important to have for the (Atomic
energy Commission, let alone for us in our attempt to understand what is
happening to this industry and what is going on." '
My second comment concerns the Commission's 6lb) power. For economic and
statistical surveys, a 6(b) questionnaire requires clearance by the Office of
Management and Budget, which include review and comment by the Business
Advisory Council on Federal Reports. If tliere is a failure to comply after issu-
ance, enforcement is the responsibility of the Department of Justice.
This means that two agencies of the Executive lie between the Commission
and the gathering of economic information. This means that had we sought to
collect data on reserve, we would have nothing to report now and probably for
the next couple of years. And even if the Commission had traveled the long audi
tortuous route to complete compliance with the 6(b), it is not clear that the'
courts would not consider reserve data a trade secret, except from public dis-
closure under Section 6(f) of the Federal Trade Commission Act. If exempt, the
data on reserves would have had to be published in an aggregative form, a result
which is less informative than a more detailed presentation.
The Bureau's economic report on Conglomerate Merger Performance, released
in .January, 1973, illustrates this in two ways.
First, one of the respondent companies, Litton Industries, did not lose it.'?
fight concerning compliance with the Bureau's 6(b) until September, 1972, three
years after the investigation began. And even then, compliance was not complete
bei-ause we were near the end of the study and did not insist on everything we
were originally after. Further, the 6(b) 's for this study did not have to go^
through 0;MB because less than 10 firms were involved. In short, collection of
information with the 6(b) is not a rapid or easy process.
Second, chapter 5 of that Report had to present what I consider its most im-
portant findings in an aggregative format. This requirement resulted from the
hard choice of whether to pursue nine firms through the courts for complete com-
pliance or to compromise in order to speed the completion of the study. The
former strategy would have probably meant that the Report would have taken
another three or four years. The compromise did mean a less informative rei^ort
than might have been because the readers coiild not ob.9erve directly and in de-
tail the information loss arising from the suppression of finance data for highly
diverse operations into consolidated statements.
I think it is clear that the Commission's 6(b) power does not appear well suitec?
to a timely collection of essential information with which to investigate particu-
lar industries, or companies, or the company in general. I think Congress may
wish to reexamine the necessity for 0MB review of and Department of Justice
compliance enforcement of 6(b) questionnaires. Further, it is my judgment that
the Commission should determine whether the courts would consider reserve
data, and financial information for disaggregated lines of business as trade
secrets. If so, Congress may want to strengthen the 6(h) power.
ATTACHMENT— AN EXAMPLE OF THE IMPACT OF CHANGING MARKET BOUNDARIES ON CONCENTRATION LEVELS
Separate markets
Single market
Different
firms'
Same
firms 2
Firm rank
A B
C
1
2
3.
4
20 40
20 10
10 5
10 5
30
10
10
10
40
30
20
20
90-
40
25
25
Top four
Total outf)uf_-
60 60
100 100
60
100
(60)
110
300
(37)
180
300
CR4 (percent)
(60) (60)
'60)
1 The dominant firms in product A are not dominant in product B, etc.
2 Each firm has the same rank in each product line.
Source: Economic Report, "Interfuel Substitutability in the Electric Utility Sector of the U.S. Economy," February 1972
table 48, p. 84.
282
Exhibit 2. — Dr. Mann's Response to Senator Hart's Letter Concerning the Con-
glomerate Merger Study and the Concentrated Industries Studies
. Federal Trade Commission,
Washington, D.C., May H, 197S.
Hon. Philip A. Hart,
Chairman, Subcommittee on Antitrust and Monopoly, U.S. Senate, Washing-
ton, D.C.
Dear Mr. Chairman : This letter gives you fuller detail regarding the Bu-
reau of Economics' work on the second part of the conglomerate merger study
and the concentrated industries studies about which you inquired in your letter
of October 11, 1972.
As you know, the second part of the conglomerate merger study was released
on January 3, 1973. It is titled Conglomerate Merger Performance: an Empirical
Analysis of Nine Corporations. Its major conclusion was that there was a serious
loss in information about sales and profits from the consolidation of acquired
firms into the aggregate financial accounts of these nine companies. This issue
is, of course, germane to all large, diversified enterprises, and the Bureau of
Economics is negotiating with 0MB to develop a line-of-business form which
will permit the publication of industry profitability statistics at the 4-digit SIC
level. This kind of data is not now available from any public sources. The pub-
lication of the second part of the conglomerate merger study has greatly facil-
itated our negotiations.
The status of the concentrated industries studies follows :
Energy. — Four studies were planned in this area. Tlie first, Interfvel Sul)-
stitutabiUty in the Electric Utility Sector of the U.S. Economy has l)een com-
pleted and published. The second study deals with an investigation of the
ownership structure within the primary energy markets : oil, natural gas, coal
and uranium. Pai'ticular emphasis is being given to the effects of petroleum
companies' acquisitions of uranium and coal producers on overall concentration.
This study will be transmitted to the Commission this summer. The inordinate
delay is largely traceable to the fact that data arfe either unavailable or of very
poor quality.
The third and fourth investigations envisioned an examination of the effect
of petroleum companies' acquisitions of coal and uranium companies on pricing
and on the rate of technological innovations within the energy sector. These
have not begun as staff is fully committed to other projects.
Prescription Drugs. — The purpose of this study is to explore the relationships
between product differentiation expenditures and market structure in certain
drug markets. A 6(b) questionnaire has been approved by the Commission. It is
being pretested with six pharmaceutical companies, five of which have completed
the questionnaire. We are negotiating with the remaining one about completion.
If the questionnaire requires any changes, it will be resubmitted to the Com-
mission for approval before transmittal to 0MB.
Electrical Machinrry. — The study proposes to examine the effect of the anti-
trust case of 1960. It is alleged that in markets as concentrated as electrical
equipment, there will be no substantive change in price behavior : a tacit under-
standing will substitute for an overt conspiracy. We intend to test that hypothesis.
We expect to transmit to the Commission for approval a 6(b) questionnaire this
summer.
Automobiles. The proposed study of automobiles has suffered from a variety
of factors. The staff which began work on this study in the fall of 1971 was shifted
to policy planning work when the Commission began an intensive effort to
come to grips with the development of models to guide its resource allocation.
The addition of new staff in the summer of 1972 permitted work to begin again
in the fall of 1972. This has resulted in a position paper, now being formalized
into a study proposal with a 6(b) questionnaire, to investigate the sources of
profits of the automobile companies, particularly General Motors. There are
many hypotheses that factors other than market power, e.g., managerial efficiency,
risk, may explain the industry's and particular firms' persistent above-average
profitability.
Sincerely yours,
H. Michael Mann,
Director.
283
Exhibit 3. — FTC Memo of April 22, 1971, re Commission Study Alternatives in
the Energy Sector
Memorandum — April 22, 1971
To : Commission
From : Office of Policy Planning and Evaluation
Subject : Commission Study Alternatives in the Energy Sector
A. INTRODUCTION
The purpose of this memorandum is to discuss the dimensions of Commission
economic study alternatives in the energy sector of our economy. The structur-
ing of a policy-oriented energy study for the Bureau of Economics is only one
part of the Commission's essentially tripartite existing program in the energy
area — vrhich also includes a preliminary, antitrust investigation of trade asso-
ciation and industry practices affecting natural gas reserves, and a special mer-
ger project involving energy mergers. Here, we will focus principally on exist-
ing plans, as w^^ll as broader possibilities, for the economic study of issues af-
fecting energy policy.
In the course of this discussion, we will do several things. First, we will pres-
ent some discussion of the backgrovind and present posture of the Bureau of
Economies" concentrated industries project — for our plans for a Commission
energy study, in large part, find their genesis there. Second, dealing with one
particular set of policy issues existing within the broader energy field, we will
discuss the development of the attached Bureau of Economics" proposed protocol
titled "Market Boundaries in the Energy Sector of the U.S. Economy." This pro-
posal outlines the Bureau's present plans for a study which would focus basically
on market definition and research and development in the energy field — and
which would have direct enforcement significance relative to the Bureau of
Competition's present energy merger project. Unlike some of the possibilities dis-
cussed in the broader-ranging memorandum which is attached, the enforcement-
oriented protocol describes a study effort which is manageable in terms of pres-
ent resources, and where, to some extent, relatively short-i'un completion can
be anticipated. Third, we will briefly comment upon and present for Commission
consideration that attached memorandum titled "Possible Dimensions of a Com-
mission Energy Study." Tliis outline of broader issues and study alternatives in
the energy area has been devloped by this Office with the assistance of the Di-
rector of the Bureau of Economics. It will discuss, admittedly in a general and
tentative manner, our conception of the dimensions which a broad economic
energy study could assume — one which would purport to generally treat federal
energy policy.
Finally, after describing some broader and narrower options for energy study,
we will present some concluding remarks and recommendations as to the further
course which we feel Commission programming should take in the energy area.
B. ORIGINS OF commission's COMMITMENT TO AN ENERGY STUDY — THE CON-
CENTRATED INDUSTRIES PROJECT BACKGROUND AND RELATED EVENTS
While this memorandum is written principally to deal with Commission study
alternatives in the ener.gy sector, it is most important that the background and
present posture of the Bureau of Economics' concentrated industries project be
understood. The energy "industry" within our economy (described, typically, as
encompassing petroleum, coal, natural gas, and atomic energy) has always been
one of the "concentrated industries" to which the Commission has plannetl to
devote intensive economic analysis, focusing on basic structure-performance rela-
tionships and their policy implications.
Until this year, the course of the concentrated industries project has been
tortuous and disappointing. We described it at some length in our memorandum
to the Commission of October 12, 1970 ^ discvissing energy planning. A few, brief
comments here will be sufficient. The present concentrated industries project
originated in the Commission minute of August 8, 196S, which directed the staff
to prepare and submit a plan, including manpower estimates, for the study of im-
portant, highly concentrated industries where there are serious questions of the
iDealinj; with the issues raised in the Sept. 1, 1970 request of the Senate Antitrust
and Monopoly Subcommittee for information about Commission plans and activities in the
energy field.
284
existence of price competition. In response thereto, the Bureau of Economies
sug:s"estecl six industries for study, ordered according to tlie following priority :
(1) steel, (2) automobiles, (3) drags, (4) electrical machinery, (5) energy in-
dustries— i>etroleum, coal, natural gas. atomic energy, and (6) chemicals.*
Subsequent to this initial planning activity, work on the concentrated indus-
tries project was suspended ^ because of the absence of the Director of the Bu-
reau of Economics who supervised the study of the Cabinet Committee on Price
Stability — released in January of 1969. In March of 1969, the Bureau Director —
in a sense reiufoi-cing the earlier priority designation established within the con-
centrated industries project — again recommended that the Commission proceed
with an in-depth study of the conduct and performance characteristics of the
steel industry.'' He did not discuss the other five industries which had been
earlier designated within the project. Responsive to this recommendation, the
Commission directed, in May 1969, that the staff proceed with the steel industry
study and that additional budgetary funds for it be requested.^ Seemingly be-
cause of resource limitations,'* neither the steel portion of the concentrated in-
dustries project — nor, apparently, any other portion — moved substantially for-
ward prior to the summer of 1970. On July 10, 1970, in Congressional testimony,
Chairman Weinberger reiterated the Commission's commitment, "to the extent
resources permit," to the study of the six concentrated industries previously
.designated."^
Thus, the record stood at the time of the Commission's request that the Of-
fice of Policy Planning and Evaluation consider and report on the issues
raised in the September 1, 1970 letter of the Senate Antitrust and ^lonopoly Sub-
committee relating to Commission plans for the energy area,^ Our memoranda
to the Commission of October 5, 1970 and October 12, 1970 were in response
to this instruction. In addition to recommending (1) a pilot antitrust in-
vestigation dealing with natural gas reserves, and (2) expedited Bureau of
CJompetition treatment of energy mergers, we also mnrle recommendations re-
lating to Bureau of Economics handling of the energy portion — and other
portions — of the concentrated industries study.
At pages 31-39 of our memorandum of October 5, 1970, we presented a dis-
-cussion of structure and structural trends within energy markets. This dis-
cussion led us to conclude :
". . . we recommend that the Commission promptly authorize a full-scale
investigation into concentration and competitive trends in the energy
sector of the economy to be conducted by the Bureau of Economics with
the assistance of the Bureau of Competition.
"Such an investigation would attempt to fix more precisely structural
changes in the energy sector, either through merger, internal expansion,
or joint venture. Special emphasis should be given the increasing dom-
inance of 'energy sources' by petroleum companies.
"Contemporaneously with developing such structural information we
would suggest that the Bureau of Economics take steps to evaluate whether
there is any relationship between such increasing concentration and dimen-
sions of conduct and performance, such as profit rates, price, new tech-
nology and discovery activity, including rate of development of new re-
serves, and competition between alternative sources of fuel."
Following our initial memorandum recommending this type of energy study,
the Commission asked that we comment upon the relative priority of the energy
component versus the other components within the concentrated industries
project. This was the essential purpose of our second energy memorandum dated
October 12, 1970. In this context, our recommendation with respect to the Bu-
reau of Economics was as follows :
That the Bureau of Economics be directed to prepare, as soon as possible,
detailed study plans covering each of the industries which have been included
within the pending concentrated industries study. Such study plans should
begin with descriptions of the industries in terms of structure, behavior, and
2 Spp : ^femorandnm to the Commission from Actins Director, Bureau of Economics,
Oct. If!. 19RS.
'^ Pursuant to the Commission minutes of Nov. 27, lOfiS.
* See : Memorandum to the Commission from the Director, Bureau of Economics, Mar. 18,
.1900.
s Pursunnt to Commission minutes of May 6, 1969.
6 See : Memorandum to the Chairman from Acting Director, Bureau of Economics,
Ma.v S. 1970.
■^ See : Statement of Cfispar W. Weinberger, Chairman. Federal Trade Commission,
fcefo7-e the ,Toint Econoniio Committee of thp Congress. July 10, 1970.
* Pursuant to the Commission minutes of S. pt. 21, 1970.
285
significant current trends, and should identify important economic concerns.
With this background the study plans shoiild proceed to a discussion of what
the Commission actually can and should do with respect to each respective
industry, emphasizing factors such as : consumer and economic significance ;
resources required and ease of investigation ; and the possibility of obtain-
ing economically meaningful relief to the problems in the industry. Such
industry study plans should provide the Bureau and the Commission with
a sound basis for finally determining priorities within the concentrated in-
dustries study and, further, should provide a way for the Commission to
determine whether or not some more immediate massive study of energy
problems would be desirable and feasible. Because of the current importance
of energy issues, and the fact that the energy area gives every present
indication of deserving priority within the concentrated industries study,
the energy area should be given immediate priority in the development of
the detailed study plans.
The recommendations contained in our memoranda were adopted by the Com-
mission, as reflected in its letter of October 13, 1970 to Senator Hart which,
relative to the study of energy, declared :
"As you know, the enei'gy sector of our economy is one of several concen-
trated industries which the Commission has planned to study. Because of our
concern about energy issues such as those which you raise, the Commission
has directed today that the initial planning phase of the energy portion of
the concentrated industries study be given high priority. We expect that this
expedited planning phase of the energy portion of the concentrated indus-
tries study will provide a great deal of information which will assist the
Commission in developing the further scope of our intended investigation
in this field."
Identical language was utilized in the Chairman's October 13, 1,970 correspon-
dence to Congressman Evins.
In December of 1970, and March of this year, the Commission and staff met
with groups of citizens and officials from the TVA area, who expressed to us their
concern about competitive problems in the energy setting — particularly increas-
ing coal prices and petroleum company extensions into competing energy sources.
At these meetings, we explained our current energy program, emphasizing that a
study plan for our treatment of the energy area was in development, and that,
were the Commission to favor a broad commitment, additional resources would
quite clearly seem to be a necessity.
This, then, has been the background from which has arisen a commitment
that the Commission consider, determine and announce the scope of its intended
energy study — including an assessment of the existing limitations imposed by
resource availability. Ideally, we would like to have this discussion of study
alternatives within the energy area accompanied by a definitive discussion of
analogous, or competing, alternatives which exist within all the other industries
which have traditionally been regarded as falling within the concentrated indus-
tries project.
Uufortimately, this is not possible, and the need for Commission clarifying
action in the energy area is immediate. Even without the definitive compara-
tive assessment of protocols, or study plans — for the other portions of the Bureau
of Economics' concentration project, however, we believe that the Commission
(having reviewed this memorandum and the attached documents) should be
In a position to make substantial forward motion in structuring, and further-
ing the execution of, its energy study commitment. Dr. Mann will — within the
very near future— submit to the Commission a "status report" on the con-
ce?itrated industries project. We are now in position, however, with Dr. Mann's
concurrence, to report preliminarily on the progress or status of the non-energy
portion of the concentration project.
In addition to its proposed protocol describing a somewhat limited, and
presently feasible energy study project within the context of the concentrated
industries project. We are now in position, however, with Dr. Mann's concur-
rence, to report preliminarily on the progress or status of the non-energy por-
tion of the concentration project.
In addition to its proposed protocol describing a somewhat limited, and
presently feasible energy study project within the context of the concentrated
industries project, the Bureau of Economics has virtually completed analogous
study plans covering electrical machinery and ethical drugs.. These are in-
stances where, in the opinion of Dr. Mann, opportunity for concentration in-
286
quiries exist wliicli can have particular policy significance. Each of these, it is
now contemplated, would take about a year to conaplete; combined, it is esti-
mated that they would consume three economists and three research assist-
ants, full-time, for a year. With respect to automobiles and steel. Dr. Mann is
now reviewing the question of whether these industries should remain within the
concentration study project. He presently expects that this consideration will
result in his conclusion that the commitment of Commission resources in these
study areas would not be justified, all things considered. The question of
whether, and in what manner, the chemical industry should be treated in the
concentration project is in the early stage of consideration.
In the Commission's letter to Senator Hart of October 13, 1970, it was pointed
out that the purpose of expediting the "planning phase of the energy portion
of the concentrated industries study" was the development of information "which
will assist the Commission in developing the further scope of our intended inves-
tigation in this field."
We now turn to a discussion of the material now available — the two attached
memoranda — which will hopefully be of assistance to the Commission in its
evaluation of the future scope of its energy activities.
C. THE BUREAU OF ECONOMICS' PROPOSED STUDY PROTOCOL TITLED "MARKET BOUNDARIES
IN THE ENERGY SECTOR OF THE U.S. ECONOMY"
As we have previously explained, there are two rather lengthy attachments
to this memorandum. One of these — the subject of this immediate section of our
memorandum — is the Bureau of Economics' Proposed Study Protocol titled
"Market Boundaries in the Energy Sector of the U.S. Economy." We would
like to briefly comment upon its development and significance.
At the time that the Commission directed that the Bureau of Economics ex-
pedite the planning phase of the energy portion of the concentrated study, it
took other action which, as a practical matter, affected the directions taken by
Economics as reflected in its attached Proposed Study Protocol. Our memor-
andum of October 5, 1970 — specifically responding to an inquiry formulated by
Chairman Kirkpatrick — devoted a good bit of attention to inter-fuel mergers
and extensions within the energy field, particularly oil company acquisitions
into the coal area. In summarizing our recommendations for an energy program,
in our memorandum of October 12, 1970, we proposed :
"That the Bureau of Competition be directed to give special priority to
currently pending merger investigations in the energy field and that it be
requested to present to the Commission, as soon as possible, its contem-
plated recommendation of a special project approach to energy mergers,
which might include attempting to secure the transfer of certain energy
merger matters from the Department of Justice to the Commission."
This recommendation was approved by the Commission and, similar to the
Commission's direction with respect to the energy study, was reflected in the
October 13, 1970 letters to Senator Hart and Congressman Evins. The letter
to Congressman Evins stated, for instance :
"Your letter specifically refers to merger transactions involving the extension
through acquisition of oil companies into the coal area. A number of mergers
of this type are presently under investigation by the Commission. Today the
Commission directed that the staff give exi>edited, priority treatment to
current merger activity in the energy field, including a number of pending
matter."
Following the Commission's initial consideration of energy problems at the
close of this past year (and its commitment to activities involving both the
Bureau of Economics and Competition), it became apparent that the development
of a soundly-based antitrust enforcement policy with respect to inter-fuel ex-
tensions and acquisitions would depend on the answering of some threshold
economic questions. These basically enforcement-oriented questions, arising out of
the initial inter-Bureau consideration of the energy problems, assumed immediate
and practical importance in Economies' planning of its course of study in the ener-
gy field. Accordingly, the study plan outlined in Economics' Proposed Study Proto-
col titled "Market Boundaries in the Energy Sector of the U.S. Economy" is di-
rected to policy issues which are of enforcement significance and which — in one
important area — the Bureau of Economics feels can be managed rather expedi-
tiously. In prefacing that portion of the draft protocool which describes its actual
"Study Plan," the Bureau states :
287
"Listed below are areas to be studied whicli the Bureau of Economics believes
can be handled with its available resources — and are necessary and vital to
any merger enforcement effort contemplated by the Commission."
The particular focal points of the study project then described, based upon the
data and analysis presented earlier in the Proposed Study Protocol are: (1) an
investigation into market definition in the energy area, looking primarily to sub-
stitutability among the different fuel sources, (2) Based upon such a market
definition inquiry, a determination of whether energy mergers of various types
should be viewed as esseutiallj^ horizontal or conglomerate, and (3) Consideration
of the likely research and development impact of inter-fuel acquisitions and ex-
tensions within the energy field.
It is the judgment of the Bureau of Economics that the inter-fuel substitut-
ability area can be adequately investigated — and the associated market definition
conclusions drawn (with the effect of producing a classification framework within
which to view energy mergers) — rather quickly and with somewhat limited
resource expenditure. The Director of the Bureau estimates that, utilizing largely
public resources, the contemplated "market boundaries" study could be completed
by one senior economist in three months.
Also encompassed within the existing Bureau of Economics' protocol — intended,
again, as an enforcement-related project- — is an investigation of the research and
development impact of the inter- fuel energy mergers. The Bureau points out that,
"ro obtain the data necessary to evaluate the theoretical possibilities" in this
area "a 6(b) questionnaire would be required as well as a substantial commitment
of legal resources to insure a meaningful response." We have difficulty in esti-
mating the resource costs and timing which would be involved in the research
and development portion of the course of action which Economics proposes.
Surely, there would be delay, and substantial costs in legal time, associated with
an effort to obtain research and development information from the companies
who have extended into competing energy resources. Our best estimate is that the
research and development inquiry proposed by the Bureau, were it to be under-
taken, would not be completed for roiighly II/2 to 2 years, and that i.t would con-
sume substantial resources in the process — i.e., probably a year of attorney time
and at least a year of economist time, as well as research assistance help.
While the Bureau of Economics Proposed Study Protocol suggests a dual probe
into energy market definition and the possiblities of competitive dislocation in
research and development, it is important that these two. workably distinct
study areas be viewed and considered separately in terms of resource demands
as the Commission defines its energy commitment. In the broader memorandum
which we have prepared, we discuss position of research and development issues
within the larger energy list. Like the Bureau of Economics we believe that the
research and development inquiry (as well as the more immediate market
boimdary investigation) could have great policy significance.
Another observation should be made, nith respect to the enforcement-oriented
course of study represented in the Bureau's Proposed Study Protocol. Review of
the correspondence from Senator Hart and Congressman Evins, and the mate-
rial submitted to us by the TVA group, shows that — as much as anything else —
their central focus is the possible anticompetitive or "monopolistic" problems as-
sociated with oil company acquisitions and other extensions into competing en-
ergy sources. Thus, the thrust of the Bureau's Proposed Study Protocol — the
answering of two basic enforcement-related questions arising out of the develop-
ment of the "energy company" — is on all fours with one of the major areas of
concern which has been emphasized to us by outside sources. The fact that we
have now received complete clearance from Justice on the Continental Oil-
Consolidation Coal transaction (discussed at pages 33-34, and 39 of our Memo-
randum of Oct. 5, 19701. brings vividly again the fact that priority should
be afforded by the Commission to the addressing of those questions whose reso-
lution is a prerequisite to intelligent merger policy.
D. BACKGBOUND TO ATTACHED MEMORANDUM ENTITLED "POSSIBLE DIMENSIONS OF A
COMMISSION ENERGY STUDY
One need only to have glanced at this week's edition of Time magazine in order
to have been glaringly confronted again with the question of our national energy
polic.v — and the sense that it leaves much to be desired in terms of coordina-
tion and farsightedness. The article, titled "Getting More Power to the People."
asked the question "Whatever became of the great energy shortage?" It answers
288
the question by pointing out its likely recurrence unless the United States can
develop a better approach to energy problems. The assertion is made that :
"To escape a real crisis next time around, the Nixon Administration must
begin now to draft a coherent national energy policy. It must measure the
nation's real energy needs for the foreseeable future and determine what
combination of Government price-regulating programs, import controls and
conservation measures will be required to fill those needs."
Essentially, the article goes on to compare future energy demand against some
of the existing information on reserves and production capacity. These compari-
sons frame certain important policy questions which are emphasized, including :
1. What energy sources should the U.S. develop most intensively?
2. Should the nation tighten or loosen its limits on foreign oil?
3. What other foreign sources can be developed?
These questions, of course, go essentially to the question of fuel supply. In con-
clusion, the Time article declares :
"Whatever the specifics, the prime essential of a national energy policy
is that all pieces fit into a sensible pattern of fuel production and use. The
present lack of policy is leading to a combination of intermittent shortages
and soaring prices. If it continues, the nation may find itself starving for
energy in the midst of potential plenty, and paying an exorbitant price as
a result."
There is a cryptic reference to the "uncoordinated, sometimes conflicting and
occasionally inept programs carried out by half a dozen highly independent
agencies." Policies of Interior, FPC, and AEC are criticized as adversely affecting
fuel prices and the development of reserves. Perhaps not too surprisingly, there is
no mention of antitrust policy issues — nor even a reference to the FTC or Justice.
Another interesting, general article in the energy field titled "Cold Facts About
the FUEL SHORTAGE" {Consumer Reports, February 1971) states:
"Much of the blame for this winter's rising electrical and fuel prices —
and for any critical shortages that may develop — rests with hydra-headed,
uncoordinated, industry-oriented regulation."
Again here, the familiar questions about public policy are raised. Did the AEC
prematurely push the importance of nuclear energy, and diminish the develop-
ment of coal reserves? Are the development of natural gas reserves being impeded
because of FPC's setting of unrealistically low prices? (Or, could producers be
withholding reserves in anticipation of future gains?) What about the impact
of foreign quotas ; and, if they were eased, how great a problem would be present-
ed by a tanker shortage?
The article provides an interesting, sharply-focused summary of the forces
of public policy in the energy mosaic, stating :
"The energy crisis is traceable largely to hydra-headed and uncoordinated
government regulations.
"The Texas Railroad Commission and the Louisiana Department of Con-
servation largely determines how much domestic crude oil will be pumped
from the ground.
"The Interior Department administers coal mine safety standards, oil
quotas, and the development of off-shore oil wells and vast, untapped lodes
of shale oil.
"The Atomic Energy Commission lobbies for atomic energy.
"The Interstate Commerce Commission affects the coal industry through
its regulntion of the rafi^-oarl^.
"The Department of Health. Education and Welfare has jurisdiction over
air pollution standards.
"The Federal Power Commission regulates the interstate price of natural
gas.
"State public iitilitiy commissions regulate the local price of natural gas.
"The .Tustice Department and the Federal Tr-ade Commission enforce the
antitrust laws under which oil companies have been allowed to enter the
coal and unnium business. The oil indnstrv now owns 2." percent of the
nation's coal production and 45 per cent of its known uranium reserves.
"The Tr<''asurv Department administors and interprets tax laws that hfive
an important bearing on domestic oil and gns exploration. (A Treasury
Department ruling, for example, has actually encouraged hnsre international
oil companies, such as Jersey Standard. Gulf, Texaco and Mobil, to explore
for oil overmen s instend of at home by deducting overseas royalties from
their Federal income taxes. ) "
289
Here, of course, the relevance of antitrust policy in the total picture is brought
out.
The need for intense governmental study of energy policy is quite clear, what-
ever efforts that may be made in the private and academic sectors. There have
been congressional proposals (e.g., Senate Resolution 45) suggesting that the
Congress undertake, or commission, a special study of energy policy. Tlie proposi-
tion has been advanced tliat the FTC — because of its economic expertise and
investigative tools — could take on a massive special energy study, requiring the
appropriation of substantial funds." It will be recalled that representatives of
the TVA group have evidenced a great interest in having tlie FTC consider a
massive, general study of national energy policy. It is in this climate that the
Commission now considers the structuring of its energy program.
Our memorandum titled "Possible Dimensions of a Broad Energy Study" is
intended to assist the Commission in this process. With the assistance of Dr.
Mann, we have prepared a discussion of the dimensions which, we feel, a com-
prehensive economic energy study could have. Both in terms of scope, and tlie
resources which would be required, it goes substantially beyond the project
whicii is outlined in the Bureau of Economics' Proposed Study Protocol.
Our point here is one of enabling the Commission to review the sorts of
issues which, we feel, could be addressed in a general economic inquiry into fac-
tors relating to national energy policy — including not only antitrust policy, but
also the question of fuel supply as such, which involves the roles of governmental
agencies affecting the energy picture. Our discussion is not, and is not intended
to be, an in-depth exploration of the various areas which might be examined in
a compresensive energy study. Rather, it is an attempt to identify tiiem and
to provide our best estimate of the resource demands which would be likely to be
associated with their study. Our discussion of the roles of other governmental
agencies will be brief, but an analysis of their performance would be vital in a
compresensive energy study.
At the close of the attached memorandum, we will summarize the alterna-
tives which we have described, and the resource costs which we feel would be
associated. We will then propose a course of action for the Commission to fol-
low in tiie study of energy.
E. CONCLUSION
At the close of our more lengthy attached memorandum titled "Possible Di-
mensions of a Commission Energy Study", we have (1) reported on the exist-
ence of certain energy projects and studies to which other groups are committed,
(2) summarized, in tabular form, the energy study options which we envision,
together with associated resource cost estimates, and (3) presented some recom-
mendations as to the approach which, we believe, the FTC should now take in
the energy area. In so doing, we have attempted to place into a somewhat larger
perspective the current study proposals which are contained in the attached
Bureau of Economics proposed study protocol titled "Market Boundaries in the
Energy Sector of the U.S. Economy."
As our attached memorandum desci-ibes in more detail, we have recommended
that our concentrated industries project dealing with the energy industry be
comprised of the four study components which we have discussed as appearing'
feasible in light of our existing resources. These study areas, as designated in our
memorandum, are : market boundaries inquiry ; industry structural analysis in
terms of production data ; effects of structural change on market power (profit-
ability study) ; and effects of structural change on new investment and R&D.
In addition to making a recomm.endation as to the scope of the concentrated
industries study in energy, we have discussed other areas of possible economic
study which, although they could have great policy significance, are clearly not
manageable in light of present Bureau of Economics' and Commission resources.
These areas, as designated and discussed at length in our attached memorandum,
are: industry structural analysis in terms of reserve data: and a long-terns
fuel sunply study. With respect to them, we have recommended that the Com-
« Some commentaries on the need for a national enerjry study have specifically empha-
sized, however, that such a study should be lodged in an entirely independent resenrch
body. The Edison Electric Institute, for instance.' commenting on S. Res. 45. said : "The
study should be performed by an independent research body. Many Federal agencies have
regulatory and. in at least one instance, supplier responsibilities in various fuel and
energy fields. In certain instances, several agencies have regulatory responsibilities in
the_ same energy field. Thus, while it would be proper to utilize the services, information,
facilities, and personnel of any of the departments or agencies of the Government, we
believe the most effective study can be provided by an independemt body."
290
mission now consider wtiether it wishes to undertake a special, more massive
energy study — one that would clearly require special congressional appropria-
tions for the puii)ose.
However, its plans for study in the energy area are to be structured, we regard
it as most important for the Commission, as expeditiously as possible, to deter-
mine the study course that it would like to take, and whether or not it would like
to make special efforts toward obtaining funding for a study which would exceed
our present resource capabilities.
Hopefully, based upon our memorandum and the Bureau of Economics pro-
tocol, the Commission w^ll shortly be in a position to chart the course of its
energy study and make its plans publicly known. In the course of amiouncing
its plans for further energy activity, the Commission might wish to indicate
publicly that we have now obtained complete clearance from the Justice De-
pai-tment with respect to the Continental Oil-Consolidation Coal merger, and
that this is one of the matters which is presently under consideration and to
which our immediate economic analyses will have relevance.
Respectfully submitted,
Lawrence G. Meyer,
Director.
Fred L. Woodworth,
Assistant Director.
Edward J. Heiden,
Economist.
Attachments: (i) Office of Policy Planning Memorandum on the Possible Di-
mensions of a Commission Energy Study :
(ii) Bureau of Economics Proposed Study Protocol on Market
Boundaries in the Energy Sector of the U.S. Economy.
Attachment 1
Memorandum — ^April 22, 1971
To : Commission.
From : Office of Policy Planning and Evaluation.
Si;bject : Possible Dimensions of a Commission Energy Study.
introduction
In this memorandum we will present, admittedly in a preliminary manner, a
discussion of those policy areas which could be included in a broad economic
study of the energy area. Our point here is one of enabling the Commission to
review the sorts of issues which, we feel, could be addressed in a general eco-
nomic inquiry into factors relating to national energy policy — including not only
antitrust policy, but also the question of fuel supply as such, as well as the roles
of governmental agencies which affect the energy picture. Our discussion is not,
and is not intended to be, an in-depth exploration of the various areas which
might be examined in a comprehensive energy study. Rather, it is an attempt to
identify them and to provide our best estimate of the resource demands which
would be likely to be associated with their study.
There is no assiunption here about the extent to which the FTC can and should
stduy energy. Clearly, within the context of the concentrated industries project, a
substantial effort is going to be made by our Bureau of Economics. Utilizing the
framework which is iirovided in this memorandum, we feel that the Commission
can examine the energy study alternatives presented, in light of our best sense
of: (1) Those areas which seem manageable with present resources, and (2)
Those which are so massive that we could not undertake them without special
funding. As to these latter areas — largely involving such things as the study
of fuel resen-es, and the interplay between governmental activity and the ade-
quacy of fuel supplies — there is a basic question as to the role which the FTC
should play, in light of our own responsibilities and those of other agencies. In
this regard, it is important to be aware of the types of energy studies and analyses
which are being undertaken by others.
We believe that this memorandum will assist the Commission in reaching a
determination as to the position which it would like to take in energy affairs,
and — should it wish to do so — in preparing requests for additional funding or
possible suggestions for interagency projects.
291
In our view, a comprehensive economic study of the energy industry and,
energy policy issues could be organized into two basic sections. The first of these
would focus on market structure and on the extent and trends of concentratioiE
within energy markets. As will be more fully discussed subsequently, the ques-
tion of looking into concentration in the energy field can have a dual nature. The
area can be approached either from the viewpoint of actual production or fronx
the standpoint of reserves ownership and control — or both. The second poi-tion of
a major enei-gy study following an iiiquiry into structure and structural trends,
would be oriented toward questions of industry performance. The performance
portion of the type of inquiry which we contemplate would include such basic
suggestions as : profitability ; patterns of new investment and research and de-
velopment activity ; and the vital question of long-term fuel supply, i.e., the way
in which the developing industry picture is likely to affect the actiial supply of
fuels by the industry to its consumers. For purposes of organization, we will
structure this latter performance area to include questions as to the manner in
which the various sources of federal governmental jjolicy have an effect on fuel
supply and the likely course of the fuel supply for the future.
/. Structural elements tcithin a study of the energy industry
In our view, there are two basic issues which lie at the heart of an investiga-
tion of those elements of structure which can affect performance in the energy
industry. Of immediate importance is the question of determining the extent of
competitive boundaries within the various sectors of the industry. No assessment
of the state of future competition within the industry can be made until it is
determined what forces shape the competitive interchange among the various
fossil fuel, and nuclear energy sources. Upon determination of the levels of
effective competition among the various energy sources, the second phase of a
structural study would consist of an investigation aimed at measuring existing
concentration and concentration trends within the different energy sources.
Here, substantial attention would be focused upon the roles of the major petro-
leum concerns and large conglomerate firms as significant and growing factors
as regards the supply of non-petroleum energy sources. An analysis of the posi-
tions of these entities, as present and future suppliers of the different energy
sources, could be approached from the standpoint of both present production
as well as reserve ownership. We will separately discuss each of these avenues
of structural investigation, explaining our judgment as to the magnitude of
resource expenditure which would be associated with each.
A. The determination of market boundaries in the energy sector
There are three critical areas which should be examined in a study of substi-
tutability among the various fuels. First, is the question of the extent to which
the broad user groups actually are able to view and utilize them as substitutes
(demand substitutability). Second, is the issue of the extent to which energy
suppliers are able to choose between the various fuels at the production stage
(supply substitutability) ; and third, is an investigation of the extent to which
transportation and geographical considerations determine the pattern of user
and supplier substitution within national or regional contexts.
Study of demand substitutability would focus on the degree of fuel inter-
changeability among the users of energy sources in four broad economic sectors :
(1) utility, (2) household and commercial, (3) transportation, and (4) industrial.
From an initial review of the available data, it appears that fuel-use statistics
are most precise and reliable for the electric utility sector, which accounted for
approximately 22% of total BTU consumption-use in 1969, but whose im-
portance is further enhanced by the fact that electric utility output itself con-
stitutes an important additional energy source for the other three sectors. Major
sources for these data include: 1) the publications of the Bureau of Mines; 2)
Steam Electric-Plant Factors, published by the National Coal Association : and
3) the Edison Electric Institute Yearbook, compiled by the Edison Electric In-
stitute of New York City.
Although the data do not seem to reveal any large-scale aggregate substitution
of one energy source for another within the recent pa.s^t (See Table 1 attached
hereto), there are indications of substantial and increasing demand elasticity as
regards individual utilities' selection of energy sources for established plants.^
1 One author argues that Inter-fuel substitution of individual users is largely traceable
to changes in their own production techniques. See William A. Vogely. "Pattern of Energy
Consumption In the United States," American Chemical Society Papers presented at De-
troit, Mich., Apr. 4-9, 1965, Vol. 9, No. 2.
292
A second type of increasing inter-fuel substitutability is evidenced by tlie in-
creasingly intense rivalry between manufacturers of nuclear generating capacity
and fossil-fueled capacity in their attempts to capture the new-installations utility
market. Simultaneously, it would appear that increasingly stringent air pollution
controls are tending to reduce the attractiveness of coal as a fuel source for
utilities.
In the household and commercial market, the principal competition between
the fuels takes place in the heating area. In the main, competition occurs in the
bidding for heating systems in new construction rather than heating systems in
-existing structures. Home-owners and commercial establishments are not likely
to switch heating systems and fuel use (e.g., oil to electricity) in response to
slight or even moderate changes in the relative prices of the fuels. This is because
the costs of switching systems are large and the cost savings benefits of switching
are likely to be relatively small. In short, high transfer costs involved in a shift
to another fuel tend to prevent household and commercial consumers from
responding to changes in relative fuel prices.^
Reflective of changing fuel use patterns in the household and commercial sector,
some available empirical evidence shows a continuation of the prior trend away
from coal consumption. Based on data presented in Table 2, attached hereto,
between 1964 and 1968, coal consumption decreased in absolute terms by about
20%. while all the other energy sources registered substantial gains (natural
gas, 20% ; petroleum, 27% ; and electricity, 38% ) .
In the transportation sector, there seems to be little substitutability among
fuels. The consumption of coal by railroads fell from 132 million tons in 1944 to
2 million in 1960, after which it was so .small that data were no longer collected.
Since airplanes and automobiles use petroleum virtually exclusively, petroleum —
for all practical purposes — supplies the entire energy needs of the transportation
sector.
Within the industrial sector, natural gas and coal are the most important
present sources of energy, closely folowed by oil. Among the several fuels, re-
cent usage increases in the indtistrial sector have differed stibstantially. Based
on data presented in Table 3, attached hereto, between 1964 and 1968, total coal
consumption (in absolute terms) increased 3%, gas 25%. petroleum 7%, and
electricity 32%. Although more recent data are not available at this time, it is
believed that air pollution controls have caused coal use by the industrial sector
to continue its low rate of increase relative to other energy sources .since 1968.
A study of supply substitutability must focus, in large part, on the extent to
which current or predictable changes in technology will, in the future, allow
fuels to the substituted for other energy sources. There is substantial current
technological development of this type affecting the energy area ; presently coal
can be converted into both oil (liquefaction) and natural gas (gasification).^
There is little doubt that this process will be commercial in the very near future,
and the major companies are active in the area."
Presently, gasoline produced from coal costs only a few cents more than gaso-
line produced from crtide oil. The increasing ability of the industry to produce
synthetic fuels from coal strongly suggests — at least as a threshold premise —
that coal and natural gas. and coal and oil, are, more and more, becoming sub-
stitutable on the supply side.
The third important inquiry, we feel, in a study of substitutability between
the various fuels involves determining the extent to which transportation and
- Pietro Balestra, The Demand for Natural Oas in the U.S., North-Holland Publishing
Co.. 1967. pp. 49-50.
'' For a review of the kind of technological developments which could increase the
degree of substitution within the near future, see Warren E. Morrison and Charles L.
Reading, An Energy Model for the United States, Featuring Energy Balances for the
Years i.<),J7 to 1965 and Projections and Forecasts to the Years 1980 and 2000, Washing-
ton, D.C.. 1963. pp. 17-18.
* In this connection, an article in Chemical Week, .Tune 15, 1968, p. 41, Indicated :
"FMC Corp. last week said that before the month was up it would sign up the con-
tractor for a 25-tons/da.v pilot plant" to produce crude oil from coal.
'"H.vdrocarbon Research . . . has had a .'^.-tons/day pilot plant for severals years . . .
(Edwin Lang, executive VP) figures coal-derived oil should be used at a 200,000-bbls/day
rate by '74."
Atlantic Richfield has a .iolnt research project with Hydrocarbon Research aimed at
facilitating production of '"liouid, petroleum-type products."
American Oil evaluated HRI process and estimates gasoline production cost of 12.10/
gallon as opposed to HRI's estimate of 11.5«?/gallon.
Humhle "has already invested $20 million in coal research and coal resources."
"Another Jersey affiliate, Esso Research . . . has formed a Synthetic Fuels Research
Dept.'" to develop process to produce gasoline from coal.
293
geographical considerations affect demand and supply snbstitiitability within
regional or local market contexts. Data which are currently available for fuel
interchange on a natioanl bi'sis may simply not be refJective of what is occurring
at the regional level.^ Thus far, to our knowledge, there has not been any syste-
matic study aimed at exploring energy market boundaries on a regional or local
basis.
In addressing the market boundaries question on a smaller than national basis,
we would anticipate that it will probably not be possible to fully determine pre-
cise regional interchangeability delineations for the various energy sources. We
do. however, anticipate that meaningful regional approximations can be devel-
oped, relying on geographic area data available from the Bureau of the Census
and individual statewide breakdowns from the Bureau of Mines. In addition,
there are certain academic studies of industrial organization problems within
the individual energy sectors " which, we feel, can be helpful in this regard.
We believe, similar to the Bureau of Economics, that an investigation of mar-
ket boundaries in the energy sector is a particularly important first step that
should be taken within the total context of our energy investigation opportuni-
ties. It would not only establish a necessai-y framework within which to assess
tlie important issues of petroleum and other conglomerate participation in the
other fuel areas, but it would also be of assistance in detennining the appro-
priate market definition approach for any antitrust proposals which might pos-
sibly result from current investigations of energy mergers. Based on an initial
inspection of available data, it appears that the area of market boundary deter-
mination could be addressed within the relatively near future by relying almost
entirely on existing public sources.
An investigation of this threshold issue of market boundaries can be initiated
immediately by the Bureau of Economics. This particular opportunity for energy
study has also been treated at length by the Bureau in the Proposed Study
Protocol which it has prepared. Within a three-month period, the Bureau expects
that it would be in a position to produce a study of inter-fuel substitutability —
with particular emphasis on the utilities sector — -which would form the basis of
a Commission position as to whether energy should be viewed as one market or
several.
B. The measurement of concentration in the energy sector
A major second component within the structural portion of a comprehensive
energy study would consist of an attempt to measure carefully existing concen-
tration and concentration trends — focusing in large part on the extent of oil com-
pany and conglomerate participation. The development of interfuel energy com-
panies under oil company or conglomerate control could offset the pro-com-
petitive implications which one would normally asosciate with inci'easing fuel
sulistitutability and the resulting widening of market boundaries in the energy
sector. If petroleum firms and other multi-fuel entities become the dominant
suppliers of the alternative energy sources, it could be that an anticipated
heightening of inter-fuel competition might not be realized to the extent that
could otherwise be expected.
Assuming the existence of a commitment, as part of an energy study, to ex-
plore existing concentration and the significance of concentration trends in
energy, a very significant question of methodology appears — one that has great
significance in terms of project resource cost. There are essentially two basic
ways of viewing the extent of petroleum company and other participation across
the broad spectrum of the total energy industry, and thus attempting to explore
the competitive significance of the emergence of the total energy company. The
first method is to develop structural informtaion based on production ; the sec-
ond is to attempt the employment of data based on reserves.
The difference between the usage of production and reserve data, in attempt-
ing to develop a meaningful long-run picture of the structure of competition in
the energy sector, is not merely an academic detail. Preliminary evidence, for
in-tance. indicates that reserves are not necessarily translated into current pro-
» For example, while national data may show substantial inter-fuel substitutability
for the electric utility sector, in the West South Central Section of the U.S. nearly all
generation is by the use of natural pas.
" See, e.g., Reed Moyer, Competition in the Midwestern Coal Tndnstri/ (Harvard Press,
1964): Paul W. MacAvoy, Price Formation in Natural Gas Fields (Yale Press. 1962;
Leslie Cookeuboo. Competition in the Field Market for Natural Oas (Rice Institute Pam-
phlet: No. 4, 195S ; Edward J. Nenner, The Gas Industry (University of Oklahoma
Press. I960) ; and De Chazeau and Kahn, Integration and Competition in the Petroleum
Industry (Yale Press, 1959).
294
dnction at similar rates by their owners ; thus, the two different bases for
assessing companies' participation, over time, in the energy industry could yield
different results. In 1970, for example, oil companies are reported to have held
about 45% of known uranium resei-ves, but only about 33% of plant capacity for
processing those reserves.^
A sample group of four oil firms (Atlantic Richfield, Humble, Texaco, and
Sunoco) were found, upon our inspection of some preliminary data, to hold ex-
tensive coal reserves (about 5% of the national total), but none of them was
engaged in current production. (The Humble Oil Company has been reported to
own over six billion tons of coal reserves, giving it third position, in terms of
reserves, among all coal producers and reserve holders.) Some reserve-holding
companies do not appear in production statistics at all because they lease coal
fields to production companies.
To the extent that the industry pattern of reserve holdings differs from the
current pattern of owner production, the measurement of industry position based
on reserves is probably more revealing about the state of future competition
than the data based on current production. In terms of resource demands, a con-
centration study based on production would be infinitely less massive than an
effort w^hich would attempt to survey and analyze reserve ownership and control
data. We wish here to discuss each of these energy study possibilities separately,
emphasizing the nature of the data sources, and the difficulty of the study which
would be involved.
S. The eimluation of concentration nf terms of production
Data on concentration, in terms of sales and production in the energy industry,
re available for all four energy sectors. We will discuss the data sources rel-
evant to each — petroleum, natural gas, coal, and nuclear.
(i) Petroleum. — Production and production capacity information on an individ-
ual firm basis for petroleum is available from several sources. Among these are :
National Petroleum News; the annual reports of individual petroleum firms;
the Oil Import Administration and Bureau of Mines within the Department
of the Interior; Moody's Industrial Manual (annual issues) ; Oil and Gas Journal;
Fortune's Plant and Product Directories, 1963 and 1965; and the Market In-
dicators series of Dun and Bradstreet. As we have previously mentioned, trans-
portation considerations (such as pipeline configurations) affect the shaping of
market boundaries within which concentration should be evaluated in regional
terms, as well as in national terms. Using the data sources indicated above,
together with certain source material which might provide some help in the
exploration of the regional nature of petroleum markets.^ we estimate that Bureau
of Economics could develop a fairly definitive picture of petroleum concentration
in regional terms.
(ii) Natural gas. — Again, as with petroleum relevant competitive markets
appear to be largely regional in nature.* In the case of natural gas, however, data
which would facilitate regional concentration analyses do not seem as readily
available as they are for coal and petroleum. The basic production and sales data
which are available come from the Federal Power Commission, in its annual
publication entitled Sales hy Producers of Natural Gas to Interstate Pipeline
Companies. However, these data have serious weaknesses for the purpose of
evaluating concentration trends in terms of regional markets. This is because
intrastate sales of gas are omitted from the FPC data. Although the exact size
of the intrastate market is unknown, the FPC estimates these sales to be about
% of the total national market. Others have placed the figures closer to 40%.
Omission of these sales could be of considerable importance since, for example,
it has been indicated that, in the Texas intrastate market, production concen-
tration is higher than in the national market. We do not know, at this time,
whether intrastate sales data can be obtained from the important producing
states. There have been possibly helpful academic studies relevant to an at-
tempt to delineate regional market boundaries in natural gas, and to identify
production concentration trends within them.^"
'U.S. Atomic Energy Commission, The Nuclear Industry; 1970 (Government Printing
Offifo, 1070). pp. 41. 3.
8 E.g., DeChazean and Kahn, op. cit.
9 The regions accounting for the bulk of production are: the Texas-Louisiana Gulf
Coast, the Texas Panhandle and adjacent portions of Western Oklahoma and Kansas, and
the West Texas-Eastern New Mexico region. Points of origin are relatively distant from
principal points of consumption in North Central. Northeastern and West 'Coast regions.
•"Paul W. MacAvoy, Price Formation in Natural Gas Fields: A Study of Competition,
Monopohi and Regulation (Tale Press. 1962) ; Leslie Cookenboo, Competition in the Field
Mnrl-et for Natural Gas (Rice Institute Pamphlet: No. 4, Jan. 19.58; and Edward J.
Neuner, The Natural Gas Industry (University of Oklahoma Press, 1960).
295
(iii) Coal.— The presence of significant transportation costs also suggests that
the development of production concentration data in coal should reflect the re-
gional nature of coal markets as a supplement to the national data. Production
information is available on an annual basis from "U.S. Coal Production by
Company," compiled and published by McGraw-Hill in the Keystone Coal In-
dustry Manual, as well as from the American Coal Association Bitumowus Coal
Fact Book ; and trade journals such as Coal Age. The market boundaries of con-
centration have already been discussed in the case of the midwestern coal mar-
ket ^ ; it seems likely that the midwestern study could provide a useful method-
ological framework for investigating other regional markets as well.
(iv) Nuclear power.— Unlike the other three "energy" areas, the market
boundaries which circumscribe competition in the nuclear fuel industry appear
national rather than regional. Though production is concentrated within a
relatively small geographic area in the far West, transportation costs contribute
only a small fraction of total production value and thus do not impose regional
limits on competitors. Data on production concentration within this national
market framework are available from : the U.S. Atomic Energy Commission. The
Nuclear Industry, 1910. Washington, 1970 (and earlier annual issues) : Arthur D.
Little Company "Report to Atomic Energy Commission and Department of Jus-
tice," Competition in the Nuclear Power Supply Industry (Washington: GPO),
1968; and Engineering and Milling Journal, McGraw-Hill, March 1970. An indi-
cation of current large firm participation in uranium milling and production
capacity is given in table 4, attached hereto.
(v) Summary. — In our earlier memoranda dealing with energy problems, we
presented some preliminary data dealing with existing concentration and con-
centration trends within the energy sector. It appeared then that the energy
industry is redirecting a significant trend toward increasing concentration, and
the growth of the positions of major petroleum companies across the entire spec-
trum of the energy industry. The Proposed Study Protocol which has been pre-
pared by the Bureau of Competition contains a substantial amount of presently
available infomiation on energy concentration, dealing largely at the national
level. Clearly, any Bureau of Economics study concentration in the energy
sector would attempt to definitively update, refine, and gather together any
available information in industry concentration in terms of production and
sales. The supplementation of the presently available national production and
sales information with regional developed concentration data — which seems to us
a prerequisite for a meaningful structural inquiry into coal, petroleum, and
natural gas — could present some diflBculty. We estimate, however, that the fairly
wide availability of public data, together with some existing studies examining
structural Issues such as the nature of regional markets, would keep the dimen-
sions of this type of effort within manageable proporitons. We estimate that one
economist, working less than a year (and with the aid of a statistical assistant)
could, relying almost entirely on public data, produce a significant study of pro-
duction concentration and trends within the four individual sectors of the
energy industry.
2. Evaluation of Concentration in Terms of Reserve Oioership and Control
As just indicated, an industry concentration inquiry looking basically to pro-
duction data — even one focusing upon regional markets — seems manageable in
terms of Bureau of Economics' resource commitment. A structural industry study
going to the ownership and control of energy reserves, however, would be quite
a different story. As we have pointed out, viewing competitors' positions in terms
of reserves may well be of greater long-run economic significance than classifying
them in terms of current or recent production. With the thought that a really
comprehensive energy study could well include a detailed exploration of reserve
ownership patterns — examining reserves in the aggregate and on a company-by-
company basis — we will here discuss the present sources of information and
difficulties associated with exploring reserve ownership information for nu-
clear fuel and the fossil fuels. Our prior work in natural gas reserve reporting
leads us to deal at greater length with the availability, and methods of reporting
for gas reserve information than for the other fuel sources.
(i) Natural gas. — The basic source of natural gas reserve data for the U.S.
is the American Gas Association (AGA). Through its Committee on Natural Gas
Reserves, it annually gathers and publishes a comprehensive estimate of gas re-
serves, cooperating in this endeavor with the American Petroleum Institute
"^ Moyer, op. cit.
27-547—74 20
296
(API) and the Canadian Petroleum Association (CPA). Reserve information is
puliiisbed in a volume entitled "Reserves of Crude Oil, Natural Gas Liquids, and
Natural Gas in the United States and Canada and the United States Productive
Caiiacity." The most recent annual volume in this series is dated May 1970, vphich
reports on oil and gas reserves estimated as of December 31, 1969.
The AGA gas-reporting Committee is composed of 14 members : a chairman,
vice chairman, a secretary, a representative of the Bureau of Mines of the U.S.
Department of the Interior, and 10 members drawn from among the ranks of the
oil and gas producers. For reporting purposes, the United States is divided into
10 districts or areas. Each one of the 10 I'egular Committee members is assigned
a district as his area of responsibility, for which he is Area Subcommitee Chair-
man. In carrying out his responsibility, each Chairman of an Area Subcommittee
draws upon a membership composed of geologists and engineers from the oil and
gas industry. The Area Subcommitees each have the responsibility for developing
a total ''proven gas reserve" figure for one of the 10 geographic districts.
The member of the main Committee, who is also the Chairman of the Area Sub-
committee, assigns the known fields within his district among the several Sub-
committee members, whose assignments may cover properties owned by their
employers, as well as properties owned by others. The reports of the individual
Subcommittee members are presented at a meeting of the full Subcommittee, and
are subject to review and discussion. On the basis of such review and discussion,
the Subcommittee then adopts a reserve figTire for each field within the geo-
graphical district, and the figures that are thus adopted are accumulated in the
Subcommittee report for that geographical district. In these reports to the Com-
mittee, only a total fignire from the respective Subcommittee is received, and the
Committee does not consider the field-by-fie!d estimates which are proposed by
individual Subcommittee members and reviewed by their respective Subcom-
mittees. Totals are published by state and subdivisions of states, but the individual
company ownership data and reserve estimates are kept confidential by each
Subcommittee." As we discussed tu our prior memorandum on the topic, there has
been criticism of the accuracy of the AGA-generated gas reserve data." Whatever
one's view may be about the sufficiency of the existing AGA and FPC data on gas
reserves — nationally, or on a regional basis — they do not provide a company-by-
couijiauy picture of industry participation in terms of gas reserve ownership and
control. An independent attempt to develop this type of structural industry view
would be a prodigious undertaking — organizationally, scientifically, and legally.
Executing an independent national gas reserves stud.v of any breadth would
require an ability to gather, understand and evaluate massive amounts of
geological data as it exists in the hands of the many producers who contribute to
the total natural gas supply. This would in elTect, require an effort resembling
in scope and magnitude that which is annually made by all the AGA Area Sub-
committees combined. Some idea of the scope of this sort of effoi-t can be gleaned
from the fact that the FPC is now preparing to carry out its own ongoing com-
prehensive National Gas Survey, having obtained a first year budgetary alloca-
tion of 22 people and some $340,000. It should be noted that the National Gas
Survey is not intended to provide public information about the reserves positions
of individual industry participants.
The presence of the AGA data, as supplemented by FPC activity, provides a
good deal of information on gas reserves n a nationally and regionally aggregated
basis. Attempting to secure reserves data on a company-by-company basis, how-
ever, would be an extremely l)urdensome undertaking.
(ii) Crude oil. — The primary source of crude oil reserve information for the
United States is the Committee on Reserves and Productive Capacity of the
American Petroleum Institute (API). According to API publications, this Com-
mittee is composed of petroleum industry management people, representatives
of industry-associated companies, and governmental participants."
12 TVyop other sources of informntion on natural gas reserves are available — all
SPPni-efl independently hy the Fedeml Power Commission. These are: (1) Annual Reports
(FPC Form No. 1.5)" of Interstate Pipeline Companies, which inclnrle statements of the
natural gas reserves under commitment contractnally : (2) Suhnussions in Pipeline Cer-
tification Proceedings, which involve proof of sufficient reserves when a pipeline seeks
authorization for a new project; and (ri) Litigated rate-making proceedings, for which
gas reserves issues and reserve data themselves are reported and explored to var.ving
degrees.
^" The Commission presently has open a preliminary investigation to determine whether
there is any substance to allegations as to collusion or other unlawful activity with respect
to natural gas reporting.
" American Petroleum Institute. Orgnn>::nfion and Definitions for the Estimates of
Resei-ves and Productive Capacity of Crude Oil, June 1970, pp. 2-10.
297
The organization and procedures employed iu crude oil reserve estimation
are very similar to those employed by the AmericiUi Gas Association in its esti-
mation of natural gas resei'ves. For crude oil estimates, the U.S. is broken
into 14 geographical areas and each area is assigned to a separate Subcom-
mittee. District Subcommittees have primary responsibility for the determina-
tion of reserve estimates in their areas. Since reserves of associated-dissolved
natural gas are closely related to crude oil reserves, close cooperation is main-
tained between the API and the AGA, including the sharing of basic data.
The crude reserve data are pubjisiied on state and regional bases rather
than iu terms of individual company ownership. The underlying company data
on estimated reserve ownership is afforded strict confidential treatment. Aggre-
gate data are published in the annual API publication entitled ''Reserves of
Crude Oil, Natural Gas Liqitid, and Natural Gas in the United States and
Canada."
Crude oil reserves are reported as either "proved"' or "indicated additional
reserves." The former designation is used for reserves which have been supported
by actual production or conclusive tests. The latter charactei'izes those reserves
where capacity for future production has not been conclusively determined.
From various contacts with other agencies and groups currently reviewing the
energy supply situation,'^ we have found a general lack of access to crude oil
reserves data on an indvidual firm basis. We understand, however, that some
fragmentary reserve data and projected reserve additions on an individual
company basis have been made available to the Cabinet Task Force on Oil
Imporr Control.^'
As was the case with respect to natural gas, an independent attempt to develop
information on crude oil reserves, on a company-by-company basis, would be a
massive and difficult undertaking, wholly apart from the obvious likelihood
tliat companies would not provide reserves ownership information without hav-
ing been forced to do so in litigation. Thus, an attempt to evaluate petroleum
structure in terms of reserves held by the industry participants would appear
to be a task of great magnitude — certain to involve the use of compulsory
process, on an industrywide basis.
(iii) Coal reserves. — There is no systematic collection of coal reserve owner-
ship data for individual firms. While data are available from the Geological
J^urvey of the Bureau of Mines on estimated coal reserved by geographical areas,
it does not, except in the most incornplete way. attempt to link reserve quantity
information with ownership.^' The only reserve ownership data for important
coal producers comes from the public reports of the companies and statements
of their top officials. Reserve estimates for the top 15 coal producei's are pre-
sented in Table 5 attached hereto, based on this type of information.
Part of the problem involved in attempting to measure reserve ownership by
individual firms is the inherent nature of mineral rights ownership. One com-
pany, for example, might own a parcel of surface land while another owns tlie sub-
surface mineral rights, or a limited leasehold interest in them for a term of
years. To further complicate the situation, a second company may hold a sub-
stantial minority interest in those holding mineral rights. Still another part of
the coal reserve information problem is that coal companies are not required to
file reports of land ownership (or mineral rights ownership) with the U.S.
Bureau of Mines.
Despite the above, there is some scattered information regarding individual
firm ownership of coal reserves.
Data reproduced in Tables 6 and 7 attached hereto, for instance, indicate the
leading coal positions of some of the nation's largest firms, including both steel
comjianies and firms involved in other energy sectors.^®
Some data are available on computer tape from the Bureau of Land Man-
agement dealing with coal permits and leases applicable to federal lands. This
producrion. however, accounts for only about 1% of the national total. The pat-
tern of private coal holdings on the federal domain for the larger coal com-
^^ These include : Office of Science and Technology ; Joint Committee on Fuel Supply
comp'r'sefl of representatives of Commerce, ICC. AEC. FPC and Interior, and operating
out of the Office of Emergency Preparedness ; and the Council of Economic Advisers.
1" Cahinet Task Force on Oil Import Control, TJie Oil Import Question, February 1970.
1' For a very helpful recent compilation of structural information on the coal industry,
includins a survey of available reserves information, see Laurence D. Beck and Stuart
L. Ra-svlincs. Coal: The Captive Giant. A Report on Coal Oicnership in the United States
(Washinjrton. 1971).
^* Included, inter alia, are: Bethlehem Steel; Ashland Oil: Southeastern Gas; Inter-
national Harvester; U.S. Steel; Occidental Petroleum: Kenuecott Copper; Consolidation;
Georgia Pacific ; Eastern Gas and Fuel ; Union Carbide ; and Pittston.
298
panies — as well as oil companies and large steel and utility firms — is presented
in Table 8 attached hereto.
Although the United States Bureau of Mines has not maintained substantial
information on the coal reserve holdings of individual companies, a study is
currently being undertaken by the Bureau of Mines' Fossil Fuels Division,
which will attempt to determine the known reserves of pollution-free, low-
sulfur coal, by asking companies to voluntarily submit this data. Completion
is hoped for by the winter of 1971.
Clearly, an attempt to obtain complete coal reserve information on a com-
pany-by-company basis would require a great resource expenditure. Attempting
to compel the numerous producing and reserve-holding companies to give ac-
curate figures on their known reserves would entail not only a considerable
legal effort in enforcing compulsory process, but also, since reserve quality is
not uniform in terms of variety and cost of extraction, considerable amounts
of geological and other technical expertise to analyze, collate, and compare
results.
(iv) Nuclear energy. — The Atomic Energy Commission is the major source
of statistics on domestic uranium reserves. The basic information is publicly
reported in the AEC publication. Statistical Data of the Uranium Industry. It
presents data on total uranium reserves, production levels, and drilling activi-
ties. The AEC does not publish the basic, underlying firm data. Reserve esti-
mates are computed by using confidential data provided on a voluntary basis
by the individual companies,^^ utilizing company engineering production, and
cost information. Only those reserves whose existence is supported by sample
data and which are indicated by cost analysis to be profitably recoverable are
included.
The AEC also published an annual review of the entire nuclear industry.^
It contains, inter alia, a comprehensive review of events in: (1) raw materials,
(2) processing and fabricating, (3) nuclear components and equipment, and (4)
reactors.
Initial inspection indicates that uranium reserve ownership patterns within
the industry cannot be established from the public AEC data listed above.
Although AEC olHcials, as a part of our recently-established liaison arrangement,
have shown a willingness to cooperate with the Commission in its study of the
energy industry, they have explained that — because of the confidentiality of the
underlying company data — they may not be in a position to make it available.
The matter is still in the exploration stage at the time of this report.
In our judgment, it is unlikely that individual firm nuclear reserves informa-
tion would be provided absent our use of compulsory process. As with the other
energy sectors discussed above, an attempt to obtain definitive nuclear reserve
information from the industry in this way would, we feel, produce difficult liti-
gation. An attempt to avoid this course, through the independent development
of information on nuclear reserves, would be virtually impossible.
(v) Summary. — Earlier, we have pointed out that concentration analysis in
energy- — the analysis of the structural positions of important competitors, and
the significance of those positions — could proceed at two levels. A production
(and sales) oi'iented concentration inquiry in energy, we have suggested, could
he done relatively easily by the Bureau of Economics and, indeed, is clearly
assumed in their Proposed Study Protocol.
As the immediately preceding brief sections have shown, an attempt to do a
reserve-oriented analysis of competitive positions in energy would be a mammoth
undertaking. While there are aggregated reserve estimates available, systematic
company-by-company data on reserves just is not available. If, because of the
long-run needs of antitrust policy and/or the illumination of the future fuel
supply situation, it were to be determined that public policy required a much
more definitive federal awareness of patterns of industry reserve ownership, how
could such a policy be executed? An awareness of the magnitude of the FPC's
Natural Gas Survey, and the reporting operations of the AGA and API, compels
the conclusion that an energy industry reserves survey — even one based on re-
porting and audit — would require a large staff, diversified scientific and tech-
nical skill, and an annual appropriations into the millions, probably for some
years. The Commission is clearly not presently in a position to undertake an in-
telligent evaluation of structure in the energy industry based on patterns of
reserve ownership, even if the industry would voluntarily submit reserves data —
which is presumably would not.
i»U.S. Atomic Energy Commission, Statistical Data of the Uranium Industry, Grand
Junction, Colorado, .Tan. 1, 1970, p. 1'^.
2" U.S. Atomic Energy Commission, The Nuclear Industry, 1970, op. cit.
299
//. Performance Elements Within A Study of the Energy Industry
As was the case with respect to the inquiries which could be undertaken in the
""structural" portion of an energy study, the possible components within the
^'performance" area break out into different categories in terms of feasibility.
Some seem manageable in light of present resources; others do not seem feasible
•in view of our capabilities and other responsibilities.
We envision that a performance study in the energy field would be organized
into three basic patterns. First, an inquiry would be made as to whether changing
market structure (i.e., the apparent increasing petroleum firm and conglomerate
firm dominance vrithin the context of a wider energy market) has been accom-
panied by evidence of those phenomena (such as higher profit levels) which
point to an increased use of market power in the relevant energy markets. Sec-
ond. v\-e would envision an investigation of the extent to which structural changes
may have been accompanied by alterations in the rate of development of new
technology and discovery activity, as well as installation of new capacity. The
third element, which we have designated within this "performance" phase, would
ibe an evaluation of the fuel-supply area, a performance dimension which reflects
'"basic reserve availability, structural change in the industry, and the externali-
ties of governmental policy formulation.
We will discuss each of these ai-eas separately, outlining briefly the study
objectives of the area, the nature of current knowledge therein, the foreseeable
limitations in the study and our observations as to the manpower costs which
would be involved.
.4. Effects of Structural Change on Market Poiver Indicators Within the Energy
Sector
The study of performance of the energy sector within the context of changing
market structure should, in our estimation, begin with an initial attempt to
assess whether increased petroleum and conglomerate firm participation in the
broad energy market has given rise to increased evidence of the use of relevant
market power with respect to acquired or retained energy assets. Specifically, it
i5hould be determined whether the replacement of previously unafBliated or inde-
pendent energy flrms by petroleum companies has had significant efi'ect on the
rate of return* on investment of the acquired flrms' assets — or on the rate of re-
turn of previously held petroleum assets. It is generally agreed that pre- and
post-acquisition comparisons of rate of return constitute an appropriate indicator
by which to ineasure an acquiring firm's utilization of market power within
markets into which it has extended."^ Presumably, if an acquiring petroleum com-
pany was able to transfer existing marketing power to newly acquired assets, this
would be expected to show up in a rate of return on those acquired assets which
would be above that of the pre-acquisition independent firm.
A pre- and post-acquisition profit study, as we now envision it, would focus
primarily on formerly independent coal companies and, to a lesser extent, ura-
nium mining and fabrication companies acquired over the past few years by pe-
troleum and conglomerate firms. Several acquisitions would be analyzed. These
are summarized in Table 9, attached hereto, together with relevant quantitative
data and information where availalde on dates of acquisition and the esti-
mated market shares of the firms involved.
Since our basic focus would be on petroleum and conglomerate extensions
into non-petroleum energy categories, we would exclude from our profit rate
performance sample the oil company acquisitions of other petroleum com-
panies,- as well as the activity of the natural gas sector whose rate of return is
regulated.
At least one source has suggested that profit data for the coal industry may
show a high post-acquisition rate of return in comparison with pre-acquisition
levels. According to McAteer,"^ the profit margin for the coal industry has been
-"L See, for example. J. S. Bain, Barrier to Neiv Competition, Harvard University Press,
1956 • L W. Weiss. "Average Concentration Ratios and Industry Performance," Journal
of Industrial Economics, XI, No. 3 (July 1963), pp. 247-252; W. S. Comanor and
T A Wilson "Advertising, Market Structure, and Performance." Review of Economica
and Statifitics, XLIX. No. 4 (Nov. 1967), pp. 42.3-440; R. A. Miller, "Marginal Concen-
tration and Industrial Profit Rates," Southern Economics Journal, XXIV, No. 4 (Oct.
1907) pp. 259-268; and N. H. Collins and L. E. Preston, "Price-Cost Margin and Indus-
try Structure." Review of Economics and Statistics, LI, No. 3 (Aug. 1969), pp. 271-2S6.
-Five producers — Union Oil, Sun Oil, Atlantic Richfield, Phillips and American — who
together have about 25% of natural gas production and over 30% of refining capacity —
have all consummated mergers with other large refiners nnd/or marketers.
2sDavitt McAteer, Coal Mining Health and Safeti/ in West Virginia (1970), p. 371.
300
1296' to 15% during the past two years, which covers the period immediately fol-
lowing many of the acquisitions in question. This is above previous industry
profit levels during the the late fifties and earlier part of the sixties (see Table
10 attached hereto) and is also above the rate of return for a few other natural
resource industry groups (see Table 11 attached hereto). As Table 12, attached
hereto, makes clear, the eight companies which acquired coal and uranium firms-
all ranked in the top 150 of Fortune's 500 and (except for General Dynamics)
had an average rate of profit in 1970 (13.D9c) which was weil in excess of the
normal rate for manufacturing of 9.1% for the year.
Information on pre-acquisition profits on specific coal and uranium acquirees
could be obtained through public sources (e.g., Moody's Industrial Manual) in
the case of single line firms, and through subpoenas and 6(b) reports for post-
acquisition data and/or where several lines of business are involved. Until such
time as more detailed reporting of profit data by divisions or product lines is
required, conglomerate and inter-fuel firms with energy subsidiaries and divi-
sions need not disclose separate financial information about individual linos of
business — such as coal operations.
We envision that it would take a senior economist three to four months to-
obtain and analyze results of this phase of an energy perfomiance study. The
necessary 6(b) reports should be quite narrow in scope and would be addressed
to a relatively small number of firms. Based on the Commission's experience with
obtaining profit information in the course of Phase Two of the Bureau of Eco-
nomics' ongoing conglomerate mei'ger study, difficulties of compliance might arise.
We would accordingly envision some, possibly substantial, attorney time to secure
compliance. Conceivably, compliance might not be obtained at all for a few firms.
It must be emphasized here that a pre- and post-acquisition profit rate analysis
would merely be an initial step in a larger evaluation of performance. The de-
finitive inten^retation and evaluation of results of such a study of the effec-ts of
structural changes in the energy industry on profit rates, would involve bringing
to bear other factors which can affect profit rate performance. For instance, vv-hile
a high post-acquisition rate of return for acquired coal assets could be a mani-
festation of an acquiring company's market power, it could also reflect increased
efficiency resulting from the installation of new equipment. It could also simply
indicate the presence of special supply and demand factors such as genuine pro-
duction scarcity or excessive foreign export demand.
B. Effects of Structural Change on New Investment and Research Development
The second portion of the "perfomiance" phase of an energy study, in our view,
would consist of an investigation into the effects of changing market structure
on research and development. This area, like the "m.arket boundaries" inquiry
discussetl earlier in connection with structure, received sulistantial emphasis in
the Bureau of Economics Proposed Stiidy Protocol suggesting some immediate
enforcement-related study activity in the energy area.
Several critics have pointed out the pos.sibility of adverse effects upon the de-
velopment of competing energy sources occasioned when relatively new fii'ms have
substantial investments in several actually and potentially competing sources of
energy.^ For instanc. it has been asserted that important tchnological develop-
ments, such as the process of converting coal to oil — believed to be imminent — are
being purposely stalled by petroleum firms with significant coal properties. The
largest of the coal to oil conversion experiments is located in Cresap, West Vir-
ginia, where the U.S. Office of Coal Research, in 1963. gave Consolidation Coal
Company (presently owned by Continental Oil) a $22 million grant to expedite a
process for converting coal to synthetic crude oil. Consolidation is reported to have
indicated, in the early 1960's, that it expected to have such a conversion process in
operation in 10 years.^
The operation actually commenced initial operations in November 1966 c shortly
after Continental Oil acquired Con.solidation) and, since that time, it has been
"* Thpy are infer alifi : Rp^onrces for thp F'ltiirp T',S, r.urrgii Pnliri€>i: An Aorvrla for
Re.ipfirch {.Tolms Hopkins Press. 19S.3). pp. 140-141: James Rirtjrewny. The Politics of
Ecolofju flOTO) : Brnce C. Netschert. Ahi-ah.nm Gnrher, and IrTrin Stelzer. Competitinn
in the Energv Markets: An Economic Annhisis, National Kconomies Research Associates.
Inc.. 1070: James K. Watson. Manager of Power, Tennessee Valley Authority. Testimony
in Hearinjrs on S. 27.^2 before tlie Subcommittee on Intergovernmental Relations of the
Senate Committee on Government Operations. Avtr. .^. 1970. pp. 737-S : S. David Freaman,
Director of the Enerjr.v Policy Staff. President's Office of Science and Technolosr.v, Testi-
monv before Snbcommitten on the Judici.ir.v, May 5. 1970. p. 28. Some of these critics'
statements liave iieen siinniiaiized in Bi^fk and Rawliugs, op. cit., pp. 120-128.
25 Beck and Ra'w lings, op: cit., p. 24.
301
reported that "continued mechanical problems" have stalled the operation.^ At
the piTseat time, the operation is apparently shut down; and it is jiot expected
to recommence operation until late 1071.-'' It has also been reported that Con-
solidation Coal — since being acquired by Continental Oil — has postponed its plans
for the commercial use of a lignite gasification plant by the early 1970's. While
there may well be determinative business reasons for these delays, they raise a
threshold question as to the vigor with which joint oil-coal firms pursue the de-
velopment of conversion processes."*
With respect to another technological process dedicated to converting coal into
pipeline-quality gas. there may be an issue as to the delay of technological inno-
vation by multi-fuel energy firms. Messrs. Charles Brtel and Carl Sopcisak, engi-
neers with Stems-Rogers Corporation, have stated that this process — called the
"Hygas"' process — could be developed commercially by mid-1974. However, they
have predicted the postponement of this development by the multi-fuel energy
companies until 1978 or 1980.^
Still another advocate of the theory that conversion processes are being pur-
posely delayed is James Ridgeway. In Tlic Politics of Ecology, he ch'iims :
"The oil companies want to control coal partly because coal competes with
oil and natural gas. but also becau.se they recognize the potential for turning
coal into gasoline. Gasoline is the major money-maker for the oil men, and
they want to keep tight hold of any development in that field. To do so, oil
firms buy coal companies ; they also lobby hard within the federal govern-
ment to make sure development of coal is forestalled.'"'"'
In a prior memorandum, we raised the issue of whether it is reasonable to
expect oil companies to proceed vigorously with research in nuclear energy
feasibility for uses now served by gas and petroleum, or whether large diversified
national corporations with interests in several competing energy sources and
products might deliberately withhold supply and new capacity, or slow the rate
of technological development. In this connection, it has been strongly suggested,
by at least one prominent industrial organization economist, that heavy commit-
ments to fixed investments, such as an oil refinery, will lead sucli oil firms to
discournge a cost-reducing innovation until they have amortized or nearly amor-
tized their original investment.^^
An inquiry into the question of possible delay of uranium development could
look to sever;al potential sources of information. Continental Oil. as part of a
joint venture with Pioneer Nuclear, has a milling plant which has been planned
for start-up in 1972, and. it is estimated, will account for approximately 5<v^ of
total milling capacity. Similarly, Humble has a plant scheduled for 1972 start-up
which should account for about 6% of total capacity. Kerr-McGee has announced
plans for additional mines and mills, but reportedly does not have a firm con-
struction schedule. Gulf Oil, in conjunction with Allied Chemical, has announced
future plans to build a fuel i*eprocessing plant as well as facilities capable of
converting recovered, slightly-enriched uranium nitrate solutions to the I'F-G
needed for nuclear reactions. Completion has been scheduled for 1973. Gulf liad
originally entered both reactor and fuel production through acquisition of Gen-
eral Dynamics' General Atomic Division. Atlantic Richfield, which originally be-
gan nuclear fuel production with a leading firm acquired in 1967 (Nuclear Ma-
terials), has likewise indicated .similar plans for a new plant, scheduled for a
1976 completion date.^^ Getty Oil. which entered uranium production through
a 1968 acquisition of Nuclear Fuel Senices, had also announcetl future plans to
build added processing and fabrication capacity. Table 13, attached hereto, pre-
sents the estimated present and future capacity plans for all companies within
any phase of nuclear energy production. Potential projects involving oil com-
panies are circled.
While we realize that, as with coal-oil conversion, a variety of business fac-
tors could delay completion of nuclear energy plants by petroleum firms, we
believe that more definitive answers could be sought to questions concerning the
extent to which the presence of competing energy positions has already, or
might, contribute to the delay of plant construction and related technology. We
=« Thtd., n. so.
^ nuh ReportPf! also in Hparinc-s heforo thp Senate Select Committee on Small Business,
Part 2. ^Jfir. 15-17. 22 : Apr. R. IflfiT : pp. 766-76S.
=« P.pok and Rawlinss. op. cif.. p. SI.
29 Thitl.
3" .Tofips Rirl'^pway. on. Ht., n. 1.^0.
^Wmarp. Fpllnpr. "The infl-enee of ISTarket Stnictiirp on Tpphnolosrieal Proeress."
Prn.-'innx iv TvJvxfrini Ornavisotinn avd Piihlic Policy. 19.^8, pp. 277-206.
3= At present. Atlantic is believed to be the firm having the largest, most sophisticated
conversion capacity.
302
would contemplate that such an inquiry would include not only the nuclear and
coal-oil-gas conversion areas, but could extend to other extraction areas as
■^vell — such as exploration of the commercial feasibility of extraction of oil from
shale or tar sands, the development of the nuclear fuel cell, or of the fast-breeder
nuclear reactor.
Relevant to this general study area, there is some evidence, albeit relating
only to petroleum technologies, that suggests tentatively that petroleum firms
have performed somewhat better in the areas of invention and innovation than
have other manufacturing sectors of our economy.^
While there have been questions al)0ut delays of innovation within the
■energy field, the industry vigorously refutes the notion that it has slowed the
rate of expansion or technological development within any fuel area. Consolida-
tion Coal, for instance, explains that, in the year following acquisition (1968),
it developed 10 new mines, which would account for increased annual production
of about 3% of the nation's total of steam and metallurgical coal sold to indus-
trial customers. In response to assertions as to the possible withholding of coal
production for the purpose of inflating coal prices, a Continental spokesman has
stated : . , . ^
In the three years, 1967 through 1969, capital outlays and commitments for
new mines and expanded capacity at existing mines totaled $174 million.
This compared with $65 million spent by Consolidated for the same purpose
in the three years prior to the merger. Since 1966, we have built or are
building 15 new mines ,and are forecasting annual coal production of ap-
proximately 80 million tons by the end of 1972. In other words. Continental
has almost tripled the rate of capital investment in order- to double coal
production since the merger. If the industry had expanded production at
the same rate as Consolidated between 1966 and 1970, there would be a
surplus coal production in 1970 of approximately 150 million tons rather
than a threatened shortage.**
Similarly, a representative of Island Creek Coal, discussing the effects of its
acquisition bv Occidental Petroleum, has stated :
When Island Creek was purchased it had a net worth of approximately
.•SSI million, was producing 26 million tons of coal annually and sold only
4.7 percent of the market. Our long range programs left Island Creek with
relativelv limited expansion plans. Once we were purchased by Occidental,
our plans changed virtually over night. Indeed, within the first year, our
plant investment doubled when Occidental made available $175 million in
new building funds, a sum since vastly increased and is due to approximate
$500 million in the years ahead.
With that one decision. Occidental moved Island Creek into a stronger
competitive position within the coal industry, permitting us to open a num-
ber of new mines with resultant increased supplies for all coal users, as
well as a new metallurgical source for sales overseas. In the next 5 years,
by example, we will open 21 new mines and by 1975 will have tripled pro-
duction. Our sales to utilities will grow from 3 percent of the market to 9
percent ,as we produce 35 million tons of steam coal. Over-all, we will pro-
duce a total of 61 million tons, another instance of almost tripling produc-
tion, which will raise our share of the market from 4.7 to 9 percent.*^
In some instances, it seems that an inquiiT into the possibility of research and
development retardation would occur within the context of physical expansion
of capacity. The two issues, although frequently related, can also be distinct.
In our view, a study of the effect of structural changes in the enegry indus-
try on a new plant capacity and technological innovation should proceed along
tvvo quite specific fronts. First, it will be necessary to evaluate the post-merger
effect of acquisitions on the development of capacity in the markets of the ac-
quired properties. This can be done, in part, by comparing pre- and post-acquisi-
tion openings and closing of mines or wells, for acquired energy companies,
with the analogous performances of entities which has remained independent.
Data on coal mine ownership and production are available for each mining com-
pany by geographic district in an Annual Report published by McGraw-Hill {The
Keystone Manual). Bv collating reports from one year to another, we should
be able to analyze at least partially the acquired coal company growth perform-
ance for periods before and after acquisition, as compared with that of independ-
ent coal firms.
=3 Edwin Mansfiolrl. The Economics of Technological Change (Norton and Company,
1963), pp. 24, 28, 10.3-110.
i" Beck and Rawlings, op. cit., p. 23.
s5 Ibid., page 37.
303
In the emerging nuclear energy field, new mining activity by petroleum and
other firms, which have entered through merger and internal expansion, is
available through the Atomic Energy Commission. Preliminary inquiry with AEC
indicates their willingness to supply the FTC with helpful data relevant to
this perfoi-mance dimension. Concerning the question of possible energy com-
pany delays in new drilling and investment activity in natural gas, the Federal
Power Commission has available some helpful data concerning the new drilling
activity of gas wells to supply interstate markets.
For this particular aspect of a performance study — an examination of apparent
relationships between structural change and the development of capacity — we
believe that resource costs would be limited. We estimate that it would require
roughly one-half man year of economist time.
The second part of a performance study dealing with new plant capacity and
research and development (R and D) would consist of an attempt to obtain
pre- and post-acquisition data on changes in R and D expenditures and efforts
for specific individual projects in the coal and nuclear fields {e.ff., coal-to-oil
conversion, pollution abatement, coal-to-gas conversion, new nuclear plant con-
struction). To this end, it would be hoped that concrete data could be obtained,
not only on pre- and post-acquisition changes in project direction, scope and
fimding, but also "motivational" data on the underlying intention as reflected
in corporate documents. In the course of such a study, we would have to be
certain that general, industry-wide phenomena were not confused with narrower
acquisition-related developments. Consequently, it would be necessary to com-
pare pre- and post-acquisition patterns of technological commitment for acquired
firms, against analogous patterns for firms which have not been acquired.
Since this type of information is not publicly available, the issuance of 6(b)
orders and subpoenas would probably be necessai'y. Information requests ou
investment and technological project changes could probably be rather specifi-
cally structured. Since this information is proprietary and highly sensitive, we
would anticipate the necessity of persistent efforts to obtain compliance.
Our requests for similar research and development data from conglomerate
firms in the Bureau of Economics' merger study met with substantial resistance —
even in the absence of actual litigation. It should be noted here that four of the
nine firms there involved insisted repeatedly and vigorously that material on
corporate investment and R and D intentions did not exist. Indeed, one company
in the conglomerate study, even under the direct threat of litigation, did not
supply any investment data.
Although it is difiicult to estimate, we believe considerable attorney time,
probably at least a year, would be necessary to obtain basic information for this
R «& D inquiry, and that such information might still be only partial. Assuming
that the necessary information is collected, we estimate that its analysis and
preparation would probably consume roughly a year of economist's time, assum-
ing the existence of adequate research assistance. Taking all things into account.
our best estimate is that the sort of research and development inquiry which
is here described and which has also been proposed by the Bureau of Economics,
would not be completed for roughly I14 to 2 years. Since research and develop-
ment, and the development of new plant capacity are vitally important to the
future of energy competition, we believe that these aspects of an energy per-
formance study are highly important and that they would represent a legitimate
commitment of the Bureau's available resoiu'ces.
C. Long-term Fuel Supply
The most important issue in the entire energy area is the question of how
an efiiciently-supplied. adequate flow of energy from various sources can be
assured at competitive prices over the next several years — so that, as TIdig
magazine put it, "All the pieces fit into a sensible pattern of fuel production and
use." ^^ As the recent Time magazine article declares :
"Whatever the specifics, the prime essential of a national energy policy
is that all pieces fit into a sensible pattern of fuel production and use. The
present lack of policy is leading to a combination of intermittent shortages
and soaring prices. If it continues, the nation may find itself starving for
energy in the midst of potential plenty, and paying an exorbitant price as
a result." "
For the purposes of organizing this memorandum, we have placed the topic
'long-term fuel supply" within the "performance" area. Needless to say, the
38 Time magazine, Apr. 19, 1971.
»7 Ihid.
304
study of determinants of present and future patterns of energy supply aLso
includes topics which we have earlier discussed as "structural" — such as the
extent and owniership of reserves. A comprehensive study of all factors which
determine patterns of fuel supply would require a massive resource commitment,
in addition to that which has been postulated for the study options already
depcvibed. There are a number of governmental agencies whose policies signifi-
cantly affect fuel supply ; the analysis of their performance alone would con-
stitute a »tudy area of great complexity and magnitude.
An exploration of the long-run energy supply area would build upon what is
known and can he developed about the structui-al and performance aspects of
the energy industry — the type of material previously discussed in this memoran-
dum. From this base, it would then be necessary to identify and analyze the
impacts of external factors — such as the presence of the varying governmental
activities — which interplay with the normal economic forces in determining the
pattern of national energy supply. Keeping in mind that single variables in the
fuel supply picture — such as the action of one government agency — have a
tendency to precipitate action by other forces which affect fuel supply, we will
now briefly discuss some of the specific additional dimensions which would
have to be involved in a comprehensive fuel supply study.
(i) Oil. — A comprehensive study of supply conditions in the oil industry would
have to assess the impact on supply of direct and pervasive governmental controls.
Illustratively, state product controls such as those imposed by the Texas Rail-
road Commission and the Louisiana Department of Conservation determine, to
a large extent, how much domestic crude oil will be pumped from the ground.
The Interior Department, too, administers oil import quotas and the development
of off-shore oil wells and oil shale properties.
In addition, federal tax law considerations — such as the availability of
depletion deductions and foreign tax credits — have an important bearing on
both domestic and foreign oil and gas exijloration. The Federal Power Commis-
sion's regulation of the interstate price of natural gas affects domestic explora-
tion for oil as well as gas.
Without further elaboration, it is clear that governmental policies have an
important effect on the availability of petroleum as a source of enei'gy supply,
and indirectly the prices within this energy market. A study of the effects of
these direct governmental factors would also require the evaluation of collateral
issues bearing upon the long-run petroleum supply picture. For example, if
forf-ign oil were otherwise available, possible tanker shortages at any time
cold affect the extent to which foreign sources of oil could be relied upon.
(ii) Corrl. — Of great significance to an evaluation of the importance of coal
in the energy supply picture are the regulations and activities of the Interstate
Commerce Commission- — for coal moves almost exclusively by rail. In this con-
nection, the available supply of coal cars becomes an important factor in the
reliability and availability of coal as a future fiiel source. At the present time,
coal cars are in short supply. Industry spokesmen believe the railroads under-
estimate the demand for coal in the 70's (and thus, the demand for coal cars).
As Table 14, attached hereto, indicates, in 1961, coal exports approximated
34 million tons, while in 1969 such exports exceeded 56 million tons. An anal.vsis
of the possible continued growth of such export trade would be significant in
this phase of a long-run supply study. Obviously, the extent of future coal export
trade would depend on the policies of importing foreign nations which, in turn,
are likely to be affected by tre.ity or reaction to our own import policies. The
recent emphasis on more stringent air pollution limitations has increased the
demand for low-sulphur coal, and future air pollution standards will continue to
increase this demand. The availability of such low-sulphur coals — a subject
presently under government stud.v — will largely determine the feasibility of
coal as a long-run fuel source and m.ay also affect substantially the stringency of
air pnllntinn standnrds thr-raseiv-^s.
(iii) NafuraJ pan.— The Federal Power Commission's regulation of natural gas
5s of the greatest significance in any analysis of natural gas as an energy source.
Some have said that thA development of natural gns reserves had been, and is
presently being, impeded because of the FPC's setting of unrealistic low ■prices
for gfis in interstate markets. If the industry hns reacted to such regulatory
policies by diminishing its exploration for and development of gas reserves, those
factors alone could cause serious dislocation in ternrs of the supply of this fuel
source — one which is of particular importance.
305
In addition to analyzing the impact of the FPC's regulatory performance, an
analysis of supply conditions and prospects with respect to natural gas should
consider also the effect of the Department of Interior's policies concerning off-
shore gas reserves. In this I'espect, it should be noted that some have alleged that
Interior's bidding procedures discourage small producers from participating in
the development of the Outer Continental Shelf by not permitting lessees to pro-
rate payments for such leases.
(iv) Xuclear energy. — A present study of the significance and future role of
nuclear energy as a fuel source might not be as formidable as comprehensive
supply inquiries for the other energy sources. Cost and demand data bearing on
nuclear energy is available, and the Atomic Energy Commission (AEC) has in-
dicated its willingness to cooperate fully in such a study.
It should be noted, however, that some have criticized the AEC for prematurely
relying on the availability and economic feasibility of nuclear energy. Nuclear
energy, at the present time, has n-it fulfilled AEC projections made for it in the
early 1960's, and critics allege that this failure has aggravated the demand
picture for coal, which in turn has created shortages and higher prices. These
possibilities would require study attention in an evaluation of the factors which
liave effected, and will continue to affect, the supply of nuclear energy.
(v) Summnry. — -It has lieen suggested that the FTC — because of its economic
expertise and available investigative tools — coidd, with additional funding,
undertake a massive special energy study, including an analysis of supply pros-
pects and problems. Without intending any implication as to whether this is
something that the agency would wish to undertake as a special economic stiidy
project — one which would require a performance analysis of other agencies ^ —
we wish to provide some estimate as to the huge resource commitment which
wonld be required.
In this immediate section of our memorandum, we have — referring to the four
major fuel sources — attempted to provide a sense of some of the complex dimen-
sions which would l)e involved in a comprehensive "fuel supply" study, over and
above the structural and performance components which would normally be as-
sociated with something sur-h as a concentrated industries project in energy. We
have pointed out some of the important ways in which the various sources of
public policy affect the patterns by which the industry participants make
dpcicions to supply the various fuel sources. An energy siipply study, therefore,
would require the participation of experts familiar with the operations and im-
pact of the governmental agencies which affect the course of energy supply.
In addition to requiring the availability of experts able to analyze the per-
formance of agencies and branches which contribute to national policy, an energy
supply study project would require a substantial group of other individuals with
sjiecial skills. One source dealing with the personnel requirements which would
be associated with an energy project study has stated :
"Such a study group would need to include geologists concerned with the
estimation of resources and reserves ; mining and petroleum engineers con-
cerned with technology of production and recovery, econometricians con-
cerned with extracting cost functions from the myriad of historical and cross-
sectional statistics available for many of the mineral fuels; and economists
concerned with the impact of industrial organization on cost and price
practices." ^
We have already explained our assessment of the extreme resource commitment
which would he involved in attemnting to evaluate competitors' relative positions
in the energy industry in terms o^' ownership and control of reserves. If such re-
serves study were not made within the context of concentration analysis — -a
stTidy option previously discussed — we envision that something analogous in mag-
nitudf* would have to be carried out as part of a comprehensive fuel supply study.
"^ KplPTfint to this, it is intprpstin? to note thnt some comTnentators on the need
for a national enerjrv stiirly havp spepifioally emphasized, howevpr, that such a stndy
shonhl hp lodprprl in an pntirely independent resparph borly. The Edison Elpp^ric Institute,
for instanee, commentintr on R. Rps. 45. said : "Thp stndy should he performed hy an
indpfipndpnt research body. I\Tnny Federal asreneies have recnl^tory and. in at least one
instance, supplier responsihilities in various fuel and enersry fields. In certaim instances,
spvpr:il asrencips have recnlatory resnonsihilifies in the same enersry field. Th-is. yrhile it
■wonV bo proper to ntiPze the services, information, facilities, and personnel of any of
the departments or aa-encies of the Goyernment, we believe the most effective study can
be provide^'' hy an independent body."
sn f- .9'. Enerqii Policies. An Agenda for FesearrJi, A ReKOvrces for the Future Staff
Report, Resources for the Future, Inc., The Johns Hopkins PreSiS, 1968, at p. 136.
306
It seems quite clear that, should the FTC undertake overall fuel supply study, a
special task force approach within the agency would be required. Such a task
force would probably require the following: (1) a director without other re-
sponsibilities, supported by a general administrative assistant and at least two
research coordinators to assist in structuring and directing the study; (2) a
large number of economists and lawyers, expert in the variety of difficult prob-
lem areas which have been discussed; (3) a number of consultants to advise on
specific technical matters; and (4) sufficient clerical, research and secretarial
assistants. Such a project, in our estimation, would take at least two and prob-
ably three years to complete, given adequate resources.
Our judgment is that, assuming the availability of the types of personnel ex-
pertise which would be needed, the annual numerical manpower resource re-
quired would approximate or exceed those presently allotted to our Bureau of
Economics. We regard it as no exaggeration to suggest, conservatively, that this
type of project would consume over $2 million annually for a period of three
years, for a total of nearly $6 million. This estimate might be on the low side.
Needless to say, an effort of this magnitude would require special appropriations.
///. Concluding comments
In concluding this discussion, we will do three things. First, we will report on
the existence of certain energy projects and studies to which other government
agencies — and some other groups — are committed. Second, in summary, virtually
tabular form, we will list the energy study options which we have here described,
together with an indication of the resource costs which we estimate they would
involve. Third, we will present some recommendations, reflecting our sense of the
approach which the FTC should take to energy. This will place the existing Bu-
reau of Economics proposals within the perspective of other energy study alterna-
tives which might, or might not. be pursued.
A. A Discussion of Some Other Existing mudy Projects or Plans Within the
Energy Sector
Relevant to a determination of the degree of resource commitment which
should be made to a study of the energy industry is, of course, the degree of
activity of other agencies and study groups. By way of summary of other
activity in the energy area known to us, it appears that several agencies have
publicly expressed an interest in a broad energy study, and two inter-agency
energy boards have been established. However, only one of the proopsed studies
appears to address itself to specific problems of competitive structure and
performance in the energy industry. In addition to agency proposals, there are
at least two pending Congressional resolutions which propose broad-based
energy studies.
Federal Potver Commission. — The FPC, as discussed herein and in our earlier
memorandum of October 5, 1970, is conducting a National Gas Survey, which is
expected to take about three years to complete. This study is concerned with
gas producers and transmission companies and involves several areas of inquiry.
These include: 1) R and D programs in the area of liquefaction and gasif action
of coal — focusing principally on technical questions and difficulties rather than
competitive issues; 2) pipeline reserves and deliverability of gas; 3) Canadian
imports of liquefied natural gas (LNG) ; and 4) natural gas demand and supply.
It would appear that most of the resource input for this study will come from
the FPC engineering staff. For the current fiscal year, $250,000 has been appro-
priated; for fiscal year 1972, $301,000 has been requested. FPC indicates that
a comparable figure will be requested for fiscal year 1973.
Interior.— The Interior Department has an energy project underway involv-
ing the compilation of statistics on production, consumption, and patterns of
technological change, dealing primarily with the oil and coal industries. It does
not include so far as we can determine an analysis of competitive factors in the
energy area. . v, •
Atomic Energy Commission. — The AEC, on a consistent and recurring basis,
collects and publishes data for all areas of the nuclear energy field. In the past,
it has emploved outside consultants to study competitive issues involved in
the nuclear energv area. Arthur D. Little, Inc. conducted a cooperative study
during 1968 for the AEC and Justice Department, in which it assessed the state
of competition in the entire nuclear power supply industry, including an evalua-
tion of the competitiveness of the major segments of the industry. This study
307
focused generally on structural determinants of competition in the nuclear field,
including general principles of guidance for the application of the antitrust
laws, as well as the optimal mix of government and private participation.*"
However, it did not address itself to specific empirical issues such as the sig-
nificance of oil company participation in the nuclear fuel cycle or the specific
measurement of structural concentration. So far as we know, the AEC has no
intention of updating or extending its competitive analysis to include the struc-
tural and performance issues which concern us here.
Inter-figency study groups. — The Joint Board for Fuel Supply was created
by Presidential order during the crisis atmosphere of 1970 and is chaired by
the Director of the Office of Emergency Preparedness. This inter-agency board
includes representatives from the Interstate Commerce Commission. Federal
Power Commission, Atomic Energy Commission, and Departments of Commerce
and Interior. It seems primarily to be concerned with the review of short-term
supply issues, including problem areas such as coal transportation. The Board
was charged with coordinating the efforts of federal agencies in dealing with fuel
supply and transportation problems during the 1970-71 heating season.
A Domestic Council, headed by the Chairman of the Council of Economic
Advisers, was created also during 1970, with the mandate to study long-range
national energy policy and present policy proposals to the President. While, in
theory, this group is concerned with all aspects of the energy industry, we are
not certain of the extent to which it will focus substantial attention on com-
petitive aspects of energy supply. This should be explored.
Legislative Proposals. — Several Congressional Resolutions calling for energy
studies have been introduced. Senate Resolution 45, sponsored by Senators
Randolph and Jackson, proposes a study which would consider 1) current and
prospective energy resources, 2) current and prospective energy requirements,
3) the impact of government policies affecting energy producers, 4) the impact
of technological developments affecting production, distribution, and transpor-
tation, 5) the maintenance of a sound competitive structure in the supply and
distribution of energy, and 6) the effect of any policy recommendations on eco-
nomic concentration in the industry. Hearings have been held on this proposal
and it was favorably reported out of the Interior Committee on April 5, 1971,
and is before the Rules Committee. Similar resolutions have recently been in-
troduced in the House. However, no hearings have yet been held on these two
House resolutions.*^
Private efforts. — Resources for the Future, Inc. (RFF), a privately funded
non-profit research group devoted exclusively to issues of development con-
servation and use of natural resources, is heavily involved in energy research.
Presently, RFF is in the process of preparing a prospectus entitled Priorities
in Energy Research, at the request of the National Science Foundation.*^ Ac-
cording to present plans, it will be similar to their U.S. Energy Policies: an
Agenda for Research, prepared in 1968 for the Office of Science and Technology,*^
which treated in fairly general terms a broad range of institutional, regula-
tory and economic characteristics of each energy sector. It did not, however,
treat issues of concentration or structure-performance relations within the
energy sector.
According to a spokesman at RFF, the new effort will be a compilation of
research topics, and will be used to support a massive NSF energy research
effort. According to RFF, competitive working of energy markets — focusing on
petroleum — will be studied, although not intensively.
B. Summary of Options for an Economic Energy Study
Listed below, essentially in tabular form, is a summary of the study options
discussed here, together with an indication of the associated resource cost esti-
mates which we have made. The list of possible study topics is references
according to the relevant pages herein.
*° Arthur D. Little, Inc., Competition in the Nuclear Power Supply Industry, Report
to U.S. Atomic Energy Commission and tlie U.S. Department of Justice, Washington :
December 1968.
*iH.R. ?,(^5, introduced by Rep. Link (N.D.) ; and H.R. 375, introduced by Rep. Giaimo
(Conn.), 92nd Congress, 1st sess. 1971.
^- Resources for the Future, Inc., U.S. Energy Policies: An Agenda for Research Johns
Hopkins Press, 1968.
« National Science Foundation has directed two additional inquiries in the energy
area, which are currently being done under contract : A survey of writing and current
research in the area ; and an engineering-oriented study of energy and technology.
308
Possihle Study Topics
Strnctn ral elements :
A. Market boundaries inquiry (pp.
4-11)
Completion in about three months by
one economist.
B. Industry structural analysis in
terms of production data (pp.
13-18)
Completion in less than one year by
one economist with research assist-
ance.
C. Industry structural analysis in
terms of reserve data (pp. 18-
29)
Would requii'e large, technically qual-
ified staff and annual appropriation
into millions. Completion in several
years. Litigation to be anticipated.
Performance elements:
A. Effects of .structural change on
market power-profitability .study
(pp. 31-34)
Completion in 3-4 months by one
economist, following availability of
data. Likely delay in compliance.
B. Effects of structural change on
new investment and R&D (pp.
35^5)
Probable completion in l^/^ to 2 yrs.
Project to consume one economist
year, and one attorney year.
C. Long-term fuel supply study (pp.
45-54)
Would require large staff, with di-
versified technical and scientific ex-
pertise. Completion in several years
with annual appropriation in neigh-
borhood of $2 million.
C. Recommendations
As we indicated at the outset of this memorandum, we have intended here to
Identify and discuss possible study topics which cnuld be included within an
economic study relating to energy policy. In so doing, we have presented infor-
mntion on the extent of existing knowledge in th evarious areas, and have also
briefly given our views abo^t some of the ways in which the study topics could
be approached. With respect to each of them, we have also given our estimate,of
the resource commitments which would be associated.
We recognize that — particularly as to the more massive study options, dealing
with industry reserve ownership patterns and long-rmi fuel supply — our resource
estimates are presently only rough approximations. However rough they may be,
the preceding tabular summary shows fhat, in terms of manageability, the al-
ternatives which we have described break out into two basic categories.
Four of the study options which we have discussed — although there is variance
among them as to estimated manpower cost and time for completion — fall within
a general category of being manageable by our Bureau of Economics. Referring
to the preceding tabular summary, these include the following: market bound-
aries inquiry : industry structural analysis in terms of production data ; effects
of structural change on market power (profitability study) : and effects of struc-
tural change on new investment and R & D. We believe that these four study
areas all have substantial policy significance and would logically constitute com-
ponents within an energy "concentrated industries study" of the sort which has
been contemplated by the Commission for some time.
In its Proposed Study Protocol, the Bureau of Economics has discussed the
market boundaries area extensively and has also indicated the desirability of
an R & D performance inquiry. We have attempted to supplement the Bureau's
Protocol with: (1) additional discussion of the execution and resource costs
of an R & D performance study : (2) an exploration of our sense of the ap-
proach which should be taken in inquiring into concentration itself, taking into
account regional markets: and (3) an explanation of our belief that an energy
concentration study should include an empirical look at profitability data within
the performance area.
As we have become more familiar with the various plans and possibilities
that exist for study within the energy -area, we have increasingly developed the
conviction that it is most important for careful work to be done addressing com-
petitive issues, as well as the more popular questions of supply capability and
long-run reserve adequacy. Thus we believe that this agency can make a real
contribution by carrying out a concentration study comprised of the four com-
ponents which we have discussed and which appear feasible in light of our exist-
ing Bureau resources. To the extent that our discussion of a presently feasible
energy concentration study deals with study options not addressed in the Bureau i
309
of Economies' Proposed Study Protocol, it is our understanding that the ba.«ie
courses of study which we envision have the approval of Dr. Mann.
In addition to the four energy study components which would appear to be
feasible in light of present Bureau resources, and which would fall logically
into a concentration project dealing with structure-performance relationships
in the energy industry, we have also here discussed two other major areas of
possible economic study within the energy sector. Referring again to the pre-
ceding tabular summary, these more massive study alternatives are: industry
structural analysis in terms of reserve data ; and long-term fuel supply. As our
di.scussion indicates, these possible study alternatives have a substantial over-
lapping similarity because of the fact that they woiild each involve an extensive
inquir.v into reserves data with respect to the four basic fuel areas — petroleum,
natural gas, coal and nuclear.
As to the intelligent development of long-run competitive policy, it is clear that
the public interest would be served if energy antitrust planning could be based —
at least in part — on viewing the industry in terms of reserves ownership and
control. So, too, as the recent furor regarding an "energy crisis" has shown,
would the public interest be ser\'ed by a systematic policy-oriented study of all
the factors which enter into both the short-run and long-run fuel supply proli-
lem. In light of the magnitude of these energy study alternatives, however, it
is clear to us that the Commission could never undertake them without securing
substantial additional funding. With this in mind, and because of our need to
develop and make known an understanding of the position which the FTC
plans to take in the energy field, it now seems appropriate for the Commission
to con'iider whether or nol; it would like to attempt some sore of massive under-
taking in the energy field.
Respectfully submitted.
Lawrence G. ^Ieyer,
Director, Office of Policy PJavninp ntuj Ernhiation.
Feed L. Woodworth.
Assistant Director, Office of Policy Planninri and Evaluation.
Edward ,I. Heidex,
Economist, Office of Policy Planning and Evaluation.
Attachments :
TABLE 1.— ELECTRIC UTILITY GROSS CONSUMPTION OF ENERGY RESOURCES BY MAJOR SOURCE, 1964-68
[Percent; trillion Btu]
Bituminous
coal and
Natural
Total
Year
Anthracite
lignite
gas, dry Petrol
leum Hydro
Nuclear
(percent)
1964
0.6
51.7
23.2
6.
1 18.1
0.3
100
1965
.5
52.4
21.6
6.
,7 18.5
.3
100
1S6S
.5
52.3
22.2
7.
5 17.1
.5
100
1967
.4
50.8
22.1
7.
9 18.2
.6
100
1968
----
.4
50.4
23.1
8.
4 16.8
.9
100
Source: '
'Minerals,
Yearbook," 1968, vc
lis. I-II, pp.24
-25.
TABLE 2.-
HOUSEHOLD
AND COMMERCIAL GROSS CONSUMPTION OF ENERGY RESOURCES, BY MAJOR SOURCE
!
1964-68
[In trillion BtuI
Bituminous
Utility,
coal
and
Natural
electricity
Year
Anthracite
lignite
gas, dry
Petroleum
purchased
Total
1964
191
sen
5,314
5.190
1.795
13, 050
1965
168
546
5,518
5,635
1,948
13,815
1966
113
.575
5.945
5.766
2, 101
14, 530
1967
128
497
6.223
6.206
2,257
15,311
1988
---
121
447
6,581
6,581
2,469
16, 069
Source: "Minerals Yearbook," 1968, vols. I-II, p. 24.
115
5,362
7,397
4,184
1,544
18, 602
101
5,640
7,671
4,138
1,634
19, 184
88
5,806
8,203
4,352
1,788
20, 237
90
5,553
8,599
4,298
1,868
20, 408
80
5,536
9,258
4,474
2,043
21,391
310
TABLE 3.-INDUSTRIAL GROSS CONSUMPTION OF ENERGY RESOURCES. BY MAJOR SOURCE, 1964-68
[In trillion Btu|
Bituminous Utility,
coal and Natural electricity
Year Anthracite lignite gas, dry Petroleum purchased Total
1964
1965
1966
1967
1968 _
Source: "iVlinerals Yearbook," 1968, vols. I-II, p. 24.
Table k — Capacity of selected uranium milling companies and plants
Nominal capacity
Company : tons ore per day
The Anaconda Co 3, 000
Atlas Corp 1, 500
Continental Oil Co. — Pioneer Nuclear, Inc ^1,700
Cotter Corp 450
Dawn Mining Co 500
Federal-American Partners 950
Humble Oil & Refining Co ^2,000
Kerr-McGee Corp 7, 000
Mines Development, Inc 650
Petrotomics Co 1, 500
Rio Algom Mines, Ltd ^500
Susquehanna- Western, Inc 2, 000
Union Carbide Corp 3, 000
United Nuclear — Homestake Partners 3, 500
Utah Construction & Mining Co ^ 2, 400
Western Nuclear, Inc 1, 200
1 Planned for 1972 start-up.
2 Under construction (1971 start-up).
Source : U.S. Atomic Energy Commission, 1970, p. 43.
Tahle 5 — Ownership and reserve patterns of the fifteen largest coal producers
Parent company : Goal reserves
Continental 7, 000, 000, 000
Kennecott 6, 000, 000, 000
Occidental 4, 100, 000, 000
Pittston 1, 500, 000, 000
U.S. steel (')
General Dynamics 500, 000, 000
Eastern 1, 500, 000, 000
Bethlehem 314, 000, 000
Pennsylvania- Virginia 300, 000, 000
SOHIO (')
A. Metal 2, 700, 000, 000
Gulf 500, 000, 000
North American 1, 000, 000, 000
Occidental (Maust) (-)
S. Illinois 1, 000, 000, 000
1 Some 50 years worth.
Source : Beck and Rawlings, op. cit., p. 67.
311
Table 6. — Coal land ownership and assessed value in Kentucky
Company : Assessed value
Betiiiehem Mines Corp $5, 305, 813
Kentland Coal & Coke 5, 152, 690
Kentucky River Coal 3,567,951
Ashland Oil 3,121,652
Fordson Coal Co 2,575,319
Elkhorn Coal Co 1, 961, 810
Virginia Iron, Coal & Coke 1, 789, 749
Southeastern Gas Co 1, 572, 441
International Han-ester 1, 546, 500
Big Sandy Co 1,542,420
U.S. Steel 1,438,550
National Mines Corp 1,253,888
J. M. Huber & J. M. Huber Corp 925, 980
Island Creek Coal Co 788,422
Western Pocahontas Corp 711, 840
Kycoga Land Co 681,118
W. W. Lindsay 639, 121
Peabody Coal Co 599,790
Penn-Virginia Corp 592, 858
C. A. Lee 588,000
Bringardner Lumber Co 511, 350
X. Y. Mining & Mfg 473, 950
Blackwoods Land Co 451,400
Columbia Fuel Corp 439, 032
Marv Helen Coal Co 368, 133
J. M. Asher & Asher Coal Mining Co 356,490
Harkins Mineral Corp 325, 000
Lawrence Tlerney Land Co 317, 847
Pocahantas Land Corp 284,380
Republic Steel Corp 280. 305
Morely H. Ringer 259,000
Source : Data is taken from Kentucky Coal, by Richard Kirby, 1968, as reported In
Beck and Rawlings, op. cit., p. 101.
TABLE 7.-C0AL LAND OWNERSHIP, ACREAGE, AND ASSESSED VALUE BY FIRM IN WEST VIRGINIA
Company
Total
acreage
Total
assessed
value
Pocahontas Land Corp. (N. & W. RR.) _ 341,496 $20,320,700
Consolidation Coal Co. (Continental Oil) _._ 329, 801 11, 987, 310
C. &0./B. &0. RR _ ._ 212,163 7,799,835
Georgia-Pacific 195,845 5,400,880
Eastern Associated Coal (Eastern Gas & Fuel) 103,775 5, 106,820
Island Creel< (Occidental Petroleum).. 103,405 7,908,370
Bethlehem Steel 84,580 3,960,245
Chas. National 82,068 2,759,200
Berwind 69,081 2,004,095
Union Carbide 59,617 41,511,060
Tetrick 53,522 469,330
Rowland _ 51,848 3,804,250
Gauley Coal Land Co _ _. 51,840 816,050
Beaver Coal.. 51,664 3,301,490
Cotiga Devlop 48,919 1,010,350
Cole, Lindsay & Woods, Trustees 43,194 3,226,375
Penn-Virginia 41,994 1,865,090
United States Steel _ _ 40,440 1,558,600
Federal Coal 37,825 1,298,050
Wheeling Dollar Savings & Trust 37,216 1,880,445
Dingess-Rum 37,135 2,364,825
Youngstown Mines 33,822 3,333,770
Southern Land Co. & Dickinson Properties, Inc.. _ 30, 350 1, 152,325
Youghiogheny & Ohio Coal... 28,979 601,950
Pittston 27,678 2,204,570
Source: Data is taken from Davitt McAteer's "Coal Mining Health and Safety in West Virginia," 1970, pp. 496-97, as
reported in Beck & Rawlings, op. cit., pp. 102-3.
27-547 O-
-21
312
TABLE 8— NONPRODUCTIVE COAL PERMITS AND LEASES OF LARGE COAL AND OIL COMPANIES AS OF AUGUST 1970
Company Acreage Date acquired
Consolidation Coal (Continental Oil) _ __ 38,032.62 1967, 1969, 1970
Peabody Coal Co. (Kennecott Copper) 50, 561.81 1967, 1968, 1970.
United States Steel 5,096.18 1967.
North American CoaL. _ _ 4,208.97 1962, 1964-66, 1%7.
Kerr-McGee oil _. 55,677.11 1965, 1967, 1969, 1970.
Atlantic Richfield Oil __ 51,000.25 1964, 1966-67, 1967-68, 1970
Sun Oil Co _ 36,390.98 1968, 1969.
Gulf Oil Corp 540.49 1964.
Texas Alberta Oil _.._ 5,084.84 1967.
Woods Petroleum 14,249.05 1969.
Carter Oil Co. (Humble Oil Subsidiary) 15, 651. 51 1963-65.
Seneca Oil Co.... 6,336.12 1967.
Beico Petroleum Co 4, 551.46 1970.
Source: Data taken from the Bureau of Land Management, August 1970 (computer tape), as reported in Beck & Rawlings
op. cit., pp. 106-7.
TABLE 9.— OIL AND CONGLOMERATE COMPANY ACQUISITIONS INTO COAL AND NUCLEAR ENERGY
Nature of
acquisition
Acquiring firm
Acquired firm
Acquired
firm,
percent of
market'
Date of
acquisition
Coal
Continental Oil
Consolidation Coal Co
11.0
11.0
5.0
2.0
1.9
1.7
1.3
1.0
8
(2)
1966
Do
.. Kennecott Copper
.. Occidental Petroleum Co
Standard Oil (Ohio)
... Peabody Coal Co
1968
• Do
Island Creek Coal Co
1968
Do
Old Ben Coal Co
1968
Do
._ American Metal Climax
.. Gulf Oil Co
_. Occidental Petroleum Co
... Ashland Oil & Refining
Atlantic Richfield
_ Ayrshire Collieries
1968
Do
Do
... Pittsburgh & Midway Coal Mining Co.
Maust Coal & Coke Co
1963
1969
Do
Archer Mineral
1968
Nuclear energy..
Do
Do...
.- Nuclear Materials
1967
... Getty Oil-..- _
... Gulf Oil
Nuclear Fuel Services
General Atomics Division of General
Dynamics.
1968
1967
1 Based on 1968 total national coal tonnage.
2 Not available.
Source: Moody's Industrial Manuals; and Beck & Rawlings, op. cit., pp. 10-11.
TABLE 10.— AVERAGE RATE OF RETURN ON INVESTED CAPITAL (NET PROFIT) FOR A SELECTED SAMPLE OF
FORMERLY INDEPENDENT COAL FIRMS FOR SELECTED YEARS
Company and year Sales Assets Sales rank Average i
Peabody Coal:
1958 -
1963 159,881 248,582 319 ^ 12.6
1965
Consolidation Coal:
1958
1963
1965 .--
Isiani Creek Coal:
1958 , ,
1963 83,175 100,585 473 j- 7.6
1965
Pittston :
1958 207,717 175,451 (2)) jq o
1963.... -- 262,891 201,838 (2) )
1 Percent of return on invested capital for selected period.
2 Not available on a comparable basis with other 3 coal manufacturers, since Pittston is primarily a coal wholesaler.
Source: Derived from Fortune "Plant and Product Directories," 1958, 1963, 1965
$92, 591
159,881
208, 301
$151, 309
248, 582
292, 467
365
319
310
282,234
283, 873
316, 054
362, 104
250, 513
447, 832
145
197
217
90, 003
83, 175
109, 554
76,976
100, 585
107, 441
374
473
500
207,717
262, 891
175, 451
201,838
(=)
(2)
313
TABLE 11— PERCENT RETURN ON COMMON STOCK FOR VARIOUS INDUSTRY GROUPS, 1957-65
Year
Coal
Copper Integrated oil
Aluminum
1957.
1958.
1959.
1960.
1961.
1962.
1963.
1964.
1965.
10.8
8.0
9.5
11.7
7.4
6.3
7.2
8.0
7.6
7.0
8.0
8.3
7.7
7.6
8.2
6.8
7.8
6.9
7.7
6.5
8.0
7.4
8.0
7.7
8.8
6.6
8.9
6.6
10.0
8.2
9.2
8.0
10.8
10.6
10.5
10.0
Source: Derived from "Standard & Poor's."
TABLE 12.-NET PROFIT AND OTHER DATA FOR FIRMS MAKING LARGE COAL ACQUISITIONS, 1970
Company
Net profit as
percent of
Fortune
invested
Coal ranking
ranking
capita
1
36
12.1
2
111
14.9
3
44
20.3
6
33
.8
10
97
5.3
11
147
12.5
12
10
12.4
14
44
20.3
Continental
Kennecott
Occidental
G. Dynamics
SOHIO..._
A. Metal...
Gulf. _.
Occidental (Maust).
Source: Fortune "Plant and Product Directory," 1970; and "Keystone Coal Manual."
TABLE 13.— COMMERCIAL CAPABILITY TO PROCESS AND FABRICATE NUCLEAR FUELS
Firm
Conversion of
uranium ore
Capabilities
Processing
and/or
fabrication of
fuels or fuel
elements
Research and
development
of nuclear
fuels
Processinp
of scrap
Allied Chemical Corp X
Atlantic Richfield NUMEC X
Atomics International ._ 0
The Babcock & Wilcox Co F
Battelle Memorial Institute _ 0
Combustion Engineering Inc F
Continental Oil-Pioneer Nuclear.. F
General Electric Co X
W. R. Grace Washington Research Center 0
Gulf General Atomic Co _ F
Jersey Nuclear Co _ F
Kerr-McGee... X
National Lead Co 0
Nuclear Chemicals & Metals Corp. _._ F
Getty-Nuclear Services Inc X
Nuclear Metals Division, Whitaker Corp 0
Tennessee Nuclear Specialists Inc.. _ X
Texas Instruments Inc _ 0
United Nuclear Corp X
Westinghouse Electric Corp X
0
X
X
X
0
X,F
0
X
0
F, X
F
X
X
X
X, F
X
X
X
X
X
0
X
X
X
X
X,F
0
X
X
F, X
F
X
0
0
X, F
X
0
0
X
X
0
X
F
F
0
0
0
X,F
0
F
F
X
0
0
X
0
0
0
F.X
F,X
Note: X— Denotes present domestic capability. F— Denotes future domestic capability. 0— Denotes no current or future
capability.
Source: Atomic Energy Commission, "The Nuclear Industry," 1970, pp. 82-83.
314
TABLE 14.— BITUMINOUS COAL EXPORTS SINCE 1961
(Net tons, thousands]
„ , . To all other
Calendar years To Canada countries Total
1961.
1962.
1963 __ 13,762 33,316 47,'078
1964
1965 _.__ 15,660 34,521 50,181
1966... 15,829 33,474 49,302
1967 15,308 34,220 49,528
J5^? - 16.748 33,889 50,637
1969 ..__ 16,788 39,446 56,234
11,169
23, 801
11,410
27, 004
13,762
33,316
14,187
33, 782
15, 660
34, 521
15,829
33,474
15,308
34,220
16, 748
33, 889
16, 788
39, 446
34, 970
38,413
47, 969
Source: "Keystone Coal Industry Manual," 1969.
Attachment 2
Proposed Study Protocol
MARKET boundaries IN THE ENERGY SECTOR OP THE U.S. ECONOMY
(Prepared by the Bureau of Economics, Federal Trade Commission)
A. Energy use and sources
The extensive use of energy, generated mainly from fossil fuels, is a funda-
mental characteristic of the U.S. economy. Energy is con.sumed as hoth a final
product, as in the case of residential heating, and as an input in a production
pro<?ess.
(1) Total consumption.— Jn 1969. total energy consumption equalled 65,645
trillion Btu's.^ Consumption has grown at an annual compound rate of 3.1 per-
cent since World War II. However, in recent years the rate of growth has in-
creased significantly ; between 1965 and 1969 it was 5.0 percent.^
During 1967. the industrial sector was the largest consumer of energy, account-
ing for approximately 32 percent of the total. The distribution of Energy Con-
sumption by Major Consumer Groups is presented in Table 1.
(2) Energy consumption relative to gross national product and population. —
To a large extent, the significance of energy in an economy is not fully indicated
by viewing the total amount consumed nor by the composition of consumption.
Additional information, especially about the efficiency of energy use. can be ob-
tained by relating energy consumption to population levels and GXP. Tlie Energy-
GNP ratio is greatly influenced by technological changes in the production of
energy, changes in the relative importance of the various fuels, and structural
changes in the composition of GNP.
Table 2 relates energy consumption to tlie value of GNP and the level of i>opu-
lation for the 1947-69 i>eriod. Per capita energy consumption has generally in-
creased since 1958. althougli prior to 195,S there are years in which the value
decreased. A somewhat different situation exists in the case of consumption per
d;>llar of constant dollar GXP. While the value of this ratio has fluctuated, it
exhil)its a general tendency to decline over time. At the present time, the value
of this ratio is increasing.
(3) Energy sources. — Primary sources of energy in the U.S. include coal,
petroleum, and natural gas. While not presently a major source of energy, nu-
clear power has great potential. Electricity, while considered to be a secondary
source since it require.s an input of a primary energy souiTe. is an increasingly
imooi*tant source of energy.
The relative importance of the individual fuels has undergone great changes
over time. The use of coal reached a peak around the 1910 i)eriod.' As coal de-
clinwl in imiiortance. the position of oil dramatically improved. In Table 3 it can
I)e seen that natural gas emerged as an important energy .source after the World
1 Incliidps niinernls fiipls. hydropower. and nuclear power.
-US. Sonntp. Snhoomnilttee on Antitrust and Monopoly, "Testimony of Bruce C.
Netschert, Abraham Gerher. Irwin ISI. Stelzer." May 1970, p. ,S. "
3 See Netschert and Schurr, op. cit., pp. 37-38.
315
War II period. Tlie relative position of gas continues to improve, helped by con-
servation pressures for the nse of a clean fuel. Nuclear power has great potential
but presently provides a rather insignificant percentage of total energy.
(4) SuniiHdri/. — Energy is by any criteria, a vital, and ix)ssibly the most crucial
factor in the U.S. economy. Energy consimiption has grown at a rate of 5 percent
between 196.") and 1969. At the same time, energy con.sumption per capita has in-
creasetl while energy use per dollar of GNP has tendetl to decrease.
Industrial users of energy have been the most imi>ortant consumers of energy
accounting for S(mie 32 percent of the total consumption. Households plus com-
mercial users, the transportation sector, and electric utilities have each generally
accountetl for slightly more than 20 percent of total consumption.
Tlie major sources of energy in the U.S. have changed over time. Initially coal
dominated the scene but with the emergence of the diesel locomotive, the demand
for coal was .seriously reduced. Oil became the leading source of energy but,
given recent concerns with the environment, the market position of natural gas
has greatly improved. Presently, nuclear ix)wer appears to be a possible replace-
ment of oil and gas as the major source of energy.
B. Energy sources — market structures
To appreciate the changing nature of interfuel comi>etition. some knowledge of
the market structures associated with the individual fuels is a necessity.
(1) Pctrolemn. — The market structure of this industiy is extremely compli-
cated. Functionally the industry includes: (a) exploration and production of
crude oil. (b) transportation, (c) refining and proces.sing, and (d) distribution
and marketing.
Gasoline and other fuels for internal combustion engines account for approxi-
mately 50 percent of refined products, the remainder composed of middle distil-
lates and residual fuels for boiler use. A .small, although increasingly significant
amount of crude production is used as an input in the production of ijetrochemi-
cal and chemical products.
The industiy is composed of both major and independent firms. While the dis-
tinction is not precise, major firms are nearly always integrated through all
stages while independents usually operate at a single stage in the production pro-
cess.* Most independents are involved in crude oil production and must rely on
the majors for piiieline and refinery .services.
There are upwards of 8,000 firms engaged in the production of crude oil ; most
of which sell their production at the wellhead to the major firms. The top 4
firms account for al)out 22 percent of total production : the top 8 for 35 percent;
and the top 20 for 50 percent of total crude production. While most producers
are not integrated, the integrated firms are clearly the dominant force in the
industry. In 1950. they accounted for about 60 percent of net production.^
Though concentration levels appear to be relatively low, crude production does
not take place in a competitive setting. In fact, the oil industry represents an out-
standing example of an industry characterized by ineffective competition. The
production of crude oil is basically a cartel, supported by direct and pervasive
government controls. Direct controls include (a) production controls by the ma-
jor producing States, and (b) the imposition, at the Federal level, of mandatory
controls on the importation of foreign crude oil.
As mentioned above, vertical integration is a common characteristic of major
petroleum companies. While vertical integration per se does not create market
power, if it encompasses a production stage where competitive forces are weak,
competitive problems can arise. Specifically, integration can serve as the "carrier"
of economic power between production stages. In the oil industry, integration
allows the firm to choose the point at which excess profits will be taken."
At the refining stage, concentration has increased to the point where the top 4
firms control 33 percent of domestic capacity, the top 8 account for 57 percent,
and the 20 largest control about 84 percent of natural refining capacity. In addi-
^ For n coinprphensivp anjilysis of the nptrolpiim industry anrl an assessment of the
comnptitivp pffpots nssociatpfl with vprtioal intpsrration. spp Dp Chazpa^i nncl Kahn, Inte-
qrntion and Competition in the Petroleum Indiistri/, (Npw Havpn : Yale University Press,
5 U.S. Senate, Subcommittee on Monopoly and Antitrust, Economic Concentration,
pt. 2. Tin. .^94-.5.
8 The retail trasoline market spfvps as an example. Indenendent jrasoline marketers
find It very difficult to conmete acainst the malors because of the advantatre that accrues
to the major (integrated) firm from monopoly profits earned at the crude stage.
316
tion there is some evidence of a trend towards higher concentration." In any
case, the concentration values do not accurately reflect the true concentration
level. They are based upon a national market, and, in many resi>ects, the refining
marliet is regional in scope.
Professor Bain's research indicates the existence of substantial entry barriers,
mainly due to large capital requirements facing ix)tential entrants. Vertical in-
tegration has been significant in raising such capital requirements for entry.
(2) Coal. — Up to tlie early years of the twentieth century, coal was the major
fuel in the United States. Since that time, coal has declined in both its relative
and absolute importance.
(a) Grades of coal. — Coal is not a homogenous product. On the basis of cer-
tain physical properties,* coal is classified as: (a) anthracite, (b) bituminous,
(c) sub-bituminous, and (d) lignite. (Bituminous coal is, by far, the most im-
portant of the four types.) It is interesting to note that the cost of production
does not api^ear to determine the quality of the final product.
All coal except coking coal is used for the single purpose of combustion to pro-
duce heat. Coking coal, often described as metallurgical coal, is used principally
in the production of steel where, in addition to providing heat, it i>erforms a
chemical and physical function. As a result, steam coal and coking coal are not
ready substitutes, and coking coal does command a substantially higher price in
the market.
To a large extent, the history of the U.S. coal industry can be explained by
four factors : (a) easy entry in the early days of the industry due to low capital
requirements, (b) the importance of transportation costs in the final product
price and federal legislation to control railroad rates, (c) a highly immobile
labor force and consequently low wages, and (d) lack of research and develop-
ment in the industry. Recent events in the industry have altered some of these
factors — but the present structure of the industry is still related to these four
items.
(b) Composition of demand. — ^Before noting the specific aspects of structure, it
is necessary to note the turbulent changes in consumption patterns. One source of
demand, the railroad locomotive, virtually disappeared by 1960. In addition, the
retail market for coal fell from a level of 100 million tons, equivalent to 23 per-
cent of total steam coal consumption, in 1947 to around 18 million tons, less than
5 percent of the total, in 1967. The abrupt decline in the retail market was mainly
due to the substitution of natural gas and fuel oil for coal for home heating
purposes. At the same time, industrial demand has also declined. In percentage
of total consumption, industrial use was between .32 percent and 36 percent of
the total in the 1947-19.58 period. Thereafter, the percentage declined to about
25 percent in 1967.
On the other hand, the electric utility industry has been a source of substantial
increase in demand for coal. Utilities consumed 86 million tons, or 20 i^ercent of
the total, in 1947 but by 1967 consumption reached 272 million tons, accounting
for 70 percent of total steam coal consumption.^
(c) Progressiveness of the industry. — The ability of the coal industry to fur-
nish the needed supplies of coal to satisfy the demands of electric utilities stems
mainly from a very impressive record during recent years in technological in-
novations in the production, distribution, and marketing areas.^° As a result
productivity has increased fast enough to offset rising wage costs.
Since 1947. productivity in underground mining has tripled, rising from 5 tons
per man dav in 1947 to about 15 tons per man day in 1967. At the same time.
TDiT-lnsr the period 19.51-63. 27 inflepenrient refineries, each with capacity in excess
of 10 000 barrels per rtav. have rtisapDearerl. Their total capacity amonnted to S percent
of the domestic canacitv in 10.57. Tnflependent refiners are cnueht in a profit squeeze —
they buy crude oil from' a marlcet where prices are mononollstically hiph dne to a cartel
and sell the refined product, casoline. in n hi-T^hlv competitive market. T\S. Senate, Sub-
committee on Antitrust and Monopoly. "Testimony of Alfred Kahn," Economic Concen-
fm^ioJi.Pt. 2. p. .502. ^ . „ ,,, ^
8 Included are age, volatility, carbon content, and heat content measured in British
Therni.nl T^nits. , , ^ , ^i.
0 While utility demand has "saved" the coal industry, it should he noted that, in the
competition for fuel demands of electric utilities, the relative position of coal to other
fuels has declined. Tn 1047 and 1048. cool had 75 nercent of this market: in 1040-1060
between 65 percent and 70 percent: and since 1060 a constant 65 percent. The decline
was due to greater shares goins to oil and. in particular, to natural gas.
1" Anion tr the more imnortant innovations are: (1) the introduction of the con-
tinuous miner method in 105S. (2) increased use of lower cost strip minine, (3) the unit
coal train concent. (4) use of low cost water transportation method, and (5) the gen-
eration of electricity at the mouth of the mine.
317
productivity more than doubled iu strip mining over the same period, moving
from 15 tons per man day in 1M~ to 35 tons i>er man day in 1967. The importance
of the more productive strip mine in the industry has increased. In 1947, 22 per-
cent of total production came from strip mines, but in 1967 the comparable figure
was 34 percent."
(d) Concentration levels. — Because of the importance of transportation costs
in the price of coal, markets have regional boundaries and, accordingly, concen-
tration levels computed on a regional basis are likely to understate true concen-
tration levels.
In a comprehensive study of the coal industry. Professor Reed Moyer has
delineated the boundaries of the mid-western coal market." His study indicates
that, in 1962, the top four firms accounted for 55 percent of total production and
the top eight controlled 75 percent of the total." These levels are sufficient to in-
sure that sellers recognize their interdei^endence in decision-making. The study
also reveals a significant trend towards higher concentration in the midwestern
market. Compared to the concentration figures reported for 1962, in 1934, the
top four firms controlled slightly less than 20 percent of total coal production and
the top eight controlled 30.4 i>ercent of total production. Moyer concludes :
The net effect of this trend has been to create an oligopolistic market struc-
composed of medium- to large-sized firms, each suflBcently large to make its
market adjustments felt by its competitors."
It should be noted that his conclusions apply only to the mid-western market.
Traditionally, low entry barriers have been cited as the reason for instability
in the coal industry, biit several factors suggest that present entry barriers may
be somewhat higher. The necessity to obtain much larger reserves, and the use
of much larger mining equipment have combined to raise entry capital require-
ments. In addition, the production cost differential between strip coal and deep
coal '^^ as well as the increasing use of long-term supply contracts ^^ have also
contributed to higher entry barriers.
Special entry problems are associated with emergence of "captive" coal mines
(i.e., mines owned and operated by large users of coal). Two effects are gen-
erally attributed to the existence of captive mines: (a) by eliminating a
sizeable coal customer from the market, the remaining commercial operators
face a thinner market, and (b) captive mine operators have been quicker to
reach agreements in labor disputes and le.ssi willing to resist wage demands."
(e) Entry lags. — Entry into coal mining involves very lengthy time require-
ments. Entering on a de novo basis requires the acquisition of significant reserves,
involving a time iieriod of at least 4 or 5 years. Similar time lapses are often
involved in negotiating a sales contract. Combining these steps with the time
required to bring a mine into protluction could involve 2 to 10 years.^*
(f ) Economies of scale. — There is evidence of scale economies in the production
of coal. Professor Moyer has compared productivity, measured as tons produced
per man-day, for both underground and strip mines in the mid-west." Plant econ-
omies are evident in underground mining iip to an annual production of 500,000
tons ; beyond this size there are few additional economies. A different pattern
exists in strip mining, productivity advances appear to continue as mine size in-
creases. Limits do exist on the optimum size of the strip mine ; diminishing
returns appear when production occurs a considerable distance from the prepa-
ration plane. In spite of such scale economics, optimum size plants appear to
account for small percentages of total output.^
11 FTC Docket 8765, Kennecott Copper Corporation, p. .31.
12 Reed Mover, Competition in the Midwestern Coal Industry, (Harvard Press, 1064).
"/Strf-.p. 68.
1* Thid.
1° Profits in tlie industry ma.v be hieh but entry deferred, If the only reserves to entrants
available are deep coal which necessitates more expensive methods of production. In this
case, entry would not be profitable.
16 Presently, some coal companies have a larpe proportion of their sales locked into
long term contracts : while these contracts have price escalation clauses, price increases
have not kept pace with prices in the spot market causing profits of these companies
to lajr the profits of companies with a smaller proportion of sales via long term contracts :
Forhex. Oct. 15. 1970. n. 80.
".Tames Hendry. "The Bituminous Coal Industry" in Adams. The Structure of Ameri-
can Industri/, .3rd edition, p. 80.
1^ Professor Fox concludes a period of 10 to 12 years will elapse between the time
a firm decided to enter and the time it becomes a substantial competitor. FTC Docket
S76.T. Kennecott Copper, p. 45.
19 Moyer, Competition in The Midwestern Coal Industry, (Harvard Press, 1964) pp.
lOfi-8.
2" Ibid., p. 108.
318
(g) Excess capacity. — In the past, the coal industry has been plagued by
excess capacity. Several factors are often cited as causes of the problem. The
demand for coal is seasonal. During periods of high demand, firms have entered,
but once demand falls there is little tendency for firms to exit the industry.
One possible exijlanation i» that there are significant costs associated with
maintaining an idle mine and, in addition, a mine may be kept idle for only
about two years, lieyond that time corrosion and water damage are likely to
force aliancionment of the mine. Hence, partial production is preferred over a
complete cessation of production. As a result, the supply of coal has l)een inelastic.
Traditionally, capacity adjustments upward have l)een sanoother than downward
adjustments during periods of declining demand.
During the 1919-23 and 1945-50 periods, substantial amounts of excess capacity
appevared in the industry. In both cases, the exces-s capacity developed as a
partial response to wartime price controls in the prior years which made
expansion unprofitable."^
Wliile the industry has been plagued with excess capacity in the past,
presently a problem of too little production appear:^-, to exist. Whether the
inelastic supply schedule is due to an increase in entry barriers or because of
domination of coal production by oil Anns is a major question as yet unanswered.
(h) Exports. — Coal exportf\ of which 66 percent is coking coal, have increased
some 61 percent since 1961, rising from 34.9 million tons in 1961 to 56.2 million
tons in 1969. This increase is mainly due to a high demand for coking coal
from .Japan's steel industry. Export to .Japan rose from 6.6 million tons in 1961
to 21.4 million tons in 1969 — an increase of 223 percent."
(i) Prices. — Table 4 presents evidence of price trends over the 1959-1969
period for bituminous coal.
While an upward trend is apparent, the data in Table 4 understates the extent
of the increase. The greatest increase in prices has occurred in the spot market —
the market where coal is so'd on a daily basis rather than on a contract basis.
Although not presented in the Table, price increases of 30-50 percent were
instituted in the first half of 1970.
(j) Major coal producers. — Petroleum companies have invested heavily in
the coal market and by 1969 accounted for nearly 25 percent of total production
from noncaptive mines. Oil company interest in coal is heightened by changes
in technology which have tended to l>ring oil and coal into direct competition "^
but. perhaps most important, is the potential of producing .synthetic gasolinj
and crude oil from coal.
(3) Xotural gas. — The natural gas industry encompasses three groups: (1)
producers, (2) pii>eline companies, and (3) distribution companies. This memo
is mainly concerned with the producing segment of the industry. Producers
are involved with exploring for, developing, and producing natural gas in the
flekl.
The production segment developed in close asociation with the oil industry,
which is not surprising since natural gas and oil are often found together
and produced as joint products. Gas had little economic value until the 19,30"s
when pipeline construction allowed long distance transmission to areas of high
population density. The leading producers are the major integrated petrolemn
comiianies.^
(a) Seller concentration. — In measuring concentration levels past research
has generally relied on sale.'--, of natural gas by the largest producers to interstate
pipelines. Tatile 9 indicates the percentage of sales accounted for by the top 4,
top S and top 20 firms during the 1961-68 period.
While care must be exercised in interpreting this data, a trend toward higher
sel'er concentration is indicated.^ Tlie data reported in Table 9 contains several
weaknesse.s. In the first place, interstate .sales figures cannot be con.^idered as
analogous to national production because intrastate .sales of natural gas are
omitted. Although the exact size of the intrastate market is luiknown, the
Federal Power Commission estimates these sales to be about one-third of the
=1. Tames W. Meehnn, Mnrkct fitrucfnre nnfl Ercexx Cnnncity: A Theoretical and
Empiricnl Anahisix, (Boston CoIIpcp : Unpiiblislied Ph.D. Dissertation). 1967.
" St<in(lnrf1 .ind Poor's, huluxtrii l^iirreil.
^^ Tlip ehanclnj; n.at'ire of Interfnel comnetition is discusserl below.
2-^ The leartinjr produeers for lOfil. 19fi.5, and 196R are identified in Table 8.
2« Similar data has been presented by Cookenboo for 19.5.".. At that time, the top 4
accounted for 22. R percent of sales, the top S acconnted for ."^.5.1 percent, and the top 20
acconnted for T>?,.1 percent of total sales to interstate pipeline. See Leslie Pookenboo, .Jr..
Competition in the Field Market jar Natural Gas (Rice Institute Pamphlet, Vol. XLIV,
.Tanuarv 19.58), p. 48.
319
total national market. Others have placed the fijiure at closer to 40 percent.
Omitting the.se sales may be of considerable importance since .scattered evidence
indicates that in the Texas intrastate market, seller concenti'ation is higher
than in the national market.^
Another .serions weakness exists because the concentration data assumes a
national market. That the market boundaries are national is supported by the
development of a vast pipeline system, but this must be viewed against the
backdrop of emerging direct competition between gas and other fuels and the
existence of significant intrastate markets. If the true market is regional,
concentration ratios computed on a national basis will tend seriously to under-
state true concentration levels.
Perhaps the most appropriate measure would be based upon the extent to
which natural gas reserves are controlled by the dominant firms in the industry.
Such data is crucial in judging the likelihood of competitive performance in
the future. Once again, this type of data is not as yet available.
(b) Buyer concentration. — Evidence of the concentration levels on the buyers'
side of the market is present in Talde 10. The evidence suggests a slight trend
toward lower concentration levels for the four largest and eight largest buyers
over the 1961-68 period.
The measures of buyers' concentration are subject to the same criticisms
described above in the case of seller concentration. However, an initial direct
comparison indicates higher concentration levels on the buyers' side of the
market.
(c) Monopoly or monopsony. — The issue of whether the natural gas produc-
ing industry is characterized by monopoly or monopsony power has received and
continues to I'eceive the attention of economic researchers. Professor Paul
MacAvoy has concluded that ". . . gas markets were diverse in structure and
beliavioi', and were generally competitive or were changing from monopsony
towards competition." -'* This conclusion applies to markets prior to 1960. Equally
important, are two studies by Cookenboc ^ and Neuner ^^ covering the same
time period as MacAvoy's work — but employing different methodology. Both
generally conclude that the evidence provides little support to a claim of
monopoly in natural gas field markets.^^
(d) Entry conditions. — Little evidence is available on entry conditions, but
an initial assessment of the industry suggests that capital requirements con-
stitute the major source of the barriers. Scale economies and product differentia-
tion advantages do not appear to present major obstacles to new entrants.
Capital requirements are large for two reasons. One. in the Southern Louisiana
area, the Federal Government lea.ses acreage for drilling purposes. Leases are
sold on a bonus-bid basis rather than on a royalty-bidding scheme. The bonus
method increa.ses the size of the initial investment required, whereas the royalty
method would minimize the size of the initial outlay. Because of the large
investments required by the bonus system, smaller firms are likely to find
entry rather difficult.''' Two, the u.se of long-term contracts between producers
and pipelines have raised capital requirements for new entrants. These con-
tracts, neces.sary for FPC certification of the pipeline, require that a producer
i»e able to commit a volume of proved gas reserves sufficient to satisfy tie
pipelines need for upwards of 20 years. As a result, the producer must ac-
cumulate sizeable re.serves, requiring large investment outlays, before any pro-
duction can be initiated and marketed.
Often suggested in the literature is that the market structure in the natural
gas producing industry has been, and continues to be, mainly determined by the
various types of contracts employed between producers and pipelines.^ At
various times, these contracts have had clauses allowing price escalation, tax
sharing, and price renegotiation. However, the most important aspect is
-' It should be pointpd out that sales in the Texas market, an intrastate market, do
not fall under FPC jurisdiction. How this affects concentration levels in the regulated
markets is fin interestin?. but as yet unexplored question.
-** Paul W. MacAvoy. Price Formation in Natural Oas Fields: A Study of Competition,
Monoiifionij. and Regulation (New Haven: Yale Press, 1962), p. 265.
-» Leslie Cookenboo. Competition in the Field Market for Natural Gas (Rice Institute
Pamphlet : No. 4), .January 1958.
3" Edward J. Neuner, The Natural Gas Industry (University of Oklahoma Press, 1960).
^llhid.,p. 245.
^- Supporters of the present system claim the bonus bid method creates an incentive
for early production while the royalty technique would increase the ability of the com-
pany to keep the lease unproductive.
^3 Resources for the Future, Inc., U.S. Energy Policies: An Agenda for Research (John
Hopkins Press, 1968), p. 54.
320
probably the duration of the contracts. There seems to be general agreement in
the literature that pipelines would be satisfied with shorter contracts.^*
(e) Summary. — Measures of concentration from both the buyer and seller
sides in the natural gas producing industry are available, but they cannot
readily be used to judge the likelihood of competitive performance. Available
evidence does suggest a trend toward higher seller concentration. While esti-
mates of entry conditions are imprecise, capital requirements appear to con-
stitute the main source of entry barriers.
4. Nuclear power. — Nuclear power, from a public policy viewpoint, is unique
among the various fuels. Its development has been basically due to federal action
associated with military projects during World War II. To this date, policy
has been concerned with delineating the extent to which nuclear power devel-
opment should l»e separated from federal control and allowed to enter the com-
petitive sector of the economy. In contrast, other fuels had their beginning in
the private sector, and the policy issue was to what extent should government
regulation be allowed, not to what extent deregulation should be practiced as
in the case of nuclear power.
(a) Trend away from Federal control. — A clear trend away from Federal
Control and towards a greater reliance on market forces exists in the area of
nuclear energy. However, some Federal involvement will always exist due to
the issues of security and safety associated with nuclear fuels.
A reading of the Atomic Energy Commission Act indicates clearly that Con-
gress intended market forces to guide the development of nuclear energy. Spe-
cifically, this legislation indicates that the use and control of atomic energy
is (a) "to be directed so as to make the maximum contribution to the general
welfare" and (b) "to strengthen free competition in private enterprise."®
(b) The nuclear power plant. — Nuclear power is a young but rapidly expand-
ing industry. Nuclear generation of electricity is expected to develop rapidly in
the 1970's. Forecasts by the AEC predict that by 1980 1-^5,000 Mwe of nuclear
power will be installed in the U.S. out of a total generating capacity of
580,000 Mwe.''"
A nuclear power plant is composed of (a) the reactor system and (b) the
generating .system. The reactor system serves the same purpose as a steam
boiler in a conventional fuel generating station, but the technology is very
different. In the nuclear plant, heat is produced by nuclear fission and trans-
ferred by a coolant and ultimately used to create steam which drives a turbine.
The generating system in a nuclear plant is the same as in a conventional
power plant.
A comprehensive study of competition in the nuclear power supply industry
has been completed and presented to the Atomic Energy Commission and De-
partment of Justice.^' In the report, the nuclear power plant is broken into four
divisions.
(1) Assemble Reactor Si/stcm (ARS) — reactor, steam generator, control
and radiation instrumentation, pipes, valves, etc.
(2) NucJear Fuel Core (NFC) — fabricated fuel elements (the end products
of uranium mining and milling) . conversion, and enrichment.
(3) Turbine generators — conversion of steam into electrical power.
(4) Balance of plant — engineering and construction services, site cost. etc.
In 1!>68 the cost of the entire package, assuming a capacity of 1,000 mega-
watts, was approximately $160 million. Of this amount, the reactor system ac-
counts for 30 percent, the initial fuel core for 20 i^ercent,^** and the turbine for
about 22 percent, with the remaining 28 percent attributed to balance of plant.
Capital costs of construction have increased at a fast rate. Assuming 1.000
megawatts capacity, a pl;an scheduled for commercial operation in mid-1975 and
mid-1976 is estimated to cost from $246 million to $265 million, respectively.^
^ The use of warrfint.v contracts, involving no commitment of specific reserves but
onl.v the jrnarantee of delivery, supports this assertion.
K Atomic Enercy Act, Section 10^.
^ Assuming the forecasts are correct, this -would create annual domestic sales of
some $5 billion in the nuclear power supply industr.v, IISAEC. Division of Operations
Analysis and Forecasting, "Forecast of Nuclear Power Growth," Wash. 1084, Decem-
ber 19(57.
^^ Arthur D. Little, Inc., Competition in the Nuclear Potrer Industry (Washington:
Government Printing Office. lOfiSl. Also see: U,S. Atomic Energv Commission, The Nu-
clear hidUKtrri. 1070, Washington. D.C.. 1070.
■■"While initially the four parts have roughly similar dollar values, the fuel cycle
becomes a much more significant and dominant cost over time because fuel is needed for
installed as well as new reactors. Other expenditures are mainl.v one-time outlays.
^^ U.S. Congress, .Toint Committee on Atomic Energv. AEC Authorising Legislation FY
1971, Washington, Mar 11, 1970. Pt. 3, pp. 1476-1478.
321
While costs of nuclear steam supply and turbine equipment have increased, the
escalation is mainly due to higher construction, equipment, and labor costs/" At
the same time, capital costs for a coal-fueled plant of the same capacity have
increased, but at a slower rate. As a result, light water reactor nuclear plants
are estimated to cost about 25 percent more than fossil plants for 1975-76
operations."
(c) Turnkey sales. — During 1964-65, many sales of nuclear power plants
were made by General Electric and Westinghouse on a turnkey basis — compo-
nents sold as a package, assembled, and made operational by the successful bidder.
General Electric and Westinghouse offered those packages at extremely low
prices, and by 1968 each had suffered losses in excess of $100 million on such
sales. Industry charges of deliberately low pricing to eliminate comijetitors and
forestall entry were levied against the firms. There is little doubt that their sales
policies did reduce competition. In 1954, some 20 firms were heavily engaged in
reactor research and development ; by 1959 the number was halved, and by 1968,
only four firms were manufacturing cost-competitive reactors. General Electric's
and Westiugliouse's combined market shares reached a peak during 1964—1965,
but following the elimination of turnkey sales, their share decreased to about
70 percent in 1967-68.
Their dominant position in the reactor market appears to be safe due to high
entry barriers. And this position becomes more important in light of their ex-
tensive integration into the other phases of the industry.
(d) Nuclear fuel cycle. — The nuclear fuel cycle includes (a) exploration,
mining, and milling of uranium, (b) conversion of yellow cake (UaOs) to uranium
hexafluoride (UFa), (e) fuel fabrication, and (d) manufacture of zirconium
tubing.*"
This memo will be mainly concerned with the mining and milling of uranium.
Table 11 presents evidence of sales, number of firms and level of seller concen-
tration at the fuel cycle. In 1968, some 15 companies *^ were engaged in mining
and milling uranium, with the four largest accounting for approximately 60
percent of the total." There is some recent evidence to suggest that significant
entry has occurred at the different parts of the fuel cycle.*^ The Arthur D. Little
study also indicates the industry's optimism about future demand for uranium.
Sales are expected to rise from $107 million in 1970 to some $563 million by 1980,
an increase of 426 percent.
By criteria, the most important development at the fuel stage has been
the strong ix)sition attained by petroleum firms. Kerr-McGee controls about 27
percent of domestic uranium capacity and is the largest single producer of
uranium in the U.S.^" Humble Oil is planning a mill with capacity equal to 8 per-
cent of domestic capacity in 1970.^' Other large mills are planned by Continental
Oil Co. and Amarillo Minerals, Inc (Pioneer Natural Gas).^* Evidence presented
by the Atomic Energy Commission indicates that in 1970 oil companies presently
held about 45 percent of known uranium reserves and that 21 oil companies, not
presently engaged in uranium mining and milling, account for about 31 percent
of total uranium exploration drilling in 1970.^"
While the petroleum companies have a strong iwsition at the mining phase,
they face some competitors. Evidence indicates that the major reactor suppliers,
with one exception, are planning to enter, or have already entered, into uranium
*" Ibirl.
•*i Ihid.
*- In repoverinp uranium from the basic ore several 'teps are involved. Initially, the
ore must be conlverted to the oxide from UsOs. This material Is then converted to gaseous
form uranium hexafluoride (I'F«). which, when enriched, increases the percentage of the
fissionable IT-235. The enriched gas is then reconverted into a form suitable as a fuel,
usually another form of uranium oxide (UO2). which is fabricated into fuel elements.
Arthur D. Little, Inc., Competition in the Nuclear Power Supply Industry (Washington,
196S).p. 29.
*-'^ .^ctuall.v there were some 110 additional companies whose combined output was
enual to only R percent of the total. Because of their size, the ADL report omitted thest
firms. Ihid.. p. 32.
** A depletion allowance of 22 percent can he applied to the recover.v of uranium. It
can be applied at either the mining or milling stage. Since the milled ore (.vellow cake)
is a higher value product, the incentive exists for the mining firm to integrate forward
and produce yellow cake from its own uranium ore. Thus, the depletion allowance ma.v
act as a force for futher vertical integration in the fuel cycle ; similar situations exist
in the oil industry.
■"^ IT.S. Atomic Energy Commission, The 'Nuclear Industry, 1970, Washington, 1970.
*" Netschert, Gerber, and Stelzer, p. 28.
1" Ihid.
*'' Enqineering and Mining Journnl. McGraw-Hill, March 1970. p. 94.
^^ U.S. Atomic Energy Commission, The Nuclear Industrt/, 1970, Washington, 1970, p. 41.
322
ore exploration and mining. Babcock and Wilcox has not entered this phase, but
Combustion Engineering, General Electric. Gulf, General Atomic, and Westing-
house are either in the fuel cycle area or are potential entrants."" In addition,
United Nuclear, an independent fuel fabricator, has a major position in uranium
mining and milling.
There is a serious lack of information about the structural characteristics of
uranium mining. Concentration data based on reserve ownership, rather than
production, is preferable but not available. Little information is available about
cost and productivity levels at either mining or milling stage. Capital require-
ments and technological changes in uranium mining have received little attention
in the literature.
In the past, the only market for uranium has been the Federal Government.
While the.se purchases were spread over some 25 companies, the top 4 (Anaconda,
Atlas, Kerr-McGee, and Union Carbide)"' supplied about 51 percent of the total
UsOs. Government purchases are to be terminated in 1970.
Significant uranium discoveries, or their develoinnent from previously known
reserves, were reported in 1969 by major petroleum firms including Pennzoil
United, Humble Oil, Standad Oil of Ohio, Amerada, and Gulf Oil. The importance
of petroleum firms in the mining of uranium is highlighted by the following
statement in a leading trade journal : "Petroleum companies dominated the field
of new discoveries . . ." ^ Nearly all large oil firms are either actively engaged in
or planning to enter the mining and proces.sing stage.
Besides being involved in domestic mining activities. Gulf Oil. Standard of
N.J., Phillips and Kerr-McGee are actively engaged in searching for uranium
in foreign countries. While oil companies are heavily engaged in the fuel cycle
part of the nuclear power supply industry, they do face substantial competition
from some of the country's largest firms.
(e) Summary. — The mining and milling phase of the nuclear fuel cycle is con-
centrated with the top four firms accounting for some 60 percent of total pro-
duction. The basic change in the industry has been the emergence of petroleum
firms into this phase of the cycle.
C. Competition in the energy sector
History indicates that competitive rivalry between the different fuels has been
intense. The steady decline of coal's dominant position since the 1930's, the
emergence of oil, the spectacular rise of natural gas, and the emergence of
nuclear power all give evidence to the existence of competitive forces. Presently,
synthetic fuels produced from coal and nuclear fuels threaten to erode the market
position of the fossil fuels.
Evidence indicates that changes in fuel use and transportation technology have
heightened the degree of interfuel competition."' In addition, environmental con-
cerns, creating pressure for a clean fuel, have been responsible for recent shifts
in fuel use.
(1) Boiler Fuel Market.
(a) Electric utility market. — In the electric utility market, coal, oil, natural
gas, and uranium oil serve the same purpose: to produce heat used to generate
steam which drives the turbines. For man.v years, fuel choice was solely deter-
mined by relative prices of the various fuels. Presently, electric utilities are
giving careful consideration to the physical characteristics of each fuel before
selecting a specific fuel.
Coal's relative position in this market has been eroded becau.se of its handling
properties and becau.se it creates significant air pollution. On the other hand,
oil and natural gas have made substantial gains in this market. There can be
little doubt that the environmental issue will continue to precipitate further
snbstitiitions for switching coal unless a more eflScient method of removing stack
emissions is discovered.^
<^" Ibid., p. 160.
si76(rf.,p. 3.3.
™ Enqineerinfi and Mininq .Journal, op. cit., p. 92.
°3 WiilLini Vogel.v has identified revohitlon.iry technological change in the consuming
sectors or in the transportation of energy as tlie most important source of increased inter-
fuel competition. Wm. A. Vogely, "Pattern of Energy Consumption in the U.S. 1047-6.5
and 1080 Projected,' Papers presented at World Power Conference, Tokyo : October 1066.
pp. .5-10. Examples of such revolutionary technological changes would include: (a) the
introduction of the diesel locomotive ; (b) the growth of the high pressure natural gas
pipeline network, made possible by the innovation of high pressure, large diameter seamless
pipe: (c) the growth of extra-high-voltage transmission lines; and (d) the development
of coordinated electric power grids in the U.S.
^■i Detroit Edison recently announced plans to convert from coal to gas at four of its
plants : See Coal News, September 1060, p. 42.
323
While oil and gas have reduced coal's position, uranium, as a source of nuclear
power, threatens to reduce their position as a boiler fuel in the electric utility
market. The advantage of nuclear generation lies in its ability to provide low
cost electricity without creating air pollution. While public acceptance of nuclear
generating stations has been slow because of problems of thermal pollution and
safety fears, there appears to be little question of ultimate acceptance.
The Atomic Energy Commission estimates that by the year 2O0O, more than
50 percent of generating capacity will be nuclear.*^"
Thus, competition in the electric utility boiler market indicates an increasing
degree of interfuel competition. While price was once the sole determinant of
demand, environmental concerns are becoming more important and will continue
to affect the choice of fuel.
lb) Nonutility. — Outside of the utility market, the choice of boiler fuel has
often been based on such nonprice factors as cleanliness, convenience, and com-
fort."" As in the case of the utility market, environmental factors have fostered
fuel substitution. In the case of domestic heating, oil and natural gas have vir-
tually eliminated coal.
(c) Fuel substitutability. — The above discussion centers around the idea of
an increasing degree of substitutability between the various fuels in the boiler
fuel market, in both the utility and nonutility areas. Changes in the degree of
substitutability, or cross-elasticity of demand, is a crucial factor in understanding
recent developments in the energy area. Unfortunately, little specific knowledge
is available, but one study indicates that in the midwestern coal market area, 64
percent of the installed electric generating capacity was capable of fuel inter-
changes."'
(2) Konbrdler fuel market. — Similar increases in fuel substitutability have oc-
curred in this market. While coal, oil, and natural gas compete with each other,
coal faces a distinct disadvantage because it presents more difficult handling
problems than the fluid or gaseous fuels. Oil and gas also face significant com-
petition from electricity in this market.
Evidence of increasing interfuel competition can be seen from the various pro-
motional schemes adopted by electric utilities and gas companies. In particular,
electric utilities have promoted the total electric home, where all energy needs,
including heat, are supplied by electricity. In the early 1950's few homes were
heated electrically, but by 1968 over 3 million homes utilized electric heat. This
reflects the entrance of electricity into a market previously supplied by petro-
leum companies. By capturing all energy needs in the home, the relative price of
electricity is lowered enabling electricity to compete successfully with the oil
and gas alternatives. In addition, the promotional scheme effectively reduces
the likelihood of the homeowner switching to these alternatives. In short, the
"all electric" home concept, by reducing fuel substitutability, may go a long ways
to reduce interfuel competition.
In a similar manner, gas companies have promoted the "all gas" concept for
such complexes as shopping centers, apartment houses, the office buildings. In
these eases, gas is even used to generate electricit.v. Both the "all electric" and
the "all gas" concept ^ represent attempts to reduce the customer's willingness
and ability to substitute fuel sources. Such programs tend to support the position
that market boundaries liave been widened resulting in increased interfuel com-
petition.^°
(3) Implications of present RdD activity for future interfuel competition. —
To a large degree, greater interfuel competition is due to basic technological
changes in the energy-consuming sectors of the economy and to advancements
in energy transportation. Present R&D activity indicates the likelihood of even
more revolutionary changes in the pnKluctiou and transportation of energy and
greater interfuel competition in the future.
^ U S Congrress, .Toint CommittPe on Atomic Energy. AEC Authorizing: Legislation
Fisrnl Year 1071. Wnshinjrton : ^Nlnr. 11. 1970. Pt. .S. p. llfil.
^ A stndv bv tlip BitTiminons Coal Institute for in.5(i revealed that in every city studied
outside of the fras-produoinfr areas, fuel oil and jras prices exceeded coal prices, yet the
chanareover to oil and jras continued. A similar pattern was observed in sales by retailers to
commercial pnd ind'^st^rial user*. B'tnniino"« Co"l Tns-t't"te. Comnnrative Fuel Costs, 195S.
reported in Reed Maver, Competition in the Midu-estern Coal Industry (Howard Press,
19ft4).p. 49.
^" Mayer, op. cit.. p. 57.
ss Total energy is equally feasible with oil. While no industry organization presently
exists to promote oil as a total energy fuel, there are signs of sucli a development in the
near future.
■'" Additional proof comes from the increased ownership of gas distribution companies
by electric utilities.
324
One innovation, tlie fuel cell, would be a direct source of competition to elec-
tricity. In fact, this innovation has the potential of virtually eliminating the elec-
tric utility industry. The fuel cell generates electricity via a flameless oxidation
process. Presently, the fuel cell is not cost-competitive with electricity, hut addi-
tional cost reductions could bring it into direct competition with other fuels,
especially electricity.'^ In response to the potential competition posed by the
fuel cell, it would api>ear that the electric utility industi-y must continue to re-
duce the costs of electricity if it is to preserve cost advantage over the fuel oil.
The production of synthetic oil and gasoline from coal or oil shale would result
in direct competition with refinetl gasoline and cnule oil. Only small cost reduc-
tions are needed to make synthetic fuels commercial."^ Again, as long as the
development of the synthetic fuels is not controlled by oil and gas firms, signifi-
cant potential competition does and can exist and can act as a restraint on com-
petitive actions of existing oil and gas companies.
The connnercial development of the fast breeder nuclear reactor would be an
additional source of interfuel competition in the future. Essentially this type of
reactor produces more muel than it consumes in the generating process. Intro-
duction of these reactors is expected by 1990-2000. Once it becomes oi>erational,
the demand for mined uranium will be reduced and utilities will be able to sell
the excess nuclear fuel produced by the fast breeder reactor. This new source of
fuel is exi>ected to be very cost competitive with conventional fuel.
The generation of ele<?tricity by the process of magneto-hydrodynamics (MHD)^
would provide economical generation of large amoimts of electrical power.""
The absence of moving i>arts in the MHD generator promises to produce much
higher energy conversion efficiencies. At the present time, the most efficient fossil-
fueled generating stations have an efficiency of only some 40 percent and nuclear
stations are currently at the 32 percent level.
All of these items would bring about revolutionary technological changes in
the energy area and, if past experience is correct, foster greater interfuel com-
petition.
(4) Summary. — Developments in the energy area indicate an increasing
amount of interfuel competition. Evidence indicates that market boundaries, de-
fined in terms of the degree of substitutability between fuels, may have changed
towards a wider market, namely, an energy market. These changes, per se, indi-
cate an increase in the level of competition. However, recent developments in the
energy area i>ermit some skepticism that the potential for greater competition
has actually been realized.
(5) Role of competition in intermediate goods markets. — The essence of eco-
nomic competition is that resource allocation choices are made by separate and
independent decision-making units. The importance of maintaining effective com-
petition in the energy sector is not adequately demonstrated by simply indicating
that monoiioly power leads to prices set above opportunity costs."^ Primary
importance in the case of energj' stems from its location in the economic pro-
cess— namely a consumed intennediate good.
Economic " theory demonstrates that price distortions flowing from market
power at such an intermediate stage lead to greater losses than would a similar
degree of market power located in a final goods market.*" Monopolistically high
prices for an input, such an energy, would be transmitted to all users of the
product and, in turn, cause them to reduce their u.sie of the input. As Kaysen and
Turner state :
. . . departures from a competitive resource allocation in markets locatetl
further back in the productive process have an ampliflefl effect through the
distortions introduced into the resource allocation of the buying industries.*^
Any price distortion in the intermediate goods price is transmitted by the price
svstem to all users, leading to a greater so-called "public welfare" loss. In con-
""The development of a commercial fuel cell by 1975 is the Roal of a group of gas
companies described as TARGET (Team to Advance Research for Gas Enerpy Trans-
mission). ,. . , i
81 For example, present technology allows the productioni of gasoline from coal at a
cost of onlv 1-20 per gallon above thepresent cost of refined gasoline.
"2 The t'eehnologv involves an MHD generator, in which there are no moving parts.
Basically, the kinetic energy of expanding gas is converted into electrical energy by util-
izing a magnetic field. .
63 When prices exceed opportunity costs, some users, or potential users, are ■willing
to pay more for an increase in output than the real cost of generating that increase.
This describes the economic meaning of an inefficient allocation of resources.
6* I. M. D. Little. The Price of Fuel (Oxford. in5.'HK "Introduction."
8^ Carl Kaysen and Donald Turner. Antitrust Policy: An Economic and Legal Analysis,
(Harvard University Press), 1965, p. 3.3.
325
trast, market power in a final goods market leads to pi-ice distortious and allo-
cative iueffi<"iene.v. but the effects are limited to a single market and adjustment
to the higher price is limited to the consumer.
For the reasons described above, if a choice must be made, it is argiiabl.v far
more important to devote resources to maintain effective competition in inter-
mediate goods markets than in consumer goods industries. This argument cer-
tainly applies to the energy sector, but. in addition, there is another reason why
maintaining competition in the energy sector is so crucial. Not only is energy
an input product, but it is a basic input used by all industries. Hence, the effects
of market power will be felt in all industries, although to different degrees de-
pending on the relative importance of energy in the industrj-'s production func-
tion, and inefficiencies in resource allocation will occur in all industries.
(6) The energy company — dci-elopmcnt of. — Anotlier dramatic development in
the energy .sector is the emergence of the so-called "energy company" — a company
with substantial holdings and operations in all energy sources. No longer do
firms limit their activities to a single fuel.
As developed in an earlier section, interfuel comi^etition has increased greatly
in recent years. The creation of energy companies might well be an attempt by
the oil companies to eliminate the emerging competition between the various
fuels.
From the viewpoint of the firm, the creation of an energy company is a logical
response to increasing intei-fuel comiietition. Given an inci'ease in the ability of
iLsers to .shift from one energ;^- source to another, the firm operating in a single
fuel area is extremely susceptible to shifts in demand due to price and/or non-
price factors. In the past, when the ability and/or willingness to shift was lesser,
the single fuel finn was relativel.v .safe from market forces.
Today's energy company is basically a trans'forme<l petroleum firm. Oil com-
panies, already heavily involved in natural gas production, liave undertaken vast
expansion plans resulting in important reserve positions in all fuels. The extent
of oil company involvement in other fuels is not fully knowai. but .some indica-
tion is available from the evidence presented in the following table. This table
understates, to some degree, the extent of oil company involvement in the nuclear
area since it omits comiiany plans to enter production and processing of nuclear
fuels such as thorium and plutonium.
OILCOIVIAPNY INVOLVEMENT IN OTHER FUEL AREAS, 1969
Energy source
Number of
companies
with
active or
planned
production
Companies
with
positions
Total
Oil shale .
3
14
13
9
18
17
Tar sands
3
16
Coal
7
16
Uranium
6
24
Source: L. C. Rogers, "Oil-finding pours into broad minerals drive," "Oil and Gas Journal," Feb. 24, 1969, p. 37.
While the evidence presented in this table does not indicate the extent of oil
company involvement in other energy sources, it clearly indicates the diversifi-
cation pattern of the oil companies. Additional information of this type is pre-
sented below in Table 12. This table provides a more comprehensive picture of
the transformation of oil companies into energj' companies.
Clearly, oil companies are engaged in the uranium area.** As discussed earlier,
the complete fuel cycle of the nuclear power industry encompasses several dis-
tinct operations. For eight large petroleum firms. Table 13 indicates their involve-
ment at different points in the complete fuel cycle.
Oil company entry into the coal market ®^ can be seen from the data contained
in Table 14. It indicates coal leases held by oil companies on public land. In addi-
tion, the estimated value of the coal reserves is presented. It should be pointed
out that, since Table 14 is limited to holdings on public land, the full extent of
coal holdings by oil firms is not revealed.
<* Oil company control of domestic uranium reserves was recently placed at 80% by
a leadinfi: trade journal. Oil and Oas Journal, Mar. 1. 1971, pp. 19-20.
<'" Oil company control of coal reserves is about 20% of domestic reserves : Oil and Gas
Journal; Mar. 1, 1971, pp. 19-20. This figure appears to be somewhat low.
326
(7) Competitive significance of events in the energy area. — In the energy area,
two developments stand out: (a) an increased degree of substitutabilitv between
the various fuels, caused to a large extent by revolutionary technological change
in the energy consuming sectors of the economy and in 'energy transportation
methods, and (b) the transformation of oil companies into energy companies.
Both events have important implications for competition between the energy
sources.
The significance of the former is that, by bringing products, previously in sep-
arate markets, into direct competition wit'i each other, market power held by a
firm in a specific fuel tends to be eroded to some degree. Ralph Nelson, in a com-
prehensive analysis of concentration trends, discovered the existence of an in-
verse relationship between market size and concentration level.*^ In short, the
emergence of an energy market, per se, implies an increase in competition.
However, the development of the energy company could offset the procomi^eti-
tive effect of wider market boundaries. While the type of evidence needed to test
this hypothesis is not readily available,*"" economic reasoning is clear as to the
possibility.
The interaction of these two forces can be illustrated by the use of a numerical
example. Table 15 lists three separate products : A, B, and C. Assume that these
products are not ready substitutes, i.e., they belong to separate economic markets.
Two additional assumptions are neces.sary : (1) the top 4 firms in each industrv
are different, and (2) each industry's output is 100 units. Table 15 indicates the
physical output produced by each of the top four firms in each industry. In each
market the top 4 produce 60 units. Hence, the concentration is 60% in each
market.
In order to demonstrate the procompetitive effects of a wider market, assume
that the products are good substitutes for each other — in place of three separate
markets there is a single economic market, as appears to be the case in energy.
Again, assume that the dominant firms in each product are different. In this
case, the largest firm in the wider market is the top firm in Product B with 40
units of output, in a similar manner, the top producer (30 units) of B would be
the second ranking firm in the wider market. Collectively, the top four would
produce 110 units with industry output being 300 units (sum of A+B+C). The
point to be made is that concentration is now 31'/f. whereas it was 69% in the
first example. The emergence of a wider market led to a reduction of concentra-
tion— a procompetitive effect.
However, to achieve the above result requires the assumption that different
sets of firms supply the three products. If this is not the case the results of a
wider market is drastically altered. To emphasize this point, assume that the 4
top firms are the same in each product. In this case, in the wider market the top
4 would produce 180 units and concentration would be 60 percent, the same level
as existed before the change in market boundaries.™
Clear implications for maintaining competition in the energy area flow from
this example. If the dominant oil companies also l»ecome the dominant suppliers
of alternative energy sources, the procompetitive effects associated with in-
creased interfuel competition will not be realized. To capture the benefits of com-
petition, merger policy, of course, must prevent the dominant oil comixinies
from establishing similar positions in the other fuels. The exact position of the
oil companies in the other fuels is not known and will l)e very ditficult to ascer-
tain, regardless of the methods employed to obtain the information. While the
full competitive effects associated with the energy company are not known, it is
clear that one very important effect has been to reduce the number of separate
decision-making units among the energy suppliers, leading to a centralization of
decision making.
The impact of this centralization on R&D activity, inventive activity, and x-ate
of innovation is of crucial importance in regards to future levels of interfuel
competition. Present research activity gives much evidence of further revolu-
tionary technological changes in the production and transportation of energy.
"'Applying his results to eners.v. a broadeninjr of market bonndnries would Increase the
size of the market and lead to a lowerinp of concentration. Ralph Nelson. Concentration
i}i the Mnnufncturing Industries of the U.S.. (Yale Press. 106.'^), pp. 46-48.
"9 The specific information would include (a) exact quantification of oil company holdings
in the alternative fuels, and (b) the holdings of non-oil companies in these fuels.
'0 Even if the top 4 firms were the same in each product line but had different ranks,
the effect would be the same — concentration would not fall to the level (H7%) it did
when firms were dominant in only one product line.
327
These developments will determine tlie future competitive positions of the in-
dividual fuels. The crucial factor is the extent to which the growth of energy
companies has centralized the decision-making power over R&D activity in com-
peting fuels in the hands of the oil industry. Can the energy company be ex-
l>ected to i)erform R&D activity in a different manner '^ than if the Anns were
operating in a single fuel area?
While the evidence is incomplete and, in some cases, contradictory some re-
liable evidence exists to indicate that ix'troleum tirms have performed somewhat
better in the area of invention and innovation than other manufacturing firms.'"
The basic question is whether, given increasing oil company control of all energy
sources, the research and development program which best sers'es the commercial
interests of the energy company also best serves the public interest.
(8) Summary. — Two developments in the energy area stand out: a) substan-
tial increase in interfuel competition, due, to a large degree, to revolutionary
changes in the technology of energy production, distribution and use: and h) the
emergence of energy companies as the result of a series of oil company
acquisitions.
From these developments flow two specific public policy questions. One, ex-
actly what are the market boundaries in the energy area and what types of
mergers are involved, i.e., horizontal or conglomerate? Two, will the mergers,
by centralizing control over R&D activities in other fuels in the hands of oil
companies, significantly affect long run interfuel competition?
D. Study plan
The Bureau of Economics is proiwsing a study aimed at investigating the com-
petitive implications associated with the development of the energy compan.v in
tlie U.S. economy. It should be pointed out that, while several government-
initiated studies of the energy area have been proposed, none, to our knowledge,
is directly aimed at assessing the competitive effects associated with the energy
company.
Listed below are areas to be studied which the Biireau of Economics believes
can lie handled with its available resources — and are necessary ,and vital to any
merger enforcement effort contemplated by the Commission.
(1) Market boundaries. — In assessing competition, one of the tasks is to
arrive at the appropriate market definition, both in terms of product lines and
geographical area. This memo contends that market boundaries have undergone
substantial change in the energy area. It appears that the individual fuels are
directly competing with each other or that the market definition has evolved
from being a coal or oil market to an energy market. If correct, the result is a
much larger market with ;an increased number of products in direct competition
with each other.
An initial investigation into this qiiestion indicates that market l)oundaries
probably can be estal)lished from public data sources. Good information on fuel
substitutability in the electric utility area is available from the National Coal
Association ''' and the Edison Electric Institute."* In addition, fuel use, by eco-
nomic sector and presented on a state-by-state basis, is availal)le from the Bureau
of Mines.'^
(2) 0(7 company acquisition. — The proposed study will attempt to determine
the nature of the mergers. They ma.v be viewed ,as either conglomerate or hori-
zontal depending upon the market definition. If separate fuel markets exist, they
are Itasically conglomerate; on the other hand, if an energj' market exists, these
mergers are horizontal in nature.
In addition, the study will determine the impact of the acquisitions on con-
centration levels.™
'^ An example : The merger of Continental Oil and Consolidation Coal involves an acqnisl-
tion by an oil firm of the coal company leading in the race to produce synithetic oil from
coal. How this will affect the Intensity of the R&D activity Is the crucial question.
'-Traditionally, economists distinguish between invention and innovation or the premise
that an invention has little or no economic significance until it is applied. Evidence of In-
ventive and innovative activity in petroleum can be found in : Edwin Mansfield, The
Economic.-^ of Technological Change. (Norton & Co., 1968), pp. 24, 2S. lOS-110.
■3 National Coal Association, Steam-Electric Plant Factors. 1968 ed, Washington, D.C.,
lOfiS.
•* Edison Electric Institute, Stati.<<ticaJ Year Book, New York, 1069.
"°IT.S. Bureau of ;Mines. Stupvhi and Demand For Enerrpi in the T'nited States By States
and Regions. 1960 and 1965, Bureau of Mines Information Circular No. 8434, Washing-
ton. n.C. 1970.
"" Concentration data will be based upon production figures. Data based upon reserve
ownership would be extremely difficult to obtain and involve a large commitment of legal
resources, with only a small probability of being successful.
27-.547 O — 74 22
328
(3) RdD activity. — There is little doubt that future levels of interfuel com-
petition will be greatly influenced l».v the outputs of present R&D programs. How
the series of oil company acquisitions involving coal and uranium mining firms
will affect the intensity and output of these R&D programs is a crucial question.
With present resources, the Bureau of Economies' can identify the competi-
tive implications flowing from the centralization of energy R&D activity in the
hands of energy companies.
However, to obtain the data necessary to evaluate the theoretical possibili-
ties a much larger resource commitment would be required. A G(b) questionnaire
would be required as well as a substantial commitment of legal resources to in-
sure a meaningful response. This process can be anticipated to be both costly
and time-consuming.
If obtained, the data could provide some answers to a very vital question. To
be candid, however, the probability of successfully obtaining such data is not
high without the major commitment of legal resources referred to above.
(4) Summary. — ^The proposed study focuses iipon the competitive implica-
tions associated with the development of the energy company — a company with
significant holdings and operations in each of the energy soiirces. This will be
accomplished by relating the energy company to (1) inter-fuel competition and
a possible change in market definition, (2) the nature of the oil company acqui-
sitions, i.e.. whether conglomerate or horizontal, and (3) research and develop-
ment activity.
The Bureau of Economics recommends that the Commission give highest
priority to such a preliminary market boundary economic study of the energy
area.
TABLE 1.— CONSUMPTION OF ENERGY RESOURCES BY MAJOR CONSUMER GROUP, 1963, 1965, AND 1967
Percent distribution
22.3
21.1
22.1
32.7
32.6
31.7
24.1
23.6
23.8
19.5
20.6
21.9
1.5
1.0
0.5
Consumer group 1963 1965 1967
Total 100.0 100.0 100.0
Household and commercial
I ndustrial
Transportation '
Electric generations, utilities 2
Miscellaneous
1 Includes military transportation.
2 Represents outputs of hydropower and nuclear power converted to theoretical energy inputs at prevailing rate of
pounds of coal per kwhr at central electric stations using 12,000 Btu per pound coal.
Source: Bureau of Mines; "Mineral Yearbook," from "Statistical Abstract 1969," 510.
TABLE 2.— ENERGY CONSUMPTION IN THE UNITED STATES PER CAPITA AND PER DOLLAR OF GNPi
[In thousands and Btu]
Year
Per capita energy Consumption per
consumption dollar of Btu
1947.
1952.
1957.
1962.
1967.
1969.
228, 132
106.1
233, 872
92.6
244, 878
96.2
256, 173
89.8
297, 543
87.3
325, 102
90.2
• GNP Is measured in 1958 dollars.
Source: Bruce Netschert, Abraham Gerber, Irwin Stelzer, "Competition in The Energy Markets," testimony before
Subcommittee on Antitrust and Monopoly, May 1970.
329
TABLE 3.-SPECIFIC ENERGY SOURCES AS PERCENTAGES OF TOTAL ENERGY CONSUMPTION i 1920-68
[In percent]
Year
Coal:
Natural gas,
Natural gas,
Oil
dry
liquids
IS. 3
4.2
0.2
22.2
5.8
.6
27.6
8.8
1.1
30.4
10.3
.9
32.1
11.4
1.0
32.3
12.6
1.5
36.0
18.0
2.3
39.9
23.1
3.0
38.2
28.3
3.2
,39.6
30.0
3.5
39.7
31.3
3.7
Electricity
Hydro
Nuclear
19203,. 78.4
1925.. 70.4
1930.... 61.2
1935 55.7
1940 _. 52.4
1945 50.7
1950 37.8
1955 29.3
1960 _ 33.2
1965 23.0
1968 21.3
3.9
3.3
3.5
4.3
3.8
4.7
4.7
3.8
3.6
3.8
3.8
1 Consumption is expressed in terns of Btu's.
■ Bituminous, lignite, and anthracite.
3 Totals may not equal 100 due to omission of exports and imports of oil.
Source: Bureau of Mines, "Mineral Yearbook," vols. I-II, various years.
TABLE 4.— BITUMINOUS COAL PRICES, 1959-69
Year
Average
value at
mine '
Freight
Wholesale
Mine run Prepared sizes
1959 4.77
1960... --.- - 4.69
1961 4.58
1962 4.48
1963 -- 4.39
1964 4.45
1965 4.44
1966 4.54
1967.... 4.62
1968 4.67
1969 5.50
3.45
3.40
3.40
3.32
3.26
3.11
3.13
3.01
3.00
3.01
5.22
5.16
5.03
4.92
:4.75
4.80
4.79
4.95
5.22
5.40
6.05
7.73
7.69
7.54
7.53
2 7.01
6.90
6.93
6.96
6.80
6.94
7.49
1 Average price at mines includes the value placed on coal at the mines for all grades.
2 Not strictly comparable with prior data.
Sources: Bureau of Mines and Bureau of Labor Statistics.
TABLE 5.— OWNERSHIP AND OTHER DATA ON 10 LARGEST COAL GROUPS
[Excluding steel company captive mines and companies producing primarily for steel industry]
Coal company
Ownership
Acquisition
date
1968 Produc-
tion 1 thou-
sands of tons
Consolidation group.
Continental Oil Co September
1966.
Peabody group Kennecott Copper Corp March 1968..
Island Creek groups Occidental Petroleum Corp January 1968
Pittson group
United Electric Coal Cos., and Free-
man Cocl Mining. General Dynamics Pre-1952 4...
Eastern Associates Eastern Gas & Fuel Association
Westmo reland .---
Old Ben Standard Oil Co. of Ohio. August 1968.
Ayrshire American Metal Climax November 1969
Pittsburg & Midway Gulf Oil Corp .- September
1963.
59, 885
Total.
Percent
of industry
production 2
12.4
59,811
12.4
32,927
6.8
19, 793
4.1
13,055
2.7
12,916
2.7
11,623
2.4
9,923
2.1
1 9,254
1.9
9,250
1.9
238, 437
49.4
^ Bituminous and lignite.
- Based on an industry total of 484,000. This total excludes 61,000 of captive production by the steel industry,
since captive companies are exiuded from the table. However, the production figures for individual companies
may include some production for the steel company market.
■' Excludes Maust coal and coke, which was acquired by Occidental in March of 1969.
' Main holdings apparently acquired in a merger with Electric Boat in 1952, but percentage ownership in-
creased in 1963 and in 1966 (to 100 percent).
330
TABLE 6.— ESTIMATED COAL PRODUCTION IN 1967-70
[Tons in thousands]
1967
1968
1969
1970, estimated
Tons
Percent
of total
production
Tons
Percent
of total
production
Tons
Percent
of total
production
Tons
Percent
of total
production
Oil companies 1 102,586 18.4 104,974 19.3 114,067
Steel companies 3 59,084 10.7 59,412 10.9 60,444
Electric utilities 4 12,973 2.3 13,747 2.5 14,707
Other industries 5 89,141 16.1 89,185 16.4 89,954
Total _._ 262,784 47.5 267,318 49.1 279,172
20.4
10.8
2.6
16.0
120,360
63,720
15,340
94, 400
= 20.4
2 10.8
2 16.0
49. 8 293, 840
49.8
1 Consolidation Coal Co. (Continental Oil), Island Creek Coal Co. (Occidental Petroleum), Old Ben Coal Corp. (Standard
Oil of Ohio), and Pittsburgh-Midway Coal Co. (Gulf Oil).
2 Estimated production of group assuming 1969 percentage and 590,000,000 tons total production in 1970.
3 Includes United States Steel, Bethlehem, Republic, Jones & Laughlin, Armco Steel corporations, and others.
4 Includes American Electric Power Corp., Duquesne Light Co., Southern Electric Generating Co., Alabama Power Co.,
and West Penn Power Co., and others.
5 Includes Kennecott Copper Co., General Dynamics Corp., American Metal Climax, Inc., Allied Chemical Corp., Union
Carbide Corp., and others.
Source: "U.S. Coal Production by Company," compiled and published by Keystone Coal industry manual, McGraw-H ill.
Inc.
TABLE 7.— OIL COMPANY INVOLVEMENT IN COAL INDUSTRY
Oil company
Coal Interest
1. Ashland Oil Co Major interest in Arch Minerals— coal.
2. Atlantic Richheld Acquired coal rights— extensive acreage.
3 Continental Oil Owner of Consolidation Coal Co.— largest in United States.
4. Gulf Oil(GGA) Owner of Pittsburg-Midway Coal Co.— large holding in Midwest.
5 Humble Oil & Refining Co ..- Extensive holdings in Midwest coal helds.
6. Occidental Pet Acquired Island Creek Coal Co.— third largest coal producer in United
States.
7. Shamrock Oil Co.. Acquired Pickens Mather Coal Co. through Kiamond Shamrock.
8. Sun Oil Co Owns extensive resources.
9. Texaco In Western Germany, etc.
10. Kennecott Copper Owns Peabody Coal Co.— second largest coal producer in United States
11. Ling Temco-Vought, Inc Ownsjones & Laughlin Steel and coal producer.
12. General Dynamics Freeman Coal & United Electric Coal Cos.
13. American Metal Climax, Inc.. Owns Ayshire Colleries.
14. Zapatco Owns Barnes & Tucker Coal Co.
15. Standard Oil Co. Ohio Owns Old Ben Coal Co. & Enos Coal Co.
16. Kerr-McGee Owner of Substantial Coal Reserves, producing coking coal from a field m
Oklahoma.
Source: Hearings, Subcommittee on Antitrust and Monopoly Senate Committee on Judiciary (1967), updated to Jan. 27
1969.
TABLE 8.— LEADING FIRMS RANKED BY SALES TO INTERSTATE PIPELINES, 1961
Producer
Percent of
total
Cumulative,
percent
Phillips
Pan American Petroleum Corp.
Humble
Shell
Texaco
Socony Mobil -
Gulf Oil.
Atlantic
Superior Oil
Sinclair Oil & Gas...
Union Producing
Union Oil of California...
Sun Oil
Cities Service
Champlin Oil & Refining
7.9
7.9
5.5
13.5
4.3
17.8
3.8
21.6
3.3
24.9
2.7
27.6
2.7
30.2
2.2
32.4
2.1
34.6
2.0
36.5
1.9
38.5
1.9
40.4
1.9
42.3
1.9
44.2
1.7
45.9
331
TABLE 9.— SALES BY PRODUCERS TO INTERSTATE PIPELINES, 1961-«8
Percent of sales accounted for by-
Year
Top 4
Top 8
Top 20
21.6
32.4
53.0
21.5
33.9
54.6
21.6
34.4
56.0
22.1
35.9
57.6
23.2
37.7
59.8
23.9
38.6
61.6
24.4
40.1
61.5
25.4
41.8
63.1
1961
1962
1963
1964
1965
1966
1967
1968
Source: Sales volumes obtained from: Federal Power Commission, "Sales by Producers of Natural Gas to Interstate
Pipelme Companies," various years.
TABLE 10.— PURCHASES OF NATURAL GAS BY INTRASTATE PIPELINES, 1961-68
Percent of purchases accounted for by —
Year
Top 4
Top 8
Top 20
45.2
63.5
60.8
60.1
60.1
59.1
58.0
58.6
58.6
93.5
45.3
90.4
42.4
42.5
40.5
38.7
39.1
38.5
90.8
90.9
90.8
91.5
92.3
92.5
1961
1962
1963
1964
1965
1966
1967
1968
Source: Federal Pow/er Commission.
TABLE 11.— SIZE, NUMBER OF FIRMS, AND DEGREE OF SELLER CONCENTRATION: FUEL CYCLE COMPONENT OF
NUCLEAR POWER SUPPLY INDUSTRY
Estimated annual U S. sales [In
millions
of 1967 dollarsl
Active U.S.
companies,!
1968
1970
1975
1980
Percent 2
107
292
563
15
60
13
35
67
3
100
120
358
714
41
100
48
175
405
5
97
3
30
100
3
100
Fuel cycle: 3
U3O8
Conversion to UFe
Enrichment
Fabrication
Reprocessing
1 Excludes companies shown as announced firm plans or project under study; also excludes foreign companies.
2 Approximate market share, top 4 participants, 1968.
'Annual market volumes include initial cores and reload. Annual demand for fuel cycle product runs approximately
one-third to one-fifth of the first core.
* U.S. Atomic Energy owned plants.
Souce: Arthur D. Little Co., Report to Atomic Energy Commission and Department of Justice," Competition in the Nuclear
Power Supply Industry," Washington : U.S. Government Printing Office, 1968, p. 63.
332
TABLE 12.-DIVERSIFICATI0N IN THE ENERGY INDUSTRIES BY THE 25 LARGEST PETROLEUM COMPANIES,
RANKED BY ASSETS, AS OF EARLY 1970
Petroleum company
(1)
1969 assets Rank In
(ttiousands) assets Gas
(2)
(3)
(4)
Energy industry
Oil shale Coal Uranium Tar sands
(5) (6) (7) (8)
Standard Oil (New Jersey) $17,537,951
Texaco 9,281,573
Gulf_. 8,104,824
Mobil 7, 162,994
Standard Oil of California 6, 145,875
Standard Oil (Indiana) 5, 150,677
Shell _.._ .__ 4,356,222
Atlantic Richfield 4,235,425
Phillips Petroleum 3, 102,280
Continental Oil 2,896,616
Sun Oil 2,528,211
Union Oil of California.. 2, 476, 414
Occidental! 2,213,506
Cities Service 2,065,600
Getty 2 1,859,024
Standard Oil (Ohio) 3 1,553,591
Pennzoil United, Inc 1,356,832
Signal 4 1,258,611
Marathon 5 1,221,288
Amerada-Hess 982,157
Ashland 846,412
Kerr-McGee 667,940
Superior Oil 494,025
Coastal States gas producing^ 490, 190
Murphy Oil 343,914
1 X
X
X
X
X
2 X
X
X
X
X
3 X
X
X
X
X
4 X
X
X
X
X
5 X
X
6 X
X
7 X
X
X
X
X
8 X
X
X
X
X
9 X
X
... X
10 X
X
X
X
11 X
X
X
X
X
12 X
X
... X
13 X
X
14 X
X
--- X
X
15 X
X
... X
16 X
X
X
X
17 X
--- X
18 X
19 X
X
20 X
--- X
21 X
X
X
X
22 X
... X
X
23 X
X
24 X
25 X
1 Includes Hooker Chemical Co.
2 Includes Skelly and Tidewater.
3 Includes reported British Petroleum assets.
4 As of June 30, 1969.
5 As of Sept. 30,1969.
Source: Col. (2) "Moody's Industrial Manual," June 1969, and 1969 annual reports.
TABLE 13.-INDICATED PRESENT OR FUTURE CAPABILITY OF OIL COMPANIES, EITHER DIRECTLY OR THROUGH
SUBSIDIARIES, IN THE NUCLEAR FUEL CYCLE
Company
Exploration
or reserve
holdings
Uranium
mining
and
milling
UF6
conversion
Fuel
preparation
or
fabrication
Fuel
reprocessing Reactors
Standard Oil (New Jersey). X
Gulf X
Atlantic Richfield X
Continental X
Getty X
Standard Oil (Ohio) X
Kerr-McGee X
Sun X
X
X
X
X
X
X
X
X
X
X
X
x'
X
X
X
"x
TABLE 14.— PUBLIC LAND COAL LEASES HELD BY OIL COMPANIES IN THEIR OWN NAME OR MAJOR KNOWN SUB-
SIDIARY, AS OF AUGUST 1970'
Company
hstimated
Number
Number of
coal leased
of
acres leased
(million
leases
(acres)
short tons)
17
37,423
643
1
4,551
48
3
15,491
164
10
8,595
106
16
37, 892
715
1
540
8
6
15,427
253
1
6,336
93
1
14, 680
155
Atlantic-Richfield
Beico Petroleum Corp
Carter Oil Co
Concho Petroleum
Consolidation Coal Co
Gdlf Oil...
Kerr-McGee
Seneca Oil Co
Sun Oil Co
Total..
56
140, 935
2,185
1 Does not include Colorado, data for which is not available.
Source: New York State Public Service Commission.
333
TABLE 15.— IMPACT OF CHANGING MARKET BOUNDARIES ON CONCENTRATION LEVELS
Separate
markets
Single 1
Tiarket
Different
Same
Firm rank
A
B
C
firms'
firms 2
1
20
40
30
40
90
?
20
10
10
30
40
^
10
5
10
20
25
4...
Tod 4
10
5
10
20
25
60
60
60
110
180
Total outDUt
100
100
60
100
60
300
37
300
CR,
((percent)
60
60
1 The dominant firms in product A are not dominant in product B, etc.
2 Each firm has the same rank in each product line.
TABLE 16.— LEADING FIRMS RANKED BY SALES TO INTERSTATE PIPELINES, 1965
[In percent]
Producer
Total
Cumulative
Humble Oil 6.4
Pan American Petroleum - 6.1
Phillips 5.9
Shell Oil --- 4.8
Gulf Oil 4.1
Socony Mobile OiL_- 4.0
Texaco -- 3. 2
Continental Oil 3.2
Union Oil of California 2.7
Sinclair Oil & Gas --- 2.6
Atla ntic Refi ni ng 2. 2
Superior Oil 2. 1
Sun Oil -- 2.1
Union Products 1-7
Cities Service Oil 1-6
6.4
12.5
18.4
23.2
27.3
31.3
34.
37.
40.
43.
45.
47.
49.
51.2
52.8
TABLE 17 -LEADING FIRMS RANKED BY SALES TO INTERSTATE PIPELINES, 1968
|ln percent]
Producer
Total
Cumulative
Humble Oil
Pan American Petroleum.
Gulf Oil
Phillips
Shell Oil
Mobil Oil
Texaco.
Union Oil
Continental Oil
Sinclair Oil & Gas
Sun Oil '.
Alberta & So. Gas Co
Superior Oil
Cities Service
Atlantic Richfield
8.6
8.6
5.9
14.5
5.7
20.2
5.2
25.4
4.8
30.2
4.2
34.4
4.1
38.5
3.3
41.8
3.0
44.8
2.2
47.0
2.0
49.0
1.9
50.9
1.8
52.7
1.8
54.4
1.8
56.2
Exhibit 4.— Letter From Commissioner Larson, AEC, Concerning the Availability
of Uranium Production and Reserves
U.S. Atomic Energy Commission,
Washington, D.C., September 11, 191/3.
Hon. Philip A. Hart,
Chainnan, Committee on the Judiciary Subcommittee on Antitrust and Monopoly,
U.S. Senate
Dear Senator Hart : Chairman Ray has asked me to reply to your letter of
August 8, 1973, concerning the availability of information on uranium production
and reserves.
334
First, let me .say that we are aware of and share with you your concern
about tlie inadequacy of energy industry data. We agree that reserve and
production data are particularly important, and we have developed such infor-
mation on uraniuna since the early 1050's.
Much of the information has been supplied l>y the uranium industry on a
voluntary basis with the understanding that proprietary information would not
be divulged. This information has been made available to the public and to
other Government agencies on a l)asis which did not identify proprietary in-
formation. Copies of recent publications based on such information are enclosed.
In the case of the FTC study on Interfuel Substitutability in the Electric
Utility Sector, information on uranium production by individual companies was
provided with the permission of the companies involved. Although the question
of reserves was discussed informally, with FTC. the matter was not pressed, and
it was the staff's understanding that the information provided was adequate.
We have supplied information on the distribution and control of uranium re-
sources within the limitations stated to various committees of Congress and
Government agencies from time to time.
We are pleased to enclose the answers to your questions in the order listed.
If we can I)e of further as.sistance, plea.se let us know.
Sincerely,
Clarence E. Laeson, Commissioner.
Enclosures.
Questions and Answers
1. Question. What information does the AEC have on uranium and/or other
fuel reserve owner.ship?
Answer. AEC has detailed information on the ownership of uranium reserves
mine-by-mine and company-by-company. AEC has not made independent assess-
ments of other fuel reserves.
2. Question. When, under what circumstances, and by what authority was this
information obtained?
Answer. This information is obtained by analysis of basic data supplied volun-
tarily by each company.
•3. Question. How was the accuracy of this data assessed?
Answei". The accuracy of the data is ase.ssed by on-the-.spot field checking,
conferences with company personnel, and independent analysis.
4- Question. What strictures exist respecting use and disposition of this data,
and why were they entered into ?
Answer. The information with respect to any individual company is treated as
proprietary and held within the AEC. This is an informal understanding on
the basis of which the companies voluntarily supply the information. However,
information compiled in a manner which does not disclose proprietary informa-
tion is published regularly and supplied, when requested, to the Congress or to
other Government agencies.
■5. Question. What are the legal powers of the AEC respecting the collection
of this type of information, e.g., does the AEC possess the power to compel
disclosure of such information?
Answer. As indicated, information concerning ownership of uranium reserves
has been acquired on a voluntary l)asis. Section 65 of the Atomic Energy Act of
1954, as amended, precludes the Commis.sion's requiring reports with respect to
any source material prior to removal from its place of deposit in nature.
Section 65 provides as follows :
"REPORTING. — The Commission is authorized to is.sue such rules, regula-
tions, or orders requiring reports of ownership, posses.sion, extraction, refining,
shipment, or other handling of .source material as it may deem necessary, except
that such reports shall not be required with respect to (a) any source material
prior to removal from its place of deposit in nature, or (b) quantities of source
material which in the opinion of the Commission are unimportant or the report-
ing of which will di.scourage independent prospecting for new deposits."
6. Question. What are the AEC policies concerning the collection of such
information?
Answer. In view of AEC's lack of authority to require reports concerning
ownership of reserves, AEC policy concerning the collection of such information
is to obtain it from the mining companies on a voluntary basis.
7. Question. What are the policies concerning the dissemination of such in-
formation to the public, to other regulatory agencie.s, and to the Congress?
335
Answer. The AEC policy is to make public as much data as possible without
divulging proprietary information and to provide the information within this
limitation, to Congress and other Government agencies.
S. Question. According to AEC information, what are the facts relevant to
the specific FTC request described by Dr. Mann?
Answer. The problem of supplying proprietary information on reserves and
production was discussed by AEC staff with Dr. Mann and other FTC staff.
It was agreed that FTC would request the companies to give permission to AEC
to provide certain production data or to supply the data directly to FTC. Most
of the companies contacted acceded to the request and asked AEC to provide the
data. It is our understanding that most or all of the remaining companies .sup-
plied data directly. FTC staff also explored with our Grand Junction, Colorado,
Office means by which information on reserves could be obtained in a form use-
ful to FTC but not compromising proprietary information. It is our understand-
ing that the Grand Junction Office requested that FTC make an official request
for the information it considered necessary to AEC Headquarters. To our
knowledge, no such request was made.
Senator Hart. Mr. Schwartz, I am advised that yesterday or last
niofht a decision was made to oive Dr. Tnre an opportunity to testify
toda}" becanse of an engagement he had. We will hear him now.
Our next witness is Dr. Norman B. Ture, speaking for the Gas
Supply Committee.
STATEMENT OF DR. NORMAN B. TURE, ON BEHALF OF THE GAS
SUPPLY COMMITTEE
Dr. TiTRE. My name is Norman B. Ture, and I am appearing before
this subcommittee on l)ehalf of the Gas Supply Committee.
I am informed that the Gas Supply Committee was formed in 1965
for the purpose of seeking amendatory legislation with respect to
natural gas producers. The Gas Supply Committee is sustained by
:Contributions from natural gas producers and regularly files all
required reports under the Federal Eegulation of Lobbying Act.
In April 1973, I was requested by the Gas Supply Committee to
prepare a study on competition in the natural gas producing industry.
This study was undertaken for the purpose of presenting it in such
congressional hearings as might be held during this term of Congress
on proposals to amend the Natural Gas Act. Since the issue of com-
petition in tlie natural gas producing industry and the relationship
of that issue to the present shortage of natural gas is of interest to
this committee, I am requesting that my study, "Competition in
Natural Gas Production,"' be sul^mitted for the record at this time.
The materials I have submitted for the record and my oral testimony
today are the products of my own independent research and analysis.
[For the study referred to see exhibit 1 at the end of Dr. Ture's
testimony.]
Dr. TrRE. The T'.S. economy has experienced an increasing shortage
of natural gas during tlie past few years, and tliis shortage threatens
to become more serious in the years ahead. The central issue for public
policy posed by this shortage is whether the FPC reirulation of natural
gas wellhead prices permits: (a) The efficient distribution of the
existing supply of natural gas among purchasers, and (b) meeting
longer term demands for i^as.
One view is that the shortage is attributable to a lack of effective
competition in the natural gas producing industry — this view is in-
correct. Objective, rigorous analysis strongly urges that the natural
336
gas producing industry is highly and effectively competitive, and
the data pertaining to the industry's operations and market results
unmistakably confirm this finding.
The gas shortage is not the outcome of a lack of competition in the
industry. It is, rather, the product of FPC ceilings on gas prices set
at levels below those which are necessary to clear the market.
Continued insistence on wellhead gas price regulation is equivalent
to continued insistence on gas shortages. If the price of gas is not
permitted to be determined in the market, it will be necessary to find
some other means for determining which gas users will get how much
gas. Any such non-price rationing would mean an inefficient distribu-
tion of gas supplies. It would also result in less of the economy's
production resources being devoted to exploration, development, and
production of gas than would be warranted by the value which would
be placed on gas in an unregulated market. Regulated prices do not
serve the present or future interests of consumers.
The central policy issue raised by the existing and prospective
shortage of gas is whether any price for gas other than the unregulated
market price will deal effectively with these shortages. Eegrettably,
this issue has been obfuscated by unfounded allegations that the
natural gas producing industry is noncompetitive or monopolized.
In fact, measured against the standard criteria for distinguishing
between competitive and monopolistic industries, the natural gas
producing industry must be characterized as highly and effectively
competitive.
One of the principal conditions for perfect competition is that the
industry in question consists of so large a number of companies that
the actions of no one company has a significant influence on the price
of the industry's product. Rigorous analysis regrettably affords no
basis for determining the minimum number of companies required
to satisfy this condition.
Data from various Government sources show a very large number
of natural gas producers :
Table 1. — Number of natural gas producers
Data source and year — Federal income tax returns (1968) :
Corporation 3, 218
Individual 35, 738
Partnership 10, 795
Census of Mineral Industries (1967) 5,482
Federal Power Commission (1971) 3,745
Despite the differences among these data sources with respect to
the criteria for including companies in the population, even the mini-
mum estimate shows a substantial number of producers.
A second condition for perfect competition is that companies in
the industry act independently. The extremely large number of natural
gas producers clearly precludes the possibility of effective coml^ination
among any significant number of them. In an unregulated market,
the difficulties whicli would be met in efforts by any few gas producers
to exert substantial control over any significant part of the total
producer population boggles the mind-
Often cited as evidence to the contrary is the prevalence of so-called
interties or interlocks. The terms refer to a variety of arrangements
337
among producers to act jointly with resj^ect to one or more aspects of
biddino- for leases, exploration and development activity, production,
and so forth. Tliese arrangements are made among a great many pro-
ducers— among major and among smaller, independent producers.
They are entered into with respect to domestic and foreign ventures
and onshore and offshore leases. The company composition varies from
arrangement to arrangement, with respect to both the identity of the
companies and their shares in each arrangement. There is nothing
furtive about these arrangements, nor is there evidence of concern by
the producere participating in them over a widespread public knowl-
edge of the arrangements.
N"o evidence has been presented to show that the so-called interties
have reduced effective competition. On the contran% these aiTange-
ments have facilitated rather than impeded competitive participa-
tion by producers other than the largest companies. If joint bidding
were prohibited, it is milikely that the smaller companies" financial
resources would permit their effective participation in lease sales. As
you know, smaller companies have indeed participated veiy effectively
in lease sales.
To the extent that these arrangements reduce risk, they also reduce
the cost of capital committed to additions to the supply of gas; hence,
they increase rather than restrict gas supply. Insofar as small inde-
pendents are included, the arrangements have the effect of expanding
and diversifying their lease acquisition, exploration and production
opportunities and capacity with respect to their capital resources. In
every significant respect, interties and interlocks promote rather than
inhibit comj^etition among producers.
The widespread allegation that interties are evidence of collusive,
noncompetitive behavior among producers is without foundation.
Another condition for perfect competition is that there is no sig-
nificant barrier to the entry of new firms. Barriers to entry into an
industry' are generally thought to arise from one or more of a number
of factoi*s, such as exclusive control by existing companies of some es-
sential production input or process, some minimum scale of plant re-
quired for at least marginally efficient operation, large capital require-
ments, some absolute cost advantages enjoyed by the existing
companies, or highly effective product differentiation, whether of the
physical characteristics of the product or merely subjective. Xone of
these entry barriers is significant in natural gas j^roduction.
Let me add another potential entry barrier. In the theory of oli-
gopoly, the longrun profit-maximizing strategy may be for oligopo-
listic companies to hold price at a depressed level in order to repel
possible new entrants into the industry. In fact, in my judgment, the
artificially low price of natural gas at the wellhead imposed by the
regulatory process has had this effect. If prices were deregulated and
if, in fact, the industry were oligopolistic, there would be very little
by way of a price increase. On the other hand, if you firmly anticipate
that if the industry were deregulated prices would go up, that would
be some of the strongest evidence that you can fiiid that the industry
indeed is not oligopolistic.
The large number of gas producers furthermore provides evidence
that there are no significant barriers to entry, either inherent in the
market or enforced by collusive action by producers. From 1951
338
through 1963, the number of corporate returns filed by crude petro-
leum, natural jjas, and natural gas liquid producers increased from
2,934 to 4,549. Thereafter, the number of returns declined to 3,218 for
the taxable year 1968. Among proprietorships, the number of returns
rose irregularly from 21,590 in 1957 to 35,738 in 1968, the most re-
cent year available. The number of partnership returns has fluctuated
within a much narrower range, from a low of 8,449 in 1959 to a high
of 12,467 in 1965.
Moreover, growth in production and sales of the smaller producers is
often spectacular. The performance record of the companies shown
in table 2 in merely illustrative of a commonplace phenomenon in
the industry.
[Table 2 follows:]
TABLE 2— GROWTH OF SALES BY SMALL NATURAL GAS PRODUCERS TO INTERSTATE
PIPELINE COIVIPANIES, 1961-71
1971 sales
(billion ft 3)
Increase
since 1961
(percent)
Annual
growth
(percent)
An-Son Corp
Apache Corp
Isaac Arnold
Exchange Oil & Gas Corp___
Imperial American Management-
King Resources Co
IVIAPC04._._
Midwest Oil Corp _.
Monsanto Co _..
Newmont Oil
0DEC05 _._
Rodman Corp _
Samadan Oil
Stephens Prod Co
TransOcean Oil, Inc.'.
9.5
1239
127.7
11.4
246
13.2
34.5
1,465
31.7
21.7
2 141
2 24.6
15.1
3 76
3 76.0
17.4
2 545
2 59.4
23.4
398
17.4
11.6
300
14.9
42.3
386
17.1
10.4
316
15.3
38.9
925
26.2
32.6
8 782
6 98.5
12.6
425
18.0
39.3
293
14.7
19.9
295
14.7
1 Since 1966.
2 Since 1967.
3 Since 1970.
* Changed name from Producing Properties in 1964.
5 Ocean Drilling & Exploration Co.
'Since 1968.
' Formed from operations of J. Ray McDermott Co. in 1968.
Source: Federal Power Commission, "Sales by Producers of Natural Gas to Interstate Pipeline Cos.," (1961-71).
Dr. TuRE. Few of the major natural gas producers can match the
growth record of the comjjanies shown in table 2. And surely these
data urge that neither the majors nor the industry structure in general
pose any monopolistic impediment to the remarkable growth per-
formance of these small conij^anies.
These data stron<rly nrge that both entrv into and exit from natural
gas production encounter no significant barriers. Indeed, the only
major deterrent to expansion of the producer population in interstate
gas is the artificially low price ceiling on gas imposed by FPC, which
in turn unduly restricts the rate of return on investment in reserve
additions.
Those who view the industry as nnncomj^etitive point to the allegedly
high proportion of total sales accounted for by a few companies as evi-
dence of noncompetitive conditions. Neither the data pertaining to
natural gas sales nor economic analysis su])];)ort this conclusion. In
the liofht of the basic characteristics of tlie industrv, the data on sales
339
concentration in no way challenofe the view that the industry is highly
and eftectively competitive.
According- to FPC data, the eight largest producers accounted for
41.8 percent, of the total sales to interstate pipelines reported by pro-
ducers to the FPC in 1968. In 1971, this share had increased slightly to
45.-3 percent.
Among the top eight producers, the s]Head in market shares was rela-
tively modest. In 1968, the largest producer's share was 8.6 percent,
and the eighth largest producer's was 3.3 percent.
The market share rankings of gas producers change frequently:
even among the major producers, market position changes materially
within a short period of time. Figiire 1 shows these changes in mar-
ket rank from 1957-69. This shifting of rank in market shares
clearly demonstrates that no one producer has tlie power to control or
even inaterially to influence either total output or prices. It is also
noteworthy that there is no correlation between size of company and
interstate gas sales revenues. For example, the avei-age revenue of
the second four largest companies is somewhat greater than that of
the first four.
[Figure 1 follows :]
340
FIGURE 1.
TURNOVER INDICATED 3Y CHANGE IN RANK
AMONG THE TEN LARGEST SELLERS OF NATURAL GAS
IN THE UNITED STATES
RANKING ON THE BASIS OF DELIVERIES TO INTERSTATE PIPELINES IN A GIVEN YEAR
1957 1960 1963 1966 1969
3
4
5
6
7
e
9
10
^^*
V /
v.. ^^'
^ 10 — N--
RANK (N 1969
I. HumbI* Oil ond Ralining Co.
2 AMOCO Production Co.
3 Shell Oil Co.
4. Cull Oil Co>p.
5. Phillipi Polioloum Co.
6. Mobil Oil Co.
7. T*Hoco Inc.
B. Allonlic Richliold Co.
9. Union Oil Co. ol Cqliiornia
10. Conlinonlol Oil Co.
Suporior Oil Co.
Sinclair Oil k Oei Co.
Allonlic Rolining Co.
Chomplln Oil and Rollnlne C*.
Union Producing Co.
w*mvnxiMfvrrmmmrt9*vnm
^AMM>*>VW^MMM«W*«MMMMaW
tOUtCI> 'od^tol P*w«r Cowwlnlon. Sol»i by Pf o i< v c tr ^, af
rtqiVfPl t>oi t» InHfimn Piir«lin« ComooAi...
341
Dr. TuRE. To put tlie natural ^as concentration ratios in perspective,
they may be compared witli the measures of concentration in manu-
facturing industries. The Census of Mamifactures for 1967 shows
that for all manufacturinij industries the median concentration ratio
was 48 percent. In other words, the natural crus producino: industry is
below the median level of concentration found in manufacturincr. Out
of a total of 412 industries, 213 or 52 percent had 8-firm concentration
ratios of 46 percent or above.
A concentration ratio of 45.3 percent, as in the case of natural gas,
clearly is not extraordinarily hicrh. The natural jras production in-
dustry ratio ranks below — probably well below — that of at least half
of the private sector of the U.S. economy. Even if, contrary to fact,
these concentration ratios were meanino:ful measures of competitive-
ness, one would have to conclude that, at worst, the natural gas pro-
ducing industiy was more competitive than half of U.S. business.
Careful empirical investigations show no significant relationship
betAveen the degree of concentration and market prices. For example,
a study by Richard Selden and Horace J. dePodwin comparing price
changes with changes in concentration over the period 1953-59 shows
that concentration explains only 1 percent of price changes and that
within industry categories there is no relationsliip between price move-
ments and degree of concentration. Moreover, the analytical connection
between some measure of concentration and degree of competitiveness
has not been established. And the conceptual validity and usefulness
of the concentration measures whicli are typically used is questionable.
None of the conditions required for perfect competition demands
that all of the firms in a perfectly competitive industry must be of
equal size, for example, have an equal percentage of output and sales.
It is an observable fact that company size varies in every industry, and
that the distribution of companies by size has little if any relation-
shij) to industry competitiveness. Substantial variation in size is com-
patible with efficient operation, irrespective of the competitiveness of
the industry.
One should expect, therefore, that even in tlie most nearly perfectly
competitive industry, a relatively small proportion of the companies
account for a disproportionately large proportion of sales. Data which
show the proportion of sales by the top 4. 8, 20. et cetera, companies
do not measure or describe industry competitiveness.
The notion that if there is some significant concentration of the
sales in an industry the industry cannot be competitive appears to rest
on the assumption that when a few firms account for a relatively large
proportion of an industry's sales, they control the market, that is, can
determine the total quantity sold and the price of the product. Con-
centration of sales, althoujrh a necessarv condition, is not a sufficient
condition for such control. To conti-ol market results, the major firms
would also have to be able to prevent entry of new firms or expansion
of output of other existing firms. The evidence is unmistakable that
the major producers have no such power.
The measure of concentration most commonly used in the United
States is the share of an industi-y's sales from the four, eight, et cetera,
largest companies. The interpretation of these indexes as measures of
342
competitiveness, however, is entirely ambiguoiis. For example, suppose
that in industry A the first 4 companies account foi- 15 ]iercent of sales
and the next 4 companies for 10 percent, while in industry B, the first 4
companies' share is 14 percent and the next 4 have 12 percent. If the
concentration ratio is measured by reference to the first four companies,
industry A is less competitive than B ; but if the first eiofht companies
are used, industry B is less competitive. Would industry A or B be
more or less competitive than industiy C in wliich the largest company
has 10 percent of total sales and no other company has more than 1
percent? Presumably, if the first 12, Ifi. 20, and 50 companies were al-
ternatively used, the competitive rankings of the industries would
change with each measure.
Given the narrow range of market shares among the major gas pro-
ducers— as shown by the FPC data on sales to interstate pipelines — the
lack of significant barriers to entry, the large number of producers, and
the lack of significant product di fie rent iation, it is difficult to believe
that any one company could exercise any significant control in an un-
regulated natural gas market.
The existence of the imregulated intrastate market alongside the
regulated interstate market, both supplied by producers selling in both
markets, affords an opportunity to test the opposing propositions about
the competitiveness of the gas producing industry. Surely if the indus-
try is monopolistic or highly comj^etitive its performance in the un-
regulated intrastate mai-ket should cast up evidence to this effect. In
fact, however, such data as are available with respect to the intra-
state market strongly affirm precisely the opposite conclusion : the
industry is highly and effectively competitive.
Two separate tests, each solidly based on fundamental analytical
propositions, are possible with the data available for the intrastate
market. The first of these tests is a comparison of gas prices in the in-
trastate and interstate markets in given regions. Economic analysis
leads to the conclusion that prices in the two markets should, in gen-
eral, be quite close if the gas producing industry is highly and effec-
tively competitive and if the FPC ceiling price is at least high enough
to clear the market. If the industry, rather, is highly noncompetitive,
substantial differences between the prices in the two markets should
generally prevail.
For the period in the mid-to-late 1960's, prior to the sharply increas-
ing shortages, intrastate prices were very nearly the same as interstate
prices. In general, the difference between the prices in any given region
was in the neighborhood of 1 cent per thounsand cubic feet as shown in
table 3.
[Table 3 follows:]
343
TABLE 3.-INTERSTATE AND INTRASTATE GAS PRICES IN CENTS PER THOUSAND CUBIC FEET, SELECTED REGIONS
1966-69
1966
1
1967
1
1968
1969
Region
Weighted
Weighted
Weighted
Weighted
average'
Range
average'
Range
average'
Range
average '
Range
South
Louisiana: 2
Offshore
interstate..
19.29
17. 00-19. 50
20.18
18. 50-24. 00
20.66
18.50-21.25
21.05
19.50-22.25
Onshore
interstate..
20.42
13.30-21.25
20.64
15.00-21.25
20.91
17. 50-22. 00
21.21
17.50-22.75
Onshore
intrastate..
19.58
14. 00-22. 30
19.58
16.50-24.45
20.21
14.75-30.00
20.32
19.50-23.68
Texas Gulf
Coast: 2
Interstate
15.59
12.00-17.00
15.70
14.25-17.00
16.89
14. 25-17. 8C
17.71
14.00-21.25
Intrastate
16.10
11.00-18.00
17.47
10.00-20.00
17.15
13.75-19.50
18.94
12.00-21.50
Rocky
Mountain: 2
interstate
13.21
8. 93-16. 00
14.45
8. 93-16. 00
14.03
8.93-15.00
14.48
8.93-17.55
Intrastate
5.09
11.51-16.90
17.29
17.00-17.50
11.57
9. 75-12. 00
Permian
Basin: 2
Interstate
16.41
12.50-13.66
16.92
14.50-17.50
16.30
14.50-17.50
16.73
14. 50-18. 00
Intrastate
16.97
3.65-19.25
16.28
15.24-22.00
17.11
13.00-18.00
18.33
12.00-20.25
' The term weighted average is defined as the sum of the annual volume of each contract multiplied by the applicable
rate of each contract divided by the total annual volume of all contracts dated in the respective year.
■ Prices are initial contract rates except for South Louisiana, which includes tax reimbursement. Prices were reported
at, or converted to, pressure of 14.65 lb./in.2a except f r S uth Louisiana, which is based on pressure of 15.025 Ib/in2a
Sources: Interstate: Foster Associates, Inc., from data supplied to Federal Power Commission. Intrastate: Federa
Power Commission, Docket No. R-389A, "Initial Rates for Future Sales of Natural Gas for All Areas," Sept. 9, 1970.
Dr. TuRE. This result is sharply at odds with those which would have
occurred if producers had operated noncompetitively in the intrastate
market. On the other hand, they are precisely the results one would
expect if the fjas production industry is hi<T:hly and effectively com-
petitive.
The findino-s for this period are so uro:ently persuasive that the ^as
producino- industry was hig^hly and effectively competitive in the un-
reo;ulated intrastate markets that any assertion that it no longer is
should require the most rio;orous proofs. At the very least, it would
be necessary to explain why the industry had changed in so short a
period of time from a highly, effectively competitive one to a highly
noncompetitive one.
The second test is a comparison of the spread among gas prices in
the intrastate market with the spread among costs of production of
the gas. If the industry is highly and effectively competitive, the dis-
persion in prices in any region in the intrastate market should be sub-
stantially less than the dispersion in costs. If the industry were signifi-
cantly noncompetitive, on the other hand, there should be much less
of a difference between the respective dispersions.
27-547-0—74 23
344
A comparison of the range of prices of intrastate sales of gas con-
tracted for in 1969 with tlie corresponding range of partial costs of
producers selling gas in the intrastate and interstate markets is shown
in table 4. Clearly, the range in intrastate sales prices — cents per mil-
lion cubic feet — in the southern Louisiana, Rocky Mountain, and Per-
sian Basin regions is far less than the range in the costs shown for that
gas.
[Table 4 follows:]
TABLE 4.-DISPERSI0N OF PARTIAL GAS COSTSi AND PRICES— SELECTED REGIONS, 1969
[I n cents per thousand cubic feetl
Range of Range of
elements of gas intrastate
Region production costs sales prices
Southern Louisiana 1.36-93.73 19.50-23.68
Rocky Mountain _ 1.64-14.45 9.75-12.00
Permian Basin __ 1.67-518.82 12.00-20.25
' Costs used in the arrays consist of direct lease operating expenses and depreciation, depletion, and amortization
reported on the 3 gas well gas lease classifications of gas only, gas condensate with lease separation, and gas condensate
with no lease separation. While the items of costs used do not represent all cost data reported in the cost questionnaires,
they do represent the major operating costs which can be identified with gas well production without allocation.
Other major items of costs reported in the cost questionnaires such as exploration and development costs, investment
in leases and equipment, and royalties generally require allocation to gas well gas in order to derive total costs. These
costs, therefore, are not included here. Such allocations and derivations are subject to difference of opinion on methods
to be employed. Consequently, any array of individual company costs would be subject to question on allocation bases.
To avoid that question only the selected costs identifiable directly with gas well gas production reported here have been
used.
While these arrays do not represent total company gas well gas costs or a proxy, they nevertheless do indicate the range
of costs experienced by individual companies in the industry.
Source: Cost questionnaires filed by producers with, and available at, the Federal Power Commission.
Dr. Ttjre. These test results strongly support the conclusion to be
drawn from the first test, pertaining to the similarity of gas prices in
both regulated and unregulated markets : The natural gas producing
industry is highly and effectively competitive. Taken together, these
test results, along with the data and analysis pertaining to the struc-
ture of the industry presented above, impose, in my judgment, an
enormous burden of proof, both analytical and factual, on those who
assert that the industry is significantly noncompetitive.
The argument that links the degree of competitiveness of the nat-
ural gas industry to the need for regulating the price of gas seems to be
that the shortage of gas results from the alleged fact that gas pro-
ducers are noncompetitive, that the prices they would set if unregu-
lated would be based on contrived shortages, and that if gas prices
were established by the FPC at the level of gas costs, regulation should
not be blamed for the shortage. It is further argued that, given these
facts, deregulation of interstate gas prices would result in prices in
excess of a just and reasonable price, affording windfall profits to pro-
ducers and impairing the interests of consumers.
This argument raises serious issues of both fact and analysis. The
assertion that the gas producing industry is noncompetitive is not
justified by analysis of the characteristics and market results of the
industry. On the contrary, the industry is highly and effectively com-
petitive. But quite apart from those findings, the basic premises upon
which the arguments for regulation are based ai-e subject to serious
challenge. These premises are: One, prices set by the FPC equal to
estimated costs of production arc the same as the market prices which
345
would i^revail in competitive markets ; two, cost-based regulated prices
are in no way responsible for the existing and prospective gas short-
ages; and three, the price increases which would result if interstate
gas were deregulated would be excessive, would provide windfall prof-
its for producers, would injure consimiere, and would not be necessary
to deal with the gas shortage.
It is widely believed that regulation by a public authority of the
price of a commodity or service aims at achieving the results which
would prevail if the commodity or service were sold in a perfectly
competitive market. Moreover, the competitive market price which
regulation ostensibly aims at reproducing is asserted to be equal to the
cost of producing the commodity or service.
Basic economic analysis demonstrates that any company, if it maxi-
mizes its profits, produces that quantity of its output the marginal
cost of which is equal to the marginal revenue. Under conditions of
perfect competition, marginal revenue for the company is equal to the
prevailing market price.
In regulatory practice, however, it is not the marginal but the aver-
age cost to which the regulated price is equated. The average cost of
that best, profit-maximizing quantity for the company to produce and
soil, however, will coincide with its marginal cost only if the market is
in longrun equilibrium.
Longrun equilibrium, however, is hardly a normal or usual state of
affairs in the dynamic real world. The mere fact of an observed increas-
ing market demand for a product or service is sufficient to establish
that market conditions are other than longrun equilibrium.
Any assertion that the average cost of gas is the competitive market
price is simply, unmistakably wrong. It is wrong in the context of the
rudimentary theory of competitive price. It is wrong as a character-
ization of the real world state of affairs. And it is wrong irrespective of
one's belief as to the competitiveness of the gas producing industry.
The problem with cost-based price regulation is not merely its con-
ceptual frailty, but also that it prevents the market from performing
its essential functions efficiently. Such price regidation precludes
market clearing, resulting either in surpluses or in shortages of gas.
If FPC regulates the price of gas. the market will clear only if the
regulated price is exactly that at which the quantity of gas demanded
IS precisely equal to the quantity that will be supplied. At any other
price, either a shortage or surplus will exist, irrespective of whether
the gas producing industry is highly monopolistic or effectively com-
petitive. But since the price fixed by FPC ostensibly is equal'to the
average cost of gas, price regulation will clear the market only if
what IS deemed by the FPC to be the average cost by purest chance
coincides with the actual market-clearing price.
Even if by pure chance the price fixed by the FPC today clears
today s market, changes in demand and in costs will make that price
invalid as those changes occur. Effective— that is, market-clearing—
price regulation, therefore, requires perfect forecasts by FPC of
changing cost and demand conditions.
It must surely be evident that FPC has seriously underestimated
both the increase in demand and the increase in the costs of gas pro-
duction. The industry is appropriately characterized as one of increas-
nig costs. Efforts to increase gas supply by the addition of reserves
346
result in sharply rising costs. Taken together with the rapidly accel-
erating increases in the demand for gas, these factors have called for
substantial increases in gas prices if shortages were to be averted.
FPC ceiling prices, no matter how determined, have fallen far short
of those required to clear the market. Since FPC has set ceiling prices
equal to its estimates of the average cost of gas, regulation must be
blamed for the gas shortage tiiat has developed. Moreover, regulation
per se is responsible for its shortage, entirely irrespective of the degree
of competitiveness of the regulated industry.
One of the principal objections voiced against deregulating the price
of natural gas in order to deal with the gas shortage is that since the
industry is monopolistic, the price increase resulting from deregula-
tion would provide windfall profits to producers. The implication in
this objection is that price increases will result from deregulation only
because the industry is allegedly monopolistic. Since the industry is
monopolistic, so the argument goes, the price increases will afford
windfall profits to the producers ; these windfalls, presumably, would
not be realized if the industry were competitive. There is, moreover,
a further implication that windfalls are intrinsically objectionable.
It is evident that at the existing FPC ceiling prices the quantity of
gas supplied is less than that demanded. Deregulation will result in
an increase in gas prices, irrespective of the competitiveness of the gas
producing industry. The extent of the price increase will depend pri-
marily on the elasticity of the market demand for gas, on how large
that demand is, on the marginal costs of gas production in the short
run, and on the increase in costs for additional reserves over the longer
run.
The objection to windfall profits seems to be based on the idea that
such profits are not earned, that they are realized because of events
over which those receiving them exercised no control. It is, of course,
the very nature of windfalls — whether profits or losses — that they are
unanticipated, since if they had been correctly forecast, the adjust-
ments made by the market participants would have precluded their
materializing.
Windfall gains and losses occur because information is not complete
or fully accurate. But information is not costless, and the more nearly
complete the information desired, the greater will be the cost of its
acquisition. Moreover, the more d^-namic the economic environment,
the more difficult it will be to obtain information. Clearly, then, infor-
mation in any industry or market is likely to be far less than complete,
particularly in a highly dynamic economy. Windfalls, therefore, are
likely to be frequent and widespread. To impute something undesir-
able to windfalls, whether gains or losses, is to wish for costless, perfect
information as a universal state of affairs.
To imply that windfall profits are realized only by monopolists
suggests that only monopolists have imperfect foresight about cost
and demand conditions or are consistently, even though unpredict-
ably, lucky. Indeed, if the market power-administered price view were
correct, monopolists presumably would have superior foresight and
would realize windfall gains or losses far less frequently than others.
Windfalls must be clearly distinguished from anticipated varia-
tions in the outcomes of business ventures. Virtually all investment
decisions involve, either explicitly or implicity, an estimate with vary-
347
ing weio:hts of a ninfre of possible outcomes, from losses (failure to
recoup the investmeut) to bonanzas (profits very substantially above
those realized on the average). This variation in possiWe outcomes is
the principal measure of the risk of a venture. The fact that perhaps
1 out of 10 ventures by a company results in extraordinary profits does
not mean that the company has realized a windfall. On the contrary,
if such extraordinary profits were not occasionally realized, then the
avei-age outcome of some large number of investments over time,
by tlie same token, would also be lower.
Such variation in results occurs in every industry, and regulated
industries are no exception. Since producers occasionally realize very
high i-eturns on gas sold subject to FPC regulation, regarding those
high return as windfalls Avould be to assert that regulation can no
more tiian the unregulated market prevent the realization of wind-
falls. The argument that regulation must be continued in order
to prevent windfalls, if they were defined as the extraordinarily liigh
returns within the probability distribution of outcomes, then would
be demonstrably wrong. And regulatory action cannot nor should it
seek to prevent windfalls, correctly defined, in the dynamic real world.
In the case of a product or service the price of which is set by public
regulation rather than the market, the potential for windfall profits
in the event of deregulation is always present, irrespective of the com-
petitiveness of the regulated industry.
One of the arguments for continued regulation of the price of gas
is that deregulation would result in a price that exceeds the just and
reasonable price for gas. Setting just and reasonable prices is one of
the hallmarks of public utility regulation in the ITnited States, de-
spite the fact that "just and reasonable" is a term that defies precise
economic meaning. Over the years, however, the terms lias, apparently,
come to mean a price at which the regulated company or industry will
earn a normal rate of return on its capital.
The normal rate of return on investment is associated witli market
conditions of longrun equilibrium. Given the present and prospective
shortages, the industry clearly is not in longrun equilibrium. Dereg-
ulation would surely result iii an increase in the price of gas, irre-
spective of the competiveness of the industry. If FPC deems the
present ceiling price to be just and reasonable — despite the fact that
it has generated a severe shortage and continues to do so — ^tlien any
market-clearing price will exceed the just and reasonable price, how-
ever competitive the industry.
Continued insistence on a regulated price for gas equal to the just
and reasonable price based on, at best, grossly imprecise cost data,
therefore, is the same as continued insistence on market disequilibrium.
Finally, the argument that continued regulation of the price of
gas is ne"cessary to protect the interests of consumers is equivalent to
asserting that "consumers are better served by artificially depressed
prices and the resulting shortages than they would be by higher,
market-clearing prices. Artificially low prices and attendant short-
ages necessarily mean that consumers who do get gas pay less for it
tiian it is worth to some nonconsumers who, because of regulation, are
precluded from bidding it away. The well-being of consumers taken
altogether clearly will be greater if the supply of gas is allocated to
those who value it most.
348
Examination of the characteristics of the natural g:as producing
industry and the data pertaining to its operations reveals that in every
significant respect the industry is liighly and elTectively competitive.
To argue that the industry is monopolistic and for that reason must
continue to be regulated in its interstate operations in order to protect
the interests of consumers is to urge the indefinite perpetuation of gas
shortages. As shown, regulated prices based on arbitrary and imprecise
computations of average production costs are not the prices which
would prevail in an unregulated competitive market. Eegidated prices
do not serve the interests of consumers; rather, under present and
foreseeable circumstances, they generate shortages which impair con-
sumer well-being.
Senator Hart. Thank you very much. Dr. Ture.
At 12 :30, under an earlier order, the Senate will have a rollcall
vote on nominations for the FBI Director, Given the fact that it is
now 12 :27, T suggest that after one question we recess and resume at
2 o'clock. Will you be able to do that?
Dr. TtTKE. Yes.
Senator Hart. For the record, would you state in summary your
professional qualifications ?
Dr. Ture. Yes, sir. I am a Ph. D. and M.A. in economics, granted
by the University of Chicago. My present position is president of
Norman B. Ture, Lie, an economic consulting firm in the District of
Columbia. My company provides research and consultant services to
businesses, trade associations, and Government with respect to a wide
area of problems, particularly those concerning public jwlicy in the
general field of economics. I held academic positions with Illinois
College, the University of Pennsylvania, and George Washington Uni-
versity. Before establishing my firm I served as an economist with
the Planning Research Corp. Tliat is a private, for-profit contract
research company. Prior to joining PRC I was director of tax studies
at the National Bureau of Economic Research, Inc., from. 1961 to 1968.
It is a very prestigious, highly estimable, nonprofit research institu-
tion. Earlier I served as a member of the staff of the Joint Economic
Committee from 1955 to 1961, and before that on the analysis staff, tax
division, in the U.S. Treasury.
I served on President-elect Kennedy's task force in 1960. I was
chairman of President-elect Nixon's task force on taxation in 1968
and I served as a member of the President's business tax task force in
1969-70.
Senator Hart. Thank you. I know that was in your prepared and
full statement, but I thought we should liave it for the record.
We recess to resume at 2 o'clock.
[A^^iereupon, at 12 :30 p.m.. the subcommittee recessed, to recon-
vene at 2 p.m. this same day.]
AFTERXOOX SESSION
STATEMENT OF DR. NORMAN B. TURE, ON BEHALF OF THE GAS
SUPPLY COMMITTEE— Resumed
Mr. Bangiert. Mr. Ture, in your statement you gave a brief explana-
tion of the Gas Supply Committee and I wonder if you could develop
that a little more fully in terms of wliat affiliations they ma}' have.
349
Were they part of the American Petroleum Institute, the American
Gas Association or are they independent of these orroups?
Mv. TuRE. Mr. Ban^ert, I don't have that infoi-mation for you. My
relationship with the Gas Supply Committee is that of a consultant —
a client relationship — and I am certain that information is available
from the Gas Supply Committee.
Mr. Bangert. They employed you as a consultant for this particular
hearinor; is that correct?
Mr. TuRE. Yes.
Mr. Bangert. Have you testified on their behalf before?
Mr. TuRE. No; I have not.
Mr. Bangert. Have vou testified with respect to natural gas in the
past?
INIr. TuRE. Not before a conofressional committee, but I have pre-
pared and submitted testimony to the Federal Power Commission
in recent years with respect to the supply of natural gus.
Mr. Bangert. In what connection did you testify before the Fed-
eral Power Commission ?
Mr. TuRE. I beg your pardon ?
Mr. Baxgert. In connection with what did you testify before the
Federal Power Commission ?
Mr. TuRE. The question was raised the other day as to an econo-
metric staff study for the supj^ly of natural gas that was prepared for
the staff by Dr. Kazoom of the Massachusetts Institute of Technol-
ogv'. I was retained along witli several of my colleagues to evaluate
Dr. Ka zoom's study.
Mr. Bangert. Is this the Planning Research Corp?
Mr. TuRE. Yes.
Mr. Baxgert. Other than your experience in connection with this
testimony, have you written generally on natural gas or natural gas
reserves?
Mr. Ttjre. I have not.
Mr. Bax'gert. On page 11 of your statement, at the end of the first
paragraph, you indicate :
Indeed it has been shown that given the existence of other conditions of perfect
competition, the perfectly competitive market solution may be reached when
there are only two companies.
Mr. Ture. Right.
Mr. Baxgert. And you cite Fama and Laffer's American Economic
Review article ?
Mr. Tfre. That's right.
Mr. Baxgert. And as I read what they say, under cei-tain conditions
of general equilibrium, with two or more noncolluding firms, it is
perfectly competitive.
Mr. Ture. That's right.
Mr. Bax-^gert. So would you agree with that caveat in their state-
ment ?
iMr. Ture. There are a number of caveats in their statement, explicit
and implicit, and they are all very important caveats, indeed. One
of them, which you have not alluded to, clearly is no barrier to entry,
Mr. Bax^gert. Well, is this then what you meant when you say
"given the existence of the other conditions to perfect competition"?
Mr. Ture. That's right; if there is no barrier to entry, the oppor-
350
tunity and likelihood of any collusive arrangement being of any dura-
tion at all is extraordinarily remote.
Mr. Bangert. Are barrier to entry and possible collusiveness the two
conditions ?
]Mr, TuRE. Let me qualify it again. I have ticked off, both in my pre-
pared statement and oral summary, the standard criteria for a com-
petitive industry. Now, those conditions must be met and they are
alluded to either implicitly or explicitly in this article which I cited
by Fama and Laffer.
Indeed, those two conditions must be met. To repeat, there are no
barrier's to entry. Too, the principal condition that is required or the
single most important condition that is required is that no one of those
firms has exclusive proprietary interest in one or more of the produc-
tion inputs or processes required for the production of the services.
But. you see the point of this article was to address itself to the
question of how many firms you have to have in order to be comfort-
able that you have a substantially competitive market solution.
Quite interestingly, the analytical conclusion is that two will do. It
is not, incidentally, a perfectly novel idea. George Stigler of the Uni-
versity of Chicago has offered the observation on a number of occasions
that there is simply no way to determine what is the minimum number
of firms that are required.
In fact, he cites among other conditions that will act exactly the
same as a substantial number of good substitutes or a few numbers of
very good substitutes.
Mr. Baxgert. Would you agree competition can range all the way
from duopolistic to monopolistic to be perfectly competitive ?
Mr. Ture. In the abstract, yes.
Mr. Bangert. "VVliat do you mean by that?
Mr. TtT^E. One would have to specify the conditions under which
that operates. Is there an area in the economy that supports that
monoply duo]3oly and maintains it over an extended period of time ? It
is difficult to find any answers to that.
Does that monopoly or duopoly depend upon some institutional
arrangement, fortified by legal sanctions, which afford the exclusive
control or ownership of production inputs or processes that are ab-
solutely essential for that production process to produce that product
or service ? Again, you will find very few instances. I don't think I
could cite you one in the U.S. economy in which that is tnie. This is
not to preclude the possibility.
Mr. Bangert. Do you have any idea how likely perfectly competi-
tive requii-ements are met in a duo]:)olistic situation?
Mr. TiTRE. Could you cite for me. sir, a duopolistic situation? Off-
hand, I can't think of one.
Mr. Bangert. Dr. Meadsday says we can't, but you raised the possi-
bility, so we thought you might know.
Mr. TtTRE. No, I raise it as a theoretical possibility.
Mr. Bangert. Does that have no application to the testimony on
natural gas today ?
Mr. TuRE. No, indeed, sir. The line of analysis with respect to the
competitive status of the natural gas industry that I have presented
to you is to say wliat the conditions are that are set classically for
perfect competition.
351
I tried to describe that for you in the prepared statement. Then, I
proceeded to examine the natural ^as producing: industry ag:ainst those
critera. I am perfectly satisfied that any fair appraisal of these facts
would suggest that it comes very, very close indeed to meeting those
criteria.
]Mr. Bangert. On the concentration of production sales that you
mention on page 21, I am wondering if the structural characteristics
of the natural gas industry make sales a good or poor measure of in-
dustry concentration ?
Mr. TuRE. Well, in the context of my observations about concentra-
tion ratios or any measure of concentration conventionally employed
as an indication of competitiveness or lack of competitiveness, in the
context of these remarks you are free to choose among any such in-
dicator of size that you prefer and they will be equally unimpressive
and unrevealing.
Concentration ratios per se are not informative.
jNIr. Baxgert. "Well, I think Dr. Wilson who will follow you this
afternoon probably agrees with you on that to a certain degree.
Mr. TiTtE. Sure. I have observed in my prepared statement that, in-
deed, since a lot of work has gone into the development of concentra-
tion ratios by one or another members of my profession, one is dis-
inclined to simply throw it all out. So there is an inclination to try to
find some way in which concentration ratios could help.
The suggestion has been made by others as well as by myself, that
in fact, if you can find other objective indications of lack of competi-
tion, noncompetitive industry structure, noncompetitive market situa-
tions, then conceivably, given that other evidence, you might look to
concentration ratios as being supportive of those observations — but not
the other way around.
Mr. Baxgert. Well, insofar as concentration ratios are a reliable
indication of anything at all, in the natural gas industry, would con-
centration ratios of uncommitted reserves by a particular area be of
any more assistance in determining competitiveness than production
sales ratios?
Mr. Tttre. Xo. As you phrased the question, the answer is categori-
cally "Xo." You began the question by inquiring as to whether or not
insofar as concentration ratios are any use at all. Let me explain the
way those concentration ratios arc useful.
They are simply measures of differences in size of the companies.
Differences in size of companies per se have no necessary bearing on
the degree of competitiveness or noncompetitiveness in the industry.
With that qualification in mind, let me elaborate.
If you have a sufficient longtime series of data, then you might just
as well use sales or an output measure, any number of similar measures,
to describe differences in size among companies and changes in the
size distribution of companies in an industry over time.
If you wish to add data pertaining to certain elements of the capital
owned by those companies, in the case of a natural gas producer's
reserves at his disposal, you may do so. Again, you will simply be get-
ting another piece of infonnation about the size distribution of the
companies and the industry and the way it changes in time if you
have an adequate time series constructed on a statistically coiisistent
basis.
352
Mr. Bangert. Well, could you tlieoretically tlien have an industry
^yitll lii^li concentration ratios that nevertheless would be very
competitive ?
Mr. TuRE. Yes, surely.
Mr. Baxgert. Therefore, concentration ratios, in your estimation,
may or may not be a key to anything.
Mr. TuRE. I can think of a number of analytical problems for which
it might be. useful to find out the size distribution of the entities com-
prising an industry or sector of tlie economy and how they have
changed through time in response to various other developments in
the economy.
Indeed, it would be useful to have these measures of the distribu-
tion by size of the companies in that industry or sector.
Mr. Baxgert. On page 48 of your statement, in the first full para-
graph, you talk about mai'ginal and average costs. You indicate in the
regulatory practice, however, it is not the marginal but the average
cost to which the regulated price is equated. The average cost of
that best quantity for the company to produce and sell, however, will
coincide with marginal costs only under two limiting circumstances.
I guess where I am confused is that I don't understand the costing
methodology that the Federal Power Commission has used. Is there
a different methodology for flowing gas as opposed to new gas ?
Mr. TuRE. ]Methodology for what purpose, sir ?
Mr. Baxgert. For costing.
Mr. TuRE. For measuring average cost ?
Mr. Bangert. Right.
Mr. TuRE. I don't think I can give you a firm answer to that question.
In other w^ords, does the Federal Power Commission indeed rou-
tinely attempt to measure the average cost of flowing gas ?
Mr. Baxgert. Well, that is what I am trying to find out from you.
Mr. TuRE. I would suspect that the answer would be better obtained
from them, sir. I can't answer that.
Mr. Baxgert. Well, do you know what the latest national cost is
as per the Beico case ? What is the average cost, the high and the low ?
Mr. Ture. No: I don't. This is one of the jn-oblems that I am sure
you are familiar with. There are substantial elements of joint and
overhead costs in the industry and thei-e ai-e enormous difficulties, con-
ceptual and practical, in allocating those costs as between gas and
other petroleum products.
So far as the joint product case is concerned, to the best of my
knowledge, there is not to l)e found anywhere in the economic litera-
ture a definitive solution as to how that allocation is to be made. So
any costing of gas or any other jointly produced product entails a
high degree of difficulty.
I have briefly scanned, and I confess that it has escaped my mem-
ory because it made no sense to me, a cost index that was used and it
struck me as so arbitrary and ill-founded with respect to the basic
determinants of costs of any operation as to not really be worthwhile.
Mr. Baxgert. On page 15 of your full statement you indicate that
joint operating agreements, where they are made, often are required
as conservation measures and for efficient production. I am wonder-
ing, even given the fact that they may be made for conservation meas-
ures whether or not you really don't have a ])lunting of competition,
since the producers in the joint operating agreement marketed all
in one package stream ?
353
Mr. TuKE. There are standard provisions, as I understand it, for
allocations to the participants in such a joint arrangement of their
respective market shares.
Mr. Baxgert. But in the Penman Basin case and the Southern Loui-
siana case, wasn't that what the court and the Commission found that
caused the imperfect market structure in those instances?
Mr. TuRE. I am not familiar with those decisions so I cannot reply
to the question, but I should be astonished if that were the case. Let me
point out that joint arrangements of the sort that have been very widely
described here and elsewhere in the natural gas producing industry
are used elsewhere in the U.S. economy. Even in the field of business
in whicli I operate, arrangements of this sort are quite frequent, and
I would say in no way at all has my participation with other firms
in any way, shape, or form ever blunted my competitive edge.
Mr. Baxgert. Do you consider yourself to be an expert in the natural
gas industry ?
Mr. TuRE. With respect to the question as to whether or not the in-
dustry is competitive, it seems to me what is required is good, sound,
fundamental analytics applied to the structure of the industry and I
think I am competent to do that and I have done so.
Mr. Baxgert. But you haven't done any particular work in the na-
tural gas industry ?
Mr. Ture. I never have been directly or indirectly employed by a gas
producer or by a regulatory agency.
Mr. Bax'gert. Have you done any economic studies in this area ?
Mr. Ture. Xo ; aside from those that I have already put into the
record for you.
Mr. Bax'Gert. I have no further questions, Mr. Chairman.
Senator Hart. Mr. Chumbris.
Mr. CiiFMBRis. I have no question, Mr. Chairman, thank you.
Mr. Ture. I should say that I do not ordinarily appear before a
congressional committee with dark classes, but in the interest of being
able to follow mv testimonv and being; able to read it. I found it was
necessary.
Senator Hart. I am glad it is not a permanent condition.
Mr. Ture. Thank you.
[The following docmnents were received for the record. Testimony
resumes on p. 419.]
MATERIAL RELATING TO THE TESTIMONY OF DR. TURE
Exhibit 1.— Study by Dr. Norman B. Ture Entitled "Competition in Natural Gas
Production"
Competition in Natural Gas Production
I. THE issues
The increasing shortage ^ of petroleum products emerging over the recent past
and in prospect raises serious questions about the effectiveness of the FPC's
regulation of natural gas wellhead prices. The central issue is whether FPC
iThe meaning of the term "shortage" is highly varied. In the field of public policy, it
generally means that some policy maker feels that the quantity of something or other isless
than it "should be". As an economic phenomenon, it means that the quantity of something
or other that people want to buy at a prevailing price is greater than the amount that will
be supplied at that price.
354
regulation of the wellhead price of nattiral gas in interstate markets permits
(1) the efl5cient distribution of existing supplies of natural gas among producers.
and (2) meeting longer-term demands for natural gas. Regrettably, the issue has
been obfuscated by the allegation that the natural gas production industry is
"monopolized" and that therefore permitting the price of natural gas to be deter-
mined by market conditions would not "protect the interests of consumers." Col-
laterally it is asserted that since the producers of natural gas allegedly are not
perfectly competitive, deregulation of the wellhead price of natural gas would not
result in a "just and reasonable" price but woiild afford "windfall" profits for
producers."
In an unregulated market for any product or service, the price of the product
or service serves three principal and related functions : (1) it provides informa-
tion to buyers about the value of the product or service relative to that of others
and, accordingly, acts as a guide to purchasing decisions, (2) it acts to ration the
existing supply of the product or service among buyers on the basis of the value
buyers place on it relative to alternatives, and (3) it provides the information re-
quired by producers of the product for decisions about how much of tJie product
or service to produce and to offer for sale. Where there is a substantially continu-
ous flow of production, the price arrived at in the unregulated market equalizes
the quantity which buyers want to purchase with that which producers want to
sell, thereby clearing the market. This is true whether the market is highly com-
petitive or noncompetitive.
The fundamental issue is whether FPC regxilation of tJie price of natural gas.
irrespective of the basis upon which FPC sets the price, results in a price which
adequately performs these functions. It is evident that at the FPC-set prices of
gas prevailing to date, no matter how those prices may have been justified by
FPC. the market is not cleared. Rather, increasingly serious "shortages" have
developed and appear likely to become more severe.^ Moreover, FPC-regulated
prices obviously have been too low to induce producers to invest suflSciently in
finding new reserves to meet the current demand for gas in the interstate market
at prevailing prices.'' And at the prevailing FPC ceilings on gas prices, current
and future investment by producers in developing additional reserves will not be
adequate to meet the prospective demand for gas at the existing price to con-
sumers.^ If the price of gas is not increased to the level that will clear the market,
it will be necessary to find some means other than the price for determining which
gas users will get how much gas.
The central policy issue is whether (a) FPC regulation of the price of gas
can be relied upon to clear tlie market and to call forth sufficient additions to
reser^'es to meet prospective demands, or (h) deregulation of the wellhead price
is necessary to achieve these results. The chief argument against deregulation
rests on the assertion that the industry is noncompetitive ; if deregulated, it is
asserted, the price of gas would be higher than that which would prevail in a
perfectly competitive market and would exceed a jirice that is "just and rea-
sonaI)le." producers would receive "windfall profits", and hence the "interests
of consumers" would not be protected." Some of these argimients are substantively
2 Tlie use of quotation marks is to make it clear that these phrases are evocative or sym-
bolic. In the context in which they are userl, rather than haviufr rigorous and unamhigiious
meaning necessary for analysis or policy purposes.
3 Contrary to a widespread allefration, the shortage is not attributable to a reduction in
output or sales by natural gas producers. Marketed gas production in 1972 was 20.0 percent
greater than in 1967: production had increased at an average annual rate of 4.7 percent
from 1967 through 1972. Cf. American Gas Association. Gns Facts, p. 29. and U.S. Bureau
of Mines.
* Of. National Petroleum Council. U.S. Energy Outlook, A Summary Report, December
1972. p. 1.3. "Deapit the superior characteristics of natural gas, domestic prices of this fuel
are held by the FPC to a fraction of the price of substitute fuels. ... At the same time
that the Government engages in this supply-limiting action, serious consideration is given
by Government and industry to the importation of natural gns at substantially higher
prices. ... As a result of these artificially low prices, reserve additions (excluding North
Slope) in the last .3 years have averaged about 9. .5 TCF/year while consumption has
age. Cf. their "The Natural Gas Shortage and the Regulation of Natural Gas Producers."
^Tbif!., p. 7. ". . . to support assumed ranges of activity levels . . . real energy "prices"
of domestic fuels at the wellhead or mine must rise sicrnificantly by 19S.5." For gas at the
wellhead, the estimated required increased is SO percent to 2.50 percent. A recent article by
Professors Stephen Breyer and Paul W. Mac.\voy provides an excellent theoretical and
empirical analysis of the contribution of FPC gas price regulation to the present eras short-
age. Cf. their "The Natural Gas Shortage and the Regulation of Natural Gas Producers."
Harvard Law Reiieir. April 197.3. pn. 941-9.'=;7.
« Cf.. for example. Testimony of Pr. .Tohn W. Wilson. Chief. Division of Economic Studies.
Office of Economics. Federal Power Commission, and Staff Reply Brief, both before the
Federal Power Commission in Bclco Petroleum Corporation, et ah. Docket No. C17.3-29.3.
et al.
355
empty, some are based on misapprehension of the facts, and some are based on
faulty analysis. For example, in what sense are the interests of consumers
protected by fixing the price of gas at an artiflcally 1o\y level so that the
consumers cannot obtain the amount of gas they want at that price? It is
dilBcult to believe that the consumer will feel "protected" by the assurance
that even though he can't get the gas he wants, if he could get it,
he'd pay a relatively low price for it. How ".iust or "reasonable"
is a price set by regulatory authority which requires an arbitrary deter-
mination of which consumers may have how much gas? What information would
one have to have to know by how much the price of gas would rise if it w^ere
unregulated and whether that price would be greater if the industry were less
or more competitive? And if producers are to be prevented from realizing greater
profits in developing resen-es, what means are there for increasing the future
supplies of gas at a lower rather than greater real cost for the economv as a
whole?
II. MARKET STRUCTURE OF THE NATURAL GAS PRODUCING INDUSTRY
To repeat, the central polic.v question is whether any price for gas other than
the inireg-ulated market price will effectively deal with the mounting shortages
of gas. But if that issue is to be clearly perceived and effectively dealt with, the
questions concerning the degree of competitiveness of natural gas producers and
the implications of alternate assessments of their competitiveness for pricing
l>olicies and price levels in the absence of regulation must first be resolved. The
following discussion examines analytically and factually the salient features
which are pertinent to determination of the competitiveness of the natural gas
producing industry. In section III, the discussi<m turns to the questions whether,
irrespective of the findings of this section, (1) prices set by regulatoi-y agencies
equal to estimated costs of production " are the same as the market prices which
would prevail in competitive markets, (2) cost based regulated prices can effec-
tively deal with existing and prospective gas shortages, and (3) deregulation
would afford windfall profits and impair the interests of consumers.
A. Distinctions Between Competitive and Noncompetitive Industry Structures
There is a prevalent misconception that companies in noncompetitive markets
exert their "market power" to "administer" the prices of the products or services
they produce and sell. The terms convey the idea of a company's somehow con-
trolling a market and accordingly being able to set or "fix" prices. But unless
buyers of the product or services are willing to buy the same quantity of its
irresi>ective of the price charged by the seller, and there is no known case where
this is so, a producer-seller cannot control the market. In setting his price, the
seller must be mindful of the quantity of his product which will be purchased at
that price.
Because in the real world no company can control all aspects of a market nor,
if the company wishes to maximize its profits, arbitrarily set a price for its
products or services without regard for market conditions, many economists re-
.iect the notions of "market power" and "administered prices" as lieing useless
either for describing reality or for rigorous economic analysis. For these econo-
mists, the distinction between perfectly and imperfectly competitive markets,
awkwardly sought by phra.ses such as "market power" and "administered prices",
is better and more precisel.v expressed by the terms "price taker" and "price
searcher".
A "price taker" is a company operating in a market . . ." in which each seller . . .
provides so insignificant a part of the total market supply that he could not de-
press the price by offering to sell more. . . ." (or raise the price by offering to
sell less). At the prevailing market price, he can sell as much as he has avail-
able. This kind of a market is called a price-takers market.^ A "price searcher", on
" By its own admission, FPC eas cost pstimates are mncli less meaningful or accurate than
sufifrested by the mathematical precision with which they are presented. These estimates
require hijrlil.v arbitrary: allocations of overhead items and joint costs. "The cost computa-
tions used "in this and other area rate proceedings seem to lie mathematicall.y precise. The.v
are not. Allocations of costs are by nature matters renuirintr a substantial amount of judjr-
ment . . . Commissioner Carver . . . pointed out the imprecision of cost cnlcnlntions . . .
Commissioner O'Connor . . . pointed out in detail the unavoidable inaccuracy of the s<-n-
tistics and allocations upon which cost computations were based . . ." (F.P.C. Opinion 595
in the Texas Gulf Coast area rate decision. Docket Nos. AR04-2. et al.. pp. 10-11).
" Armen A. Alchian and William R. Allen. Uvirersity Economics. Wadsworth Publishing
Company (Belmont. California. 1967), pp. 104-106.
356
the other baud, cannot assume that the quantity of the product or sen-ice he offers
for sale will have no influence on the market price. He must, instead, search for
the price at which he does best, i.e., maximizes his profits. He does indeed set — or
"administer" — his price, hut not in flagrant cUsregard of the market conditions
which, irrespective of his preferences, dictate to him how nuich of his product or
service he can sell at each price.
The distinction between "price taker" and "price searcher" is merely a matter
of degree. Each "sets" his price, hopefully, at the level that will maximize his
profits. "It's just easier to find that price in some price taker's markets." The
price searcher, on the other hand,' . . . has to resort to trial and error, never
being sure it has found it" (i.e., the profit-maximizing price)."
What are the differences in degree between price takers' and price searchers'
markets? The standard response to the question is to delineate markets in terms
of the degree of their comijetitiveness. At the one extreme, the necessary condi-
tions for the perfectly competitive market are usually listed as :
(1) So large a number of buyers and sellers that no one of them can affect the
market price by changing the amount he offers to buy or sell.
(2) Independence of action by each buyer and seller, i.e.. since there are so
many buyers and sellers, it impossible to organize effective combinations of either,
and moreover, for the .same reason, each buyer or seller recognizes that he need
not be concerned about the actions of others.
(3) Complete knowledge by each buyer and seller of the offers to buy and sell
by the participants in the market.^"
(4) There is no significant barrier to the entry of new companies nor to the
change in scale by existing companies in response to changes in market demand.
(5) As a corollary, the product or service being sold is substantially undifferen-
tiated, i.e., there is a substantial number of reasonably close substitutes (or even
a small number of very good substitutes) for the product or service sold by any
one company.
Given these conditions for perfectly competitive markets, the demand curve
facing any one seller is infinitely elastic, i.e., he can sell any quantity he has avail-
able at the existing price."
At the other extreme, in the perfectly monopolized market there is only one
seller. Given the conditions of demand for his product or service, i.e., how much
of his product or service purchasers are willing to buy at any given price, varia-
tions in the quantity he offers for .sale will affect the price at which each quantity
can l)e sold. He can .sell more of his product or service only by reducing the price ;
if he raises the price he will sell less. He is, in other words, a price searcher, rec-
ognizing that his actions will affect the market price and seeking that price at
which he will do best.
The principal condition for the existence of the monopolized market is that the
monopolist has exclusive control over one or more of the resources essential to
the production or sale of the particular monopolized good or service. A further
condition for the existence of a monopoly is that no other company produces and
.sells a close substitute product or service equally accessible to the buyers of the
monopolist's product. The would-be monopolist, indeed, may invest in efforts to
differentiate his product or .service from that of other producer-sellers, i.e., to
make his offerings more attractive and desired in .some way or other than that of
others. To the extent that he succeeds, the demand for his output is greater and/
or less elastic than otherwise, but product differentiation does not result in the
producer's being able to obtain any price he choo.ses for a given quantity of his
output. And product differentiation is not costless. The price searcher .seeking to
differentiate his product, accordingly, will invest in differentiation up to that
point at which the increa.se in his revenues from increasing the demand for his
product and/or making that demand less elastic is just equal to the incremental
cost of the product differentiation.
With the possible exception of the markets for some raw agricultural products,
perfectly competitive markets do not exist in the real world. It is equally clear
that no perfect monopoly exists in an economy such as that of the United States.
"Ibid., pp. .308^.309.
^^ Cf. George J. Stif^ler, The Organisation of Industry, Richard D. Irwin (Homewood,
Illinois. 1968), pp. .5-7.
"By the same token, the supply ciirve facing any one buyer is infinitely elastic, i.e.. he
can purchase any quantity he wishes to without aflfecting the market price. In sliort, all
buyers and sellers in perfectly competitive markets are complete price takers.
357
For the vast majority of products and services, actual market condition lie be-
tween these extremes.^
B. Structural Characteristics of the Natural Gas Producing Industry
Viewed in the light of the basic conditions of perfect competition and monop-
oly, delineated earlier in this discussion, the natural gas production industry
surely must be characterized as highly and effectively competitive.^
1. Number of gas producing companies
One of the principal conditions for perfect competition is that the industry in
question consists of so large a number of companies that the actions of no one
company has a significant influence on the price of the industry's product. Rigor-
ous analysis affords no basis for determining the minimum number of companies
required to satisfy this condition. Indeed, it has been shown that given the exist-
ence of the other conditions for perfect competition, the perfectly competitive
market solution may be reached when there are only two companies."
Data from various government sources show a very large number of natural
gas producers. In 1968. for example, 3.218 Federal corporation income tax returns
w'ere filed by companies classified as producers of crude i>etroleum. natural gas,
and natural gas liquids. This number does not include integrated producer-
refiner companies which w^ere classified under petroleum refining. For the same
taxable year, there were .35,738 Federal individual income tax returns filed with
business income schedules showing crude petroleum, natural gas. and natural
gas liquids production and field services as the principal source of the business
income. And for the same year, there were 10,795 partnership information returns
showing this industry classification as the major source of the iiartnership's
income.^' Even if as many as half of the individual and partnership returns under
the broad heading reported income primarily from companies engaged in pro-
viding field services, the prodiicer population was very large indeed.
The Census of Mineral Industries data are based on a different definition of
the producer population.^*^ For 1967. the Census shows 5,482 operating companies
in crude petroleum and natural gas, down from 10,594 in 1963. Of the Census
measure of the operating company population in 1963. about 15.4 percent w'ere
classified in the natural gas subindustry."
According to the Federal Power Commission, there were 3.745 jurisdictional
natural gas producers in 1971. The producer population covered Ity the FPC
includes only companies in the interstate market and omits an intermediate num-
ber of producers selling less than 10 million MCF of gas annually interstate.
Despite the differences among these data sources with respect to the criteria
for including companies in the population, even the minimum estimate shows a
substantial niunber of producers.
2. Independence of action hy producers
As noted earlier, a second condition for perfect competition is that companies
in the indu.stry act independently. This follows from the first condition, i.e.,
since there are so many companies in the industry, it is impossible to organize
effective combinations among them for purposes of controlling the volumes of
output and of infiuencing price.^*
" "Pprfect competition" and "monopoly" are abstract analytical concepts which are
intended to facilitate analysis. These formal abstractions do not conform precisely with
reality, nor do they need to in order to be useful analytical tools. Encineers often analyze
physical objects as If they were in a vacuum or movinff without friction even though, in
fact, a perfect vacuum or perfectly frictionless motion has never been observed. The fact
that, in reality, a particular industry does not exactly conform to perfect competition does
not at all imply that it is therefore a monopoly.
^'^ The technical definition of "effectivply competitive" is provided below at pp. .36-,37. In
nontechnical terms, "effectively competitive" means that the market results, i.e.. price and
quantity, differ only modestly and insignificantly from those of a perfectly competitive
market.
" Cf. Eugene F. Fama and Arthur B. Laffer. "The Number of Firms and Competition."
The American Economic Rei-ieir, Volume LXII. Number 4. September 1972. pp. r>70-R74.
^■'T^.S. Treasur.v Department, Internal Revenue Service. Stntintics of Income-Bnuinexn
Income Tax Return, 1968. Not all of these individual and partnership returns were the
returns of operating companies, of course ; many of them probably reported income from
participation in mutual-type funding of exploration and drilling activity. Nevertheless,
these returns suggest a very large population of unincorporated producer businesses.
" Cf . U.S. Department of Commerce. Bureau of the Census. 1967 Census of Mineral In-
(histricx. Crude Petroleum and Natural Gas, p. 13A-1.
!• Ibid., p. 1.3A-.-.
^'^ Or that the costs of organizing and policing such combinations would significantly
exceed the gains to the participants.
358
The extremely large number of natural gas producers clearly precludes the
possibility of effective combination among any significant number of them. In
an unregulated market, the difficulties which would be met in efforts by any
few gas producers to exert substantial control over any significant part of the
total producer population boggles the mind.
Often cited as evidence to the contrary is the prevalance of so-called ''inter-
ties" or "interlocks". The terms refer to a variety of arrangements among pro-
ducers to act jointly with respect to one or more aspects of bidding for leases,
exploration and development activity, prf)duetion. etc. These arrangements are
made among a great many producers — among major and among smaller, inde-
pendent producers. They are entered into with respect to domestic and foreign
ventures and onshore and offshore leases. The company composition varies from
arrangement to arrangement, with respect to both the identity orf the com-
panies and their shares in each arrangement.
These various arrangements existing at various times have been described and
diagrammed by the FPC staff, by natural gas producers" representatives, by the
industry press, by private research groups, by universit.v scholars, etc. There is
nothing furtive about them, nor is there evidence of concern by the producers
over widespread public knowledge of the arrangements. Joint bids in public sales
of leases on Federal lands and offshore do not in any way conceal the identity
of the companies comprising the arrangements, nor is the fact of any such ar-
rangement deemed to be the basis for disqualification of the group.
In a word, the.se so-called "interties" or "interlocks" are the antithesis of the
collusive combination which would characterize the industry as noncompetitive.
The openness of the arrangements, the diversity of the arrangements in which
any one company, small independent or major, is engaged at any one time, the
frequency with which new groups, consisting of different companies, are formed
are evidence not of cartellike restriction of competiiton but rather of the inde-
pendent pui'suit of its own profit-maximizing opportunities liy every producer
in the industry.
No evidence has been presented to show that the so-called "interties" have re-
duced effective competition. If these arrangements were anti-competitive in char-
acter, there should be some concrete manifestation to that effect. The evidence
as to the results of these arrangements, however, suggests quite the contrary,
i.e., that they contribute to vigorous competition among producers. Consider, for
example, their impact on offshore lease sales. If these groups were collusive, anti-
competitive coml)inations, they would presumably operate to hold down the
prices paid for such leases. In fact, however, both the total amounts of high
bids and per acre prices in recent sales have been extremely high."
The "interties." moreover, have facilitated rather than impeded competitive
participation by producers other than the largest companies. In the sale of off-
shore leases in 1970 and 1972. groups headed by smaller and newer producers
were among the top successful indders. For example, a group headed by Trans-
Ocean Oil. Inc., a 51 percent owned subsidiary of Swift and Co., entered the third
largest bid which was accepted in the December 1970 sale and had the top
accepted l)id in the December 1972^ sale. If joint bidding were prohibited, it is
unlikely that the smaller companies' financial resources would permit their
effective participation in lea.se sales.
The impetus for producers, large and small, to form groups for bidding, ex-
ploration, production, etc., stems from diverse sources. To a considerable extent,
group bids permit producers to expand the number of l)locks on which they can
bid without incurring the extraordinary risks associated witli putting all one's
eggs in one basket. The same is true in the case of the exploratory arrangements
into which producers enter. .Toint operating agreements, where they are made,
often are required as conservation measures and for efficient production. In fact.
19 Cf. The on and Gax Journal for Docpmber 21. 1070. pp. l.*^ ff.. rocarding the Decpm-
ber 17 1070 sale of leases in the Oiilf of Mexico oi¥ Western Lonisiana : The Oil and Gas
Jotirnnl for September IS. 1072. pp. ?,S ff.. resrarflinsr the September 1072 sale ; and The
on Dailit for December 21. 1072, pp. 1-2. for the December 1072 sale.
20 TransOcean, orig-inally incorporated in April 10r>S as a wholly-owned subsidiary of
.7. Ray McDermott and Co., concentrates its operations in exploration and development. It
has been an extremely vicorons and highly successful producer, despite its recent entry. Cf.
1072 Annual Report "of Swift and Company: "In the December. 1072. federal sale of off-
shore Louisiana leases, a group headed by TransOcean was highest liidder on two blocks
totalling 8,237 acres. A position was ei*tablished in the North Sea, where TransOcean
obtained interests, or agreements to obtain interest, in 42G,000 acres in the United Kingdom
sector . . ." pp. 14-15.
359
many of these joint exploration and prortnction arrangements are encouraged and
even required by State autliorities under laws intended to assure maximum
etficiency in the recovery of oil and gas. They expressly provide, moreover, for
separate marketing of the production from joint ventures.^^
All such arrangements, rather than reducing competition, serve to strengthen
it. To the extent that they reduce risk they also reduce the cost of capital com-
mitted to additions to the supply of gas, hence increase rather than restrict gas
supply. Insofar as small independents are included, the arrangements have the
effect of expanding and diversifying lease-acquisition, exploratory, and production
opportunities and capacity with respect to their capital resources. In every signifi-
cant respect, "interties" and "interlocks"' promote rather than inhibit competition
among producers.
The widespread allegation that "interties" are evidence of collusive, noncom-
petitive Itehavior among producers is without foundation.
3. Barriers to entry
Another condition for perfect competition, collateral with a suflSciently large
number of companies such that no one company can influence price, is that there
is no significant barrier to the entry of new firms.
Barriers to entry into an industry are generally thought to arise from one or
more of a number of factors, e. g., exclusive control by existing companies of
some essential production input or process, some minimum scale of plant required
for at least marginally efficient operation, large capital requirements, some abso-
lute cost advantages enjoyed by the existing companies, or highly effective prod-
uct differentiation, whether of the physical characteristics of the product or
merely subjective. None of these entry barriers is significant in natural gas
production.
According to Pi'ofessor Clark A. Hawkins : "There are no apparent economies
of scale ... in discovering and producing natural gas. However, from the risk
standpoint, there may be economies if it is recognized that, although risk may
not be an obstacle to entry, it may be inversely related to size. A large company
can drill more wells than a small company without facing bankruptcy if the
wells are unsuccessful. Thus, although there may be modest capital require-
ments to entry, risks may be greater for the small firms. New firms may also be
at a disadvantage due to existing firms having many of the best deposits —
best in the sense of being easiest and/or cheapest to find. 8ome good leases and
luck may be important requirements for entry of a producer. As for product
differentiation, a barrier to entry is practically nonexistent apart from quality
differences that are largely nature induced. Except for possibly the risk-factor,
the I)arriers to entry for natural gas production are substantially less than in
most manufacturing. Even the risk case is not clear, since it may be an induce-
ment to certain types of venture capital that would be in a high marginal tax
bracket. Tlie rise of mutual-type funds selling pieces in drilling ventures in recenjt.
years is some indication that the high risks themselves do not deter enti-y-" "
Professor Hawkins' assessment of entry barriers, if anything, overstates their
severity. The risk factor he cites as a possible barrier is in part vitiated liy the
mutual-fund approach to financing indeiiendent exploratory and drilling ven-
tures : the funds at risk for any one investor are relatively small, and the
deductibility for income tax purpose.s of drilling costs and dry holes further
reduces the potential maximum loss to the fund i)articipant.
While new firms conceivably might be at a disadvantage because established
firms have already discovered many of the best, most easily found, deposits, there
is little a priori or concrete evidence to support this supposition. For one thing,
the significant entry barrier, if there were one, would be some advantage for
the large established companies in developing new reserves. On a priori grounds,
it is difficult to identify any such advantage. Hawkins cites the case of Clinton
Oil Company, founded in 1963, as one of the largest and most successful inde-
pendent oil and gas operators in the Mid-Continent and Gulf Coast area.^
Another example is TransOcean Oil, Inc.^* One of the most dramatic examples of
21 Participants in such ventures explicitly include these provisions, modeled after the
Unit Afrreement form issued by the American Petroleum Institute, in their contractual
armncronients.
" Clark A. Hawkins. ".Structure of the Natural Gas Producinc Industry." in Keith C.
Brown, ed., Regulation of the Natnrnl Gnx Producing Industry, Resources for the Future
(.Johns Hopkins University Press, 1972). p. 164.
w Ibid., p. l.-^S.
-* See footnote 2. pape 1.5.
27-547 O— 74 24
360
new entry is provided by Louisiana Land and Exploration Co. Prior to 1971. it
sold fewer than two million MCF of gas a year to interstate pipelines and was
not included in the FPC's annual Sales by Producers of Natural Gas to Interstate
Pipeline Compandes. But in 1971 it sold 37.5 million MCF to interstate pii>elines.
In the 1972 lease sales, it bid actively, alone and in combination wth other com-
panies. The fluctuations in the producer population demonstrate that Clinton Oil
Company, TransOcean, and Louisiana Laud and Exploration are not isolated in-
stances, but illustrative of the fact that the holdings of existing companies set
up no significant barrier to entry by new producers.
Moreover, growth in production and sales of the smaller producers is often
spectacular. The performance record of the companies shown in Table 1 is merely
illustrative of a commonplace phenomenon in the industry.
TABLE 1— GROWTH OF SALES BY SMALL NATURAL GAS PRODUCERS TO INTERSTATE
PIPELINE COIVIPANIES., 1961-71
1971 sales
(billion ft 3)
Increase
since 1961
(percent)
Annual
growth
(percent)
An-Son Corp
Apache Corp
Isaac Arnold
Exchange Oil & Gas Corp
Imperial Ameiican Management.
King Resources Co
MAPC04
Midwest Oil Corp
Monsanto Co
Newmont Oil
0DEC05...
Rodman Corp
Samadan Oil
Stephens Prod. Co
TransOcean Oil, Inc.^.
9.5
1239
127.7
11.4
246
13.2
34.5
1,465
31.7
21.7
2 141
2 24.6
15.1
3 76
3 76.0
17.4
2 545
2 59.4
23.4
398
17.4
11.6
300
14.9
42.3
386
17.1
10.4
316
15.3
38.9
925
26.2
32.6
6 782
6 98.5
12.6
425
18.0
39.3
293
14.7
19.9
295
14.7
1 Since 1966.
2 Since 1967.
3 Since 1970.
* Changed name from Producing Properties in 1964.
5 Ocean Drilling & Exploration Co.
'Since 1968.
' Formed from operations of J. Ray McDermott Co. in 1968.
Source: Federal Power Commission, "Sales by Producers of Natural Gas to Interstate Pipeline Cos.," (1961-71).
Few of the major natural gas producers can match the growth record of the
companies shown in Table 1. And surely these data urge that neither the majors
nor the industry structure in general posed any monopolistic impediment to the
remarkal)le growth performance of these small companies.
There is virtually no opportunity for gas producers to invest profitably in
product differentiation. In most industries, companies attempt to differentiate
their output from that of other companies, by imbuing it with some iniique phy-
sical attribute, by advertising, by providing special services to its buyers, by loca-
tional factors, etc. None of the product differentiation devices is a realistic option
for any gas producer. Any quality differences are the result of natural phenomena.
They are not subject to exclusive proprietary interest by any one or small group of
companies.
The large number of gas producers furthermore provides evidence that there are
no significant barriers to entry, either inherent in the market or enforced by
collusive action by producers. From 1951 through 1963, the number of corporate
returns filed by crude petroleum, natural gas, and natural gas liquid producers
increased from 2,934 to 4.549. Thereafter, the number of returns declined to 3,218
for the taxable year 1968. Among proprietorships, the number of returns rose
irregularly ffom 21.590 in 1957 to 35,738 in 1968. The number of partnership
returns has fluctuated within a much narrower range, from a low of 8,449 in 1959
to a high of 12,467 in 1965.^ These data strongly urge that both entry into and exit
from natural gas production encounter no significant barriers.
23 statistics of Income, op. cit., various years.
361
Professor Hawkins need ont have qualified his observations about ease of entry
into the gas producing industry. Both analysis and the factual record urge that
neither inherent nor collusive barriers to entry exist in any significant degree.
Indeed, the only major deterrent to expansion of the producer population in inter-
state gas is the artificially low price ceiling on gas imposed by FPC, which in turn
unduly restricts the rate of return on investment in reserve additions.
Jf. Concentration of production sales
Those who view the industry as noncompetitive point to the allegedly high
proportion of total sales accounted for by a few companies as evidence of noncom-
petitive conditions. This sales concentration presumably would permit the major
producers to influence the market price of gas. if sold in an unregulated market.
The producer industry, so the argument goes, cannot be deemed to be competitive.
Neither the data pertaining to natural gas sales nor economic analysis support
this conclusion. In the light of the basic characteristics of the industry the data
on sales concentration in no way challenge the view that the industry is highly
and effectively competitive.
a. Concentration ratio for natural gas sales. — FPC data pertaining to interstate
sales by gas producers show that gas sales by the 8 largest producers accounted
for 41.8 percent of the total .sales to interstate pipelines i-eported by producers to
the FPC in 1968. In 1971. this share had increased slightly to 45.3 percent."'^
Among the top eight producers, the spread in market shares was relatively
modest. In 1967, the largest producer's share was 7.5 percent while that of the
eighth largest was 3.3 percent. In 1968. the spread was slightly larger; the larg-
est share was 8.6 percent and eighth largest was 3.3 percent."'
The market share rankings of gas producers change frequently ; even among the
major producers, market position changes materially within a short period of
time. "Over the twelve-year period, from 1957 to 1969, only one producer among
the first ten at the beginning of the period kept its rank in terms of sales to inter-
state pipeline companies. First-ranked Phillips Petroleum gave way to third-
ranked Humble Oil and Refining. Five producers passed out of the rank of the
first ten." -^ The following chart, excerpted from the testimony of J. Rhoads
Foster, graphically illustrates the lack of control by major producers on market
position.-^
Tills shifting of rank in market s-hares clearly demonstrates that no one pro-
ducer has the power to control or even materially to influence eitlier total output
or prices. ^" Moreover, the significant and frequent shifting in market shares
among major producers makes the interpretations of concentration ratios hope-
le.ssly ambigiious.
The more comprehensive data in the Census of Mineral Industries for 1967
show that the eight largest operating companies producing crude petroleum and
natural gas (Standard Industrial Code 1311) accounted for 46.4 percent of the
value of natural gas shipments.^^ This measure differs only modestly from the
concentration ratio derived from FPC data on sales only to interstate pii^elines.
To put these natural gas concentration ratios in perspective, they may be com-
pared with the measures of concentration in manufacturing industries. The
Census of Manufactures for 1967 shows that for all manufacturing industries,
the median concentration ratio was 48 percent. In other words, the natural gas
producing industry is below the me<lian level of concentration found in manu-
facturing. Out of a total of 412 industries, 213 or 52 i>ercent had eight-firm con-
centration ratios of 46 percent or above.
28 Some of the sales reported to FPC by individual companies were made under FPC
filingrs coTerinq; other producers ; the practice in these cases is to attribute the sale to the
filing producer. This treatment of sales implies that the concentration ratio derived from
the data overstates the actual concentration of sales, but the extent of this overstatement
is not precisely known.
27 FPC. Sales bi/ Producers of Natural Gas to Interstate Pipeline Comvanies. (1968-69).
25 Cf. Testimony of J. Rhoads Foster in Permian Basin Area Rate Proceeding, Docket
No. AR70-1, pp. .37-39.
29 Ibid., page 38.
'" It is also noteworthy that there is no correlation between size of company and inter-
state gas sales revenues. For example, the average revenue of the second four largest
companies Is somewhat greater than that of the first four.
31 Cf. 1967 Census of Mineral Industries. Crude Petroleum and Natural Gas. Supplement.
The company size rankings are determined by value of shipments of both crude petroleum
and natural gas. not natural gas alone. However, the Census data do show gas shipments by
the eight firms which have the largest amount of crude petroleum and natural gas ship-
ments combined. Conceivably, the rankings and the concentration ratio could differ if only
natural gas shipments were taken into account.
362
FIGURE 1,
TURNOVER INDICATED BY CHANGE IN RANK
AMONG THE TEN LARGEST SELLERS OF NATURAL GAS
IN THE UNITED STATES
RANKING ON THE BASIS OF DELIVERIES TO INTERSTATE PIPELINES IN A GIVEN YEAR
1957 1960 1963 1966 1969
RANK IN 1969
1 Humble Oil ond Refining Co.
2 AMOCO Production Co
3 Shell Oil Co
4 Gull Oil Corp
5 Phillips Petroleum Co.
6 Mobil Oil Co
7 Texaco tnc-
8 Allanlic Richfield Co.
9 Union Oil Co of Cqlifornio
10 Continenrot Oil Co.
Superior Oil Co
Sinclair Oil 8, Got Co
Atlantic Refining Co.
Champiin Oil ond Refining Ce
Union Producing Co.
— i~»~i •■~ii~n'iri I III II I III 1 1 1 1. I.
SOURCf: Federal Power Co w m inion. S ol e» by Producer! of
Nalurol Oai to Inlerilate Pipeline Componiei.
363
Eight-firm concentration ratios as great or greater tlian natural gas appear in
a wide range of SIC four-digit manufacturing industries. Among tliese are : two-
thirds of the textile mill products,^- half of the paper and allied products,^ chem-
icals,''* three of four synthetics industries,'^ three of the four rubber industries,''*
the four glass industries,''' a majority of the primary metal industries,"^ all five
office machine industries,"' 26 of the 33 electrical equipment and supply industries,
including all seven household appliance groups,'"' nine of the fourteen transporta-
tion equipment industries,''^ all but two of the eleven industries malving scientific
instruments and related products,'^ all four tobacco industries.'^' seven out of nine
clay products," all four li(iuor industries.'"^ four of the five edible oil producers."
Some of the Census-derived concentration ratios for manufactures are under-
stated, either becaiise the relevant market for a product is much smaller than
the national basis the Census uses (e.g. the markets for newspapers, milk, bread,
brick products, cement and concrete), or because the four-digit industry con-
tains largely noncompeting products (such as men's dress shirts and nightwear,
photographic equipment, or food preparations, not elsewhere classified). Imports
also affect the level of concentration, raising it when the importer is an American
firm already counted among the eight largest domestic producers in the industry,
lowei'ing it otherwise.
These data ambiguities probably do not substantially impact on the concen-
tration ratio for natural gas sales. However, their effect on the measure of manu-
facturing concentration may be substantial. W. G. Shepherd made such adjust-
ments with respect to the 1966 ratios, based on value added for the top four
firms, using data from the Annual Survey of Manufactures. He concluded that
the weighted four-firm average of all four-digit manufacturing industries was 60
percent, rather than the 39 percent average he derived from unadjusted Census
figures." Presumal)ly, if these adjustments were made with respect to the 1967
manufacturing industry data, a very substantially larger proportion of four-digit
manufacturing industries would show eight-firm concentration ratios in excess
of that derived for natural gas.
A concentration ratio of 46.4 percent, as in the case of natural gas, clearly is
neither extraordinarily high nor peculiar to natural resource or other basic
industries. Since not less than 52 percent of manufacturing industries (and
probably a much higher proportion) have equally high or higher ratios, the
natural gas production industry ratio ranks below — probably well below — at
least half of the private sector of the U.S. economy. Even if, contrary to fact,
these concentration ratios were meaningful measures of competitivness, one
would have to conclude tliat, at worst, the natural gas producing industry was
more competitive than half of U.S. business.
^E.jr.. wool weavinfc and finishing mills, 62 percent; woven carpets and rugs, 93 per-
cent : thread mills. 81 percent : tire cord and fabric. 9R percent.
^E.p.. piilpmills, 70 percent: sanitary paper products. 79 percent; building paper and
board mills. 69 percent : pressed and molded pulp sroods, 87 percent.
2* E.g.. alkalies and chlorine, 88 percent; industrial gases, 84 percent; cyclic intermedi-
ates and crudes. 64 percent ; inorganic pigments, 78 percent ; industrial organic chemicals,
n.e.c. 58 percent.
35 E.g., synthetic rubber. 82 percent; cellulosic manmade fibers, 99'-f- percent; noncellu-
losic organic fibers, 94 percent.
^*E.g., tires and inner tubes, 88 percent; rubber footwear, 75 percent; reclaimed rubber,
96 percent.
3'' E.g., flat glass, 98 percent ; glass containers, 75 percent ; pressed and blown glass, n.e.c,
83 percent ; products of purchased glass. 50 percent.
'8 E.g.. blast furnaces and steel mills. 66 percent; primary copper, 98 percent; primary
zinc, 90 percent ; primary aluminum. 100 percent.
^E.g., typewriters. 99 percent; electronic computing equipment, 83 percent; calculating
and accounrting machines, 90 percent ; scales and balances. 72 percent ; oSice machines,
n.e.c. 74 percent.
^ Ranging from 63 percent for electric housewares and fans to 95 percent for household
laundry ennipment.
^ Ranging from ship building and repairing, 59 percent, to locomotives and parts, 99
percent.
*2 E.g., optical instruments and lenses, 59 percent ; automatic temperature controls, 75
percent ; photographic pquipment and supplies. 81 percent.
^•■'E.g., cigarettes. 100 percent; cigars, S3 percent; chewing and smoking tobacco, 81
percent ; tobacco stemming and redrying. 87 percent.
^*E.g., ceramic wall and floor tile, 76 percent; vitreous plumbing fixtures, 84 percent;
porcelain electrical supplies, 70 percent.
*»E.g., malt liquors. 59 percent ; malt, 62 percent ; wines, brandy, and brandy spirits, 63
percent : distilled linuor except brandy, 71 percent.
*'E.g.. cottonseed oil mills, 00 percent; soybean oil mills, 76 percent; shortening and
rooking oils, 67 percent ; vegetable oil mills, n.e.c, 78 percent.
^"William G. Shepherd, Market Poicer and Economic. Welfare: An Introduction Random
House (New York, 1970), p. 106.
364
&. Concentration and compctitweness. — As pointed out later in this discussion,
careful empirical investigations show no significant relationship between the
degree of concentration and market prices. Moreover, the analytical connection
between some measure of concentration and degree of competitiveness has not
been established. And the conceptual validity and usefulness of the concentration
measures which are typically used is questionable.
None of the conditions required for perfect competition demand that all of the
firms in a perfectly competitive industry must be of equal size, i.e., have an espial
percentage of output and sales. Indeed, if this were a required condition, one
could unequivocally state that no industry could ever be perfectly competitive,
unless it could be established that there is some uniquely optimum size of firm for
each industry towards which all companies in the industry will tend if the
industry is perfectly competitive. It is an observable fact that company size
varies in every industry, and that the distribution of companies by size has little
if any relationship to industry competitiveness. Moreover, it is observable that
unequal size distributions persist with little significant change over many years.
These observations strongly suggest that there is no unique optimum size of the
firm in any industry and that substantial variation in size is compatible with
eflScient operation, irrespective of the competitiveness of the industry."*
One should expect, therefore, that even in the most nearly perfectly competitive
industry, a relatively small proportion of the companies account for a dispro-
portionately large proportion of sales. Data which show the proportion of sales
by the top 4, 8, 20, etc., companies do not measure or describe industry
competitiveness.
The notion that if there is some significant concentration of the sales in an
industry the industry cannot be competitive appears to rest on the assumption
that when a few firms account for a relatively large proportion of an industry's
sales, tliey "control" the market, i.e., can determine the total quantity sold and
the price of the product. Concentration of sales, altliough a necessary condition,
is not a suflBcient condition for such control.
For example, consider a highly competitive industry with no significant bar-
riers to entry, composed of a large number of companies of various sizes, pro-
ducing an undifferentiated product. Suppose one of the companies produces and
sells, say, 20 percent of the total output of the industry. Suppose further that that
company seeks to raise the market price of the product by reducing its output
and sales. The initial, momentary impact would be a reduction in the quantity
supplied and an increase in market price. At the higher market price, however,
all of the other companies would seek to increase their output until their mar-
ginal costs were again equal to the price. In addition, new companies would
enter the industry. Tlie temporary effect would be a reduction in the market
share of the large company. With the increased output of the other existing
companies and the addition to output by the new companies, total quantity sup-
plied would increase and the market price would fall. As market price decreased,
firms would contract output and some firms would leave the industry. Tliis process
of ad.iustment would end when the market price had once more returned to its
original level. A symmetrical process would occur if instead the large firm were
to attempt to increase its sales by reducing its price. Clearly, the high sales con-
centration in this case does not necessarily imply any disproportionate control
over market results. Sales concentration alone does not suffice ; to control market
results, the major firms would also have to be able to prevent entry of new firms
or expansion of output of other existing firms.
c. Concentration measurci. — A number of alternative concepts and measures of
concentration have been developed and used in empirical and analytical investi-
gations. The measure most widely used in the I'nited States, and used above
for FPC, Census of Mineral Industries, and Census of Manufactures data, is the
share of an industry's output coming from the 4, 8, etc., largest firms. Elsewhere,
the shares of some other designated number of firms, or the number of firms
which account for some designated share, e.g., SO percent, of the industry's out-
put, is used.*®
As indicated, the measures most commonly used in the ITnited States is the
share of an industry's sales from the 4, 8. etc., largest companies. The interpre-
tation of these indexes as measures of competitiveness, however, is entirely am-
*«Ct. George .T. Stigler. The Theory of Price (The Macmillan Company of New York,
1966). pp. 15S-160.
*'^ Cf. Stigler, The Organisation of Industry, op. clt., p. 30.
365
bigious. For example, suppose that in industry A tlie first 4 companies account
for 15 i)ercent of sales and the next 4 companies for 10 percent, while in industry
B, the first 4 companies' share is 14 ijercent and the next 4 have 12 percent. If the
concentration ratio is measured by reference to the first 4 companies, industry A
is less competitive than B, but if the first 8 companies are used, industry B is less
competitive. Would industry A or B be more or less competitive than industry C
in which the largest comiiany has 10 percent of total sales and no other company
has more than 1 percent? Presumably, if the first 12, 16, 20, and 50 companies
are alternatively used, the competitive rankings of the industries would change
with each measure.
More fundamentally, however, the meaning of any such index is unclear. Con-
sider a specific industry in which the largest company has 8 percent of sales, the
next largest has 7 percent, the third has 6 percent, and so on over the first, say,
25 companies, with the remaining, say, 3,000 companies accounting for, 35 per-
cent of the industry's sales. If the industry met all of the other conditions for
substantially perfect comjietition, what significance should be attributed to the
fact that the largest company sells 8 percent of the industry's total output? As
shown above, if it attempted to control the market price, for whatever reason,
its success would be, at best, momentary. To exert control, it would have to en-
gage in collusive action with some other companies in the industry (not necessar-
ily the next several largest). But then it is not market share which indicates
the degree of competitiveness ; it is, rather, the practical possibilities for under-
taking and enforcing collusive arrangements among any of the companies.
The reasoning, then, should run the other way : if there is evidence that an
industry is noncompetitive, the conventional concentration ratio conceivably
might indicate the potential for market control among the first several largest
firms. Of itself, however, the concentration ratio is not a reliable indicator of
competitiveness in an industry.
Given the narrow range of market shares among the major gas producers (as
shown by the FPC data on sales to interstate pipelines),™ the lack of significant
barriers to entry, the large number of producers, and the lack of significant prod-
uct differentiation, it is diflScult to believe that any one company could exercise
any significant control in an unregulated natural gas market.
C. Evidence from the intrastate market
The existence of the unregulated intrastate market alongside the regulated
interstate market, both supplied by producers often selling in both markets,
affords an opportunity to test the opposing propositions about the competitive-
ness of the gas protlucing industry. Surely if the industry is "monopolistic" or
highly noncompetitive, its performance in the unregulated intrastate market
should cast up evidence to this effect. In fact, however, such data as are available
with respect to the intrastate market strongly affirm precisely the opposite con-
clusion, viz., the industry is highly and effectively competitive.
Two separate tests, each solidly based on fundamental analytical propositions,
are possible with the data available for the intrastate market. The first of these
tests is a comparison of gas prices in the intrastate and interstate markets in
given regions. As is shown below, economic analysis leads to the conclusion that
prices in the two markets should, in general, be quite close if the gas producing
industry is highly and effectively competitive ; if the industry, rather, is highly
noncompetitive, substantial differences between the prices in the two markets
should generally prevail.
The second test is a comparison of the spread among gas prices in the intra-
state market with the spread among costs of production of the gas. If the in-
dustry is highly and effectively competitive, the disiiersion in prices in any
region in the intrastate market should be sub.fi;tantially less than the dispersion
in costs. If the industry w^ere significantly noncompetitive, on the other hand,
there should be much less of a difference between the respective dispersions.
1. Comparison of interstate and intrastate prices
The significance of this test derives from some fundamental principles of
economics concerning the pricing behavior and results of companies in com-
petitive compared with noncompetitive industries.
Any producer-seller in any kind of market who maximizes his profits produces
and offers for sale that quantity which just adds as much to his cost as to his
revenues. Clearly, if the company were to produce and sell, say, 1001 units instead
of 1000 units and if producing the additional quantity were to add less to the
5" Of. Hawkins, op. cit., pp. 141-145.
366
company's cost than to its revenues, it would pay the company to produce the
larger quantity. By the same token, if producing and selling, say, 1011 units in-
stead of 1010 were to add more to the company's cost than to its revenues, it
would not pay to produce and sell the larger quantity. The best quantity to pro-
duce and sell, therefore, would be more than 1000 and less than 1011, and the
company must seek out that one best price and quantity, given the conditions
which determine its costs and the demand for its products or services.
If the perfectly competitive market in which no one producer-seller's actions
materially affect the market price, the additional revenue obtained from selling
one more unit of the product or service is equal to the market price of the
product or service. For a company in that kind of market, the profit-maximizing
output is that quantity such that producing and selling one less unit would
subtract less from cost than the market price and producing and selling a quan-
tity one unit more would add more to cost than the market price. In short,
the profit-maximizing output is such that its marginal cost is just equal to the
price.
In the monopolistic case, since each different amount of the product or service
can be sold by the company only at a correspondingly different price, the change
in the monopolist's revenues resulting from producing and selling a given quan-
tity rather than one imit more or less is not equal to the price. Thus, suppose
demand conditions are such that he can sell 1,000 luiits at, say. $100 a piece (total
revenue=:$100.000), but if he offers to sell 1010 units he can obtain a price of
only $99.90 (total revenue=$100,899). Then, selling the additional 10 units adds
$899. or $89.90 per additional unit, to his total revenue, not $1000 for $999. The
additional revenue per unit. $89.90, is less than the price, $99.90. at which 1010
units can be sold. The addition to his total revenue from selling the larger rather
than the smaller quantity — his marginal revenue — in other words, is less than
the additional quantity times the new price at which the total quantity, 1010
units, can be sold.
Just as in the perfectly competitive market, in the perfectly monopolistic
market there is some one output and price at which the company maximizes
its profits, given the company's costs for producing and selling various amounts
of the product or service and given the conditions of demand. To repeat, the
condition for profit maximization is that the company produce and sell that
quantity of its product or service the marginal cost of which is just equal to
the marginal revenue. In the perfectly competitive market, since marginal reve-
nue equals price, the maximizing rule may be restated that the company pro-
duces that quantity the marginal cost of which is equal to the price. In the
monopolist's case, at the profit maximizing output marginal cost is less than
price.
As noted earlier, few industries meet the conditions Avhich delineate either
perfect competition or perfect monopoly. Most industries, however, incline much
more toward the perfect competition end of the .spectnim than toward the mono-
polist.^^ Tlie monopolist, to repeat an earlier observation, must have exclusive
control over one or more of the inputs essential to the production or sale of his
output, i.e.. he must be able to exclude completely any other company from
producing and selling a reasonably close substitute product or service. While in
most industries, companies attempt to differentiate their output from that of
other companies, there are few instances in which that product differentiation
is — or has been — subsantial, at least for any length of time. With few significant
exceptions, if any one company in an industry can differentiate its product, other
companies can undertake similar product differentiation to eliminate or greatly
reduce the competitive advantage of the first company. As a consequence, the
companies tend to offset each other's product differentiation efforts and the
demand advantages which might be realized if only one or a few companies
differentiated output. In most industries, therefore, close substitutability among
the various companies' products or services is the rule, and substantial uni-
queness is the rare exception.
The significance of this observation lies in the fact that the greater the number
and the closer the substitute products, others things being equal, the more price
elastic is the demand for the company's output.^" Moreover, the more elastic the
" Cf . Milton Friedman, Capitalism and Freedom (University of Chicago Press, 1964),
pp. 1*^1-122.
"- The substitutes need not be products with basically .similar physical characteristics.
Soft drirlks. fruit juices, coffee, tea, milk, and alcoholic beverages are substitute products
in varyinp degree. In a free market, more or less close substitutes for natural gas include,
e.g., oil, natural gas liquids, hydroelectricity, and coal.
367
demand, the closer is marginal revenue to price.'^' Thus, in an industry in which
there are many substitutes for any one company's output or even a few very
good substitutes for any one company's product or services, the elasticity of
demand facing any one company is likely to be higli.^^ If any one such company
produces its protit-maximizing output, i.e., that output the marginal cost of
which is equal to the marginal revenue, then its price is likely to be close to a
perfectly competitive market price.
This is, indeed, the technical meaning of the phrase "effective competition."
Conditions of perfect competition are seldom perceived in the real world — some
product differentiation exists in most markets — but for numerous industries the
conditions of demand facing the iirms differ only modestly from those they would
face if the market were perfectl.v competitive. The resulting market solutions,
therefore, are close to those that would prevail inider perfect competition.
"\^'ith these analytical propositions in mind, suppose, to begin with, that sellers
in the intrastate market were, in fact, highly monopolistic. Suppose further that
the price of gas set by the FPC in the luicrfiiatc market is at least as high a.s that
which would be reqiiired to clear both the interstate and intrast<ate markets,
if the industry were highl.v comiietitive. Then for the monopolistic producers,
who sell in both markets, tlie demand for gas in the regulate<l market would be
infinitely elastic at the regulatetl price (up to that quantity of gas for which
interstate buyers would only pay a price less tlian the regulated price). In the
unregulated market, however, the demand for gas as seen by the producers would
be less elastic, since changes in the quantity offered for sale by an.v one such
monopolistic producer would affect the market pi'ice: for any one such producer,
therefore, each different quantity of gas could be sold only at a different price.
The nuirginal revenue for any quantity of gas sold in that market, therefore,
would be less than the price for that quantity. In order to maximize profits, the
monopolistic producers would offer for sale in each market that quantity for
which the marginal revenue is the same in both and is equal to the marginal
cost of the total output. Since marginal revenue equals price in the regulated
market and is less than price in the unregulated market, the price in the latter
necessarily would exceed that in the former, if the producers behave like profit-
maximizing mono])olists.^''
On the other hand, suppose that the industry is highly and effectively com-
petitive. Under this assumption, the demand facing each producer in the unregu-
lated market will be highly elastic — approaching infinity — even if the market
dematul is highly inelastic. Then each producer will offer for sale that quantity
the marginal cost of which is equal to the regulated price in the interstate
market and equal to marginal revenue in tlie inti-astate market. Since marginal
revenue will be very nearly equal to price in the unregulated market and .since
marginal revenue in each market must be equal and the same as the marginal
cost for each producer for his total output, the price in the unregulated market
will be little, if any, higher than in the interstate market. In effect, the FPC
ceiling on the interstate price imp(>ses a ceiling as well oii the intrastate price.^"
This analysis is graphically illustrated in Figure 2. Du represents the market
demand for gas in the imregulated. intrastate market. Dr is the market demand
for gas in the regulated interstate market, and Dt is the total demand for gas,
taking lioth markets together. Pr is the price of gas set by the FPC in the inter-
state market. MC is the sum (horizontal) of the marginal cost schedules of all
the producers, who sell gas in both markets. If the industry is perfectly — or
nearly so — eomijetitive, MC is the industry supply schedule.
The demand for gas facing any one company in the interstate market is the
horizontal dotted line at Pr, and the marginal revenue for any output, as seen
by any one company, is also Pr (up to the quantity Qr). If the industry is
effectivel.v comiietitive, the demand for gas as seen by any one company in the
unregulated market will also be a virtually horizontal line at the prevailing
'^ Not ationally, marginal revpniie=p(l + Y). where p Is the price and 7 is the elasticity
of dp'^and (with a negative vahie). Where demand is infinitely elastic, J- is infinitesimally
small, and marginal revenue equals price. The smaller the elasticity of demand, clearly, the
greater is the excess of price over marginal revenue.
^ Indeed, substltutabillty is one of the reasons that the number of firms in an industry
or their concentration is often a misleading indicator of the industry's competitiveness. Cf.
George .7. Stigler, The. Theorii of Price, op. cit., pp. 197-199.
^Ci. Stigler. Theory of Price, op. cit.. pp. 209 ff.. for a discussion of discriminatory
pricing. by a monopolist. In effect. FPC price ceilings face each producer with an infinitely
elastic demand situation in the interstate market, up to that quantity of gas for which
buyers are willing only to pay less per :MCF than the ceiling price.
^8 Cf . Milton Russell, "Producer Regulation for the 1970's," in Keith C. Brown, ed., op.
cit., pp. 224ff.
368
FIGURE 2
um --
'R
market price. Since (a) marginal revenue for each prcxlucer must be equal in
both markets, (b) marginal revenue must be very nearly equal to price in the
intrastate market if the industry is effectively comi>etitive, and. (c) marginal
revenue in the interstate market equals the regulated price, Pr, the price in the
intrastate market must be very nearly equal to that in the interstate market.
Then, to maximize its profits, each company offers for sale that quantity tlie
marginal cost of which is equal to the marginal revenue which is equal to Pr,
the regulated price, if the industry is effectively conii^etitive. In the intrastate
market, the total quantity offered for sale is Quq, in the interstate market, sales
are Qr, and the total quantity offered for sale is Qt^. which is equal to the sum
of the quantities demanded in both markets at a price of Pr.
On the other hand, if the market is highly noncomi)etitive, marginal revenue
as .seen by each company in the unregulated intrastate market is less than, rather
than equal to, the price at which any given quantity can be sold by each com-
pany. To maximize* its profits, each company will sell that quantitj' in each
market for which the marginal revenue is the same. Since marginal revenue,
is Pr in the interstate market, each company will .sell that quantity in the
intrastate market for which the marginal revenue is also equal to Pr. In Figure
369
2, the quantity in the intrastate marltet for which the marginal revenue is equal
to Pr is Qv^i which is sold at a price of Pv^, substantially higher than the regu-
lated price Pr. Total sales in both markets combined are Qt^, equal to the sum
of Quif and Qr.
For the period in the mid-to-late 1960's for which price data on intrastate sales
ai-e available and prior to the sharply increasing shortages, intrastate prices
were very nearly the same as interstate prices. In general, the difference between
the prices in any given region was in the neighborhood of one cent i)er MOF.
(See Table 2.)
TABLE 2.-INTERSTATE AND INTRASTATE GAS PRICES IN CENTS PER THOUSAND CUBIC FEET, SELECTED REGIONS
1966-^9
1966
1967
1968
1
1969
Weighted
Weighted
Weighted
Weighted
average!
Range
average'
Range
average!
Range
average '
Range
Region
South
Louisiana: 2
Offshore
Interstate..
19.29
17.00-19.50
20.18
18. 50-24. 00
20.66
18. 50-21. 25
21.05
19. 50-22. 25
Onshore:
Interstate..
20.42
13. 30-21. 25
20.64
15.00-21.25
20.91
17. 50-22. 00
21.21
7. 50-22. 75
Onshore
intrastate..
19.58
14. 00-22. 30
19.58
16. 50-24. 45
20.21
14.75-30.00
20.32
19. 50-23. 68
Texas Gulf
Coast: 2
Interstate
15.59
12.00-17.00
15.70
14.25-17.00
16.89
14.25-17.80
17.71
14.00-21.25
Intrastate
16.10
11.00-18.00
17.47
10. 00-20. 00
17.15
13.75-19.50
18.94
12.00-21.00
Rocky
Mountain: 2
Interstate....
13. 21
8. 93-16. 00
14.45
8. 93-16. 00
14.03
8. 93-15. 00
14.48
8. 93-17. 55
Intrastate
15.09
11.51-16.90
17.29
17.00-17.50
11.57
9.75-12.00
Permian
Basin: 2
Interstate....'
16.41
12.50-16.66
16.92
14. 50-17. 50
16.30
14.50-17.50
16.73
14. 50-18. 00
Intrastate
16.97
13.65-19.25
16.28
15. 24-22. 00
17.11
13. 00-18. 00
18.33
12. 00-20. 25
1 The term weighted average is defined as the sum of the annual volume of each contract multiplied by applicable
rate of each contract divided by the total annual volume of all contracts dated in the respective year.
2 Prices are initial contract rates except for South Louisiana, which includes tax reimbursement. Prices were reported
at, or converted to, pressure of 14.65 Ib./in.^a except fcr South Louisiana, which is based on pressure of 15.025 lb/in2a.
Sources: Interstate: Foster Associates, Inc., from data supplied to Federal Power Commission. Intrastate: Federal
Power Commission, Docket No. R-389A, "Initial Rates for Future Sales of Natural Gas for All Areas," Sept. 9, 1970.
This result is sharply at odds with those which would have occurred if pro-
ducers had operated noncompetitively in the intrastate market. On the other
hand, they are precisely the results one would expect if the gas production indus-
try is highly and effectively competitive. The evidence for this period from the
intrastate market strongly reaffirms the conclusion that the industry is highly
and effectively competitive.
Consider, next, the situation when the FPC ceiling price is less than that
required to clear the total regulated and unregulated market if the industry
operates competitively. Moreover, assume that the increase in demand (relative
to the increase in supply) which is responsible for this situation occurs in both
markets. T'nder the.se conditions, price will rise in the intrastate market, irre-
spective of whether the industry is highly monopolized or highly competitive.
The increase in price in the unregulated market will, moreover, induce a reallo-
cation of sales, to the extent that existing contracts permit, from the interstate
to the intrastate market. This shift will occur irrespective of the comi>etitivene.ss
of the industry. The price increase would also induce producers to attempt to
add to their reserves, hence to increase their supply, at a faster pace. If the
industry operated subject to constant costs, a higher price would prevail in the
unregulated market until the additions to supply, all of which would be allocated
to that market, were sufficient to bring the unregulated price down to the ceiling
price in the regulated market, assuming the industry is competitive. If it were
370
not competitive, on these assumptions tlie allocation of additional supplies to
the unregulated market would continue until the marginal revenue to the monop-
olistic producers in that market was equal to the ceiling price they obtain for
their gas in the interstate market.
On the other hand, since the industry, in fact, operates subject to increasing
costs, the adjustment process will involve a continuing shift of sales from the
interstate to the intrastate markets, so long as the ceiling price on interstate
gas sales is not increased. This result will not depend on the competitiveness of
the industry.
In view of the continuing and accelerating increases in demand and in costs
and the continued imposition of ceilings on both new gas and flowing gas in the
interstate market, it is not possible to draw any definitive conclusions about
industry competitiveness, parallel to those for the mid 1960"s, from comparison
of current or very recent market conditions. Clearly the adjustment process
described above is well undenvay. The market solutions toward which those
adjustments are heading will depend heavily on whether the FPC continues to
impose ceiling prices below the market-clearing price.
On the other hand, the findings from the earlier period are so urgently iier-
suasive that the gas producing industry was highly and effectively competitive
in the unregulated intrastate markets that any assertion that it no longer is
should require the most rigorous proofs. At the very least, it would be necessary
to explain why the industry had changed in so short a period of time from a
highly effective competitive one to a highly noncompetitive one.
2. Comparison of intrastate prices and costs
As noted, under conditions of "effective competition," the differences among the
competing firms in the level and elasticity of demand are likely to be modest. On
the other hand, although market forces themselves tend over time to eliminate
differences in the cost structures among the competing firms, at any given mo-
ment in time these differences are likely to be considerably more substantial
than the differences in demand.^'' Accordingly, a cross-section of the companies in
any effectively competitive market at any given time should reveal a significantly
greater dispersion in their costs of producing and selling the quantities of the
products or services they offer for sale than in the prices they receive for their
products and services. In other words, prices among such companies will not
necessarily be identical, but they will be more closely clustered than their aver-
age costs of production and sale.
In contrast, in the highly noncompetitive industry, differences in demand condi-
tions facing the companies should be substantial. Cost structures, at any given
time, also should be expected to differ materially among the companies, just as in
the case of a perfectly competitive industry. Assume that the dispersion in co.sts
among producers is of the same magnitude, or nearly so, irrespective of whether
the industry is highly competitive or highly noncompetitive. Then if the industry
is noncompetitive, there shoiild be much less of a difference between the disper-
sion in prices and the dispersion in costs observable in an unregulated market.
A comparison of the high, low, and weighted average prices of intrastate sales
of gas contracted for in 1969 with the corresponding range of partial costs of
producers selling gas in the instrastate (and interstate) markets is shown in
Table 3.^ Clearly, the range in intrastate sales prices (cents per MCF) in the
Southern Louisiana, Rocky Mountain, and Permian regions is less than the range
in the costs shown for that gas.
These test results strongly support the conclusions to be drawn from the first
test, pertaining to the similarity of gas prices in both regulated and unregulated
markets, viz., the natural gas producing industry is highly and effectively competi-
tive. Taken together, these test results impose an enormous burden of proof,
both analytical and factual, on those who as.sert that the industry is significantly
noncompetitive.
E'' Indeed, even among perfectly competitive firms significant cost differences should be
expected, except under conditions of long-run equilibrium.
^^ Cost data reported to the FPC are for total operations, without distinction between
interstate and intrastate sales. This is unavoidable since both markets are often served by
the same leases.
371
TABLE 3.-DISPERSI0N OF PARTIAL GAS COSTS' AND PRICES-SELECTED REGIONS, 1969
[I n cents per thousand cubic feet)
Range of Range of
elements of gas Intrastate
Region production costs sales price
Southern Louisiana _.-. 1.36-93.73 19.50-23.68
Rocky Mountain 1.64-14.45 9.75-12.00
Permian Basin 1.67-518.82 12.00-20.25
1 Costs used In the arrays consist of direct lease operating expenses and depreciation, depletion, and amortization
reported on the 3 gas well gas lease classifications of gas only, gas condensate with lease separation, and gas condensate
with no lease separation. While the items of costs used do not represent all cost data reported in the cost questionnaires,
they do represent the major operating costs which can be identified with gas well production without allocation.
Other major items of costs reported in the cost questionnaires such as exploration and development costs, investment
in leases and equipment, and royalties generally require allocation to gas well gas in order to derive total costs. These
costs, therefore, are not included here. Such allocations and derivations are subject to difference of opinion on methods
to be employed. Consequently, any array of individual company costs would be subject to question on allocation bases.
To avoid that question only the selected costs identifiable directly with gas well gas production reported here have been
used.
While these arrays do not represent total company gas well gas costs or a proxy, they nevertheless do indicate the range
of costs experienced by individual companies in the industry.
Source: Cost questionnaires filed by producers with, and available at, the Federal Power Commission.
III. COST-BASED REGULATED PRICES VS. DEREGULATED MARKET PRICES
The most vigorously urged justification for FPC regulation of the price of
natural gas is ba.sed on the assertion that the gas producing industiy !•'' highly
noncompetitive.
The line of argument that has been advanced to link the degree of competitive-
ness of the natural gas industry to the "need" for regulating the price of gas,
to the specific method for determining the regulated price, to the existence of a
natural gas shortage, and to the consequences of deregulating the price of gas
is murky and iworly articulated. According to this argument, regulation is neces-
sary ". . . because, in fact, the prevailing conditions either preclude or inhibit
the attainment of a competitive market solution. In such circumstances, as in
the natural gas industry, there are structural conditions which, if left unregu-
lated, would produce a monopolistic rather than a competitive end result." ^° It is
further argued that the competitive end result is a market price equal to the
cost of production : "The elementary fact ... is that the new gas cost is the com-
petitive market price. The hallmark of a competitive industry is a level which
tends to equate resources and costs (including a fair return) . . . The fact that
price equals cost in a competitive market is the reason why cost determinations
are fundamental to efficient regulatory ratemaking." ^ In noncompetitive
industries, on the other hand, it is argued that firms with monopoly power con-
trive artificial scarcities of their product so as not to spoil the price they can
get. Such firms, allegedly, contrive to keep price above marginal cost because in
that way they maximize profit.
The line of argument, thus, seems to be that the shortage of gas results from
the alleged "fact" that gas producers are monopolists, that their pricing behavior
differs from that of competitive firms, that the prices they would set if unregu-
lated would be based on contrived shortages, and that if gas prices are established
at the level of gas costs, regulation should not be blamed for the shortage. It is
further argued that, given these "facts", deregulation of interstate gas prices
would result in prices in excess of a "just and reasonable"' price, according wind-
fall profits to producers and impairing the interests of consumers.
This line of argument raises serious issues of both fact and analysis. In Section
11, above, the assertion that the gas producing industry is noncompetitive was
examined and found to be unjustified. On the contrary, the characteristics of the
industry and market results attest to the fact that it is higlilv and effectively
59 Cf. Wilson, op. cit., p. 12.
^Ibld., pp. 14-15.
372
competitive. But quite apart from those findings, tlie basic premises upon wliicli
tlie arguments for regulation are based are subject to serious challenge. These
premises are that (1) prices set by the FPC equal to estimated costs of produc-
tion are the same as tlie market prices which would prevail in competitive
markets; (2) cost-based regulated prices are in no way responsible for the exist-
ing and prospective gas shortages; and (3) the price increases which would
result if interstate gas were deregulated would be excessive, would provide
windfall profits for producers, would injure consumers, and woiild not be neces-
sary to deal with the gas shortage.
A. Is a perfectly campctitive market prloe equal to the cost of production?
It is widely believed that regulation by a public authority of the price of a
commodity or service aims at achieving the results wliich would prevail if the
commodity or service were sold in a perfectly comi)etitive market."^ Moreover,
the competitive market price which regulation ostensibly aims at reproducing
is asserted to be equal to the cost of producing the coiumodity or service.®^
Whether regulatory agencies generally do, in fact, conscioTisly seek to set com-
petitive market prices is a question which must be reserved for some other dis-
cussion. But if the FPC does indeed aim at the competitive market solution in
regulating the price of gas, the question is whether the regulated price should
be set equal to the estimated cost of production,** i.e., is a competitive market
price equal to the cost of producing the product or service?
The basic analytics of the competitive market solution were delineated in Sec-
tion JI of this discussion. To repeat the central points, any company operating
in a perfectly competitive market produces and offers for sale at any time that
quantity of its product or service the marginal cost of which is equal to the mar-
ginal revenue, which in perfect competition is equal to the prevailing market
price. In regulatory practice, however, it is not the marginal but the average cost
to which the regulated price is equated. The average cost of that best quantity
for the company to produce and sell, however, will coincide with marginal cost
only under two limiting circumstances.
One of these circumstances is that over the range of output in which the com-
pany's production occurs, average cost is the same at every different quantity
produced. Thus, if the company's output may range from, say. 1000 to 1500 units
per operating period, and if the average cost of 1000 units, 1500 units, or any
other quantity between 1000 and 1500 units is the same, marginal cost will also
be the same as average cost over this output range. But if this were the case for
any significant number of companies in the industry, output would be indetermi-
nate and no stable market price would be achieved. Any one such company could
find any best quantity to produce only if its average cost (equals its marginal
cost) throughout its range of production possibilities were exactly equal to mar-
ket price ; but even under these conditions the company would find no best output
between 1000 and 1500 units, in the example above. Any random change in out-
put within this range by any substantial number of companies would clearly
affect the market price, requiring all of the companies again to change output.
In short, under these circumstances, the quantity produced and offered for sale
by any company and by all companies, hence market supply, would fluctuate
widely and frequently as would the price of the product or service. No stable
market solution of price and quantity would be achieved.
In fact, price mf)vements of this character are not typically found in any
market. This limiting circumstance therefore, may be dismissed on factual as
well as analytical grounds.
The other limiting circumstance in wliich the average cost equals the marginal
cost of the I>est quantity of the product for the company to produce is when long-
run equilibrium has been attained in the industry. Tlie principal conditions for
long-run equilibrium is that when each firm is producing its best output, i.e., that
quantity the marginal cost of which is equal to marginal revenue, the industry
as a whole earns the same rate of return as that generally pre\'ailing in all
industries. For this condition to be satisfied, the average cost, including the
* Cf. Wilson, op. cit., p. 12 : ". . . the competitive price should be the regulatory stand-
ard. Virtually every undergraduate textboolc on regulatory economics makes precisely that
point in tlie opening chapter."'
82 Ibid., pp. 14-15 : ". . . the new pas cost is the competitive marl?et price. The hallmarlc
of a competitive industry is a price level wliich tend.s to equate revenues and costs (includ-
ing a fair return) . . . the fact that price equals cost in a competitive marl^et is the reason
why cost determinations are fundamental to efficient rcfrulatory ratemaklnj;."
"3 To repeat, such estimates involve highly arbitrary allocations of overhead and joint
costs.
373
average rate of return on the capital conimittefl to the industry must be equal
to the market price. Since marginal cost must also be equal to the market price,
marginal cost must also equal average cost. If these conditions were to obtain,
there would be no incentive for firms generally either to leave or to enter the
industry, and the market would clear at the prevailing price, i.e., the quantity of
the product or service offered for sale at that price would equal the quantity
buyers would purchase at that price.
Failing these conditions, there is an incentive either to commit additional
production inputs to the industry if its profit rate exceeds that generally avail-
able, or to withdraw production resources, if the profit rate is less than that
generally prevailing. If the profit is above average, more production resources
are added and supply increases. The price of the products will fall, at least rela-
tive to what it otherwise would have been. In addition, the costs of the produc-
tion inputs, hence costs of production will rise, as firms in the industry attempt
to bid away productive sen'iees from other industries. If the profit rate is below
average, the exodus of protluction inputs from the industry reduces the market
supply and raises the price of the industry's output. Moreover, input prices and
costs of production will fall. In either case, these adjustments will continue until
it no longer pays to shift re.sources from one industry to another. When the
adjustments come to a halt, then, the price of the product is just equal to its
average cost, including as one of the costs the rate of return on investment
generally available throughout the market.®*
These general equilibrium conditions hold, irrespective of the degree of competi-
tivene.ss of the industry. The limiting case is that in which a company or a com-
bination of companies can both bar the entry of new companies into an industry
with a rate of return in excess of the generally prevailing market rate and also
fails to expand its own investment.
In the long run, therefore, prices tend toward equality with average cost, in-
cluding a "normal" rate of return, irrespective of the degree of competitiveness of
the market.®
Except under conditions of long-run equilibrium, however, marginal cost and
average cost are not the same. If average cost increases with increases in output,
marginal cost will exceed average cost ; if average cost falls as output increases,
marginal cost is less than average cost.*' Since the company produces and sells
that quantity the marginal co.st of which equals the market price (in the perfectly
competitive market), when average cost is rising, the price will be greater
than average cost and the company will earn a profit, i.e., an amount greater than
the generally prevailing rate of return. If at the company's best output its aver-
age cost is decrea.sing, marginal cost is le.ss than average cost, and the company
will suffer a loss. It will earn less than the generally prevailing rate of return.
The competitive market solution, therefore, is a price wliich is greater or
less than the average cost of the quantity produced and sold except tinder condi-
tions of long-run equUihriinn. It is useful, for many analytical purposes, to spell
out the conditions for long-run equilibrium, not because the economy as a whole
or any market therein has actually attained these conditions in the dynamic
•" This rate of return may in fact differ from industry to industry because of differences
in tlie risk of investment in eacli. Tlie new price, after the adjustments are completed, -will
be lower than, the same as. or higher than before depending on whether the industry Is
characterized as a decreasing, constant, or inicreasing cost industry. A decreasing cost
industry is one in which the minimum average cost from a given scale of plant declines as
the scale of plant is increased. An increasing cost industry experiences a rise in the mini-
mum average cost as scale increases. Natural gas production is in general subject to increas-
ing costs, i.e., the cost per MCF of gas incurred in the development of additional reserves
increases as new reserves are added.
^ Equality of price and average cost is conventionally identified as the principal condi-
tion of long-run eouilihrium in perfect competition. As shown, however, this general equi-
librium condition is not restricted to the ease of perfect competition. On the contrary,
general equilibrium analysis shows that, other things being equal, all industries in the
long run tend toward satisfying that condition. The distinction between the marlcet price
situation of competitive and noncompetitive industries disappears in the condition of long-
run equilibrium. Cf. Eugene F. Fama and Arthur B. Laffer, op. cit.
M See Stigler, The Theory of Price, op. cit.. Appendix B, pp. .'?.'?7-3.38, for a simple formal
statement of the relationships among total, average, and marginal quantities. The common
sense of the propositions is readily illustrated bv simple arithmetic example : Suppose the
total cost of producing 10 units of a product is .SlOO and the total cost of producing 11 units
is S121. The average cost of 10 units is .S100-M0 = $10 : the average cost of 11 units Is
$12lH-ll = $ll : the marginal cost of producing 11 units instead of 10 is .S121 — .?100=$21,
obviously more than the average cost nf 11 units. Alternativelv, suppose that the total cost
of 11 units were .flOD instead of $121. Then the average" cost of 11 units would be
.$109 ^11 = .$9.91, and the marginal cost of 11 units would be $109 — $100=. $9. 00, less than
the average cost.
374
real world, but because delineating these conditions suggests the kinds of
adjustments firms, industries, and sectors tend to make.
Long-run equilibrium, however, is hardly a normal or usual state of affairs
in the dynamic real world. The mere fact of an observed increasing market de-
mand for a product or service is sufficient to establish that market conditions
are other than long-run equilibrium (unless it can be shown that the affected
industry had fully and correctly anticipated the increasing demand and had
scheduled and effectuated instantaneous adjustments thereto, a virtual
impossibility).
Any assertion that the cost of gas is the competitive market price is simply
unmistakeably wrong. It is wrong in the context of the rudimentarv theory of
competitive price. And it is wrong as a characterization of the real world state
of affairs. And it is wrong irrespective of one's belief as to the competitiveness
of the gas producing industry.
B. Are cost-hased regulated prices responsible for the gas shortage?
As the preceding discussion shows, a cost-based regulated price is not the com-
petitive market price, except in the unreal case of long-run equilibrium. But the
problem with cost-based price regulation is not merely this conceptual frailty.
Far more serious is the fact that cost-based price regulation is likelv to result in
failure of the market to perfonn its essential functions efficiently. In "a word, such
price regulation is likely to preclude market clearing, resulting either in sur-
pluses or in .shortages of gas.
The analysis may be presented diagramatically. In Figure 3, let MC be the
sum of the marginal cost schedules of the gas producing companies, assuming
the industry is effectively competitive, or the marginal cost schedule of a mo-
nopolistic producer. Let D represent the market demand for gas, and let MR
represent the marginal cost of varying quantities of gas if the industry is mo-
nopolized. If the industry is effectively competitive, the unregulated price will
be Pi. at which the quantity supplied will be <?,. On the other hand, if the indus-
try is monopolized, the quantity supplied will be Q^, which will be sold at a
price of P^.
Now suppose that FPC fixes the price of gas at what it deems to be the average
cost of gas production. If it believes that cost to be anvthing less than P^ and
therefore sets the price below P3, the quantity supplied will lie less than (?-. i.e.,
less than the unregulated monopolist would offer, irrespective of whether the
industry is effectively competitive or monopolized. Clearly, at any price fixed
below P.,. an enormous ".shortage" will exist, i.e.. the quantitv offered for sale
will be far less than the quantity demanded at that price.
If FPC sets the price above P3 but below Pi. the quantity supplied will be
greater than that which would be offered if the industry were monopolized, but
less than that which would be offered in the effectively competitive market. In
either case, a shortage would exist, i.e., the quantitv supplied would be less than
that demanded at the fixed price.
If FPC sets the price above Pi, a surplus would temporarilv develop, i.e.. the
quantity demanded at the fixed price would be less than the quantity supplied,
again irrespective of the competitiveness of the industry. In time, however, prices
would tend to sink below the FPC ceiling and output would decline, as a result of
reduced exploratory effort.
Clearly, if FPC regulates the price of gas, the market will clear onlv if the
price is fixed exactly at Pi. At any other price, either a shortage or surplus will
exist, irrespective of whether the gas producing industrv is highlv monopolistic or
effectively competitive. But since the price fixed by FPC ostensibly is equal to
the average cost of gas. price regulation vn\\ clear the market onlv if, bv pure
chance, the average cost is deemed by the FPC to be precisely P,.
The enormity of the difficulties facing FPC in regulating the price of gas is
difficult fully to comprehend. Even if all the cost elements could be accurately
and unamliiguously determined by the FPC. it would still face the impossible
task of determining the correct quantity of output the cost of which is to be de-
termined in order to set a price which will clear the market. In other words, it
would have to know the marginal cost of every conceivable, different output, to
find that output the marginal and average costs of which are the same, and to
determine that at the fixed price equal to that average and marginal cost, the
quantity of gas purchasers would want to buy is just equal to the quantitv produc-
ers would offer for sale. It boggles the mind to assume that the FPC — or any regu-
latory agency— is capable of making the required determinations.
375
FIGURE 3.
P2-- -\- -^
D
Q'
Qi
It cannot be emphasized enough that the quantity, cost, and price determi-
nations by FPC have to be such as to clear the market, unless the FPC or some
other public body is to be given the responsibility for allocating the available
quantity without reference to demand conditions — how much of the product or
service all of the various buyers want to purchase at that price. But as shown, if
the price the FPC sets is equal to "the"' cost of production, the market will not
clear, except if the industry is in long-run equilibrium and if the FPC happens
27-547 O— 74-
-25
376
by purest chance to set the price at the market-clearing, long-run equilibrium
level.
Clearly, irrespective of whether the industry is competitive or noncompetitive,
the task of price regulation imposed on the FPC is impossible to discharge effi-
ciently. To do so, FPC would have to have precise knowledge both about the mar-
ket demand for gas and the marginal costs of production for every producer. More-
over, even if by pure chance the price fixed by the FPC today clears today's
market, changes in demand and in costs will make that price invalid as those
changes occur. Effective, i.e.. market-clearing, price regulation, therefore, requires
perfect forecasts by FPC of clianging cost and demand conditions.
It must surely be evident that FPC has seriously underestimated both the
increase in demand and the increase in the costs of gas production. As noted
earlier, the industry is appropriately characterized as one of increasing costs.
Efforts to increase' gas supply by the addition of reserves result in sharply
rising average costs. Taken together with the rapidly accelerating increases in
the demand for gas, these factors have called for substantial increases in gas
prices if shortages were to be averted. FPC ceiling prices, no matter how deter-
mined, have fallen far short of those required to clear the market.
Both abstract and empirical analyses'" leave no room for doubt that since
gas prices were established by the FPC at the level of gas costs, regulation
must be blamed for the gas shortage that has developed. Moreover, regulation
per se is responsible for the shortage, entirely irrespective of the degree of
competitiveness of the regulated industry."
C. Dereffulation and price changes
One of the principal objections voiced against deregulating the price of natural
gas in order to deal with the gas shortage is that since the industry is "monop-
olistic," the price increa.se resulting from deregulation would provide "windfall"
profits to producers.*" The implications in this objection are either that price
increases will result from deregulation only because the industry is (allegedly)
monopolistic, or that the price increases will be higher because the industry is
allegedly monopolistic than they would be if instead the industry were com-
petitive. Since the industry is monopolistic, so the argument goes, the price
increases will afford "windfall'' profits to the producers : these windfalls, pre-
sumably, would not be realized if the industry were competitive. There is, more-
over, a further implication that "windfalls" are intrinsically objectionable.
1. Dereffnlation, price changes, and the competitiveness of the industry
The argument that the price of gas must continue to be regulated in order to
avoid excessive price increases and windfall profits for allegedly monopolistic
producers appears to stem in large part from misapprehensions about price
behavior and price results in competitive and noncompetitive industries. These
misapprehensions lead to the conclusions, which cannot be substantiated either
by analysis or facts, that (a) prices in noncompetitive markets are systematically
higher than those in competitive markets, and (b) when demand increases,
prices rise more in noncompetitive than in competitive markets.
a. MarJcet prices and the competitiveness of markets. — Does a company's price
behavior differ systematically with respect to the degree of competitiveness of the
market In which it operates? As noted earlier, any producer-seller in any kind of
market who maximizes his profits produces and offers for sale that quantity which
just adds as much to his cost as to his revenues. The condition for profit maximi-
zation, in other words, is that the company produce and sell that quantity of its
product the marginal cost of which is ju.st equal to the marginal revenue. Differ-
ences in market competitiveness, therefore, are not relevant factors Influencing
pricing behavior. Both the perfectly competitive company and the monopolist,
insofar as each is a profit maximizer, are guided, consciously or not, by the same
•" Cf. Breyer and M.TcAvoy, op. clt.
^' To recapitulate, if the price of new pas Is set equal to average cost, then for every
producer of gas subject to the regulated price, marginal revenue = regulated price = average
cost. But even if the industry were perfectly competitive, there is no a priori basis for
expecting that at this price the market will clear, since there is no reason to assume that
marginal cost will be the same as average cost. In fact, the odds against the market's clear-
ing are astronomical.
"* Cf. Initial Brief of Congressman George E. Brown. .Jr.. Before the Federal Power Com-
mission, in the Matters of Belco Petroleum Corporation Agent, et ah, Docket Nos. C17.3-293
et al.
377
rules. Contrary to a popular notion, the profit-maximizing monopolist does not
deliberately withhold output from the market to drive up the price, no more than
the profit-maximizing company in a perfectly competitive market. Nor does either
seek to maximize price per se. Descriptions of pricing behavior in noncompetitive
markets which seek to convey the impression that the firms in those markets de-
liberately set out to create artificial shortages or deliberately strive to maximize
price, rather than profits, are grossly in error, both analytically and factually."
Such descriptions may be deemed by those providing them to be effective forensic
ploys in an adversary proceeding, but they must be recognized as merely such.
In the erroneous view associated with the terms "market power" and "admin-
istered prices," the less competitive an industry, hence the greater the "market
power" of the companies in the industry, the higher will be the prices of the
products and services it produces and sells. This conclusion might follow if the
typical firm in a competitive industry had exactly the same costs as the typical
firm in a noncompetitive industry and if the market demands in their respective
industries are identical.
Quite obviously, no such comparison can be made directly, since the conditions
required for meaningful comparison are hardly likely to be met. Identical market
demands are virtually inconceivable. The identical product cannot be sold at the
same time in both a competitive and noncompetitive market which are otherwise
identical. Nor, until the problem of comparing apples and oranges is solved, can
any inference be drawn by comparing prices of differing products sold in markets
of differing degrees of competitiveness.
Meaningful comparison, moreover, requires the assumption that there are no
significant differences in costs as between the companies in perfectly and im-
perfectly competitive markets. If cost conditions do differ significantly, however,
there is no basis for a priori judgment as to whether prices will be higher in im-
perfectly than in perfectly competitive markets. The validity of such judgment or
finding would depend on knowledge of the cost conditions of the companies in
the markets and a determination that the level of cost and the increase in costs
with increases in output are closely and positively correlated with the degree of
market imi)erfection. While it is conceivable that the degree of imperfection of
competition exerts some influence on co.sts, far more important influences are the
technical conditions of production and the basic conditions of supply of produc-
tion inputs, and there is no reason to assume that these influences are significantly
and systematically associated with the degree of competitiveness.
Indeed, an analytical answer to the question whether market prices are higher
the less the degree of competition would require determination of what the mar-
ket price of a product or service in fact sold in a competitive market would be
if the market instead were noncomi)etitive (in terms of number of companies
but otherwise identical). But this would be an unanswerable question since the
degree of comi)etition in a market is specifically related to actual economic
factors.
&. When demand increases, do prices 7isc more in noncompetitive than in com-
petitive markets? — In the popular but erroneous view, companies which are
deemed to exert "market power" to "administer prices" allegedly increase prices
more than competitive companies when demand increases and reduce prices less
when demand declines.'^ Analytically, no such generalization is possible. Given
the rules for profit maximization which apply equally to companies in com-
petitive and noncompetitive industries, all that can be said is that the change in
prices in either case will dei>end on the specific changes in the level and elasticity
of demand for the respective products or services and upon the cost conditions of
the companies.
For example, if one could assume that the cost conditions if the companies in
both the competitive and noncomix'titive industries were identical and that the
7" Cf. Alchlan and Allen, op. clt., pp. 308 ff.
" This misconception owes much of its popularity to Gardiner Means, whose monograph
Industrial Prices and Their Relative Tnflexibilitj/, Senate Document 13, 74th Congress, 1st
Session (.January 17. 193.5), sought to demonstrate that in concentrated industries, prices
are changed infrequently and in particular are rigid downwards. Later work by Means
attempted to show that the increase in the price level in the mid-.'jO's was attributable to
price increases by companies in concentrated industries which "administer" their prices.
Cf. Hearings before the Subcommittee on Anti-Trust and Monopoly of the Committee on
the Judiciary, United States Senate, 1957. For a critical examination of Means' views, cf.
George J. S'tlgler and James K. Kindahl. The Behavior of Industrial Prices, National
Bureau of Economic Research (New York. 1970), and George J. Stigler, TJie Organization
of Industry, op. cit.
378
initial market demand conditions were also identical, then if an increase in
demand is associated with a decrease in elasticity of demand, prices will rise
more in the noncompetitive than in the competitive industry. On the other hand,
if the increase in demand is associated with an increase in the elasticity of
demand, prices will rise more in the competitive than in the noncompetitive
industry. If cost conditions change along with changes in demand, then it is also
necessary to specify the changes in cost before a surmise about the comparative
extent of price rise is possible.
Merely characterizing the industry or market in terms of competitiveness is an
analytically inadequate basis for generalizations as to the extent of price change
in response to changes in demand. To repeat, the extent of price changes depends
on the specific demand and cost conditions and changes therein. There is, more-
over, no a priori reason to assume these demand and cost conditions are sys-
tematically associated with the degree of market competitiveness.
There have been several careful and objective empirical investigations of
changes in prices in response to changes in demand conditions aimed at deter-
mining whether the extent of such price changes is correlated with the concen-
tration of the industry, using concentration as a proxy index for competitiveness.
The evidence from these studies is consistent with the above : no significant
relationship exists between frequency or amplitude of price change and degree
of concentration. A study by Richard Selden and Horace J. dePodwin comparing
price with changes in concentration over the period 1953-59 shows that concentra-
tion explains only 1 percent between price movements and degree of concentra-
tion.''^ If one wishes to predict the proportionate change in price of the output
of industry A vs. that of industry B, measures of the concentration of the indus-*
tries will be useless for this purpose. The factual question as to the degree of
concentration of any particular indu.stry, e.g., natural gas, has no bearing on th^
extent of price change — where prices are free to change in response to changes
in demand.'^'
Insofar as the argument against deregulation is based on objection to the
possible gas price increases consequent thereto, one's belief concerning the com-
petitiveness of the gas producing industry is not necessarily pertinent. It is cer-
tainly a fair surmise that under existing and likely prospective demand and cost
conditions, the unregulated market price of gas would exceed the present FPC
ceilings. But gas prices would rise as a result of deregulation irrespective of
whether the market is effectively competitive or highly noncompetitive. And
without far more information than is now available, pertaining to basic cost and
demand conditions and the likely changes therein, no a priori assertion as to
whether the price increase would be greater if the industry is deemed to be non-
competitive than if it is effectively competitive can be substantiated.
2. Does the possibility of "ivindfall" profit, if the price of gas were dereg-
ulated, depend, on whether the industry is monopolistic?
The objection to "windfall" profits seems to be based on the idea that such
profits are not earned, i.e., that they are realized not because of exceptional skill
or industry on the part of those who realize them but because of events over
which they exercised no control. It is, of course, the very nature of "windfalls" —
whether profits or losses — that they are unanticipated, since if they bad been
correctly forecast the adjustments made by the market participants would have
precluded their materializing. Thus, suppose that in an iinregulated market,
competitive or noncompetitive, one or more producers correctly forecasts that
demand for the industry's products or services will expand by some given amount
at some future time. The profit-maximizing rules discussed above would lead
" See their "Business Pricing Policies and Inflation," Journal of Political Economy,
April 1963.
'3 Certainly one of the most careful and thorough studies of the prices of products pro-
duced by so-called "concentrated" industries is that by George .1. Stigler and James K.
Kindahl. op. clt. According to Stigler and Klndahl : "The main thrust of the doctrine of
administered prices is that contractions in business lead to no systematic reduction of
individual prices and . . . expansions in business may only tardily lead to price in-
creases . . . Prices of concentrated industries ... do not respond to reductions in
demand, or so It is believed. We raise grave doubts of the validity of this belief . . . fOlur
collection of commodities is in no sense random : Indeed it is purposely concentrated in the
areas wliere "administered" prices are most often said to exist . . . [W]p find a predomi-
nant tendency of these prices to move in response to the movement of general business. As
a summary figure, in the four cycles we find prices moving in the same direction as business
.T6 percent of the time ; remaining constant 17 percent of the time ; and moving perversely
27 percent of the time." Op. cit., pp. 7-9.
379
these producers to attempt to provide for a timely increase in their output,
hence in their demands for production inputs. To the extent they succeeded in
implementing thes plans, when the demand increase in fact materialized the
market price would be lower and/or the costs of production higher than if the
demand change had not been foreseen. The resulting profits, therefore, would
be at a level determined by efficient, i.e., profit-maximizing, conduct of business.
The profits would, of course, be those that had been incorporated into the com-
panies' plans regarding investment, use of other production inputs, volume of
production, etc. They would, in short, be the expected profits and, by definition,
not "windfalls."
Windfall gains and losses occur because information is not complete or fully
accurate."* But information is not costless, and the more nearly complete the
information desired, the greater will be the cost of its acquisition.'" Clearly
then, information in any industry or market is likely to be far less than com-
plete, particularly in a highly dynamic economy. "Windfalls," therefore, are
are likely to be frequent and widespread. To impute something undesirable to
"windfalls," whether gains or losses, is to wish for costless, perfect informa-
tion as a universal tate of affairs.
To imply that "windfall" profits are realized only by "monopolists" suggests
that only "monopolists" have imperfect foresight about cost and demand condi-
tions or are consistently, even though unpredictably, lucky. This imperfection
is strangely at odds with the popular notion that monopolists have "market
power" which they exert to "administer" prices. Indeed, if the "market power —
administered price" view were correct, monopolists presumably would have
superior foresight and would realize windfall gains or losses far less frequently
than others.
The fact of the matter is that windfalls are a well-nigh universal phenomenon
in a dynamic economy in which economic entities have less than perfect fore-
sight and knowledge. And far from being undesirable, they are an essential
phenomenon in a market economy for achieving efficient allocation of resources.
As noted at the beginning of this discussion, one of the essential functions of a
price is to provide information required for decisions about production. Profit
may usefully be viewed as the price paid for the services of capital.'* If the
amount of capital to be used in any given line of production is to be efficiently
determined, the price paid for the services of capital in alternative uses must
reflect the real contribution to the value of output of those services in those
alternatives. Unanticipated changes in profits — "windfalls" — are signals to af-
fected producers to change the amount of capital committed to their production,
relative to their original plans. If by some exercise of public authority these
"windfalls" are concealed from producers, some other set of information from
some agency other than the market must be provided. Experience here and
abroad with governmental planning of economic activity and the allocation of
production inputs affords no evidence of the superiority of this approach over
the voluntary responses of free market participants to market-determined prices.
Of equal importance, windfalls must be clearly distinguished from the varia-
tions around the mean probability of the outcomes of business ventures. Virtually
all investment decisions involve, either explicitly or implicitly, an estimate of
a range of iwssible outcomes, from losses, i.e., failure to recoup the investment,
to bonanzas, i.e.. profits very substantially above those realized on the average.
This variation in possible outcomes is the principal measure of the risk of a
venture. The fact that one out of 10, say, ventures by a company results in
extraordinary profits does not mean that the company has realized a windfall.
On the contrary, if such extraordinary profits were not occasionally realized,
then the average outcome of some large number of investments by the company
would be lower, and the company's volume of investment over time, by the same
token, would also be lower.
''* Or where, even with perfect information, sellers and buyers are prevented, say by pub-
lic authority, from acting most efficiently upon the information.
■'^ In addition, some information may simply be unavailable, e.p., the amount of rainfall
on farms in different areas. Less rain than forecast may mean drought and windfall losses.
'^ In riporous economic analysis, profit is regarded as that part of the price for capital
services which exceeds the cost of production of these services. Since the flow of capital
services is usually provided by a stock of capital of extended life, the price for capital
services from any given stock of capital is likely to var.v over the lifetime of the capital, in
response to changes in demand conditions and in the cost of other production inputs used
with the capital. To the extent that these changes are not accurately foreseen in the deci-
sions to acquire the capital stock, hence are not included in the probability distribution of
the net returns on that capital, the profits realized in any given time period may include
windfall gains or losses.
380
Such variation in results occurs in every industry, and regulated industries
are no exception. "A relatively small investment in exploration [for natural gas]
can yield a very high return, or a large investment can yield a minimal re-
turn . . . However, the ex ante expectation of the profit from such investment
on some risk-adjusted basis must be comparable to the expectations of compet-
ing investment projects or there will be a net flow of funds away from such
activity . . . there must be movement away from commitment to drilling if aver-
age return falls." " By the same token, movement away from drilling clearly im-
plies that average returns have fallen or are falling, even though one or more
ventures yield above average returns. Since producers occasionally realize very
high returns on gas sold subject to FPC regulation, regarding those high returns
as "windfalls" would be to assert that regulation can no more than the unregu-
lated market prevent the realization of "windfalls." The argument that regula-
tion must be continued in order to prevent "windfalls", if they were defined as
the extraordinarily high returns within the probability distribution of outcomes,
then would be demonstrably wrong. And as we have shown, regulator^' action
cannot nor should it seek to prevent "windfalls", correctly defined, in the dynamic
real world.
In the case of a product or service the price of which is set liy public regulation
rather than the market, the potential for "windfall" profits in the event of deregu-
lation is always present, irrespective of the competitiveness of the regulated
industry. As shown, such profits are essential if the investment required to
eliminate the shortages caused by the regulatory authority's setting the price
at an artificially low level is to be made.
Collateral with the argument that continued regulation of the price of gas
is required to avert windfalls is the assertion that deregulation would result
in a price that exceed the "just and reasonable" price for gas. Setting "just
and reasonable" prices is one of the hallmarks of public utility regulation in
the United States, despite the fact that "just and reasonable" is a term that
defies precise economic meaning." Over the years, however, the term has, ap-
parently, come to mean a price at which the regulated company or industry will
earn a normal rate of return on its equity capital.
As noted earlier in this discussion, normal rate of return is a.ssociated with
market conditions of long-run equilibrium. If the FPC attempts to fix the price
of gas so as to result in a normal rate of return in the gas producing industry,
therefore, it must face precisely the difficulties discussed above in finding a
market-clearing price equal to average cost of production. To repeat, these diffi-
culties are insurmountable. In a word, no "just and reasonable" price for gas
will clear the market unless the gas industry is in long-run equilibrium.
Given the present and prospective shortages, the industry clearly is not in
long-run equilibrium. Deregulation would surely result in an increase in the
price of gas, irrespective of the competitiveness of the industi-y. If FPC deems
the present ceiling price to be "just and reasonable" — despite the fact that it
has generated a severe shortage and continues to do so — then any market clearing
price will exceed the "just and reasonable" price.
Moreover, "just and reasonable" prices cannot be construed as those which
would prevail in competitive markets, except under conditions of long-run equi-
librium. So long as market conditions of supply and demand are not those of
long-run equilibrium, the unregulated market price will differ from the long-run
equilibrium price at which only the normal rate of return is earned. And this
proposition is just as valid if the indu.stry is perfectly competitive as if it is
highly noncompetitive.
Continued insistence on a regulted price for gas equal to the "just and reason-
able" price based on at best grossly imprecise cost data, therefore, is the same
as continued insistence on market disequilibrium.
Finally, the argument that continued regulation of the price of gas is neces-
sary to protect the interests of consumers is equivalent to asserting that con-
sumers are better served by artificially depressed prices and the resulting short-
ages than they would be by higher, market-clearing prices. Artificiall.v lower prices
and attendant shortages necessarily mean that some non-price, non-market mech-
anism miLst be used to allocate the quantity of gas .supplied among would-be
■'■' Clark A. Howkins. op. cit. p. 164.
■^^Cf. Alchlan and Allen, op. clt.. page 334 : "There is nothing in economic analysis that
permits any propositions about what is fair or not fair. In fact the words "fair", "jnst". or
"reasonable" have no objective content . . . Except, possibly, one meaning — 'The fair
price Is what I think It should be.' "
381
purchasers. Conceivably, some such non-price distribution method may be justified
on political grounds : it cannot be justified on economic grounds. When the regu-
lated price is below the market-clearing price, as at present. "Consumers who do
get gas . . . pay less for it than it is worth to some nonconsumers who, because
of regulation, are precluded from bidding it away. The level of total satisfaction
to the nation is reduced by the difference between the production foregone in
higher value uses and the production achieved in lower value ones." ™
rv. CONCLUSION
Examination of the characteristics of the natural gas producer industry and
of the data pertaining to its operations reveals that in every significant respect
the industry is highly and effectively competitive. The contentions that the in-
dustry is noncompetitive rest on faulty analysis and misconceptions concerning
competitive behavior and results as well as upon incorrect interpretations of
the operational significance of some of the industry's practices. Under critical
examination, those contentions fail both analytically and factually.
To argue that the industry is monopolistic and for that reason must continue
to be regulated in its interstate operations in order to protect the interests of con-
sumers is to urge the indefinite perpetuation of gas Shortages. As shown, regulated
prices based on arbitrary and imprecise computations of average production costs
are not the prices which would prevail in an unregulated competitive market.
Regulated prices do not serve the interests of consumers ; rather, under present
and foreseeable circumstances, they generate shortages which impair consumer
well being. "In sum, at any given price more gas would be produced without regu-
lation than with . . . not only because resources will be allocated more efficiently,
but also because more resources will be committed to the industry." ^
Appendix L
Personal Resume of Norman B. True
I am Norman B. Ture. President of Norman B. Ture, Inc., an economics con-
sulting firm in the District of Columbia. Norman B. Ture, Inc. provides research
and consulting services to business, trade associations, and government with
respect to a wide array of problems, particularly those concerning public policies.
I received the M.A. and Ph. D. degrees in Economics from the University of
Chicago. I have held various academic positions at Illinois College, the University
of Pennsylvania, and the George Washington University.
Before establishing my present consulting practice in 1971. I served as an
economist with the Planning Research Corporation. Prior to joining PRC, I
was Director of Tax Studies at the National Bureau of Economic Research. Inc.,
from 1961 to 1968. Earlier, I served as a member of the staff of the Joint
Economic Committee (1955-1961) and on the Tax Analysis Staff, U.S. Treasury
Department (1951-1955).
I was a member of President-Elect John F. Kennedy's Task Force on Tax
Policy in 1960, Chairman of President-Elect Nixon's Task Force on Taxation
in 1968, and a member of President Nixon's Task Force on Business Taxation in
1969-70. In addition, I have served on numerous other consulting and advisory
groups to various Federal agencies.
Exhibit 2. — Additional Testimony of Dr. Norman B. Ture
Norman B. Ture, Inc..
Economic Consultants,
Washington, D.C., July 19, 1973.
Hon. Philip A. Hart,
U.S. Senate,
Washington, D.C.
Dear Senator Hart : I enclose additional testimony submitted for the record
of the June 26-28, 1973, hearings of the Subcommittee on Antitrust and Monopoly,
Committee of the Judiciary. United States Senate. The additional testimony
concerns (I) The Proposed National Energy Resources Corporation. (II) Com-
ments on the Testimony by Dr. John W. Wilson, Chief, Division of Economic
™ Russell, op. cit., pp. 227-228.
^ Russell, op. cit., p. 235.
382
studies. Federal Power Commission, and (III) Comments on the Testimony by
Dr. David S. Schwartz, Office of Economics, Federal Power Commission.
I hope that you and the Subcommittee Staff will feel free to call upon me
in connection with any questions you may have concerning this additional
testimony.
Sincerely yours,
Norman B. Ture,
President.
Enclosure
Additional Testimony Sxtemittb^d By Norman B. Ture
My original testimony before the Subcommittee on Antitrust and Monopoly,
Committee on the Judiciary, United States Senate, on June 27, 1973, focused
primarily on Competition in Natural Gas Production. In the course of the Sub-
committee's hearings, however, testimony was submitted by various witnesses on
a large number of other issues. The following additional testimony, submitted
for the record, concerns several of these issues.
/. The Proposed National Energy Resources Corporation
A proposal for a Federally-owned "National Energy Resources Corporation"
(hereafter, NERC) to explore for, develop, and produce petroleum resources on
publicly-owned land and offshore has been advanced on various occasions.^
Various "advantages" are claimed for a NERC by its proponents. For one thing,
so it is claimed, NERC ". . . could serve to supplement the privately-owned
segment of the petroleum industry." ^ Presumably, NERC ". . . would be motivated
to explore, develop, and rapidly commit new supplies because of its sensitivity
to broader social needs." ^ NERC would also ". . . be sensitive to the environmental
safeguards and conservation practices required in offshore operation." * In addi-
tion, a NERC's operation would not be guided solely by the profit-maximizing
criterion of the private gas-producing industry : ". . . although it should manage
the nation's resources in an efficient manner and on a profit-making basis, it would
also be expected to be strongly motivated by the need to meet national energy
requirements." " Moreover, NERC presumably would provide representative cost
and other data pertaining to natural gas production, re.serves. supplies, etc., to
enhance FPC's price regulating ability. Finally, NERC would act as a "yard-
stick," exerting competitive pressure on private producers to increase supply and
to restrain upward price pressures.
1. NERC AND EFFICIENCY IN NATURAL GAS PRODUCTION
The major issue raised by the NERC proposal is whether the existence and
operations of any such government corporation would enhance or reduce the
efficiency of natural gas and other petroleum fuels production.
In the private sector of the economy, the market place effectively and imper-
sonally measures economic efficiency by the profitability of business undertakings.
Moreover, differences in profitability sen-e the essential function of directing
production inputs to their best uses. Blunting the profit-maximizing motive
impairs the efficient, i.e., most productive, use of production inputs.
In a highly and effectively competitive industry such as natural gas production,
profitability, i.e.. efficiency, depends on minimizing costs. This is true for any
gas producer, and it would be equally true for a NERC.
iMost recentlv, by Mr. Lee C. White. Chairman of the Enerpry Policy Task Force of the
Consumer Federation of America and formerly a Commissioner of the Federal Power Com-
mission bv Congressman Georpre E. Brown. ,Tr.. and by FPC staff members .Tohn Wilson
and David S. Schwartz, before the Antitrust and Monopoly Subcommittee of the Senate
Judiciary Committee, on June 26, June 27, and June 28, 1973. respectively.
2 White, op. cit. „ „ . , ^ „ i,
3 Schwartz, op. cit.. p. 54. Schwartz's statement does not define "social needs, a phrase
commonly eniploved in the public policy forum when the proponent of a new governmental
activity "is unable rigorously to define its purpose. Nor does Schwartz Indicate what the
undefined "social needs" are broader than. . ^ . «. ,,
* Ibid The environmental safeguards and conservation practices required in offshore
operation to which NERS would be sensitive are nowhere defined. Nor is there any indica-
tion in Schwartz's statement whether the environmental safeguards and conservation
practices would be more or less restrictive of exploration, development, and rapid commit-
ment of new supplies than those now observed by private producers.
5 White, op. cit. "National energy requirements'' are not defined or quantified.
383
The basic question raised by the NERC proposal is in what way would a
XERC be more eflBcient than private gas producers? Would NERC protluce at
any given real total cost more gas than private producers? Would it produce
any given amount of gas at a lower real total cost than private producers?
None of the NERC advocates have suggested any reasons to believe that NERC
would be more efficient than private producers. On the contrary, NERC pro-
ponents have claimed as one of its advantages that its operations would not be
guided solely by profit maximization but as well by "sensitivity to broader social
needs." " By hypothesis, if the NERC's activities were not guided by efforts
to maximize profits, it would be wasting the production resources at its disposal.
Disregarding the barrier to efficiency which would result from lack of a profit-
maximizing criterian, what advantage would a NERC have over private pro-
ducers in any of the various stages of the investment in additional gas reserves
or in the production of gas? Would it have access to technical advances or to
a superior technology not available to private producers? Would it have superior
managerial and executive skills at its disposal? Would it be able to acquire
drilling services at a lower real cost than private protlucers?
Neither theory nor past experience with government corporations suggest that
a NERC would be as efficient as private producers. On the contrary, given the
absence of incentives to efficiency, there would be a waste of resources and
higher costs in general.
A dramatic example of the relative efficiency of a government cori)oration is
the case of Australia's two interstate airlines. One is government-owned, one
private. The government has excluded other firms from entry and has imposed
a very high degree of uniformity on the two carriers, with respect to routes, stop-
overs, number and type of equipment, timetables, fares, and costs. The govern-
ment carrier pays the same wages, sales and income taxes, insurance rates, and
dividends (to the Treasury) that it would pay if it were privately-owned. Pas-
senger service, food, and cabin configurations are virtually identical. The gov-
ernment operates all airi>orts and assigns equal facilities to the two firms. It
also divides its official passenger business between them equally.
Despite these similarities, the private carrier was more efficient on three
counts for eleven consecutive years, up through the latest year available. The
private firm averaged twice as many tons of freight and mail carried per em-
ployee, twenty i>ercent more passengers per employee, and thirteen percent
higher revenues per employee.'^
Of course, doubts about the efficiency of government enterprises cannot rest on
a single example. On the other hand, it is reasonable to require any proposal for
new government activities and expenditures to meet rigorous tests of net gain
to the nation. At the very least, NERC advocates should be required to demon-
strate that over the years, the large number of government corporations have
operated at least as efficiently, in real terms, as companies in the private sector
of the economy.
n. NERC AND THE SUPPLY OF GAS
One of the principal arguments advanced for a NERC is that it would supple-
ment private production of natural gas and petroleum liquids, i.e., increase the
supply of these fuels. NERC advocates, however, are silent as to the many
questions raised by this argument.
Private producers each year commit huge amounts of resources to geological
and geophysical activity, to lease acquisition, to exploratory drilling, to develop-
ment, and to production of petroleum products. Existing private producers could
commit even larger amounts to these activities. The question is not whether it
is physically possible to devote more of the economy's resources to these activities,
but whether, and if so, to what extent, under existing and prospective circum-
stances it is in the interests of the economy as a whole to do so.
For example, suppose that under existing FPC price ceilings, each additional
per MCF. By assumption, gas production could be increased by 10 percent, but
to increase the amount of gas by, say, 10 percent over current production levels,
* Schwartz, op. cit., p. 54.
■^ Cf. Davifl G. Davies. "The Efficiency of Piihlic versus Private Firms, The Case of
Australia's Two Airlines." Journal of Lnir and Economics, Volume XIV. Number 1, April
1971, pp. 149-165. The data for the private carrier include some small intrastate subsidi-
aries, which may bias the results. It seems doubtful that these subsidiaries (all of which
lose money and receive jroverniment subsidies) are more efficient than the competitive inter-
state carrier. To the extent that the subsidiaries are less efficient, the superior efficiency of
the private operator demonstrated above is understated.
384
it would require, on the average, an additional, say, SO^* of production inputs
per MCF. By assumption, gas production could be increased by 10 percent, but
only at an addition to total cost per MCF which substantially exceeds the addi-
tion to FPC-permitted revenue per MCF. Clearly, this increase in production
would be uneconomical, not merely for the gas producers but for the entire econ-
omy. Real production capability would be wastefuUy used, irrespective of whether
the additional gas were produced by the existing private producers, by new
private companies, or by NERC.
If the NERC were to undertake significant aditions to gas reserves and pro-
duction without regard to costs or profits, its actions would in no sense be high-
minded or sensitive responses to "broader social needs," unless the latter are to
be defined as wasting scarce and valuable production services. Indeed, a NERC
could serve the public interest only if its supply-increasing activities were
guided by precisely the same eflBciency-maximizing, i.e., profit-maximizing
principles upon which private producers seek to operate.
Then, it may be fairly asked, how would NERC economically increase supply
above that which private producers will make available? The ans^v^er by some
of its advocates is that NERC ". . . by virtue of the fact that it would provide
for an independent alternative source of supply . . ." would ". . . obligate pro-
ducers to render services at prices reflecting just and reasonable rates." *
The argument rests on the premise that the gas production industry is non-
competitive, that it is "combine" or a "stodgy cartel," * and that producers are
conspiring to hold back on committing proved reserves and on gas production in
order to force an increase in FPC ceilings on the wellhead price of gas. No
substantively significant evidence pertaining either to the industry's structure
or market results support this characterization and allegation. On the con-
trary, the industry has been shown to be higlily and effectively competitive.^"
The risks which would be incurred by any one producer or group of producers
in holding off on proving up new reserves or on holding back at any stage from
initial investigation in seeking new fields to delivery of gas to a pipeline would
be enormous. It passes belief that any producer would he willing to incur such
risks.
The deliberate hold-back argument clearly implies that at existing FPC ceil-
ings the producers allegedly holding back are not maximizing their current
profits, (i.e., that at present levels of production, marginal costs are less than
the FPC ceiling price" in anticipation of larger future profits by forcing an
increase in the FPC ceiling. But before deciding to hold l)ack, the producer must
conclude with considerable certainty that doing so will result in a largv, price
increase in the near future.^' For the longer he must hold back on current sales,
the larger his loss from foregone production becomes. Moreover, the present value
of his increased future revenue diminishes as the increase is postponed, since a
dollar of additional revenue to be earned in two years is wortli less than a dollar
to be earned in one year. Also, the longer he must wait for the price to rise, the
larger the risk of increased production at current prices by other existing produc-
ers or by new entrants, hence the greater the risk of loss of market share. Clearly,
if some producers were deliberately holding back, i.e., producing gas in quantities
le.ss than that at which marginal cost equals the FPC ceiling price, other firms,
existing or new entrants, could enlarge their profits by committing additional re-
serves, unless it could be shown that in every case in which a producer is holding
back, the producer's marginal cost for any given quantity of gas is lower than that
of producers who are not holding back. Tlius, producers who were deliberately
holding back would have to be confident that they could prevent entry and pi"e-
clude other producers from making additional commitments. If they could not,
their holding back would result in expansion of future production by other pro-
ducers, hence less of a future price increase. But the smaller the future price rise,
the 'ess worthwhile the risk and loss of current income.
If, contrary to fact, the industry were privately cartelized, any coUusive effort
by the cartelized companies to control output and price would require the cartel's
8 Wilson, op. clt., p. 101.
0 Ibid., n. 101.
1" See Norman B. Tiire. Competition in Natural Oas Production, Testimony Submitted to
the Subcommittee on Antitrust and Monopoly, Committee on the Judiciary, United States
Senate, .Tune 27, 1973, pp. 5-44.
" If this Is not the case, that Is, If at present levels of output, marginal costs are equal to
the FPC selling price, there is no speculative holding back Involved ; producers are supply-
in? gas In such quantities as to maximize current profits.
^ He must also find some way to conceal his holding back from holders of royalty inter-
ests or face highly punitive damage awards to them.
385
control over all of the other gas producers, numbering in the thousands, and
ability to bar entr>- of new producers. Since there are no inherent entry barriers,
the only device which the colluding producers could use to control other com-
panies and to bar entry would be to maintain gas prices at a depressed level at
which profitability would be too low to attract additional capital to the industry.
But to depress prices, the colluding producers would have to increase output. If
the colluding producers, on the contrai-y, aimed at raising prices by decreasing
tlieir production, their success in this respect would result in expansion of
sales by others, existing producers and new entrants.
The collusion-to-hold-back-reserve-commitment-and-production argument is
analytically senseless. Moreover, the data pertaining to the industry's operations
afford no support for it. If producers were restricting output to force a price rise,
one would expect to find production declining. Furthermore, the reseiTe/produe-
tion ratio should be growing steadily, as producers prepare to take advantage of
a price increase by boosting output from reserves rapidly when the increase is
granted. But the table below shows that the opposite trends have actually oc-
curred ; production has risen and the reserve/production ratio has fallen each
year for a decade.
ANNUAL ESTIMATES OF NATURAL GAS RESERVES AND PRODUCTION, 1962-721
Billion
fts
Reserves/
production
Reserves
Production
(ratio)
272.3
13.6
20.0
276. 2
14.5
19.0
281.3
15.3
18.3
286. 5
16.3
17.3
289. 3
17.5
16.5
292. 9
18.4
15.9
287. 3
19.4
14.9
275. 1
20.7
13.3
290. 7
22.0
13.2
278. 8
22.1
12.6
266. 1
22.5
11.8
Year:
1962
1963
1964....
1965
1966
1967
1968
1969..
1970
1971
1972.. _
' Figures include Alaska. 1972 Reserves/production ratio excluding Alaska was 10.5.
Source: American Gas Association, "Gas Facts," 1972, p. 11.
These statistics clearly indicate that the industry has expanded production
rapidly, even at the cost of having lower reserves from which to supply future
production.
Even if producers were withholding output, the usefulness of a NERC would
depend on its being able to find and produce enough gas to make up the entire
.shortfall between the quantity privately supplied and the quantity demanded
at the current price. Presumably, this shortfall must be very large, i.e., pro-
ducers must have cut back output to a large extent ; small reduction would
hardly seem to warrant the expectation of a price rise sufiScient to cover the risk
involved in foregoing current profits. If NERC could not quickly fill the gap, pro-
ducers would still have an incentive to hold back, since there would still be
excess demand at the current price. But it is unlikely that NERC could add
significantly to supply in the near term. In recent years, the largest producer
has supplied 6-9 percent of all gas to interstate pipelines," the market from
which producers are allegedly holding back. If the quantity demanded at the
current price exceeds the amount supplied by only 10 percent (implying a de-
liberate cutback of 10 percent or less by each producer), NERC would have to
become the largest supplier in the market.
Finally, the notion that NERC could significantly increase the supply of gas
entirely the impact of any large-scale operations of a NERC on the real costs
of gas.
Gas exploration and development is extremely complex and difficult, requir-
ing great technological sophistication, especially for offshore operations. No
NERC would come into being with necessary skills and know-how. It would be
required to hire existing firms and personnel and to acquire equipment.
" Cf. FPC, Sales hy Producers of Natural Gas to Interstate Pipeline Companies (annual).
386
The additional demand by NERC for these production services would certainly
drive up their costs.
To cite a single example, the current rate of production of drilling rigs is lag-
ging far behind the number of rigs now demanded for exploration of new leases,
and the cost of rigs has risen sharply." Significant increases in the demand for
drilling facilities by NERC, unconstrained by requirements for profit-maximiza-
tion, hence rigorous cost control, woiild further escalate the cost of drilling. With
existing ceiling prices, such cost increase w^ould inhibit exploration and develop-
ment activity by private producers, irrespective of the competitiveness of the
industry.
Since NERC demands for the production services required for the discovery
and development of gas reserves and for the production of gas would increase
the co.srt of these services across the board, marginal costs of production for all
producers would be increased relative to what they otherwise would be. In-
creases in marginal costs are, by definition, reducAions in supply. Thus, a NERC
would reduce the amount of privately supplied gas, at any given price relative
to the amount supplied in the absence of NERC. Unless, for reasons not even
remotely suggested by its proponents, NERC were to be more eflBcient in real
terms than private producers, it would at best merely transfer gas exploration,
development, and production from private enterprises to the public sector
(more likely, it would reduce the aggregate amount of gas supplied at any price,
because it is almost certain to be a highly ineflScient operation). Perhaps this
socializing of the production of gas is the real objective of the NERC proposal.
If indeed this is the case, policy-makers should be keenly aware of the real loss
to the economy which in all probability would result.
in. NERC "representative cost data"
One of the advantages claimed for NERC is that it would supply the cost data,
not satisfactorily obtained from private producers, which is required for regula-
tion. As in the case of the other arguments for a NERC, even casual examina-
tion reveals that this one is substantively frail.
Unless NERC were trying to maximize its profits, it would not be producing at
minimum cost, nor would it produce the most efficient quantity at a given price.
Its cost experience thus would not be representative of private producers and
could only misinform FPC.
One important aspect of efficient production is that it occurs over time. Pro-
ducers do not produce all possible gas out of the ground instantaneously, nor do
they keep current production as close to zero as they can. Rather they seek the
most efficient pattern of production, revenues, and costs overtime. This requires
an assessment of the present value of future income and costs. That is. each
producer, just as any other businessman, must decide how much a dollar of
future income or expense is worth today before he can maximize the value of
his expected profits over time. This calculation depends on the discount rate, i.e.,
the rate at which he converts future income (or expenses) to present values.
Such present value calculations are at the heart of the investment decision ; the
present value of the excess of revenue over costs with respect to a given invest-
ment must be at least as great as that which could be obtained from alternative
nsos of the resources committed to the investment if the investment is to be
warranted.
For the government, however, there is no established discount rate and no
market mechanism for setting one.^° Clearly this will result in a different ex-
penditure pattern and cost experience than for a private firm.
1* Cf. Business Week, June 2.3, 197.3. p. 32 : "One major problem could make exploration
of the new leases difflcnlt : the availability of drillinR rigs . . . 'There is no way to take
care of the overall rie demand on the short term basis . . . the shipyards are full, and the
cost of these rigs Is up tremendously.' "
1° The scholarly literature reveals widely disparate views among economists as to the
determination of an appropriate discount rate for the government to use. Cf. Robert Dorf-
nian. ed., Measuring Benefits of Government Investments, (Washineton. D.C. 1965) : Otto
Eckstein. "A Survey of the Theory of Public Expenditure " and .Tack Hirshleifer, "Com-
ments," in National Bureau of Economic Research, Public Finance: Neerfs, Sources & UHH-
zation (Princeton, 1961) ; W. .T. Baumol. "On the Social Rate of Discount," American
Economic Review, Volume LVITI. Number 4. September 1968, pp. 788-S02 ; Arnold C.
Harherger, in Economic Analysis of Public Investment Decisions: Interest Rate Policy &
Discounting Analysis, U.S. Congress, Joint Economic Committee, July 31, 1968.
387
One of the most important reasons that one cannot use the costs of a govern-
ment enterprise to judge a private one is the difference in tlaeir funding. Private
producers typically rely largely on their cash flow and to a lesser extent on at-
tracting additional private investors. Because of the high risk involved in the
industry, particularly in exploration, investors demand a higher return on in-
vestment in oil and gas than in many other lines. The cost of capital in the oil
and gas industry, therefore, is relatively high. The amount of capital available
to a gas producer may be severely limited, especially in the short run.
However, XERC would face apparently much lower capital costs. If it received
funds through Congressional appropriations, it would treat its cost of capital as
zero. If it borrowed from the Treasury or from private lenders with a Treasury
guarantee against default or bankruptcy, it would pay much lower interest rates
than private firms engaged in equally risky ventures which operate without guar-
antee of repayment.
Lease acquisition costs afford a clear example of the artificial capital cost ad-
vantage a NERC would enjoy. Lease acquisition costs are a major and increasing
element of total investment by the industry.^"
Moreover, there are no "typical" acquisition costs. Each property differs as to
geological and geophysical characteristics, expected exploration and develop-
ment costs, and expected income potential. Even if total expected costs and
income from two tracts were comparable, the fraction attributable to gas alone
would frequently differ. This is because oil is frequently found along with gas, in
proportions which vary from one tract to the next. The amount that any firm is
willing to pay for a tract, therefore, does not reflect its cost for acquiring a
certain amount of gas. Yet it is this figure that an agency regulating only gas
would want. Clearly, a NERC would no more be able to avoid this difficulty than
private producers. Xor wou'd it be able to avoid the problems involved in allo-
cating the cost of dry holes. Its cost allocations would be as arbitrary and
imprecise as those applicable to operations of private producers.
The most serious objection to the intervention of NERC in lease acquisition is
the efficiency loss that would result. The economy's output is maximized by
allocating production inputs to the producer who can use them with the least
waste, that is, to the producers to whom the inputs are worth most. The only way
to determine which producer values a given input most is to let every producer
offer what he believes it is worth to him. That is exactly what happens in the
case of lease auctions. If some sites were reserved for NERC or if it were able
and willing, without profit-maximizing constraints, to outbid even the most effi-
cient producers, then leases would no longer go to the producers to whom they
are worth the most. The economy as a whole would lose.
Another problem in determining typical production co.sts stems from NERC's
objectives. If it were not trying to maximize profits, its production costs would
not measure representative costs of producers. Rather, its costs would be those of
an inefficient, nonprofit-maximizing entity. And if NERC were to alter its pro-
duction techniques to meet some social objective, lying beyond the perview of
private producers, its cost experience would not be indicative of that of private
producers.
Private producers pay various taxes and work under numerous regulatory
restraints imposed by FPC and other federal and state agencies. It is unlikely
that NERC would be subject to these costs. Yet if it were not, its cost experience
would diverge in still another way from that of private producers.
NERC might very well devote more resources to attaining "social" goals than
do private producers. Difficult as "social goals" are to define, it is even more
difficult to quantify such goals and to measure the costs incurred in their pursuit.
One such goal might be to insure that the production of gas is "sensitive to the
environmental safeguards and conser^-ation practices requiretl in offshore opera-
tion." " How much safer and how much more conser^-ing should gas exploration,
development, and production be than at present? What additional costs should be
incurred for each increment — however measurable — of safety and conservation?
^' Most gas is produced on property that is leased by producers. U.S. Energy Outlook
(National Petroleum Council. December 1972). p. 115, estimates 1971 expenditures of
SHI 7 million for lease acouisitions plus .$140 million for lease rentals by oil and gas pro-
ducers. The sum. S957 million, represents over 9 percent of the Industry's expenditures for
exploration, development, production, and overhead (excluding North Slope oil and all
Alaska n gas). Under one projection, bv 1985 lease costs will total $.S.5 billion, or more
than 16 percent of that year's expenditures. But these acquisition cost estimates may
already be out of date. In the last two offshore lease sales, winning bids totaled $3.2 billion.
Another sale is expected in December.
" Schwartz, op. cit., p. 54.
388
What would cast up the information NERC management would need to answer
such questions?
Without the objective constraints of the market place. NERC costs would be
indicative primarily of the preferences of NERC management. The guidelines
relevant for a government enterprise which seeks to pursue nonbusiness objec-
tives and goals of social policy are, by hypothesis, not appropriate goals for
private enterprises without the authority or capability of government
instrumentalities.
IV. NERC AS THE INDUSTRY "YARDSTICK"
One advantage claimed for the NERC is that its operation would act as an
industry "yardstick," i.e., would exert pressure on private producers to increase
supply and to restrain upward price pressures. Ostensibly. NERC would
"* * * prompt commitment of available reserves and development of prospective
reserves * * *" by private producers "* * * because of (their) awareness that
the new corporation (i.e., the NERO) could accelerate its efforts and bring
on independent supplies of gas."" Presumably, NERC could also cancel out
any pressure from private producers on FPC to raise the ceiling price by bringing
sufficient additional supplies of gas into any market with an actual or pros-
pective shortage.
Clearly, NERC could have no significant impact as a yardstick unless the
scale of its operations were quite substantial. Even if NERC were as large as
the largest private producer, any realistic variation in the magnitude of its
operations would be of little consequence for total supply and for pressure on
the price of gas toward the market-clearing level. The yardstick argument
implies a giant NERC, dwarfing the largest private producers. It implies, in
other words, substantial socialization of gas exploration, development, and
production.
Apart from this implication, it is not clear what guides a NERC would follow
in pursuit of its yardstick function. If a NERC existed today, presumably it
would be exploring, developing, and producing gas at 100 percent of capacity:
moreover, it would, presumably, attempt to increase quickly the commitment
of reserves to interstate pipelines and to augment rapidly the flow of gas at or
below present FPC ceiling prices. But the technology of natural gas production
precludes quick additions to reserves. And the incremental costs of increasing
the volume of flowing gas in the short term would be extraordinarily high,
far greater than existing FPC ceiling prices. By definition, any such action
would be wasteful and inefficient.
Without committing substantial additional reserves, however, NERC would,
in all likelihood, be ineffectual in offsetting present upward price pressures
toward a market-clearing level. So long as the quantity of gas supplied, including
that from NERC, is less than that demanded at existing ceiling prices, NERO's
efforts to restrain price increases by reducing the price of gas it sells would
simply inten.sify the shortage. Only by adding to the quantity supplied by
private producers an amount of gas equal to the shortfall at the current ceiling
price could NERC cancel the upward price pressure. But unless NERO could
produce this additional quantity at a marginal cost significantly below that
of private producers, its efforts to make up the shortfall would be highly wasteful
in terms of the real resources that would be required.
The difficulties just outlined would be present under any circumstances, not
merely those of the current gas shortage. So long as NERC departed from
the profit-maximizing condition of producing that output the marginal cost
of which is equal to its marginal revenue, any price-quantity decision it would
make would be both arbitrary and inefficient. For example, if it were to base
these decisions on average cost plus "fair" rate of return (the price-output
decision which FPC staff erroneously identify as the competitive market solu-
tion"), it would only by purest chance come up with the most efficient output.
Any other price-output determination would be equally arbitrary and equally
likely to be inefficient.
Would a NERC attempt to make independent price decisions, i.e.. act as if
it really had the "market power" to "administer prices"? Or would it base
its price-output policies on eifforts to reinforce FPC ceiling prices ? In the former
case, assuming a NERC large enough to exert a significant influence on gas
" Rrhwartz. op. clt.. p. 55.
19 Cf., e.g., Wilson, Belco et al., Docket No. C173-293. et al.. pp. 14-15.
389
prices, the question might be fairly asked. "Why should FPC have any regulatory
power over the field price of natural gas?" In the latter case, NERC would in
effect be merely an instrument of FPC regulatory policy. As such, it would
invest the FPC with an extraordinary capacity to control virtually every
aspect of the natural gas industrj-, not in resiwnse to the dictates of the
market, i.e., of consumer preferences and real production costs, but ratlier
by reference to the preferences of the FPC and its bureaucratic technicians.
It is difficult to visualize any circumstances in which the interests of consumers
and economic efficiency would be more greatly imperiled.
II. Comments on the Testimony by Dr. John W. Wilson, Chief, Division of Eco-
nom^ic Studies, Federal Potvcr Commission before the Subcommittee on Anti-
trust and Monopoly, U.S. Senate Committee on the Judiciary on June 27,
1973
Dr. John W. Wilson attempts to show, in his testimony before this Subcommit-
tee last month, that "* * * the petroleum industry is not, in any economically
meaningful sense of the word, either adequately or ivorkably competitive (p. 2,
emphasis supplied). Much of his argument rests on irrelevant or misinter-
preted evidence.
Wilson starts on the wrong track when he asserts "There is an absence of
adequate comjjetition when, as in the petroleum industry, sellers are able to
exercise great discretion in establishing prices, supply levels, and other market-
ing strategies." In fact, as I indicate on p. 7 of my testimony, "Competition in
Natural Gas Production", submitted to this Subcommittee on June 27, producers
in any type of market "exercise discretion" in .setting prices and quantities. But
all producers, setting prices at the level which they hope will maximize profits,
are constrained in doing so by the market demand for their products, over
which they do not exercise control.
Wilson avows, quite properly, that "Concentration, after all, means virtually
nothing in and of itself" (p. 4). He then proceeds to disregard this assertion,
and devotes twenty pages, replete with largely irrelevant tables, to the topic.
He asserts that "* * * concentration serves as a basis for logical conclusions de-
rived via the classical deductive method of logic * * *" (p. 5), and attempts to
substantiate this erroneous assertion by quoting completely nonanalytical, so-
ciological ob.servations by Corwin D. Edwards. Wilson should have stood by his
original observation, for in fact measures of concentration are in no way indicative
of degree of competitiveness.^
Wilson inserts in his discussion of concentration a Table 2 (p. 11) which pur-
ports to show the annualized first quarter 1972 and 1973 returns on equity of
26 major oil companies. Wilson fails to explain the pertinence of this informa-
tion to his analysis, contenting himself with the assertion * * * "that the 'energy
crisis' has not created obvious financial difficulties for these firms." (p. 10) The
"average" return was only 12.6 percent in the first quarter of 1973.^ No figures
are pre.sented to place this average in the context of other industries. But it is
interesting to note that petroleum refining (which would include these integrated
producers) was the only category out of the fifteen manufacturing groups sur-
veyed by the Federal Trade Commission and Securities and Exchange Commis-
sion which experienced a decline in profits from 1971 to 1972.- Thus, a rise in
early 1973 is even less surprising than it might otherwise appear. Furthermore,
preliminary estimates by the Commerce Department's Bureau of Economic
Analysis show that book profits before tax for all corporations rose from $88.2
billion in the first quarter of 1972 to $113.1 billion in 1973."^ This is an increase
of 28.2 percent, essentially equal to Wilson's "average" increase of 28.7 percent
for the oil companies.
Moreover, as Wilson surely must be aware, annualizing a single quarter's
results often provides grossly misleading impressions of developments in a com-
pany or industry. This is particularly true if the annualized quarter is com-
pared with that of another year without adju.stment for changes in overall busi-
ness conditions.
2" Spe my preparpd statempnt. Competition in Natural Gas Production, submitted to this
Snhcnmmittee on .Tune 27, 1973, pn. 21-.31.
21 How this average or the sample of major companies were chosen Is not clear. In fact,
the median rate of return for the twenty-six was 11.5 percent.
22 TT.R. Department of Commerce, Survey of Current Business, May 1973, p. S-19.
» Ibid., p. S-2.
390
Furthermore, Wilson fails to point out the obvious fact that there is no rank
correlation between company size and rate of return. If his Tables 1 and 2
demonstrate anything, it is that concentration measures have no bearing at all
on operating results.
Wilson is wrong in claiming (p. 12) that: "A familiar rule of thumb is that
in industries where the eight largest firms have at least 50 percent of the sales,
normal unrestrained market forces are likely to be an insufficient guarantee
against monopolistic market performance." There is no analytical basis for deter-
mining the number of firms necessary for effective competition. The size distribu-
tion of companies in an industry, which is all that concentration ratios measure,
is not itself a determinant of the industry's competitiveness.
Table 3 of Wilson's testimony (p. 13) purports to show high concentration
ratios for sales of new gas contract volumes sold to interstate pipelines in three
areas. He excludes an unstated number of contracts involving more than one
producer {"et air contracts). As he points out, "To the extent that the largest
firms had either a disproportionately large share of the et al. volumes, or a dis-
proportionately small share, the actual concentration ratios would be either
slightly higher or lower." The latter conjecture is more probable, since et al.
sales are likely to contain combines of small producers who would be less likely
to produce singly. That is, the single-producer contracts are likely to be more
heavily concentrated than all contracts.
Furthermore, the concentration ratio for a particular region does not give a
true indication of the options facing a pipeline. Frequently the pipeline can buy
gas directly from a producer in another region, or it can buy from another pipe-
line which draws on a different region.
Wilson attempts to paint an even darker picture by showing the concentration
ratios for uncommitted reserves reported by 79 large producers on December 31,
1971, and June 30, 1972 (Table 4, p. 17). As he concedes in a footnote, "Neverthe-
less, to the extent that nonreporting small producers may have had significant
volumes, the ratios reported here tend to slightly overstate actual market con-
centration." The omission is crucial. It involves 22 ma.ior producers, each of
whom supplied more than 10 million MCF of gas in 1971, and over 3600 small
producers.
The percentages in Table 4 are higher than in Table 3 and also less meaning-
ful. No pipeline has to buy gas on a particular date. It can wait for the next offer
of new gas. Furthermore, the eight largest reserve-holders in a region on one
date are frequently not the same as the eight largest half a year later, or even
a day later. Moreover, the company distributions of uncommitted reserves on
a single day in many cases indicate nothing more than survivorship of success-
ful exploration. Thus, if, say, 100 companies had acquired exploratory drilling
rights in a given area and if 99 of the companies had come up with only dry holes,
clearly the one successful company would have 100 percent of the reserves in that
area. That is one reason the figures in Table 3. which takes the more realistic
time span of a year, are lower than the one-day figures in Table 4.
Table 5 (p. 21), in which Wilson attempts to show the concentration of lea.se
acquisitions, is grossly deceiving. He covers up the joint acquisition of many
leases by lumping all bidding partners together with the "primary" firm. It is
far from clear what source Wilson used for his estimates, but a look at the Sep-
tember 1972 sales shows that he apparently included under Gulf Oil's acquisition
four tracts leased in combination with Mobil Oil and two Pennzoil affiliates,"
two with Amoco Production Co., and three with Mobil and Chevron.
If these bidders are not incorrectly aggregated, it turns out that the four
highest bidding groups included seven companies, and the eight highest included
11 companies in the September 1972 sale. In the December 1970 sale, the top four
bids included 21 companies, and the top eight includetl 27 companies. In the
December 1972 sale, the top bid was made by a combine of seven companies and
the top ten bids included over 30 companies.^
Wilson lists petroleum industry mergers and acquisitions since 1949 in an
effort to show that concentration is increa.sing. He claims that "the dominant
majors (have) been free from the threat of new entry" (p. 22). However, as
2* Pennzoil Offshore Gas Operators (POGO) and Pennzoil Louisiana and Texas Offshore
(Plato).
25 Cf. The Oil and Gas Journal for December 21. 1970, pn. 1.^ ff., regarding the December
1970 sale of leases in the Gulf of Mexico off Western Louisiana : The Oil and Gas Journal
for September 1,8, 1972. pp. 38 ff., regarding the September 1972 sale; and The Oil Daily
of December 21, 1972, pp. 1-2, for the December 1972 sale.
391
he implicitly recognizes, there has been considerable turnover within the ranks
of the top suppliers,^ and there has been extensive new entry, both by newly
formed companies ^ and through acquisition of existing firms by firms outside
the industry. In the latter category, he himself cites Monsanto Chemical, Allied
Chemical, Diamond Alkali, and Swift & Co. (Table 6, pp. 23-25), all of which
now rank as major interstate producers.
In short, Wilson's irrelevant and misleading information fails to establish
that concentration is particularly high in the natural gas producing industry.
Xor does he refute the more straightforward evidence that concentration is
lower in natural gas than in a majority of manufacturing industries.^ Most
important of all, he is unable to show that concentration ratios are a reliable
indicator of competitiveness. In fact, they are not.^
Wilson points to the numerous joint bids submitted in offshore lease sales
as evidencing lack of competition. He goes so far as to maintain that "there
is little or no substantive economic difference between and the end result
obtained from the formation of a bidding combine and the end result of a
conspiratorial agreement between oil companies to rotate bids" (p. 34). This
preposterous claim ignores several obvious and well-known facets of joint
bidding.^
First, there is vigorous competition for tracts. The lease sale of December
1970 drew 1043 bids on 127 tracts, and the 1972 sale drew more than 1000 bids
for 219 tracts.'' One block in 1970 attracted 18 bidders.
Second, it is not true on factual or theoretical grounds, as Wilson contends
that the offshore leasing program "has become one of the most onerous anti-
competitive cartelization devices at work in our domestic gas producing industry"
(p. 34) because smaller producers "have been effectively precluded from enter-
ing these producing areas except by obtaining limited farmouts of unwanted
acreage from the dominant majors or perhaps by joining one of the established
companies as a junior partner" (p. 35). The winning bid out of the 18 for that
tract in the 1970 sale, a record bid per acre up to that time, was not submitted
by a combine of "giants," but by a group headed by a new entrant, Pennzoil
Offshore Gas Operators (POGO), along with Mesa Petroleum, Texas Produc-
tion and Mobil. "POGO and its partners had high bids totaling $153.3 million
on 9 tracts."^ The largest bids in that sale and in the December 1972 sale were
submitted by a group which did not include any "giants" : TransOcean Oil,
Hamilton Brothers, Highland Resources, Hunt Oil. Kewanee, and Placid Oil
(plus General Crude in 1970 and Ashland in 1972). At least 45 companies
participated in the winning bids submitted in December 1972.^^ Far from
removing competition, such combines enable companies which could not effec-
tively bid alone to capture leases. In addition, the fact that major producers
on occasion engage in joint bids with smaller ones convincingly demonstrates
that the majors do not control the industry and are not trying to do so. If,
contrary to fact, the industry were cartelized, then he majors would do every-
thing possible to exclude competitors from bidding and production. Instead,
joint bids by assorted combinations of majors and independents increase com-
petition and reduce still further the chance of domination by any one firm or
small group.
Third, companies which submit joint bids on some blocks compete on others,
often during the same sale. Wilson himself documents (in Table 8. p . 31) that
Chevron, for instance, bid alone 79 times in the 1970-1972 period and also par-
ticipated in varying combinations with 9 other companies, some of which were
competitors on other bids. In December 1972, Chevron teamed with Mobil,
POGO, and Plato in the high bid on Block 532. It joined 6 other companies
(some of which Wilson fails to list) in winning Block 249 over Mobil and a
dozen other competitors.^ Similar examples abound.
Furthermore, joint bidding does not mean joint marketing. On the contrary,
joint ventures expressly provide for separate marketing of production.
2« Cf. Testimony of J. Rhoads Foster in Permian Basin Area Rate Proceeding, Docket
No. AR70-1. D. 38. for a vivid grraphlcal representation of this turnover.
2^ Cf. pp. 19-21 of mv testimony of June 27, 1973.
28 Qf. pp. 21-26 of mv testimony.
29 Cf. pp. 27-31 of my testimony.
3" Cf. pp. 13-17 of my testimony.
31 U.S. Department of the Interior, Geological Survey, Outer Continental Shelf Statistics,
June 1973. p. 20.
32 dil and Oas .Journal, December 21, 1970, p. 15.
33 The Oil Daily, December 18, 1972, p. 12.
3* Ibid., p. 12.
27-347 O — 74 26
392
Wilson alludes to "a multiplicity of financial interlocks through which inter-
state pipelines have, in effect, provided hundreds of millions of dollars in interest
free loans to natural gas producers in order to speed exploration and develop-
ment" (p. 82).
There is nothing suspicious or covert about these advance payments, as the
"loans" are correctly called. They have been explicitly and repeatedly authorized
by the FPC. By providing producers with an additional source of capital, they
have aided in the more rapid increase in production. From the standpoint of
the pipelines, they are a means of guaranteeing more supplies to their custoniers.
Far from restricting competition, they have made capital more accessible
throughout the industry.
Wilson asserts that "market control in the petroleum industry, including
the natural gas producing sector, is held by a closely knit consortium comprised
of the large, fully integrated oil companies and their jointly interlocked affiliates.
These firms, working in cooperation with each other, have the ability to control
petroleum supplies and, in so doing, to maneuver for monopolistic market price
levels" (p. 83).
In making such a fantastic claim, Wilson is evidently unaware of his Commis-
sion's own statistics. These show that in 1971, there were 101 major producers,
each supplying at least 10 million MCF of gas per year to interstate pipelines,
an estimated 3,644 small producers,^ plus an unknown number of producers
selling intrastate only. The vast majority of these producers were independents,
not "large, fully integrated oil companies" or "their jointly interlocked affiliates."
Furthermore, no company or "closely knit consortium" can control price. As
Wilson himself points out, "virtually all of the largest interstate natural gas
pipeline companies are also involved in petroleum exploration and devel-
opment— either directly or through corporate affiliates." (p. 79). This fact
alone helps keep prices down. Producers recognizes that the pipelines are not
beholden to them but can turn to their own affiliates for gas if the price is not
sufficiently low.
Clearly, a pipeline will integrate vertically only if it realizes some cost saving
by itself engaging in production. It is well established in economic theory that
a vertically integrated producer will maximize profits by setting price equal
to marginal cost for every intra-company transaction, just as any competitive
profit-maximizing, non-integrated firm will do.^" Tliere is no basis for assuming
that vertical integration of one or more companies in the industry will cause
natural gas prices to be any higher than otherwise.
The same observation applies to the intrastate market. Wilson apparently
believes that producers in intrastate commerce are uninterested in profit maxi-
mization ; "e.g.. Producer X buys gas in the intrastate market from another
producer, Y, at a high price (perhaps X uses this gas as fuel in his refinery)"
(p. 85). Yet if X is interested in maximizing profits he will purchase fuel (and
every other input) for his refinery at the lowest possible price. If he pays a "high"
price, presumably the fuel is not available for a "low" price. Moreover, even if X
is a subsidiary of Y, the price paid by X will not exceed Y's marginal cost for the
gas if Y is to maximize its overall (i.e., X and Y) profits.
Moreover, evidence from the FPC shows very close congruence of intrastate
and interstate prices. Table 2 of my testimony (p. 41a) presents a comparison
using data from FPC Docket No. R-389A for intrastate sales, of prices on new gas
sold interstate and intrastate over the years 1966-1969 in four different areas.
The conclusion is unmistakeable : both the weighted average and the range of
prices are very close in the two markets (indeed, the intra state price is frequently
lower). This is exactly what one would expect from a competitive industry."
Wilson proposes the establishment of a government corporation to develop
petroleum energy resources on Federal property (pp. 89, 101-103). Wilson errs
in forecasting that such a corporation would spur producers into greater activity.
S5 Federal Power Commission, Sales by Producers of Natural Oas to Interstate Pipeline
Companies, 1971. p. vi.
38 The problem of the correct Inside pricing — or transfer pricing — of intermediate prod-
ucts produced in a vertically integrated firm is discussed in Kenneth .T. Arrow, "Optimiza-
tion, Decentralization, and Internal Pricing In Business Firms," Contrihutions to Scientific
Research in Management Science, McGraw Hill Book Company (New York) 1964, pp. 9-18 ;
.Tack HIrshleifer, "On the Economics of Transfer Pricing," Journal of Business of the Uni-
versity of Chicago, Vol. XXIX, No. 3. July 1956, pp. 172-184 : HIrshleifer, "Economics of
the Divisionallzed Firm," Journal of Business of the University of Chicago, Vol. XXX, No.
2, April 1957, pp. 96-108 ; Mohamed OnsI, "A Transfer Pricing System Based on Oppor-
tunity Cost." The Accounting Review, July 1970. pp. 535-543.
^ Cf. pp. 33-42 of my testimony.
393
In fact, the additional demand that it would create for already scarce geophysical
and geological knowhow, drilling rigs, and other specialized manpower and
equipment, would make development and production of natural gas even more
costly and less attractive for private producers. Rather than acting to "establish
a force which will obligate producers to render service at prices reflecting just
and reasonable rates" (p. 101), a government corporation would only discourage
private production.
Wilson concludes that one necessary reform is "the establishment of a clear
understanding that just and reasonable prices should fairly reflect no more than
the costs of eflicient operations plus a reasonable rate of return" (p. 105). It is
impossible for a regulatory agency to set "just and reasonable" prices,'* and
virtually as difficult for it to set prices that will clear the market and effectively
allocate output.
Wilson's testimony is almost entirely irrelevant and misleading concerning the
competitiveness of natural gas production. Nowhere does he show that the indus-
try is noncompetitive, although he relies heavily on "indirect evidence" which is
analytically without foundation. Nor does he demonstrate how increased regula-
tion will solve the current gas shortage, a shortage which has been created by
regulation.*
///. Comments on the Testimony by Dr. David S. Schwartz, Office of Economics,
Federal Power Commission before the Subcommittee on Antitrust and Monop-
oly, U.S. Senate Committee on the Judiciary on June 27, 1973
Dr. David S. Schwartz asserts in his testimony before this Subcommittee that
"This industry can best be characterized as a vertically integrated bilateral
oligopoly, that is, a market with major imperfections in both buying and selling."
(p. 8). This characterization is certainly unwarranted with re.spect to gas pro-
ducers-sellers. (Cf. my testimony to this Subcommittee on June 27). In addition,
FPC data show that there were 103 interstate pipeline companies in 1971,
accounting for an estimated 70 percent of new gas purchased in that year."
Another 7 billion MCF was sold to an indeterminate number of customers. No
formal basis exists for determining the minimum number of firms at which an
industry is oligopolized, but it is certainly a distortion to characterize an indus-
try with several thousand sellers and hundreds, if not thousands, of buyers as
oligopolistic.
Schwartz asserts: "In a workably competitive market, it is the costs (plus a
fair rate of return) associated with bringing the product to the market that
determines the price anticipations of producers" (p. 5). This is incorrect. Price
anticipations of producers-sellers depend on a variety of factors, including in
the case of the natural gas industry the general cast of price regulation, as
revealed in part by past ceiling prices and the changes therein in response to
changing cost constraints on exploration, development, and production. Schwartz
probably intended to characterize the conditions of supply, i.e., the amounts pro-
ducers are willing to invest in the discovery and development of new reserves
and the costs they must incur in the production of additional quantities of gas.
Schwartz repeats the demonstrably wrong FPC staff contention that the amount
of gas supplied depends on its average cost including a fair rate of return." It is,
however, the marginal cost, not the average cost that determines the quantity
supplied. "Any assertion that the cost of gas is the competitive market price is
simply, unmistakeably wrong. It is wrong in the context of the rudimentary
theory of competitive price. And it is wrong as a characterization of the real
world state of affairs. And it is wrong irrespective of one's belief as to the com-
petitiveness of the gas producing industry.'"
Schwartz contends : "The primary objective of regulation is to determine a
price which will cover the resource cost of bringing energy to market . . ." (p. 6).
This is not always cited as the fii'st goal of regulation, and it is certainly a goal
that the FPC has not attained.
»8 Cf. pp. 70-71 of my testimony.
^ Cf. pp. 54-57 of my testimony : also Stephen Breyer and Paul W. MacAvoy, "The Natu-
ral Oa^ Shortaire and the Regulation of Natural Gas Producers," Harvard Laic Review,
April 197.3. pp. 941-987.
*«FPC. op. cit., p. V.
■•1 The cost concept employed by Schwartz is an artificial, public utility notion of "cost of
service." This cost concept has little in common with the real economic costs of any com-
modity or service, including gas. which are clearly delineated in elementary economics
textbooks.
*2 p. 53 of m.v testimony. Cf. pp. 47-53 of that testimony for an extended discussion of
Schwartz's error.
394
"It must surely be evident that FPC has seriously underestimated both the
increase in demand and the increase in costs of gas production. As noted earlier,
the industry is appropriately characterized as one of increasing costs. Efforts to
increase gas supply by the addition of reserves result in sharply rising average
costs. Taken together with the rapidly accelerating increases in" the demand for
gas, these factors have called for substantial increases in gas prices if shortages
were to be averted. FPC ceiling prices, no matter how determined, have fallen
far short of those required to clear the market.
"Both abstract and empirical analyses leave no room for doubt that since gas
prices were established by the FPC at the level of gas costs, regulation must be
blamed for the gas shortage that has developed. Moreover, regulation per se is
responsible for the shortage, entirely irrespective of the degree of competitiveness
of the regulated industry.
". . . if the price of new gas is set equal to average cost, then for every pro-
ducer of gas subject to the regulated price, marginal revenue-regulated price-
average cost. But even if the industry were perfectly competitive, there is no
a priori basis for expecting that at this price the market will clear, since there
is no reason to assume that marginal cost will be the same as average cost. In
fact, the odds against the market's clearing are astronomical."
Despite the inability of the FPC to regulate supply effectively, Schwartz
feels the agency should be given power over demand as well : "If supplies are
inadequate, in the short run, we should rely upon direct controls such as the
end-use priorities set by the FPC in its curtailment procedures. It is incon-
ceivable that we should permit the private interests to perform the role of tax
collectors and to assign priorities in the market place by imposing a price incre-
ment above that which would prevail under workable competition" (p. 7).
Priorities in the market place are never set single-handedly by suppliers, They
are determined by buyers deciding how much of any commodity they want in
terms of its utility to them. Such allocations are far more socially efficient,
equitable, and democratic than any cumbersome bureaucratic procedure.
Moreover, there is no issue concerning ". . . imposing a price increment above
that which wou'd prevail under workable competition." FPC price ceilingn are
not floors. FPC has no power to impose a price increment above that which
clears the market. Indeed, the principal requisite for such power is precisely
that which Schwartz proposes be given to FPC, i.e., the direct controls over
which consumers are to get how much, if any, gas. Such authority is appro-
priate to a totalitarian state ; it is grossly at odds with the requirements of a
free society. The proposal to elaborate FPC control over end use reflects the
empire-building aspirations of the bureaucrat who "knows" that he knows what
the people should have and at what price.
Schwartz interprets the plea of a pipeline group for deregulation as evidence
"that very little motivation exists for pipelines to drive a hard bargain and
that the relative strength of producers acting in combination is decidedly en-
hanced" (p. 16). It is difficult to understand why he fails to cite the obvious
explanation for pipeline companies' wishing to see deregulation, viz.. FPC
regulation has resulted in a gas shortage, hence in constraints on the growth
of their sales : deregulation will result in expansion of gas supply, hence allow
pineline sales to increase in line with market forces. By the same token, deregu-
lation will strengthen the bargaining position of interstate pipelines. It will
encourage exploration and development whch will increase supply.
Schwartz errs along with Wilson in maintaining "that small sellers are unable
to enter prolific offshore areas independently or at all because of significant
large investment requirements" (p. 19). His assertion is factually incorrect.
Schwartz points to "over fifty major mergers during the 1960's alone" (p. 21)
as a sign that competition is inadequate. Like Wi'son, he is relying on inaccurate
and irrelevant information. Mergers provide no indication of the degree of com-
petitiveness of an industry, particularly when new firms are constantly starting
up. As George J. Stigler put it : "A comnrehensive census of mergers would
reveal a vast number that have no real relevance to the question of monopoly."
Moreover, Schwartz's list of "over fifty major mergers" actually numbers
only fifty even, and at that includes such "major" mergers as the acquisition
of Tekoil Corp. (as.sets $12.4 million) by Consolidated Oil and Gas (assets $4.9
million).'"
« P. .=i7 of my testlmnnv. Qf. nn. 54-57 for fnrthpr discussion.
"Georep .T. Stlpler, The Theory of Price, 3rd ed., The Macmlllan Company (New York,
19R6K p. 236.
« Cf. Table 6, p. 24, of Wilson's testimony.
395
Schwartz suggests that "if we assumed an annual growth rate of 1.4% our
potentially recoverable gas reserves would be adequate for 32 years using the
Potential Gas Committee forecast or for 65 years using the U.S. Geological
Survey estimates"*" (p. 23). The assumption of an annual growth rate of 1.4
percent is scarcely realistic. According to the U.S. Bureau of Mines, production
has risen by 5.2 percent a year over the past decade (1962-72). If that growth
rate continues, potentially recoverable reserves will be exhausted in 25 years,
using the Potential Gas Committee estimate, or 35 years, using the Geological
Survey estimate. Such prospects hardly validate Schwartz' sanguine assessment
that "there is no question that * * * there is no physical shortage of potential
natural gas supply" (pp. 22-23).
Schwartz asserts that "the imperfections in fuel markets generally make it
possible for an increase in the price of gas to trigger an increase in the price
of other fuels, particularly when these firms market petroleum products as well
as coal" (p. 26). He does not substantiate this claim, which is analytically un-
sound. The fact that a shortage of gas exists at the current price necessarily
implies that some users of other fuels would buy gas instead if it were avail-
able. If the price of gas rises, supplies will increase and would-be customers who
are now using alternatives will be able to buy gas. Their demand for other fuels
will fall, creating downward, not upward, pressure on the price of alternatives.
The fact that some gas producers also sell alternative fuels is totally imma-
terial to this analysis.
Schwartz presents data on the decline in well drilling over the past decade
(p. 26 and Table I). He notes that the decline has been greater for develop-
mental than for exploratory drilling and reaches the illogical conclusion "that
the industry continued to explore for new gas supplies but deemphasized develop-
ment and potential commitment of new supplies to meet market demands" (pp.
26-27). As usual, he fails to provide either a factual or an analytical basis for
this claim. The logical conclusion, of course, is that gas is becoming harder to
find and that development of many reserves is not profitable at current prices.
Surely Schwartz is familiar with the straightforward evidence for this con-
clusion : both the percentage of dry holes and the average well depth have in-
creased year by year.*^ Since drilling costs increase more than proportionately
with well depth, drilling has become steadily more expensive.
Schwartz observes that "A comparison of the average five-year earlier period
[i.e., 1963-67] with the 1968-1972 five-year average indicates net production
going up by more than 29%, total reserve additions going down by approximately
50% in response to a 33.5% increase in weighted average initial contract prices
and 13.8% [increase in] weighted average new gas ceiling prices" (p. 28) (un-
derscoring added). The fact cited by Schwartz that net production increased by
more than 29% in the period 1968-1872 is certainly at odds with his assertion
that producers are deliberately holding back on gas production to force an in-
crease in the FPC price ceiling.
In the same context, Schwartz professes to be puzzled by what he identifies
as ". . . an inverse relationship between price and new supplies — what econ-
omists would call negative elasticity" (p. 28). In fact, Schwartz need not
be puzzled if he will only refer to elementary economic principles. A short-run
supply schedule denotes the alternative quantities a company or an industry
operating to maximize profits, will produce and offer for sale at alternative prices
for the product, given the techniques of production and the costs of the produc-
tion inputs. If either or both of these change, a new supply of the production
results. For example, with given production technology and prices of production
inputs, a company (or an industry) might produce, .say, 1.000 units of its product
if the price were, say, $1.00, 1,010 units if the price were $1.05, 1,020 units if
the price were $1.10 etc. Suppose that both the technical conditions of production
and the costs of production inputs change, and under these changed circumstances,
the company (or industry) would produce only 900 units if the price were $1.10,
903 units if the price were $1.0."). and 905 units if the price were $1.10. Suppose
that before these changes in cost conditions the price was $1.00, and after the
changes the price is $1.10. By assumption, the quantity supplied initially was 1,000
units, and subsequently it is only 905 units. Clearly one should not disregard all
^ Schwartz' arithmetic is faulty. The correct durations under his assumptions are 38 and
60 years, not 32 and 65.
*'Ampricnn Gns Association. Gas Facts, 1971, p. 43: National Petroleum Council, U.S.
Energy Outlook (December 1972), p. 85.
396
of the changes in the technical and cost constraints on production and conclude
that the higher the price the less the quantity supplied, yet this is precisely
what Schwartz does.
It is well known that the petroleum industry is an increasing cost industry.
Schwartz has taken price-quantity observations from different supply conditions
and erroneously referred therefrom a negative elasticity of supply.
According to Schwartz (Table II), the weighted average initial contract
price increased from n.0(^ per MCF in 1963 to 25.8<t: per MCF in 1971, or by 51.8
percent. The average drilling expenditure per gas well (excluding lease acquisi-
tion, exploration, development and production costs and expenditures for service
wells) rose from $92,368 in 1963 to $166,582 in 1971, or by 80.3 percent.** Lease
acquisition costs have also risen much more rapidly than prices. The following
Table (from U. S. Geological Survey, op. cit., p. 20) shows that the average win-
ning bid price per acre for offshore Louisiana tracts rose by 1213 percent from
1962 through 1972.
March 1962 $236. 78
June 1967 685. 17
December 1970 1, 548. 10
September 1972 2,017. 86
December 1972 3, 108.04
In light of the steeper increase in costs than in prices, it is not at all "puzzling,"
as Schwartz believes (p. 28), that additions to reserves have fallen in recent
years despite modest price increases.
Schwartz asserts that there has been a high percentage of "shut-in" wells
federal offshore leases in recent years (Table IV and pp. 30-31), and concludes
that "there have been and are anticipations on the part of producers which
have led to significant postponement of commitment from the offshore area"
(p. 31). Instead of leaping to the conclusion that thousands of gas producers
have joined in a successfully enforced conspiracy to cap their wells and postiwne
commitments (a completely implausible notion), Schwartz should have informed
the Subcommittee that all but a small number of these shut-in wells are already
committed to existing gas purchase contracts. Of those that are not, moreover,
only a handful represent gas reserves which could economically be made available
to the interstate market. Shut-in wells represent a very small amount of un-
committed reserves.
Schwartz is correct in saying, "It is the incremental cost of bringing forth new
supplies of gas that is relevant for the firm in an operational context" (p. 32).*'
But he follows this observation with one that is utterly false : "This is the
motivating factor behind the regulatory determination of a new gas price
equating incremental costs plus fair rate of return which would conform to the
concept of an equilibrium price in a competitive market" (p. 32). In the first
place, "incremental cost plus fair rate of return" would not "conform to the
concept of an equilibrium price in a competitive market" except if (a) the
industry were in long-run equilibrium and (b) is operating subject to constant
costs. The first condition demonstrably and evidently does not exist, and
Schwartz surely knows that the industry is characterized by conditions of
increasing long-run costs, not constant costs. Secondly, what Schwartz labels
"incremental cost", which he alleges FPC uses for its price regulation deter-
minations, is, in fact the average cost of a larger output, not the increase in total
cost associated with that larger output. The latter, in fact, is the incremental
or marginal co.st that is "relevant for the firm in an operational context."
Schwartz's assertions are completely at odds with even rudimentary price theory.
Schwartz' confusion and the absurdity of his observation are nowhere more
evident than in his discussion of supply elasticities (pp. 32-35 and Table V).
In this discussion, by unqualifiedly equating the marginal cost of gas production
with the cost to consumers, he contends that "the consumer would be better
off if the price were kept at 25<f per MCF instead of 37.5(# and supplements or
alternative fuels were purchased to satisfy the incremental need of one-half
TCF as long as they could be obtained for something less than the equivalent
of $2.87 per MCF" (p. 33).
*^ Cf. FPC. Fitnfifitical Data Associated with Exploratory Effort and Discovery of Gas
Reserves, United States, Docket No. R.?fi9-B, p. 54.
49 T'his statement by Schwartz, incidentally, is at odds with his assertion on page 5 of his
testimony.
397
One of the substitutes which buyers are turning to is liquefied natural gas
(LXG), selling at prices far higher than 37.5^ MCF. Since regasified LNG
is indistinguishable from natural gas, it is inconceivable that users would prefer
to pay many times the natural gas price for LNG if other supplies were available.
Yet this is exactly what Schwartz contends in saying that "the consumer would
be better off it supplements or alternative fuels were purchased as long as they
could be obtained for something less than the equivalent of $2.87 per MCF."
Actually the relevant price for the consumer is 37.5c, not $2.87. The consumer
who fiice'a a choice of buying gas at 37.5(5 per MCF, or doing without any and
buying a higher-priced fuel instead if the price of gas is held down arbitrarily,
is not likely to feel he "would be better off if the price were kept at 25^; per MCF."
It should be remembered that price will rise to 37.5(ii (for example) only if
demand exists for gas at that price. The assumption that 10.5 TCF would be
sold at that price is proof enough that consumers would feel better off with gas
at 37.5(' than without it at 25«i.
Fiu-thermore, Schwartz uses illustrative elasticities which may be unrealis-
tically low. As he points out, there is "uncertainty regarding the supply-
price elasticity in the long run" (p. 33). Yet the highest elasticity he chooses Ls
.5 (out of a range of zero to infinity). The higher the elasticity, the lower the
cost of raising supply. In the long run, the supply is generally considered quite
elastic, as firms are able to expand output, new firms can enter the industry,
etc. With an elasticity of 2, for example, the marginal cost that Schwartz cal-
culates to be associated with a prise rise from 250 to 37.50 per MCF is only
50(' per MCF.
Part of Schwartz' error is in assuming that elasticity of supply remains con-
stant over the entire price range from 25(^ to 500 per MCF. In fact, Schwartz'
assumption of constant elasticity would lead the FPC to conclude it should roll
back the ceiling price to, say, 10 per MCF. Assuming a constant elasticity of
supply of .1, this 96 percent decrease in price (from 25<j^ per MCF) would induce
suppliers to cut production by only 9.6 i>ercent to 9.04 billion MCF (9.04 TCF),
an obviously absurd result. Under Schwartz' line of "reasoning", consumers
would pay a total of only $90.4 million (=1^5X9.04 TCF) instead of $2.5 billion,
a saving of $2.4 billion.
Why does Schwartz arrive at such absurd conclusions? As previously shown,
his assumptions about elasticity of supply are extremely unrealistic. Moreover,
he assumes that demand and supply are no win equilibrium, an assumption
which is patently false and which he himself abandons in hypothesizing an in-
crease in price. This invalidates his results, for it fails to account for the change
in demand for substitutes. If more gas is consumed at 37.50 per MCF than at
25<f, as Schwartz assumes it would be, some consumers must be currently paying
more than 37.50 for a substitute. They will therefore realize a saving. Further-
more, the assumed increase in the consumption of gas necessarily would mean
than the demand for substitutes will diminish, pushing down the price of the
substitutes. Thus, all buyers of the substitutes will also save.
Moreover, in stating that consumers would be better off buying additional
substitute fuels equivalent to one-half TCF of gas at any price less than $2.87
per MCF, Schwartz implicity assumes that the elasticity of supply of the sub-
stitute fuels is infinity, i.e., any additional quantity of such fuels will be sup-
plied at an unchanged cost. While purporting to show the increase in social costs
for an addtional one-half TCF of gas, he neglects to present corre.spondlng
estimates for an equivalent increase in other fuels. Since these substitutes cur-
rently cost considerably more than natural gas. there is a strong likelihood that
their incremental social costs will substantially exceed the costs that Schwartz
presents for additional natural gas.
Finally. Schwartz's recommendation that the price of gas .should not be in-
creased, necessarily implying, on his own assumptions, that the quantity of
gas should not be increased, is ludicrously at odds with the theme of his entire
testimony, viz., that the Nation should have a greater supply of gas and would
have it but for the conspiracy of gas producers to hold back production. Unless
he believes that, by some sort of magic, additional gas can be produced at no
incremental social cost of the magnitude he himself suggests he has impaled
himself on the horns of his own dilemma : On the one hand, additional gas should
be produced and the conspiring producers should be forced to increase supply,
but on the other hand, additional gas should not be produced because the social
cost of the additional supply would exceed that of alternative energy sources.
Schwartz continues to muddy the waters with his estimates of the overall
impact on consumers of increased gas prices (Table VI and pp. 35-37). He
398
compares the price of expiring contracts with various new gas prices, but he
makes no allowance for the fact that exploration and development costs have
risen tremendously since the expiring contracts were written. In short, it would
be impossible to replace the volumes covered by expiring contracts at the old
rates. Therefore, the only relevant comparison is between the price necessary
to bring forth sufficient new gas and the cost of alternative fuels which con-
sumers would have to buy if the additional gas is not available.
In a characteristically irrelevant aside, Schwartz concludes that "a significant
proportion of the total volumes imder contract expiring in 1973-1980 can be
attributed to the top five producers" (p. 37). But the five differ from year to year
and region to region. There are actually from 14 to 21 producers among the top
five in each region over the eight year span, according to his Table VII. Further-
more, it is not clear if the "total volumes" actually refer to all production in an
area or only to production by major producers or only to sales to interstate pipe-
lines. In brief, the figures are meaningless and deceptive.
Schwartz echoes Wilson's erroneous contention that "the ability of the pipe-
lines to withstand producer demands for higher prices is significantly vitiated
because of their self-interest as producers of gas" (p. 40). As stated earlier,
vertical integration does not lead to sacrificing the profits of the total business to
increase the profits of a part of it, and the existence of production subsidiaries
gives to pipelines a means of resisting price increases by their other suppliers.
Schwartz also shares Wilson's confusion about joint ventures being "anti-
competitive." This is completely inaccurate, as I showed above and in my
testimony.
Schwartz avers that "the only way in which social priorities can be imple-
mented on a uniform basis is to regulate both intra and interstate sales of
natural gas" (p. 50). Nowhere does he define "social priorities," or demonstrate
how these undefined "social priorities" would be implemented by extending FPC
control to the intrastate market. Nor does he deal at all with the social loss from
the inefficient nonmarket allocation of supplies, or with the impairment of con-
sumer wellbeing resulting from curtailments.
He is also wrong in asserting, "There is no doubt that the intrastate market
can always offer a little more than any ceiling price set by the FPC * * *" (p. 50).
That is true only so long as the FPC sets the price so low that the quantity
demanded exceeds the quantity supplied. If the FPC set a ceiling at or above the
market-clearing price, the interstate and intrastate prices would coincide.
The rise in intrastate prices is not responsible for the pressure on interstate
prices, as Schwartz believes ; it is symptomatic of a shortage of gas which can be
remedied only by freeing all gas prices to clear the market.
Exhibit 3. — "Comments on Certain Matters Raised During Hearing on Natural
Gas— June 26, 27, 28, 1973," by W. O. Senter, Executive Vice President, Gas
Supply Committee
Gas Supply Committee.
Washington, D.C., July 16, 1973.
Hon. Philip A. Hart,
U.S. Senate,
Washington, D.C.
Dear Senator Hart: I enclose a part entitled "Comments on Certain Matters
Raised During Hearings on Natural Gas — June 26, 27, 28, 1973." This paper
provides some additional information on matters which arose during the hearings
and which should l)e considered in reaching any conclusions based on such
hearings.
Additional testimony will be submitted by Dr. Norman B. Ture on economic
matters by July 20. 1973.
If these materials raise any further questions, please call upon me.
Sincerely,
W. O. Senter.
Executive Vice President.
Enclosure.
Comments on Certain Matters Raised During He:arings on Natural Gas
June 26, 27, and 28, 1973
The Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary
of the United States Senate held hearings on June 26. 27 and 28. 1973. The
announcements concerning these hearings indicated the focus would be on com-
399
petition in the natural gas industry (see Subcommittee press releases, June 5, 8
and 20. 1973). However, the scope of the hearings extended to a number of other
matters— understandably in light of the complexity of the reasons underlying
the nation's natural gas shortage. The following comments are submitted, dealing
with matters other than competition.
1. THE PROCEDURES INVOLVED IN VARIOUS REPORTS OF NATURAL GAS
In recent hearings before the Subcommittee on Antitrust and Monopoly, Senate
Judiciary Committee, it has been alleged that the producing industry has under-
reported natural gas reserves to the Federal Power Commission. Mr. James T.
Halverson, Director of the Bureau of Competition of the Federal Trade Com-
mission, made many such allegations, including the suggestion that the "pro-
cedure of reporting reserves through a subcommittee of the American Gas Asso-
ciation composed of employees of major producers could provide the vehicle for a
conspiracy among the companies involved to under-report gas reserves * * *."'
Mr. Halverson based his observations largely upon alleged discrepancies between
"proved" reserves figures of the AGA and the estimates of reserves made only
by pipeline companies in their annual Form 15 Reports to the FPC.
These allegations reveal a basic lack of understanding of methods of reiwrting
reserves. These methods and the related definitions differ widely, so that some
reserves are much less definitive than others. For example, the methods of deter-
mination used for calculating "dedicated, remaining recoverable salable" re-
serves for Form 15 Reports submitted by interstate pipelines to FPC generally
result in a reserve figure somewhat larger than the figure which would be
reached through use of the more stringent definitional standards employed by the
AGA in determining "proved" reserves.
The figures reached through the AGA method of determining "proved" reserves
are based upon actual test fiows, and therefore satisfy a specific definition. How-
ever, downward revisions to these estimates at a later date can and do occur as
additional field performance characteristics become available. To demonstrate
how reserve estimates can differ, a limited discussion of reserves classification
will be helpful.
As stated at page 102 of Reserves of Crude Oil, Natural Gas Liquids, and
Natural Gas in the United States and Canada and United States; Productive
Capacity as of December 31, 1972 (prepared jointly by the AGA, American Petro-
leum Institute and Canadian Petroleum Institute, emphasis supplied) :
"Proved reserves define the current estimated quantity of natural gas and
natural gas liquids which analysis of geologic and engineering data demon-
strate with reasonable certainty to be recoverable in the future from known
oil and gas reservoirs under existing economic and operating conditions. Reser-
voirs are considered proved that have demonstrated the ability to produce by either
actual production or conclusive formation test.
"The area of a reservoir considered proved is that portion delineated by drilling
and defined by gas-oil, gas-water contacts or limited by structural deformation or
lenticularity of the reservoir. In the absence of fluid contacts, the lowest known
structural occurrency of hydrocarbons controls the proved limits of the reservoir.
The proved area of a reservoir may also include the adjoining portions not de-
lineated by drilling but which can be evaluated as economically productive on the
basis of geological and engineering data available at the time the estimate is
made."
When there are relatively few wells in a new field, it is likely that reserves
estimates made by different experts will differ tremendously, depending upon the
methods employed in making such estimates. The following quotation from page
104 of the above cited rei)ort is germane to this point :
"The drilling of additional wells in a reservoir not only delineates the produc-
tive area but also provides additional basic geological data. Estimates of i>orosity,
interstitial water, pay thickness and other reservoir factors may be revised by
new data. Analysis of the producing history of a reservoir, including production of
oil, gas and water, and pressure performance results in more accurate concepts
concerning the producing mechanism, recovery eflSciency and the performance of
the reservoir. The composite of this new and improved information will yield more
precise estimates of the ultimate recoveries and remaining reserves and result in
revisions to previous estimates. Changes in reserve estimates brought about the
application of cycling or other recovery techniques are included in the revision to
reserves. Also, changes in reserves resulting from a reduction in the estimate of
the proved area are included in revisions."
400
These considerations make it imperative, in every comparison of reserves esti-
mates, to inquire : "were the estimates made as of the same date and on the basis
of the same data?" If the answers to these questions are not "yes," then compari-
sons of the estimates are absolutely meaningless.
The reserves reported to the FPC by interstate pipeline companies on Form 15
might in some instances encompass portions of all the reserve figures included
in various classification methods. The figure that appears on Form 15 is an inde-
pendent estimate reached by the buyer. Since these estimates are not confined to
"proved" reserves, they should be expected to be larger than AGA estimates even
if comparable on all other bases.
In comparing any two sets of reserves estimates, another essential question is
whether the estimates were prepared for the same purpose. As is apparent from
the earlier quotation, the AGA has a rather stringent definition of "proved" re-
serves. On the other hand, for certain purposes a company might desire an esti-
mate of combined proved and probihie reserves. Such pun^oses wou'd include
preparation of future budget and drilling programs. Thus, a company might ask
its reserve estimators : "if we fully develop and drill so many wells in this field
what can we predict in the way of reserves to be discovered?" Such forecasts of
reserves would certainly not be a "proved" reserve estimate as defined by the
AGA.
Since no allegation has ever been made that AGA "proved" reserves represent
all reserves estimates made for all purposes, Mr. Halverson is completely unjusti-
fied in stating or implying that such figures are misrepresentations. His state-
ments prove nothing more than that he does not understand the technical meaning
of the word "proved."
In response to Mr. Halverson's reference to the AGA as a possible "vehicle for
conspiracy," it should be noted that the National Gas Survey has conducted an
investigation of natural gas reserves and concluded that its estimates of "proved"
reserves were approximately 10% below the figures reached by the AGA. More
information on the study of the National Gas Survey appears at page 16 of the
direct testimony of Mr. Howard "William Pifer, III, submitted to the Hart Sub-
committee on June 26, 1973.
It should also be noted that Mr. Lewis A. Engman, Chairman of the Federal
Trade Commission, at pages 6 and 7 of his direct testimony submitted on June 27,
1973 before this Subcommittee, described the FPC investigation of reserves by
examining the field by field estimates made by each Southern Louisiana Subcom-
mittee member of the AGA for the years 1966 through 1970. Therefore, Mr. Hal-
verson's statement at page 4 of his above-mentioned testimony is misleading, to
say the least, in stating that the FPC "relies solely on the company (without in-
dependent audit) to provide all the raw data * * *." Further, the FPC has con-
ducted investigations in Docket No. R-^05, through which it received data from
all large producers regarding nationwide uncommitted gas reserves available for
sale. The most recent investigation under this docket was instituted by an order
issued September 12, 1972. and the results of this investigation revea*ed that
producers were not withholding any substantial quantities of gas from the market.
2. UNCOMMITTED BESERVES DATA
Various witnesses at the hearings drew a number of questionable conclusions
from data submitted by the FPC on volumes of uncommitted gas reserves. These
uncommitted reserves data do not constitute any basis for the assertion that the
industry is not competitive.
The volume of uncommitted gas reserves is not unreasonably large by any
standard. The total uncommitted reserve figure as of the last date checked by
the Commission, June 30, 1972, was 3.4 trillion cubic feet excluding Alaska. This
compares with a total proved reserved figure for the United States excluding
Alaska of 234.6 trillion cubic feet (as of December 31, 1972), or less than 11/2 per-
cent. When compared with production of natural gas, 22 trillion cubic feet for
1971), the uncommitted figure represents less than two months' gas supply.
There are logical reasons why tnere must be some inventory of "uncommitted"
reserves at any given point in time. Reserves become "proved" when their exist-
ence is definitely established by the drilling of a well or acquisition of other
geologic and engineering data which demonstrate with reasonable certainty their
existence. They become committed when a contract is signed for their sale. After
discovery and prior to commitment, the gas field must be developed by drilling of
wells to a sufficient degree to establish a sufficient quantity of reserves to assure
the pipeline purchaser that the necessary investment in pipelines and facilities
401
is justified. In tlie case of smaller fields in areas remote from existing pipeline
facilities, it may not be economic for the pipeline to undertake new construction
needed for a connection until other discoveries are located nearby. Uncommitted
reserves can be compared to a manufacturer's inventory of "goods in process" —
they are on hand in a reasonable known quantity but not yet ready for sale. The
fact that the present quantity of uncommitted reserves is so small compared to the
total reserves is a cause for serious concern.
The process of discovery, development and commitment of new gas reserves is
therefore a continuous process which occurs in the normal course of business.
The reports to the FPC of the uncommitted reserves on a given date are analog-
ous to clipping one frame out of a moving picture film. The reserves which are
uncommitted, for example, on December 31, 1971, are not the same resen-es shown
as uncommitted on June 30, 1972. Many, if not most, of the reserves as of the
first date have been committed to contract by the second date, and, in turn, re-
placed by other different newly discovered reserves. As a result, the grouping of
uncommitted reserves into the "four largest companies," the "eight largest com-
panies," etc. can be quite misleading.
The four largest companies on the first date are undoubtedly different com-
panies than the four largest companies on the second date. This is suggested
by Tables 6a, 6b and 6c to Chairman Nassikas' prepared statement. Furthermore,
the four largest companies vary in identity between producing areas, so that the
four largest in one area are not the same companies as the four largest in an-
other area. Thus, the grouping attempted by Witness Wilson is completely mis-
leading.
3. WELLHEAD SALES BY PRODUCERS TO INTRASTATE PURCHASERS SHOULD NOT BE
SUBJECT TO FPC JURISDICTION
Since 1969 the vast majority of new reservers discovered in the United States
have been committed to the intrastate market. Joseph Swidler, Chairman of the
New York Public Service Commission, has stated : "In recent years intrastate
buyers have in fact virtually monopolized new gas supplies." ^ The statement
is not entirely accurate because it ignores those reserves committed to the
interstate market under the Commission's Order 431, which has provided for the
issuance of limited term certificates. These commitments amount to at least 421
billion cubic feet.^ But it is safe to say that the vast majority of the new reserves
discovered in this country since 1969, except for those discovered in the offshore
federal domain, have been committed to the intrastate market. The issues to be
considered are (1) the reasons why the intrastate market has been able to
purchase the bulk of new gas supplies, and (2) what action, if any, Congress
should take with reference to this market.
The obvious difference between an intrastate gas sales transaction and a com-
parable interstate transaction is that the latter is regulated by the Federal Power
Commission. By nearly every pertinent test, including financial ability and
tenacity in searching for new gas supplies, interstate buyers are at least as
competent and aggressive as intrastate buyers. Therefore, it must be concluded
that the basic reason why buyers in intrastate market have been able to purchase
most of the newly discovered gas reserves in the last four years is because their
purchases are not regulated by the Federal Power Commis.sion. Accordingly, the
intrastate market offers an interesting yardstick with which to test the plausi-
bility of many of the charges and allegations made by witnesses in these pro-
ceedings. One such charge is that absent regulation by the Federal Power Com-
mission, field prices of gas will rise without limit because producers are not
effectively competitive. The broad range of gas prices in the intrastate market
refutes this contention. Attached as Appendix A is a compilation of intrastate
prices made by the Federal Power Commission Staff in two separate reports
dated September 9. 1970 and November 8, 1971 in Rulemaking Docket No. R-389A.
These summaries show that intrastate prices have risen gradually, reflecting
market conditions when intrastate buyers were no longer able to obtain all of
the gas supplies they needed merely by bidding against the FPC regulated price
ceilings.
1 StateniPnt of .Tospnh C. Swirllpr bpforp thp Senntp Committee on the Judiciary, Subcom-
miftee on Antitrust and Monopoly, Jnnp 26. 1973. p. 10.
2 Source : Emerirencv contracts on file with thp Federal Power Commission as rate sched-
ules or as pxhihUs nnd certificate applications filed through September 5, 1972, certificated
through August 31, 1972.
402
The second conclusion to be drawn from the intrastate market is that supply
is responsive to price. Increases in intrastate prices were clearly a factor reflected
in an increase in exploratory gas drilling in 1972. Because of the limited extent
of the intrastate market, price increases in that market have not had the full
beneficial impact on supply that removal of regulation on interstate prices would
produce. Nevertheless, intrastate price increases, together with price increases
permitted by recent Federal Power Commission orders, have begun to reverse
the decline in exploratory drilling, a first step toward obtaining new gas
reserves.
Closing their eyes to lessons provided by the intrastate market, industry
critics advocate that independent producers' sales to intrastate buyers should
be regulated by the Federal Power Commission. It is indeed ironic that the per-
sons advocating this extension of regulatory jurisdiction are the same persons
who were strongly instrumental in creating the current shortage through restric-
tive regulation of producers prices at the federal level.^ The basic thrust of their
position is that little expansion is to be expected in domestic gas supplies from
expanded domestic exploration. Therefore, the Federal Power Commission should
be given jurisdiction over the intrastate market, thus assuring the redistribution
of current short inventories of gas supplies in the United States by eliminating
a nonfederally regulated intrastate market. This would permit the interstate
market to again compete effectively for what new supplies of gas would be forth-
coming. This bafiling position entirely overlooks the supply-eliciting function of
increased prices, and assumes that prices have no effect on supply, an assumption
which is demonstrably unfounded and contrary to experience in other facets
of the American economy. Rather than relieve gas supply deficiencies through
relaxation of Federal Power Commission price constraints and supply depres-
sants, the Swidler-White approach would extend over all gas exploration the
dead hand of interstate regulatory policies which have been operating as a
deterrent in the interstate market.
Aside from the general adverse effect on supply which extension of regula-
tion (rather than reduction of regulation) would have, the Swidler-White pro-
posal contemplates a major reallocation of this country's natural resources. In
all areas of the nation's economy and particularly in those industries relying
upon natural resource extraction, industrial sites have been located near sources
of feedstocks. It is sound economics to locate steel plants in the vicinity of
coal mining operations, fish canneries in port cities, metal smelters near mine
mouths and industries using extensive quantities of natural gas, such as chem-
ical and gas industries, in the proximity of natural gas fields. This logical site
selection process has gone on for many years, and substantial industries in gas
producing states are directly dependent upon their supplies of local natural
gas.
If prices of domestic gas are allowed to seek free market levels, such in-
dustries would gradually convert to other fuels or energy sources if con-
version becomes economically required. But if the Federal Power Commission
deprives these industries of their fuel supplies in order to provide natural
gas to portions of this country to which it is not indigenous, or which have
prohibited the development of natural gas in their own areas,* a great economic
dislocation will result. By forcing artificial reallocation of natural resources
from industries in states where resources are found to industries in other states,
a whole series of complex business relationships will be disrupted, with conse-
quential economic hardships diflScult to measure.
It is not unreasonable to anticipate that in many areas, mines and industrial
plants which have been constructed because of contractually assured supplies
of adequate gas from intrastate suppliers will close their doors, and add workers
to unemployment rolls rather than assume the immediate high cost of alterna-
tive energy sources. While some trends to reduce industrial gas consumption
in the producing states must be regarded as inevitable, the competitive free
market is perfectly equipped to accomplish this transition over a period of time
3 This position is argued most strongly by Joseph Swidler and Lee White, both of whom
are former chairmen of the Federal Power Commission which, during their terms of office,
Imposed the restrictive pricing policies on interstate regulation which led directly to the
gas shortage faced today. , , , , i ^.v,
* The New England States have strongly opposed the leasing of federal acreage in the
Atlantic Shelf, offshore of New England, even though if gas were found in this area it would
provide substantial quantities of that scarce product without the cost differentials of trans-
ported gas from the Southwest.
403
with the least economic disruption. A massive reallocation of natural resources
by administrative fiat could, on the other hand, wipe out and reverse economic
gains which are so important to the nation's economy.
One additional point should be made. Those parties advocating expansion of
Federal Power Commission regulation to the intrastate market fail to recog-
nize that the intrastate market is not free from regulation. Most gas produc-
ing states have already adopted, or will shortly adopt, gas curtailment pro-
grams containing systems of priorities which allocate gas similar to the cur-
tailment programs by the Federal Power Commisson." Moreover, states largely
regulate the intrastate gas market assuring domestic and small commercial con-
sumers a first priority use of gas. This is not the type of situation contemplated
by Congress when it enacted the Natural Gas Act to regulate in areas consti-
tutionally prohibited to state regulation.
4. ALLEGATIONS WITH RESPECT TO NATURAL GAS MARKETING
In the course of their testimony in these proceedings, Messrs. Swartz, Hal-
verson, and White have stated or suggested that producers, in an effort to
justify a higher price for gas and in expectation that increased prices will be
forthcoming, are consciously delaying the exploration, development, produc-
tion, and sale of undiscovered gas reserves, thus creating the impression of a gas
shortage.
To suggest that any responsible producer would by conscious design delay
the prudent exploration, development, production, and sale of known and pros-
pective natural gas reserves reflects complete ignorance of the stringent legal
obligations imposed on a producer-lessee under the usual oil, gas, and mineral
lease. These legal obligations give full effect to considerations of prudent oper-
ations, which in turn depend on such factors as prices of products, volume of
production expected, and availability of markets. It would be irrational for pro-
ducers to pursue the course of action suggested for the simple reason that if
producers resorted to such "holding off the market" tactics they would suffer
severe financial los due to the risk of money damage judgment or forfeiture or
cancellation of valuable mineral leases.
To properly appreciate the issues involved and to place them in their proper
perspective, it is essential to understand that the exploration and develop-
ment of oil and gas properties has, with rare exception, occurred under the
terms of oil. gas, and mineral leases. Such leases are the legal vehicles by
which a producer-lessee acquires the right to enter upon the premises to ex-
plore for, and if found, to develop, produce, and market the oil and gas which
may underlie the property described in the lease. For example, in Louisiana,
the "exclusive right" to explore and develop lands for minerals, together with
the concommitant right ultimately to produce and market same if found,
belongs to the landowner or to a mineral servitude owner, and absent a lease
granted by such parties a producer would not have the legal right to do any
of these things unless he purchased the land or the mineral rights therein out-
right.
Under the terms of these lea.ses the producer-lessee assumes certain express
obligations to the lessor and there is additionally imposed by law, because of the
nature of the basic relationship between lessor and lessee, a number of "implied
covenants or obligations" which the lessee is bound to discharge, whether or not
set out in the lease, on pain of suffering total or partial cancellation of the lease,
monetary damages, or both.
These implied covenants or obligations are inferred or implied from the basic
lessor-lessee relationship. Broadly stated, there exists in both common law juris-
dictions and in Lnuisiam. where the civil law predominates, an equitable prin-
ciple to the effect that if the compensation or consideration of one party to a
contract depends wholly upon the diligent conduct of the other, the law implies
a duty of diligent conduct even in the absence of an express contractual pro-
vision.
From this fundamental premise it is reasoned that since an oil and gas lease
invests the producer-lessee with the "exclusive" right to drill on the land covered
by the lease, and the lessor is contractually rendered powerless to exercise that
5 Rpp Tpxns Rnilronrl rommission curtailment order of January 3, 1973 In Gas Utilities
Division, Docket No. R-489.
404
right, the lessor's reasonable expectation of development of the mineral poten-
tial and the monetary return to be realized therefrom — repeatedly identified by
our courts as the principal or primary consideration for granting the lease —
should be afforded protection by law.
The jurisprudence has evolved several well-defined implied obligations. They
are:
(1) The obligation to drill additional wells on the leased premises once pro-
duction is established ;
(2) The obligation to protect the leased premises from uncompensated drain-
age of oil and gas occasioned by wells located on adjoining lands ; and
(3) The obligation to produce and market the oil and gas discovered on the
leased premises.
The underlying premise of all these obligations is the recognition that pecu-
niary gain to the les.sor — the principal consideration for the lease — depends
entirely upon the diligent operation of the leased premises by the producer-
lessee. If the lessee permits drainage to occur, this consideration is diminished.
If the product once discovered is not marketed, no further consideration is re-
ceived by the lessor. And, if the lessee fails to diligently explore and develop,
the potentinl of the landowner's property is not fully realized. Once produc-
tion is established the lessee is not permitted to rest on his laurels. To avoid the
risk of judicial cancellation of his lease as to undeveloped areas, the lessee must
within a reasonable period of time commence additional drilling operations to
further develop the remainder of the leased premises. He mu't. in the words
of one court, conduct all such operations as would a "reasonably prudent op-
erator in the same or similar circumstances having due regard for the interest
of both contracting parties." And, as stated a little differently by another
court, "time and prompt development become of the essence of oil and gas con-
tracts once production has been found."
The following brief quotation taken from the jurisprudence best express the
essence of the rule, viz :
"The justification for the respondent's position is that the geologic data and
the experience upon surrounding lands are both unfavorable to the discovery of
oil or gas upon the east half of Section 16 (the 320-acre tract). The respondent's
oflBcers state that they desire to hold this tract because it may contain oil ; but
they assert that they have no present intention of drilling at any time in the
near or remote future. This attitude does not comport with the obligation to
prosecute development with due regard to the interests of the lessor. The pro-
duction of oil on a small portion of the leased tract cannot justify the lessee's
holding the balance indefinitely and depriving the le.ssor not only of the expected
royalty from production pursuant to the lease, but of the privilege of making
some other arrangement for availing himself of the mineral content of the land."
Sander v. Mid-Continent Petroleum Corp.. 292 U.S. 272, 54 S. Ct. 671, 78 L.Ed.
1255. 93 A.L.R. 454 (1934)
Other authorities in point are Wier 1. Grnbb, 228 La. 254, 82 So. 2d 1, &\jhio
Petroleum Company 1. Miller, 237 La. 1013, 112 So. 2d 695, and Fox Petroleum
Co. V. Booker, 123 Okla. 276, 253 Pac. 33, 38, quoted with approval in Wier v.
Grtim, 82 So. 2d 1, 7.
The implied obligation to prevent drainage (sometimes referred to as the "off-
set" obligation) imposes on a lessee the duty to prevent oil or gas from migrating
in the confining subsurface formation to a producing well located on adjoining
lands. In many common law states and Louisiana, the "rule of capture" prevails.
This rule i)ermits an adjoining landowner, or his mineral lessee, by conducting
operations on such adjoining lands, to drain oil and gas from beneath the lands
of a neighboring o^Tier without incurring liability. This frequently occurs where
a single reservoir underlies two adjoining tracts, a very common occurrence. The
theory is that since neither landowner "owns" the oil and gas as they exist in
the subsurface reservoir, either may, by conducting operations on his own land,
"capture" the oil and gas by reducing it to possession at the wellhead and thus
become its owner. Because of this rule it is an implied obligation of all mineral
leases that the lessee, by the drilling of "off-set" wells, must prevent such migra-
tion of hydrocarbons or drainage from the leased premises.
"Withholding of gas production from the market is virtually impossible becau.se
the producer cannot delay production if a reasonable market is available. Again
the underling rule is that the lessee must operate the leased premises as a prudent
405
administrator for the mutual benefit of lessor and lessee and is obligated to
market the production at the best market price available, assuming there is a
market. Actually, there is very little litigation on this point for several reasons.
First and foremost is the fact that the lessee is anxious to begin receiving rev-
enues. Secondly, because of the fact that a great many producing wells, both
oil and gas, are more often than not completed in reservoirs from which other
producers are also producing, curtailment of production would mean a monetary
loss to the producer because of drainage. And thirdly, if production in paying
quantities ceases for sixty or ninety days, depending on the lease terms, the lessee
may lose the lease.
These implied obligations or covenants are generally applicable to leases
granted by the State of Louisiana. The State Mineral Board, through its Fact
Finding Committee, has devised an extremely efficient method for insuring com-
pliance with those obligations. The Board early in its history adopted a philo-
sophy of maintaining maximum flexibility as to operations expected of its lessees
and chose instead to rely on the generally implied obligations, diligently enforced
by the Fact Finding Committee and its supporting staff of highly trained tech-
nical personnel. This Committee continuously concerns itself uith the implied
obligation to market oil and gas. once discovered.
The state lease form, like other leases, permits the lease to be maintained by
the payment of semi-annual shut-in rentals if there is located on the property
covered by the lease, or on land unitized tlierewith, a well or wells capable of
producing gas in paying quantities and gas is not being u.sed or sold "because of
the lack of a reasonable market or marketing facilities or governmental restric-
tions. ..." Again, as is the case with most fee-lands leases, this clause can
only be utilized where there is no available reasonable market, and the Lieu
Royalty Committee, as a matter of course, reviews each lease being maintained
by shut-in rentals every six (6) months to determine if a reasonable market has
become available.
The State Mineral Board, through its Fact Finding Committee, Lieu Royalty
Committee, and supporting staff, effectively exercises its supervisory authority
to require diligence in the exploration and development of state leases and in the
marketing of oil and gas discovered thereon.
Under Sections 5 and 8 of the Outer Continental Shelf Lands Act the authority
to administer the outer continental shelf lands, and to grant oil and gas leases
thereon, is vested by law in the Secretary of the Interior (Secretary), and the
Secretary in turn has i.ssued extensive leasing and operating regulations which
are found in 30 C.F.R. 250 et seq.. 43 C.F.R. 2234 5-3. and 43 C.F.R. 3380 et seq.
Section 3(c) of the federal oil and gas lease form spells out the drilling
obligations imposed on the lessee. The provisions of the lease in this respect for
the most part mirror the pertinent regulations, i.e., 43 C.F.R. 3387.3-2 (a),
3387.3-2(c). and 3387.3^ and 30 C.F.R. 250.33(a), 250.33(b) and 30 C.F.R.
250.34 and 250.35.
The federal lease form contains an express provision corresponding to the
implied obligation to develop :
"After due notice in writing to diligently drill and produce such other wells as
the Secretary may rea.sonably require in order that the leased area or any part
thereof may be properly and timely developed and produced in accordance with
good operating practices." (Section 3(c) (2)
If the lessee fails to comply with any provision of the lease, the Outer Conti-
nental Shelf Lands Act or the pertinent regulations, the lease is subject to
cancellation. Under Section 5(b) of the Outer Continental Shelf I^nds Act,
43 C.F.R. 3386.2, 30 C.F.R. 250.80. 250.81. and 250.82 and Section 10 of the lease,
the Secretary, upon the giving of a thirty (30) day notice of default is authorized
to cancel nonproducing leases, subject to judicial review. And in the instance of
a producing lease, it may be canceled by appropriate proceeding before the
United States District Court having jurisdiction. As noted previously, the lessor
also has the right to invoke any other legal or equitable remedies available
which may include the right to assert the forfeiture of the lease and a claim for
monetary damages, or both, in the event a violation of the implied obligations
can be shown.
With respect to the implied obligation to market once production is established
on a federal lease, the same general rules apply and. unless a reasonable market
is not available, the lessee must produce the well. In this connection, cognizance
406
should be taken of Special O.C.S. Order No. 4. dated August 28, 1969, issued by
the Supervisor pursuant to 30 C.F.R. 250.11 and 250.12 which permits the exten-
sion of a lease beyond its primary term even in the absence of actual production,
where transportation facilities are not available to market the product, or a
well capable of producing has been abandoned temporarily to facilitate proper
development by the construction of a platform or otherwise. Under O.C.S. Order
No. 4 the Supervisor may approve a suspension of production and extension of
the lease provided at least one well has been drilled on the lease and determined
to be capable of being produced in paying quantities. The order thereafter sets
out fairly detailed criteria which must be met in order for the well to qualify as
a well capable of producing in paying quantities. During the period of such
suspension, the lessee must continue to pay rental or minimum royalty fixed at
the discretion of the Supervisor and such payments may not be recouped out of
subsequent production royalties. In summary, it is fair to say that the basic
obligations imposed on the lessee under a federal lease covering outer continental
shelf lands are not materially different from those which arise under the ordinary
fee-lands lease or the leases used by the State of Louisiana.
The foregoing analysis is important not merely because it demonstrates the
error of certain arguments but more so because it underscores the danger of
placing any substantial credence upon the views of persons who are totally
unaware of the circumstances under which exploration, production, and market-
ing of natural gas take place.
5. THE PEOPOSAL TO CREATE A GOVERNMENT CORPORATION FOR GAS DEVELOPMENT ON
FEDERAL LANDS
It has been proposed that a government corporation be formed to drill for gas
on federal lands. (See, e.g.. Testimony of Lee C. White, Senate Subcommittee on
Antitrust and Monopoly, June 26, 1973, Tr. 465-67.) The reasons asserted in
justification are (i) that the goal of the government corporation would be to
produce gas for consumers, not to make a profit, (ii) that such government cor-
poration would receive a greater degree of public confidence than a private
corporation, particularly as to environmental matters, and (iii) its costs of
finding and producing gas would provide valuable data.
This proposal, while having surface plausibility, has obviously not been
thought through carefully. Before any credence can be given to such proposals,
the proponents should be required to answer such questions as the following :
(1) Where do the geologists and geophysicists come from? Most such trained
personnel work for existing gas producers, so if hired away the ability of existing
gas producers to explore for new gas supplies is simultaneously reduced, with
no net benefit to anyone.
(2) How does the government corporation obtain leases? If they are cost free,
how can the corporation's experience provide data comparable to private com-
panies? If the government corporation has to bid in competition with private
companies, but with limitless funds from the public treasury and without the
discipline of profit-orientation, it can outbid private companies and its cost
experience will be meaningless.
(3) What if the government corporation finds oil instead of gas or finds both
on the same leases? (The ability of geologists to search for the two products
seperately is not perfect.) To estimate the cost experience for gas when oil is
produced .iointly requires wholly arbitrary cost allocations over which the FPC
has struggled for 15 years.
(4) If the government corporation pays for its leases, where does it get the
funds? By transfer from one account to another on Treasury Department books?
This would result in the same lack of bidding discipline as noted earlier. By
borrowing or equity funding in the public money market? If by borrowing,
government guarantees would be needed since the corporation wouUl have no
assets and, since such guarantees are not available to private corporations, any
capital cost experience would be noncomparable with that of private companies.
407
(5) Where does the government corporation obtain drilling rigs and related
services? Presumably by hiring independent drillers as do most private com-
panies. This does two things — make rigs scarce for a period which helps no one.
and costs the government the same as private industry so no new cost informa-
tion is provided.
( ti ) How long does it take for gas production by the government corporation
to rt'acli a significant level? Many companies have been opei-ating in the Gulf of
Mexico for over 20 years and have spent literally thousands of man-years stud.v-
ing geology and operations in the area. If studied from scratch, the government
corporation would require 5 to 10 years to be a competent operator. If this exper-
tise is "bought" by hiring from private companies, then the government corpora-
tion cannot provide any "independent" information.
(7) Wluit happens lo gas production found by the government corporation?
Presumably it is delivered to one or more interstate piitelines for their markets.
But which pipeline or pipelines? Would the government corporation or the FPC
have to consider comparative "need" for every new sale? At what price would
this gas production be sold. At the government corporation's cost? In early years
when production volumes are low and unproductive investment high, the cost
could lie astronomical. Each increment of production (i.e.. separate discovery)
would have a different cost with strange results to the pipeline purchaser, or
purchasers. Would its gas be priced at area rates, the same as private gas
pnxlucers? Or at market value? If so, then there is no cost saving to consumers
in either case, so wby have a government corporation? If sold at less than area
rates or market value, wlio decides which pipeline gets the bargain?
( 8 ) If the goal of the government corporation is to pro<luce gas, not to make
a profit, where is the concept of consumer protection? Does this mean produce
gas at any cost but sell it at low cost? If so. it .simply means that the general
treasury pays part of the consumer's cost of gas. Yet there is general agreement
that the underpricing of gas has resulted in inefficient uses of gas — which con-
tinued underpricing will perpetuate.
(0) The history of oil and gas exploration is re]>lete with examples of major
di'^coveries made on geological prospects which had been condemned as tin-
productive by earlier explorers. If massive amounts of acreage are subjected to
exploratory scrutiny of only one company (i.e.. the government corporation),
the result "will be a failure to find significant new reserves. Only the divergent
views available in the competitive private company exploratory system can
insure maximum and timely discovery of reserves.
(lOi A goveriunent corporation would not be either better able or better moti-
vated to meet environmental responsibilities. Otherwise, why do we see the
present widespread litigation concerning the environmental impact of Corps of
Ensineers flood control and b.vdroelectric projects? Objections to environmen-
tally sensitive projects obviously arise from the nature of the projects, not from
the identity of the person involved.
(11) It has been estimated that less than ~)('/c of all federal lands (including
offsliore federal domain) have been leased for oil and gas exploration. Obviously
a government corporation could not undertake to explore all of the unleased
areas within any reasonable time frame. But then, if the government corpora-
tion took only a portion, how would its lease be selected? If it took only the most
de'^irable lenses, incentives for private comiiany exploration would be diluted.
If it took only the least desirable leases, the cost of oil and gas found could be so
high that it could not be sold, except at a loss. In either instance, the informa-
tion obtained would be noncomparable with the experience of private companies.
( 12 ) How can formation of a government corporation alleviate the dual reasons
for declining private industry gas exploration : inadequate economic incentives
and restrictions on availability of acreage for exploration? The government cor-
poration is not suggested as a substitute for but as a supplement to private ac-
tivities. Therefore, its mere creation cannot cure the conditions which have led
to past inadequate exploratory levels on the pait of private companies.
.-)47— 74 27
408
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412
Exhibit 4 — Response of James T. Halverson to Comments of W. O. Senter
(exhibit 3)
Federal Tradt^, Co^rMissTON,
Bureau of Competition,
WasJiiiiyton, D.V., Feu/ua/y 1, 197^.
Mr. W. O. Senter,
Executive Vice President,
Gas Supply Committee, Washington, D.C.
Dear Mr. Senter: By letter to me dated July 18, 1973. Senator Hart has
transmitted yonr comments "On Certain Matters Raised Dnring Hearings On
Natural Gas June 26, 27 and 28, 1973," so as to provide me with an opportunity to
evaluate your comments and reply to them in writing for the hearing records.
This letter replies to those portions of your comments which relate to the re-
marks made by me on June 27, 1973 before the Senate Subcommittee on Anti-
trust and Monopoly. In replying to you, I am requesting that Senator Hart
make a copy of this letter a part of the record of the Suljcommittee's hearings
into competition in the energy industry. This reply reflects my own personal
views; it does not constitute an olficial statement by the Federal Trade
Commission.
As background to my statements before and to the information submitted to
the Subcommittee, I note that Chairman Eugman received a letter from Sena-
tor Hart on July 5, 1973. This letter requested a detailed report on all Commis-
sion investigations relative to energy including an investigation, styled In the
Matter of the American Gas Association, et al.. File No. 711 0042. which relates
to the reporting of natural gas reserves. I am enclosing a copy of Senator Hart's
letter. Chairman Engman directed me and I directed members of the Bureau of
Competition to prepare a report as requested by Senator Hart. This staff re-
sponse was transmitted to the Subcommittee on June 19, 1973 and I shall hence-
forth refer to it as the Staff Memorandum of June 19.
Senator Hart also requested that Chairman Engman. I and certain staff mem-
bers appear on June 27 before the Subcommittee to testify and answer questions
regarding pending Commission energy investigations. In preparing the Staff
memorandum of June 19, and in the preparation of my testimony, care was
taken to avoid any disclosure of information protected by either the Commis-
sion's Rules of Practice or by the "Commitment of Confidentiality" extended by
the Commission to any company in connection with File No. 711 0042.
At page two of your comments you state that observations by me that the
producing industry has under-reported natural gas reserves to the Federal
Power Commission, and that the procedures of the American Gas Association
could provide the vehicle for a conspiracy to under-report reserves, were both
based "largely upon alleged discrepancies between 'proved' reserves figures
of the AGA and the estimates of reserves made only by pipeline companies in
their annual Form 15 Reports to the FPC." The attribution of this basis to my
observations is inaccurate. My belief that the AGA could provide a vehicle for
conspiracy is based upon the procedures and organization of the AGA for re-
porting reserves as those procedures and that organization are outlined at pages
224-25 of the transcript of my remarks. My belief that producers have seriously
under-reported reserves to the AGA is based in large part upon comparisons of
internal company documents maintained by two producers who have completely
complied with our subpoenas (e.g., reserves kept for tax purposes see Tr. 227-28),
with AGA estimates. As I noted in my remarks CTr. 226). discrepancies be-
tween Form 15 figures and AGA figures led to the di'af ting of subpoenas in the
Bureau's investigation, but "The theory of the investigation was to compare the
reserve estimates used b.v the companies for internal purposes with the esti-
mates submitted to the American Gas Association . . . ." Estimates for internal
company puqioses include but are not limited to Form 15 estimates; to date,
stnff lias mjide only limited use of Form 35 data.
However, staff does look upon Form 15 estimates as useful tools for gauging
the accuracy of AGA estimates. At page four of your comments, you intimate
that Form 15 estimates should exceed AGA estimates for the same tract because
the former include probable reserves. While some pipeline companies m.ay in-
clude probable reserves in their estimates of dedicated (Form 15) reserves, there
is no reason to a'^sume that all or even many do so. There has b^en testimnnv
during our investigation that pipelines have for years deliberatelv under-esti-
mated reserves in connection with their negotiations for purchasing gas. and
staff has noted instances in which producer estimates of proven reserves have
exceeded Form 15 estimates for identical tracts.
413
Your statement (page four)— that comparisons of estimates not made at the
same date and based on the same data are meaningless — flies in the face of the
AGA and Federal I'ower Commission practice of comparing annual AGA esti-
mates ; the practice of producers of booking annual field by field estimates ; and
the comparisons made by the Federal Power Commission of estimates compiled
in the course of its National Gas Survey with AGA estimates/ Further, AGA
estimates for a given year, say 1968. are compiled in the following year, e.g.,
1969. Most company estimates for 1968 are made in 1968. This means' that any
new discoveries, developments or revisions occurring during a year should be
reflected in the AGA estimate for that year, although not necessarily in all com-
pany estimates for that year. Accordingly, in the absence of negative revisions
(the AGA afl^rmatively reveals negative revisions ), AGA estimates for a partic-
ular year should equal or exceed comijarable company estimates for that year.
It is noted that the Commission subpoenas issued to the eleven producers call
for back-up data for all estimates submitted. When a large difference exists be-
tween a company and an AGA estimate, this back-up data will be examined,
particularly when the difference exists as an isolated instance as distinguished
from a trend over a period of years.
At page five of your comments you state that becau.se no allegation has been
made that AGA estimates of proved reserves are made for all purposes. I was
not justified in stating or implying that AGA figures are misrepresentations.
This apparently is a refei'ence to conclusions by me of AGA under-reporting
based upon comparisons of AGA estimates with producer in-house (company)
estimates. Your point seems to be that AGA estimates cannot be compared with
company estimates unless both were made for the same purpose. The only rea-
sons you cite for the ineompatability of AGA and company estimates appear at
page four — that '"the AGA has a rather stx'ingent definition of 'proved' reserves"
and that comijany estimates may combine proved and probable reserves.
On June 27 I explicitly stated (Tr. 227) that the AGA definition of proved
reserves "is also the definition employed by the [producing] companies." The
stringent definition of proved reserves employed by the AGA is thus also followed
by the producers. Your concern over the inclusion of probable reserves in com-
parisons of proved reserves has also been voiced by Gulf Oil Corporation, and I
have responded to Gulf as follows :
I wish to assure Gulf that in comparing various reserve compilations
appearing in Gulf documents, staff did not compare potential reserves with
proved reserves. In comparing AGA estimates with Gulf book reserves and
other estimates, only those estimates which Gulf labeled as '"proved" were
compared. Accordingly, the concern expressed at pages 8 and 9 of Gulf's
Response over staff inexperience in handling reserve figures is unwarranted.
This is to assure you that staff, in utilizing the docimients of producers otlier
than Gulf, will continue to differentiate between proved and potential including
probable reserves.
As you note (page five), the Federal Power Commission has conducted an
investigation of natural gas reserves, the "National Gas Survey" (NGS) and in
its report thereof ("National Gas Reserves Study") has concluded that its esti-
mates of proved reserves were approximately 10% below tlie figures reached by
the AGA. I have commented to Dr. Paul .T. Root of the National Gas Reserve
Study (NGRS) w-ith regard to this Study as follows :
The NGRS presents an estimate of the proved reserves of natural gas in
the United States as of December 81. 1970. As vou indicate (page two), of the
6.358 gas fields identified by the NGS. all 108 fields thereof reported by the
AGA to contain 400 Bef (biilion cubic feet) of gas or more (referred to in the
NGRS as the "certainty sample") were surveyed, but only 50 of the 6.250
"under 400 Bcf" fields were surveyed. It is noted that the 6.250 fields were
divided into six stratum according to the amount of reserves of gas in each
field as reported by the AGA. and that the 50 fields were then randomly
selected from these strata, with the number drawn from any one stratum
determined in part by standard deviation figures derived from AGA reserve
estimates for the fields in the strata.
Based upon this survey of 158 fields, the NGRS concludes (Appendix VI,
pasre 25) that "the estimate of statistical reliability attributable only to sam-
pling can be expressed by stating that there is 95 percent confidence that the
reserves lie within 22.0 TCf [Trillion cubic feet] (or 10 percent) of 228.5
^ At pacre five of yoiir cominpnts (s^e infra) you citp with approral a pomparif^on by the
Federal Power Commission of its own estimates of proved reserves with AGA estimates.
414
Tcf." I have no quarrel with this statement as a mathematical expression,
but I am highly concerned with the sampling procedures that underlie it.
Specifically. I am concerned that the sampling was weighted toward fields in
which AGA under-reporting was least likely to occur and that few if any
fields were surveyed in which AGA under-reporting was most likely to occur."
Staff of the Bureau of Competition has reviewed AGA estimates of fields
in the Offshore Area of South Louisiana and has concluded that tracts
reported by the AGA to contain relatively small amounts of reserves are most
frequently the ones that are most seriously under-reported.^ This suggests
that had the purpose of the NGS been to examine critically the accuracy of
AGA figures, the certainty sample would have been drawn from among those
fields reported by the AGA to contain relatively small amounts of natural gas.
Instead, the certainty sample was drawn from the fields reported by the AGA
to have the most gas and this bias was continued throughout the strata. Thus
the NGS sampled .21% of the fields in the 0-1 Bcf and 1-.5 Bcf stratum. .41%
of the 5-10 Bcf strata. 1.25% of the 10-50 Bcf strata. 3.53% of the 50-2(M) Bcf
strata. 4.95% of the 200-400 Bcf strata, and as noted. 100% of the over-400
Bcf strata. In all, only 26 of the 5.620 fields reported by the AGA to be under
50 Bcf in size were surveyed.
The relatively under-developed, significantly under-reported fields have
been as might be anticipated, fields with comparatively recent discovery
dates. However, the NGS rejected stratification by discovery data. As a
result, only 18 of the 50 randomly selected fields had discovered dates as
recent as 1960-1970. and there is no way of knowing from any published data
from which strata these 18 were drawn.
Further, the Federal Power Commission is well a^vare that AGA under-
reporting is particularly suspect in Offshore South T^ouisiana, as well as
in the Rocky Mountain region and Alaska.* Notwithstanding this fact, the
NGS i-ejected stratification based on geographic distribution. As a result,
only nine of the 50 randomly selected fields were located in Offshore South
Louisiana and in the Rocky Mountain region, with none being drawn from
Alaska. Whether any of the nine were drawn from fields with discovery
dates as recent as 1960-1970 and from the 50 Bcf and under stratum is
luiknown.
The selection of only 26 fields out of 5.620 in the suspect 50 Bcf and under
stratum, with only a few if any having been drawn as well from the s^isjiect
geographical regions and the su.s]iect discovery date grou]>. is in my oiiinion
a pre.scription for overloolving AGA under-reporting. As the NGRS acknowl-
edges, usage of a confidence interval requires some degree of normal or
symmetrical disti'ilnition (NGIIS. Appendix VI, page 26) and failure to
adequately sample from population stratum introduces the possibility of
major error in estimating these stratum (NGRS, Appendix VI, page IS).
The meager random sampling liy the NGS not only fails entirely to recognize
the i)ossibility of asymmetry in population due to AGA under-reporting. Init
it leans over backwards to avoid discovering it.
It was the Federal Power Commission's concern over the accuracy of re-
serve reporting in Offshore South Louisiana that led to the mailing of
questionnaires, on August 14, 1969, to producers I'equiring them to furnish
detailed information on reserves in all fields (over 200) in that area. Pro-
ducer opjiosition to these questionnaires resulted in FPC abandonment of
this inquiry. The Federal Trade Commis.sion investigation seeks much of
the same information from producers which the FP(^ sought. Until a field
by field check is made on all AGA estimates for Offsliore South Louisiana,
and possibly of the San .Tuan and T'intn-Green River sulvareas of the Rocky
Mountain region and of Alaslca as well, flie NGS estimate, like the AGA
estimate, will remain suspect.
The NGS limited its .sampling from small fields and eschewed stratification
by geographic area and field di.scovery data in part through reliance on
- The sijiniflcant role played by producers in establishing the procedures by the NGS to
estimate proved reserves is snininarized in an attachment hereto.
=5 The Federal Power Oonimission has apparently also been suspicious of AGA under-
reporting of reserves in these comparatively undeveloped fields, as witness Its uncommitted
gas reserves study m.Tde in connection with the Soiith Louisiana rate case.
*E.g., see fFPCl Staff Counsel's answer in Opposition to Petition to Reopen Proceedings,
pp. 3-4. ARfiO-l as regards Offshore South Louisiana and Appendix A of FPC Order No.
4.^5 regarding the Rocky Mountain region. The A(t.A has admitted publicly that its 1068
aftd 1069 estimates of proved reserves were under-reported by 26 Tcf.
415
standard deviation tigures derived from AGA reserve estimates. Your con-
clusion (page five) tliat any distortions tlirough the use of AGA figures
would have relatively little effect on projected total reserves, because the
standard error "takes into account variability of measurements within
strata." misses the point that the "standard error" takes into account only
such variability as its .'sampling method is designed to detect. A check on the
accuracy of critical AGA figures might have revealed, as our investigations
has thus far revealed, far more deviation than AGA figures in fact reflect.
This check, which could well have dictated a radically different approach to
sampling, was never made.
At another point in my letter to Dr. Root, I make the following additional
statement regarding the XGS and XGRS :
If the XGS had re(iuired producers to furiiish their own in-honse esti«
mates and back-up calculations, as we have retiuired in our investigation,
XGS personnel would have been in a far stronger position to assess whether
all relevant raw data had lieen made available to them upon which to base
an estiuuite. Lil^ewise, if raw data had been sought from more than one
}»roducer in each tield as was not the case with tlie X'GS, XGS personnel
would have had an additional check on whether all relevant raw data had
J)een furnislied.
One further comment on the X"GS before turning to your comments on my
remarks (,'f June 27. The XGS as.signed the ta.sk of compiling a list of gas
fields not reported by the AGA to the Oil Information Center (OIC) of the
University of Oklahoma Research Institute. The XGS directed the OIC to
jierform this task by using its "data base" and other information sources —
each 'if tlie other information sources that was specified is a government
j.ublication (see XGRS, Appendix II, page 1). The apparent sources for the
data ba.se itself were government production reports (in the 12 states that
publish them) and otherwi.se, the International Oil Scouts Annual Review
( see XGRS, Aijpendix III, pages 3-5) .
It is dubious whether production reports are the best sources for locating
fields not in production. The Oil Scouts is a producer organization subject to
The same influences as the AGA subcommittees which estimate reserves.
While government publications may be useful sources for compiling a universe
of gas fields, staff members of the Bureau of Competition have found no
source in this regard equal to the unpublished well drilling, testing and com-
pletion reports maintained by the Federal and State government.s — appax*-
ently the OIC overlooked this source. Further, our investigation has uncov-
ered a number of instances in which temporarily abandoned reservoirs con-
tained gas in paying quantities which was not reported to the AGA. X^otwith-
standing this, the OIC systematically eliminated all "abandoned or temporar-
ily abandoned fields or pools'" (X'GRS, Appendix III, page 7) from its list of
aas fields to be estimated by the XGS.
Referring again to page five of your comments, you there criticize my statement
(Tr. 226) that the FPC should independently audit company raw data, by
noting that Chairman Engman of the Federal Trade Commission described (at
pages 6 and 7 of his Statement: Tr. 201-202) an FPC investigation of AGA
estimates for 1966-1970. Apparently you view an investigation of AGA estimates
as tantamount to an audit of company raw data. In any case, the investigation
noted by Chairman Engman refers to one made by the Federal Trade Commis-
sion, not by the Federal Power Commission. It was the FTC as part of the
instant investigation into AGA reporting, not the FPC, that first gained access to
AGA field-by-field estimates. This fact is made clear by Chairman Engman's
very next sentence :
Because of their confidentiality a third-party arrangement was agreed
upon whereby the documents would remain at Price-Waterhouse but Bureau
of Oompetition [of the FTC I] attorneys would have possession of and
access to, the field-by-field estimates (italics added).
As further evidence of FPC auditing of producer reserves, you cite Docket
X'o. R^05. which you describe (page five) as an inquiry into nationwide uncom-
mitted gas reserves available for sale by large producers. This inquiry not only
exemi)ted proved reserves which are committed to interstate pipelines (an esti-
mated 70% of total proved reserves), but also proved reserves held for direct
industrial contracts, company use-warranty, and company use-fuel and feed-
stock. I have commented to Gulf Oil Corporation with regard to these exemptions
as follows :
416
All proved reserves, whether or not "available for sale," should be
reported to the AGA. Thus, proved reserves committed contractually or
otherwise considered to be available for sale would not be reported in
response to the FPC's Questionnaire, but should be reported to the AGA.
It is interesting to note that even proved reserves existing on an as yet
non-producing lease, may be committed contractually several years before
the lease is in {iroduction, hence not subject to the FPC Questionnaire, but
of course still subject to being reported to the AGA. In addition, testimony
regarding a previous FPC Questionnaire raises some doubt whether uncom-
mitted proved reserves existing on a lease that has no transportation
facilities are considered by producers to be "available for sale." If so, these
reserves would also not be reported in response to the FPC Questionnaire,
but still should be reported to the AGA.
In Docket No. R-40."), the FPC relies on producer statements and does not
retpiire back-up data. You fail to cite however, the first FPC inquiiy into
uncommitted gas reserves available for sale — ^that inquiry was in connection
wiih AR60-1, the second South Louisiana area rate case, and did involve
FPC auditing. Mr. Lawrence R. ]\Iangen of the Federal Power Commission
testified in AR69-1 as to the procedures utilized in connection with this un-
committed reserve study. According to his testimony, no data was taken
from producer offices (Tr. 5200), all work papers were destroyed once the
examination was completed (Tr. 5200, 5430), the stafe examined only one-
third of the uncommitted reserves reported to be available for sale as of
December 31. 19<i9 " ( Tr. 5201 ) : the producers themselves supplied the audit
team with the list of reservoirs to be checked (Tr. 5456) ; producers who
reported any uncommitted reserves Vvcre not cheeked to see if they reported
such reserv'es for all of their fields (Tr. 5446) ; FPC staff spent a total of
18 man days checking out uncommitted resei-ves of producers failing to
report any such reserves (Tr. 5203) and apparently confined these efforts to
discovery,' as opposed to developmental well drilling (Tr. .5452-54.53).^
All in all. I believe that the various inquiries hitherto undertaken by the
Federal Power Commission concerning the amount of proven reserves of natural
gas that are extant have been highly useful as regards the purposes for which
they vx-ere undertaken, but that they do not constitute and never were intended
to constitute a review of the accuracy of AGA reporting. Further, because they
fail to provide an adequate basis by which to determine such accuracy, and be-
cause the marshalling of facts with regard to this nation's energy crisis is of the
highest priority, there is a pressing need for full, expeditious, implementation
of the Commissions inquiry into this matter.
At pages 13-21 of your comments, you compile and di«cuss the various obliga-
tions which mineral "lessees owe to their lessors and conclude (pages 20 and 21)
that the obligations of lessees of federal offshore lands do not differ materially
from those owed by other mineral lessees. This discussion is the predicate for
your stated view (page 13) that it would be irrational for producers to withhold
production and therei^y breach ol)ligations which could give rise to legal actions.
The first answer to this contention is that there is no legal obligation for
producer-lessees to report reserves accurately to the AGA, even should they
produce them. Secondly, the risk of legal action must be weighed against the
pos.sible gain — I note that jurisdictional wellhead prices for new natural gas in
Offshore South Louisiana have risen from the IK- ISIcf rate (established by the
FPC for a five year period in AR61-2, decided in 1069) to rates as high in some
instances as 45(^ Mcf. Thirdlv, as with so many dejure argiiments, the contention
simply does not square with the facts. As I have noted (Tr. 229). our investiga-
tion "has uncovered numerous instances in which apparently substantial amounts
of proved reserves of natural gas have been discovered in the Federal Offshore
areas and not produced." One company alone has receivefl fourteen suspensions
of production bevond the primary lease term, despite its reporting to the United
States Geoloffie Survey of the discovery of hydrocarbons ' "in paying quantities."
In sum. while it may be irrational to violate legal obligations and for that
matter, to violate the antitrust laws, it cannot be assumed that for this reason
5 An amount slisrhtly in excess of 1% of total proved reserves reported for South
Louisiana by the AGA for that year. „ - ^, T^rir., :.t„*-„^„7 /3„.
6 1 note that tlio foUnwinf: statement appears at pa?e 8 of the FPC s Nationnl Oas
Reserves Sttudif "The essential elements and techniques of the NGRS had been applied and
tested previousiy bv the FPC's Bureau of Natural Gas in the rncommitted Gas Reserves
Survev conducted as part of the South Louisiana Area Rate Proceedinfrs.' _
' Natural gas was discovered in twelve of the fields ; oil was discovered in two of tne.
fields.
417
such violations will not occur. I continue to hope that recalcitrant, producers
v.ill aaree voluntarily to return on their subpoenas, so that the Bureau's investi-
gation into AGA reserve reporting niaj- he concluded promptly.
Very truly yours,
James T. Halverson,
Director, Bureau of Competition..
Exhibit 5.— Response of W. 0. Senter to Comments of James T. Halversom
(Exhibit 4)
Gas Supply Committee,
Washington, B.C., March 6, 1974.
Hon. Philip A. Hart,
V.S. Senate, Old Senate Office Building,
Washington, D.C.
Dear Sexator Hart : By letter addressed to me dated February 1. 1974. Mr.
James T. Halverson, Director, Bureau of Competition, Federal Trade Conuuis-
sion. res-ponded to certain comments which the Gas Supply Committee had filed
Avitli the Subcommittee on Antitrust and JMonopoly by my letter dated July 16,
1073. In his letter, Mr. Halverson i-equested that you make siich letter a part
of the record of the Subcommittee on Antitrust and Monopoly hearings on compe-
tition in the natural gas industry. I make a similar request with respect to this
letter.
I think a comparison of the two letters referred to will make clear that there
Is a basic and fundamental disagreement between the Gas Supply Committee
and Mr. Halverson with respect to both the applicable facts and the conclusions
to be drawn from those facts. I will not undertake to reiterate those facts or
conclusions except in one respect.
In his letter at pages 4-9, Mr. Halverson criticizes the National Gas Survey
and the National Gas Reserves Study conducted thereunder, particularly with
respect to the statistical sampling procedures utilized. Mr. Halverson did not
explain in his criticisms that the statistical procedures utilized were based upon
the work and judgment of a statistical validation team comprised of a number
of experts from both the academic world and sectors of government other than
the Federal Power Commission. This statistical validation team was comprised
of the following persons :
Daniel M. Bass, Chairman, Petroleum Engineering Department, Colorado
School of Mines.
Basil P. Korin, Chairman, Department of Mathematics and Statistics, Ameri-
can University.
Lawrence R. Mangen, Federal Power Commission.
Daniel F. Merriam, Chairman, Department of Geology, Syracuse University.
Alfred T. Miesch. United States Geological Survey, Department of the Interior.
William L. Monroe. Federal Power Commission.
Howard W. Pifer III, Assistant Professor of Business Administration, Harvard
Business School.
Paul J. Root. Federal Power Commission.
Wade P. Sewell. Federal Power Commission.
Hari'y B. Sheftel, Office of Management and Budget.
•Joseph Waksherg. Bureau of the Census. Department of Commerce.
Marie D. Wann. Office of Management and Budget.
The report of this statistical validation team indicates that the participants
were ". . . chosen because of their experience in the application of statistical prin-
ciples to a variety of practical problems, especially in various disciplines of
mineral science" (National Gas Reserves Study, Appendix VI. p. 1).
In his letter of February 1, 1974, Mr. Halverson stated that he was "highly con-
cerned with the sampling procedures" which underlie the National Gas Reserves
Study conclusions with respect to the statistical reliability of its estimates. Mr.
Halverson apparently overlooked the statement of the statistical validation team
that:
"Additional sampling would reduce the standard error and, therefore,
improve the statistical accuracy of the estimate. It is the iudgment of the
Statistical Validation Team, however, that additional sampling would have
little practical effect on the reliability of this estimate of total reserves
because of the problem of measurement error. That is to say, even if an inde-
pendent estimate of gas reserves had been made for each field in the
population, the value of total reserves determined would only be an estimate
418
of the 'true' value because of judgment inherent in estimating the reserves of
individual gas fields." (National Gas Reserves Study, Appendix VI, p. 2)
On the basis of the foregoing, it would seem that Mr. Halverson's criticisms
tend to be theoretical, whereas the statistical validation team is comprised of a
number of qualified persons familiar with the various disciplines of mineral
sciences. Weighted in this balance, the combined judgment of the team should
be given utmost credence.
Yours very truly
W. O. Senter.
Exhibit 6.— Response of Joseph C. Swidler, Chairman, State of New York Public
Service Commission to Comments to W. O. Senter, Executive Vice President,
Gas Supply Committee
Public Service Commission,
Albany, N.Y., Augmt 30, 1973.
Hon. Philip A. Hart,
U.S. Senate, Committee on the Judiciary, Subcommittee on Antitrust and Monop-
oly, Washington, D.C.
Dear Senator Hart : This is in response to your letter of July 18, 1973, asking
for any comments I may have about the testimony of W. O. Senter, executive vice'
president of the Gas Supply Committee, in relation to the natural gas hearings
befoi-e the Subcommittee on Antitrust and Monopoly of the Senate Committee on
the Judiciary.
At pages 8-12 of his prepared testimony, Mr. Senter attempts to respond to
my conclusion and recommendation that Federal regulation should be extended
to cover so-called intrastate natural gas sales. Mr. Senter asserts that total
deregulation, not extended regulation, is the proper course (1) because prices
have been rising only gradually in the free market conditions of the intrastate
markets and (2) because supply is responsive to price. With regard to recent price
increases in the intrastate market, I should point out that intrastate buyers need
bid only slightly more than interstate buyers are allowed to pay in order to capture
new gas supplies. Any gradualism in the rise of intrastate prices must be at-
tributed to the divided nature of the market, half regulated and half unregulated.
If regulation is removed from interstate sales, field prices for natviral gas will
surely rise in both markets even faster than tliey have recently been rising.
With regard to supply, Mr. Senter asserts that .supply is responsive to price but
he does not attempt to prove it or to show how responsive supply may be. Where
supplies are potentially unlimited in relation to demand, supply will, of course,
respond to price increases. This is by no means true of natural gas supply. If, as
appears to be the case, overall gas reserve additions are relatively unresponsive to
price, existing gas consumers will find themselves bidding desperately against
one another and against potential new gas consumers for limited available
supplies.
Under those circumstances I fear the true meaning of Mr. Senter's statement
that while "some trends to reduce industrial gas consumption in the producing
States must be regarded as inevitable, the competitive free market is perfectly
equipped to accomplish this transition over a period of time with the least eco-
nomic disruption." (At mimeograph page 12). Where will the gas come from to
accommodate this intrastate transition? Will there be enough gas left to meet
the needs of captive, priority users in the interstate market? Mr. Senter does not
say. While trying to extend the benefits of additional gas supplies for the ad-
vantage of intrastate industrial consumers, including the refinery loads of the
oil companies themselves, Mr. Senter does not weigh the risk to the residential,
institutional, commercial and industrial customers who depend upon the inter-
state market for their gas supplies.
Gas prices are now escalating rapidly to levels which hold out great incentives
for production. Whatever additional supplies may result should lie allocated fairly
between the interstate and intrastate markets under Federal regulation of both
interstate and intrastate sales at wholesale. The opposite course of deregulation
of all sales would be disastrous to the interstate buyers dependent on a gas
supply.
I am grateful for the opportunity you have accorded me to comment on Mr.
Senter's statement.
Sincerely,
Joseph C. Swioler.
Chairman.
419
Senator Hart. Now we agrain invite Dr. David Schwartz, assistant
cliief , Office of Economics, FPC, to come forward.
Let me state for the record that Dr. Schwartz received his B.A.
fi'om the University of Maryland and his Ph. D. from the University
of Wisconsin. He served on the faculties of the Universities of Wis-
consin and Maryland. He also had regulatory experience in the field
of communications, as an economist and public utilities specialist with
the Federal Communications Commission.
Dr. Schwartz previously appeared as a witness before this subcom-
mittee testifying on the impact of technology on the industrial orga-
nization of the electric power industry. He also testified before the
SP2C and, in addition, has published in the area of public utility regu-
lations and market study.
STATEMENT OF DR. DAVID SCHWARTZ, ASSISTANT CHIEF, OFFICE
OF ECONOMICS, FEDERAL POWER COMMISSION
Dr. Schwartz. 1 want to tliank you for the opportunity of appearing
here this afternoon. Initially, I want to cite a disclaimer at the bottom
of my testimony, that is the views and opinions expressed in this state-
ment are entirely personal and are submitted in an individual capacity.
They do not necessarily reflect the views of the Federal Power Cojii-
mission's Office of Economics.
The purpose of my testimony is to examine the general question of
market structure in the gas producing industry and tlie specific ques-
tions concernino- the nature and extent of the industrv's organization
as It relates to the question of workable competition.
In addition, I will review the various proposals to deregulate the
price of natural gas at the wellhead and their potential impact on
su})ply elicitation.
An evaluation of industry structure is relevant to deregulation
advocacy and is intimately tied to the factors underlying the current
unavailability of natural gas.
Lastly, a consideration of alternative means of increasing supplies
and the role of regulation in the past, as well as in the future, in the
most critical aspect of pricing and resource commitment, will be
assessed.
Mr. CiiuMBRTs. Will you bear with an interruption?
We had the Federal Power Commi^ion here in their official capacity
and you are speaking as an individual.
Would you mind telling us for the record whether we initiated your
coming liere or if you initiated the desire to speak before' our
subcommittee.
Senator Hart. I am told we initiated it.
Dr. SciiAVARTz. I would never initiate a request of this kind. It is
inconceivable. I received a letter from Chairman Hart asking if I
vv'ould testify. I do not have that letter with me but I would be more
than glad to provide it.
Senator Hart. And my answer indicated that we did request you to
be here.
Mr. CiiUMBRis. I thought it would be good to have it for the record.
Yesterday we had the chairman and it ought to be a matter of
record how you were brought into the hearing.
420
Dr. Schwartz. Yes, I agree with you.
It is impossible to examine the question of dere^lation without
focusing on tlie issue of market structure. The critics of regulation
cont^?nd that the shortage of natural gas is due to ill-conceived price
regulation and characterize our present circumstances as a regu-
latory induced shortag-e.
If the FPC had not kept prices artificially low, the argument goes,
thereby stimulating demand and discouraging exploration and de-
velopment, we would not be in the predicament that exists today.
This contention has recently become somewhat tarnished in light
of the fact that shortages exist in petroleum and petroleum products
as well as natural gas. It is interesting to note that despite past pro-
rationing, quota systems, and supports to maintain higher prices for
crude oil and petroleum products, today we are faced with inadequate
supplies of home heating oil and gasoline.
On the one hand, we have lower prices for natural gas because of
the price constraints imposed by Federal regulation to prevent con-
sumer exploitation; on the other hand, we have higher prices for
crude oil and refined products because of Government sanctioned
constraints, and shortages in both product areas.
Therefore, one can legitimately raise the question whether monopo-
listic constraints over supply availability imposed by the multiprod-
uct firms are the basis for higher prices irrespective of regulatory
surveillance.
In addition, because of interfuel substitutability, higher prices
obtained by producers for natural gas can be leveraged to obtain
higher prices for their oil products, and often coal as well, which are
competing products at the point of final sale.
In short, the industry contention is that the regulated price is be-
low the equilibrium market price and therefore a shortage of gas has
resulted.
The critics argue that under a competitive market structure, with-
out regulatory interference, prices would rise to the level required
to bring; forth the supplies needed to fulfiJl current demands for gas.
In this manner, assuming competitive markets, both the producer
interests as well as the consumer interests and the broad public in-
terest would be served by resource optimization.
It is true, of course, that competitive markets allow for equilibrium
adjustments in which price is the lever which equates the quantity
demanded to the quantity supplied.
In addition, both equities are served; that is, the producers cover
their costs plus a competitive rate of return on investment and the
consum.ers obtain the supplies at the lowest possible cost without any
economic rents reflected in price.
While this theoretical analysis may have some abstract appeal, my
main concern is that it is inappropriate as a description of the natural
gas producing industry and totally devoid of the institutional reali-
ties that reflect a multitude of market imperfections.
The m.isspecification of the mai'ket structure can lead to erroneous
conclusions with regard to both pricing and optimal levels of supply.
The general confusion stems from equating contract prices as com-
petitively determined prices.
421
In addition, sucli terms as "commodity value" or "market value"
are used synonymously with the term "competitive prices." These
catchall symbols do not distinguish a market price or commodity value
determined in an imperfect market as distinct from prices deter-
mined under conditions of workable competition.
In monopolistic or administered markets, the contract or market
price or commodity value will reflect conditions markedly different
from prices that obtain under competitive market conditions.
This distinction is very fundamental because the gas producing
industry postulates the reliance upon market prices and/or com-
modity value as a legitimization of its demand for deregulation, or in
the alternative, as a regulatory standard.
Senator Hart. Doctor, I think we should interrupt. There is a roll-
call on the floor. I expect to be able to get back in about 10 minutes.
Dr. Schwartz. All right.
[A brief recess was taken.]
Senator Hart. Doctor, we interrupted you, as I recall, on page 5.
Dr. Schwartz, That is correct.
The gas producing industry points to the price of substitute fuels,
in the range of 52 cents to 82 cents, or supplemental sources of gas,
$1 to $1.87, as reflecting the commodity value of wellhead gas in
the lower 48 States.
The very premise of this position, that the so-called market value
should determine the price of natural gas, is contrary to the basic
concept of a competitive market price.
In a workable competitive mai'ket, it is the costs, plus a fair rate
of return, associated with bringing the product to the market that
determines the price anticipation of producers.
It is the costs associated with the production function, not the
value in the end market to consumers vis-a-vis alternative fuel costs,
which would be controlling under competitive market conditions.
To postulate the justification for natural gas prices on market fac-
tors as they relate to alternative fuel prices of supplemental gas prices,
is a prima facie admission that there is market power which can ex-
ploit the differential between the costs of exploring, developing, and
producin.'i- gas in tho, lower 48 States as distinct from the end-market
value of the commodity.
One additional collateral point should be addressed concerning tlie
difference between the regulated or cost-based price of gas and the price
of alternative fuels to uhimate consumers.
The contention is made that either prices should be decontrolled so
as to permit them to escalate to the approximate market value of alter-
native fuels, or that regulation should set prices at the crossover point.
In this v,-a.\, the argument continues, this would discourage inferior
uses of gas, such as for boiler fuel : motivate sTeater energy conserva-
tion ; and, in an overall sense, curb the demand for gas.
Of course, this position totally ignores any discussion or justifica-
tion of the windfall profits tliat will result.
I'he primary objective of regulation is to determine a price which
will cover the resource cost of bringing energy to market, but there is
no reason for an exh-a price increment on the basis of a demand con-
straint or conservation.
422
If supplies are inadeqiifite. in the short run, we should rely upon di-
rect controls such as the end-use priorities set by the FPC "in its cur-
tailment procedures. It is inconceivable that we should permit the pri-
vate interests to perform the role of tax collectoi-s and to assign prior-
ities in the marketplace by imposing a price increment above that
which would pi'evail under workable competition.
Another level of confusion that has been injected into the question of
market structure concerns the contention that there is competition
among producers in bidding for leases, olfshore as well as onshore, that
parallels price competition among sellers.
In addition, the argument is advanced that there is competition
among pipelines for new gas supplies and that this reflects a significant
competitive characteristic.
To postulate these arguments as in any way relevant to the question
of producer competition in seller-buyer negotiations is completely
spurious.
Elementary economics holds tliat it is the rivalry among sellers to
bring their goods to market and the inability of any one seller or com-
bination of sellers to influence price that is the traditional role of com-
petitors.
This is the essential element that is lacking in j)i'oducer market struc-
ture. As subsequent discussion will demonstrate, the use of market I
power by natural gas producers — of course, the exercise of this power
is greatest at a time of shortage — precludes workable competition in
this industry.
In addition, the lack of flexibility and incentive on the part of pipe-
line purchasers, who are also producers of gas. to bargain vigorously
undermines any contention of meaningful competition.
This industi-y can best be characterized as a vertically integrated,
bilateral oligo]:>oly, that is a market with major imperfections in both
buyinp; and selling.
FPC jurisdiction over the producing sector has a long history which
dates from the passage of the Natural Gas Act in 1938. Prior to the
famous Phillips decision placing ]iroducers under regulation, a debate
raged within the Commission as to the applicability and advisability of
extending jurisdiction to the producing sector.
In the Phillips decision of 1954, the court stressed that the sales by
independent producers in interstate commerce did not differ essentially
from the sales made by producing afHliates of interstate pipelines, and
therefore, in both cases, the rates charged may have a direct and sub-
stantial effect on the prices paid by ultimate consumers. Protection of
consumers against exploitation at the hands of natural gas companies
was the primaiy aim of the Natural Gas Act.
This decision, in effect, made the determination that competition in
the producing sector was not adequate. There would, in fact, be no
logical basis for regulating the industry if wellhead prices could be
determined in a coui])etitive milieu free of market constraints.
The fundamental issue of market structure was examined further
in the original Penman Basin case wherein the producers advocated
relying upon contract prices — for example, mai-ket price — as a liasis
for regidatory ceilings.
The Commission determined that while there were many producers
selling gas to interstate pipelines both in Permian, as well as other
423
areas, that the evidence did not permit the finding that competition
among the sellers was in any way adequate to assure the public of just
and reasonable prices.
The Commission further concluded that the supply of gas con-
trolled by producers was so restricted in relation to denmnd that the
ensuing economic power didri't permit for bargained prices between
buyer and seller as a regulator}- standard.
The Commission made the finding that there was no evidence of
competition betw-een producers to make new sales by offering lower
juices, but to the contrary, the only competition was among pipelines
to secure new supplies at ever-escalating prices.
The Commission concluded that the degree of competition by pro-
ducers was inadequate to afford consumers the protection which was
envisioned in the Xatural Gas Act.
In the southern Louisiana area rate proceeding, the Commission
again reviewed the industry contention that there M'as effective com-
])otition in the gas producing sector and again rejected this contention.
The Commission pointed to the stability of unregulated field prices
through 1050 at levels not exceeding 9 cents per thousand cubic feet
and the escalating prices in this area from 1051 to 1958 reaching a
IcAel of 24 cents i)er thousand cubic feet.
In the 2 years between 1051 and 105o prices more than doubled. In
this period the wholesale price index moved downward and therefore
the rise cannot l)e accounted for by general inflation.
They concluded that the market imperfections challenged the pro-
du.cer contention of a free and competitive market and stressed that
the serious imperfections precluded reliance ui)on market prices.
They stressed again that the ultimate consumer cannot be protected
from unreasonable purchased gas costs if contract or market prices
were relied upon because of the lack of arm's length bargaining exist-
ing in the producer market.
Finally, the Supreme Court in affirming the Permian decision high-
lighted the importance of costs as a regulatory criteria and it also
noted the continued absence of effective competition :
The field price of natural gas produced in the Permian Basin has in recent
years steadily and significantly increased. These increases are in part the
jiroducts of a rehitively inelastic supply and steeply rising demand ; but they
are also symptomatic of the deficiencies of the market mechanism in the Permian
P. i.sin. Producers' contracts have in the past characteristically included indefinite
' sr-a!ation clauses. These clauses, in combination with the price leadership of a
few large producers, and with the inability or unwillingness of interstate pipe-
lijie-; to liargain vigorously for reduced prices, have created circumstances in
which price increases unconnected with changes in cost may readily be obtained.
The essence of the Commission and court determinations indicates
that the evidence on market structure precludes consumer protection
l)y exclusive reliance upon pipeline and distributor regulation at the
Federal and local level without controlling the price charged by pro-
ducers in the field.
Furthermore, it was determined that conti-actual relationships be-
tween buyer and seller did not reflect competitive bargaining; rather,
they reflect strong incentives on the part of pipelines to effectively
compete, particularly in periods of shortage, given the market power
of producers.
27-547—74 28
424
The evidence indicated that the market stratesfy promnlsfated by-
producers reflected a comnninity of interests in dealing with pipelines
purchasers in which new reserves are offered as a package and not as
individual supplies of gas by single sellers in competition with one
another.
Frequently a producer in a field acted as operator for all producers
and when new supplies were offered, they were usually provided under
uniform terms and conditions, including price, so as "to preclude inde-
pendent initiative and aggressive price rivalry which are the hall-
mark of a competitive industry.
On the buyer side, the pipelines are at a great disadvantage because
their need for assured supplies for many years in the future requires
large scale purchasing to meet anticipated needs with fixed pipeline
facilities tied to specific producing areas.
If they are to sustain their market growth and fulfill the obiectives
of tlie business enterprise as profit maximizers, new gas supplies under
long term contracts are essential.
^Y\mn a pipeline attempts to secure a supply from amono; tlie limited
packages of new gasfor its own system in competition with other pipe-
lines purchasers, it is at a distinct disadvantage in trying to bargain
with a producer, or combination of producers, in the areas where it
mav seek new gas supplies close to its system.
For any significant expansion of pipeline facilities, the pipeline
must denionstrate the pi^ocurement of a 20-year supply, in most in-
stances, in order to obtain new financing, achieve operating efficiencies,
and sustain profit levels.
Although there are instances of long term contracts in other indus-
tries, the 20-year sales contract prevelant in the gas producing indus-
try has the effect of concentrating tlie demand for a 20-year supply of
gas at one time, that is, at the time of purchase.
This obviously results in a concentration of pipeline requirements
and reflects an abnormal— in view of other industry practices— im-
pact on limited supply availability.
In light of the fact that only" a small fraction of gas produced in
any 1 year becomes available as new reserves to the pipeline purchaser,
and given the present "requirements for new supplies, the pipelines are
at a distinct disadvantage in price negotiations and anticipation of
hard bargaining with producers is wholly illusionary.
In addition.the regulation of pipelines on a cost-of-service basis,
in which the higher cost of pu?^chnsed gas is included as f>n operating
expense, mitigates against pipeline counterpressure with regard to
producer demands. "^
An added di'^incentive is the now common automatic purchased gas
adjustment provision that permits the pipeline to pass through any
increases of purchased gas costs without delays.
Lastly, the fact that t^^^ major pipebnes have producing- affiliates
which will beupfit from higher wellhead prices provides another dis-
incentive for the pipeline as a purchaser to act as a self-motivated
competitor.
The position o^ the pipelines was clearly demonstrated in the recent
second Permian F>npin ai-ea rate case. A F-70-1.
T^je pipeline conu^anv o-roup ar.<nied for dp facto deregulation, con-
tending that any rigid pricing method was futile and that establishing
425
higher area ceilings was no solution becanse intrastate purchasers
coukl.ahvays otter something greater tlian area ceilings.
The pipeline group contended that their hands should be untied and
they should be permitted to compete by negotiating contracts for which
they would obtain certificates free of constraints of Conunission
imposed prices.
This position speaks more eloquently than any theory of market
structure as to any meaningful bargaining power of the pipelines as
a coiuiterforce to producer demands.
In light of these factors, one must conclude that very little motiva-
tion exists for pipelines to drive a hard bargain and that the relative
strength of producers acting in combination is decidedly enhanced.
In the various area rate proceedings, the gas-producing industry
introduced a plethora of evidence to support the contention that effec-
tive competition should be relied upon as a regulatory guide and
asserted that contract prices should be used to support this position
related to: (1) concentration ratios, (2) leadership turnover, and (3)
conditions of entry.
Of major importance is the reliance of the producers on concentra-
tion ratios predicated upon production, volumes sold, in any 1 year,
to support the position that the industry was not signilicantl}^ con-
centrated, particularly in contravSt to other industrial sectors.
In this regard, the latest information indicates that 22 domestic
producers furnished the interstate pipelines with 71 percent of the
gas supplied in 1071.
While this appears to be a relati\'ely low measure of concentration,
it is totally inappropriate because the great bulk of the gas produced
in any 1 year was committed to contract many 3'ears in the past and it
is not indicative of new supplies.
Tlie only relevant concentration measure pertains to uncommitted
reserves. Unlike other industries, production in the natural gas indus-
try does not equate to new supply availability.
It is this information, that is uncommitted reserves over an extended
period of time, which is the valid measure of concentratioii. This is the
very information that the industry has refused to provide — except on
two occasions, December 31, 1971. and June 30, 1972 — for special pur-
poses and in aggregate form, so that a valid assessment can be made as
to concentration an.d control over new supplies.
In the latest producer proceeding involving Belco Petroleum, which
was the lirst formal evidentiary hearing under the optional pricing
procedure, the FPC staff used new sales excluding et al. contracts as a
proxy for uncommitted reserves to measure four-firm and eight-firm
concentration.
To the extent that producers were additionally involved in et al.
sales, the concentration ratios would have been higher than reflected
in the staff exhibit.
The conclusion reached, contained in the initial staff brief, page 3-1,
indicates that,
* * * as was shown in exhibit .33 the natural gas producing industry is higlily
concentrated, with the top 4 firms often controlling 50 percent or more of the
relevant market and the top 8 accounting for 70 to SO percent.
Additionally, the staiT brief pointed out that the validity of sim.ply
comparing concentration ratios with other manufacturing industries
426
to determine potential competitiveness is exaggerated because gas is
not a durable goods and gas demands are essentially nonpostponable.
liecause there are no secondhand supplies available, producers can
keej) finite depletable resources underground, and therefore have the
opportunity for price speculation by withholding gas supplies to force
prices upward.
Another important area in which evidence was introduced bv pro-
ducers concerns the contention that there is turnover among the top
firms in the inchistry, and this presumably implies that if old leaders
fall from the top 10 while new ones rise, there is a degree of market
competition reflected in this rotation.
In the Belco proceeding, the evidence indicated that the top eight gas
producers in 1970 were also among the top nine in 1957. Moreover, the
two firms that attained the ninth and tenth places by 1970 did so not
through competiti\e growth but through merger.
It appears that to postulate turno\'er as meaningful evidence of effec-
tive competition in the gas-producing industry is an unsupportable
assertion. All the indications are that the major firms have been con-
tinually dominant over a long period of time and that significant eiitry
barriers exist that would prevent a breakthrough within the i-anks of
the majors.
The final criteria to establish the predicate for a competitive struc-
ture is the contention by the producers that there are no significant
entry bairiers in the industry.
This assertion fails to perceive the fact that small sellers are unable-
to enter prolific offshore areas independently or at all because of sig-
nificant large investment rexjuirements. Their entry cannot be charac-
terized as inducing competitive interplay when they depend upon
farm outs l)y large producers or combine with large producers in joint
ventures that reflect a coalescence of their interests.
New entrants possess no market power which can oft'set the dom-
inance by the majors and rarely can the smaller firms influence sui:)pl,v
or price in an independent manner.
Here again, a comparison with manufacturing industries would lead
to erroneous conclusions with regard to the sigiiificance of new entiy
in the gas-producing industiy\
Finally, the relevance of market structure and the appropriate regu-
latory standards wei-e recently articulated in the above-cited BrJco pro-
ceeding. The FPC stall' unequivocally took the position tliat due to the-
absentee of effective competition in the natui'al gas industr}-, cost-based
price regulation was the only valid regulatory criteria.
A welter of evidence introduced for the first time provided a n_ew
dimension to market structure in the gas-producing industry. Tlie
inescapable conclusion was: "The petroleum industry is not sti-uctured
so as to render competition workable." (Staff reply brief, p. 35.)
In light of this conclusion, it is obvious that the reliance uj^on mar-
ket detei'inijted ])rici'S would I'eflect monopolistic rather than com-
petitive conditions.
The extensive evidence on the nature of the anticomi^etiti^-e struc-
tural features of the petroleum industry ilhistrated the manner in
which major firms ai-e extensively interlocked with each otlier tlirough
an all-pervasive web of partnerships and joint ventures in all stages
of finding and producing gas.
427
Since the fundamental and indisi)utable requirement for a competi-
tive maiket is a diverse group of iudependent sellers, tlie [)i"oduoer
contention that the industry is workably competitive and that market
determined prices are an adequate regulatorv standard is unsuppoit-
able.
The evidence concernino- mergers among large firms in the petioleum
industry indicated that there were over 50 major mergers daring the
1960's alone.
In addition to the elimination of substantial numbers of independent
producers, the turnover among tlie top 10 as discussed previously indi-
cates that dominance of the large producers.
The most significant institutional characteristics are the interlock-
ing relationships in joint bidding for offshore Federal leases, Louis-
iana State leases, joint production from oflshore leases, joint owner-
ship of foreign subsidiaries, joint ownership of oil pij-tclines, and
unitization agreements in the Permian Basin, Tex., all pointing to the
community of interests that pi'evails in the producer market structure.
The inesf\a])able conclusion in evaluating the evidence in prior area
rate cases and the new evidence on joint ventures and interlocking rela-
tionships suubmitted in the Belco proceeding is an awareness of the
formidal)le market imnerfections and of the absence of workable com-
petition in the gas prodiir-ing industry.
The question of available sni)])lies and the causal factors concerning
our present needs to cui'tail deliveries of natural gas is an emotionally
<?harged and controversial subject. In order to objectify the relevant
factors, I think it is imjiortant to separate the various components of
the supply question as it I'elates to the availability of natural gas.
First, there is no question that the domestic resource base in the
Ignited States is sul^stantial and there is no physical shortage of the
])otential natural gas su]iply. The estimates of our potential gas sup-
])ly range from a low of 1,100 ti'illion cubic feet by tho Potential Gas
Committee to a high of 2,100 trillion cubic feet Iw the U.S. Geological
Survey and l)evond this level assuming technological improvements.
This resource base should be compared with the current production
of 22.4 trillion cubic feet as a gage of potential gas suj^ply availability.
It has been estimated that if we assumed an annual growth rate of
1.4 percent, our ])otentially recoverable gas reserves would be adequate
for 82 years, using the Potential Gas Committee forecast, or for fio
years, using the I'l.S. Geological Survey estimates. Excluding Alaska.
i:>royed reserves at the end of 1072 — that is, the actual reserves avail-
able for production in an inventory sense — were 234.6 trillion cubic
feet : and including Alaska. 2Gfi.l trillion cubic feet.
"With regard to the adequacy of the resource base, e\'en the producer
industry agrees, the domestic natural gas potential can provide sig-
nificant levels of new supplies.
Of course, the industiy argues that price has been inadequate to
bring forth the potential supplies that exist in a resource sense. This
is the key area of controversy.
Has the industry failed to perform des]:)ite the regulatory determi-
nation of area rates that cover all costs, including dry hole, and under
recent decisions provide for a 15-percent rate of return: alternatively,
is the industry correct in its contention that price levels are too low,
discouraging exploration and develof ment ?
428
Before examining the questions concerning supply-price elicitation
in a regulatory context, it is important to realize that there are cer-
tain external factors which played an important part in our current
suppl}^ problem.
First, the early lOOO's market forecasts by the industry indicated a
very sigiiificant drop in the growth rate of natural gas sales by the end
of the 1960'S. Given the fact that there was approximately a 20-year
supply on hand in the early 1960's, this quite naturally discouraged
any significant exploratory effort.
T"!naware of the prospective new demands for gas resulting from air
pollution abatement, the industry projected future growth rates that
were approximately half the level prevailing at that time.
Secondly, there was only one Federal wildcat offshore lease sale be-
tween May 1968 and September 1972 by the Department of the In-
terior.
Thirdly, given the limited amount of domestic oil exploration and
development in the sixties, there was a marked drop in drilling which
affected natural gas reserves found because it is conservatively esti-
mated that 25 percent to 40 percent of natural gas is discovered in the
search for oil.
Lastly, there were many opportunities available for international
companies to channel their capital to other areas such as the INIiddle
East. Alaska, and the North Sea, thereby reducing exploratory and
developmental activity in the Southwestern United States.
It is impossible to be sanguine about the potential of using price to
constrain the demands for gas. Particularly in the short run. demand
is relatiA^ely inelastic and the price of alternative fuels is significantly
higlier than natural gas.
In addition, any increase in the wellhead price when averaged with
the lower rolled-in price has an impact on consumers in the end market.
Also, because consumers have incurred substantial sunk costs in gas
burning equipment, they are unlikely to shift to other fuels if this en-
tails any significant capital costs for new equipment. The impact of
environmental requirements has heightened the need for clean burn-
ing fuels, creating considerable pressure on industrial users to demand
natural gas.
Lastly, the imperfections in fuel markets generally make it possible
for an increase in the price of gas to trigger an increase in the price of
other fuels, particularly when these firms market petroleum products
as well as coal.
To return to a consideration of the supply question, an examination
of table I shows the drop in total wells clrilled, for all hydrocarbons.
From 1963 to 1972, there was a decline of npproximately o5 percent.
The average of the earlier ,5-year period, 19r)?,-67, in contrast to the
latest 5 years, 196S-72, indicates a decline of 26.6 percent.
The downturn in gas and gas-condensate well drilling was not as
great as in total wells drilled. It is interestin.fT to note that the decline
in developmental gas and gas-condensate wells and footage drilled in
the latter ,5-year period, 1968-72. from the former 5-year period, 1963-
67. was 15.8 percent and 12.2 percent, respectively.
This is greater than the relative decline in explanatory wells and
footage drilled in the same periods, 11.2 percent and 6.6 percent, re-
spectively. This suggests that the industry continued to explore for
429
new gas supplies but cleemphasized development and potential commit-
ment of new supplies to meet market demands. It should be noted that
1972 -was a turnaround year in gas well drilling, reflecting an increase in
both exploratoiy and developmental wells and footage drilled over
1971. There is speculation as to whether this marked increase in drill-
ing is due to the prospects for deregulation or for higher prices gen-
erally.
Senator Hart. Doctor, I apologize, but there is another vote on the
floor. We will recess for 10 minutes.
[A brief recess was taken.]
Senator PIart. You were about to continue on a table that we dis-
cussed in part with the chairman of the Commission yesterday.
Dr. Schwartz. That is right, Mr. Chairman.
The historical relationship of gas production and new additions of
reserves is reected in table II. Of significance is the marked increase in
production, or demands for gas, in contrast to new reserve additions.
The average of the earlier 5-year period, 1965-67, indicated production
of 16.4 Tcf and new additions totalling 19.9 Tcf. [trillion cubic feet].
In this 5-year period the weighted-average initial contract price was
17.3 cents and the weighted-average new gas ceiling price 18.1 cents. It
is interesting to note that in the 1963-67 period new gas found exceeded
gas produced and that there were substantial new commitments in the
18-21 Tcf range with initial contract prices in the 16-18-cent range and
approximately an 18-cent new area ceiling price.
There was no supply deficiency in the earlier 5-year period. Allow-
ing for lags and inationa7\v effects, we can still discern that signifi-
cantly higher quantities of new additions were being brought forth at
considerably lower prices than in the latter 5-year period, 1968-72.
In fact, net production, demand, increased to over 21 Tcf on the
average, while new additions shrunk to approximately one-half of the
average new additions in the earlier 5-year period.
That is, new additions averaged about 10 Tcf in 1968-72. The
weighted-average initial contract price ranged between 19 and 30 cents
dui-ing this period and averaged 23.1 cents in the latter 5 years.
The weighted-average ceiling new-gas price ranged between 17.6 and
25 cents and averaged 20.6 cents and averaged 20.6 in the latter 5-year
period.
A comparison of the average 5-year earlier period with the 1968-72
5-year average indicates net production going up by more than 29
percent; total reserve additions going down by approximately 50
percent in response to a 33.5-percent increase in weighted-average
initial contract prices and 13.8-percent weighted-average new-gas
ceiling prices.
Wliat appears to be an inverse relationship between price and new
supplies — what economists would call negative elasticity — is the puzzl-
ing question that emerges from these figures. The normal expectancy
would be for supply to increase as price increases and even if the
elasticity of suDply response is less than the price increases — ^that is,
supply is relatively inelastic — we would still expect something other
than negative elasticity.
I think the answer to this apparent contradiction lies elsewhere. "With
the anticipation of significant price increases that have existed since
1968, one would expect lower exploratory and developmental activity.
430
Put another way, it is more profitable to keep gas in the ground rather
than to explore', develop, and produce new supplies for commitment
to contract as long as the expected present value of future returns is
greater than current rates of return that could be earned at existing
piiee levels.
In other words, producers would prefer to speculate that price
increases in the future will result in higher returns than commitment
of gas at current price levels.
Senator Hart, Doctor, let me interrupt. Yesterday we referred to
tliis table when we were discussing the subject matter with Chairman
Xassikas. I sort of backed away, as I recall it, because we were unsure
pi-erisely how you were defining these things. But it appears, and I now
ask you if this is correct and, if so, explain the basis for it, that with
the price increase of more than 33 percent
Dr. Schwartz. That is an average, Mr. Chairman,
Senator Hart. Yes, it is an average rate of 33 percent. There was a
decline in total reserve additions of almost 50 percent.
Dr. Schwartz. That is correct.
Senator Hart. In the second period of comparison ?
Dr. Schwartz. That is correct.
Senator Hart. Tell me why it is correct.
Dr. Schwartz. T do so later on in my testimony. I will be more than
glad to articulate freely.
Senator Hart. Well, if vou do respond to this, we need it in the
record. We were unsure of this.
Dr. Schwartz. Obviously, if you compare the two 5-year averages,
the increase in price is weighted-average increase in prices — that is
the prices paid l)y producers to pipelines for the sale by producers to
pipelines.
If you take the initial contract price comparing the two 5-yeai
periods, tliere was an increase in price. Actually, in the last 5 years, if
you talve the average initial contract price, the weighted average (that
is weighted witli volumes), we are not adding up a simple arithmetic
average, but the contracts tliat come in with the volumes associated with
those contracts, and we are gettino- a Aveialited-average contract price.
If you take the weighted price in 1968, it was 19 cents. In 1972 it was
30.4 cents, which is approximately a 50-percent increase in the last 5
years of weigh.ted-average initial contract prices. In that period, the
new reserve additions ranoed between 9.4 and 12, and averaged about
10.
No, it would range between 8.3. as you see in column 3 of table 2. and
averaged 10. Tliis is an empirical fact taken from the records of the
Federal Power Commission: We had a 50-percent increase in the
initial average contract price and a decline of approximately 50 per-
cent of new resei've additions.
[Table 2 referred to appears at the end of Dr. Schwartz' statement.]
Senator Hart. TTntil I backed off yesterday, I was trying to get an
answer to the question of liow you can suggest a price increase increases
the reserves. Here it appears that you are losing ground rapidly as you
increase price, but now you tell me wdiat is wrong with that, if any-
thing.
Dr. Schwartz. It is one thing to cite what the factual information
is. It is another thing to determine what the causal factors are. The
431
industry says, the price is inadequate and they just didn't produce. I
say that you will not produce as long as we have anticipations of higher
prices in the future. It is illogical for a firm and any management of a
firm, from a profit maximizer standpoint, to produce gas at 26 cents,
Avhich was the area ceiling established in the Soutliern Louisiana case
in July 1971. when, in fact, the prospects are for 45 cents.
To commit your gas at 26 ceiits is an imprudent decision on the part
of management.
As long as we have price expectations which will exceed the poten-
tial returns that can be earned now — in other words, if future returns
are greater than present returns anticipated — then you will not de-
velop and commit gas.
I believe this point is made on the bottom of page — well, I have my
summary here. I have it on 21 and why don't I just jump to that point
in order to summarize my views, if that is appropriate ?
Mr. Chumbris. To put this in focus, the chainiian's question yester-
day came at a j^oint where Chairman Xassikas was giving a year-by-
year i^rice of natuial gas. starting. I believe, with 106o-64 up to 1968.
That is when the chairman saw this chart and asked the chairman to
ex])lain the variance between your chai't and his testimony.
You were taking it as 1963-67 and 1968-72, while Xassikas was tak-
ing it vear bv vear.
Dr. Schwartz. The basic difference, I believe, Mr. Chumbris ■
Mr. Chumbris. I was merely focusing on how the question came up
so that if anyone wanted to read the record, he would not have to read
where Nassikas was getting his figures fi'om and how vour chart came
into the picture. I was ti-ying to put together Xassikas' reply and your
reply to the Chairman's question, so that if there is an issue to be
resolved, we can resolve it.
Dr. Schwartz. I think that is a veiy correct clanfication of the
sequence of events and I think there is one added factor you should
have in order to further clarify : Chairman Xassikas was dealing witli
the average price i^aid by ])ipelines for flowing gas and that price is
entii-ely different, because that is a rolled-in price of all former con-
tracts, eai'lier contiiacts. Then you average any neAv commitments at
liigher prices.
I am dealing with the weighted-average initial contract prices and
on contracts that are made in that year. I say that is the better measui-e
of supi^ly elicitation because that is the price the pioducer is getting
under the contract that he consummates witli the pipeline. This is a
better measure, in fact, of producers" antici])ations of what supply
elicitation or new supplies he wishes to commit in tei'ms of the future.
Xow, there is anothei- column that deals with weighted-average rate
ceilings established by the Commission. Of couree, those are less than
contract prices and there is a lot of controversy as to what i:)rice signal
does the producer respond to. Does he respond to the contract prices he
enters into? Does this become his anticipation in tenus of new supply
elicitation or does he respond to area ceilings ?
That is why I gave you both, because in many instances I think it
will be one or the other or j^erhaps both, depending upon tlie
management.
I hope that is clarifying. ]Mr. Chairman.
Senator Hart. It is.
432
Dr. Schwartz. Table Til provides a detailing of weio-hted-a-verage
initial contract prices for the last 3 years for the major producing
areas.
With a price increase of approximately 50 percent, 20,8 to 30.4 cents
in the latest 3-year period, allowing for lags in commitment, therei is
pessimism as to new additions of resen^es increasing appreciably and
more cnrtaihnents are still projected by the industry.
Lastly, table IV depicts the response to the offshore Louisiana
leaee sales in 1962 and 1970. Of the 401 leases sold in 1962, 143—35.7 per-
cent-— are currently producing, but 55 — 13.7 percent — ^are producing
shut-in.
[The tables referred to appear at the end of Dr. Schwartz' state-
ment.]
Dr. Schwartz. This is a very high percentage of shut-in tracts for
such a long time snan. In fact, the producing-shut-in leases as a per-
cent of all prorlucing Ipases is 27. S percent. On the h^asis of the total
bonuses paid — $445 million — the "producing-shut-in category is $56.8
million — 12.8 percent.
It is interesting to note that the Belco Petroleum lease, the basis
for the original optional price hearing referred to earlier, %vas first
obtained by Chevron in the 1962 lease sale and made available to
Belco on a farm-out arrangement in Apiil 1971. Finally, sometime
this year gas will flow to the interstate market.
Of the 117 leases sold in the 1970 offshore lease sale in the Federal
domain only 9 — 7.7 percent — are currently producing and 38 — 32.5
pei'cent — ^are classified as producing shut-in.
It should be noted that 70 leases — 59.8 percent^ — are not classified
and. therefore, do not fall into either category. Of the total bonuses
paid — $845.9 million — the producinof-shut-in category accounts for
$34r>.l million — 40.9 perr^ent — of total bonuses.
Here again, a very larofe proportion of the leases as well as the
bonuses paid are reflected in the producing-shut-in category. Taken
together, it would appear that there have been and are anticipations
on the part of producers which have led to significant postponement
of commitment from the offshore area.
There are a number of variables that impinge oft any determination
of consumer costs associated with changes in price.
The m.ost si«2;nificant aspect is to determine what incremental sup-
plies will result from vai-ying prices. This is the very information that
the gas producing industry contends they cannot provide.
It is the industry position that supply-price elasticities cannot be
quantified, and that we must accept on faith that hip-her prices will
bring more gas than lower prices. Yet an examination of table IT
indicates that new reserve additions were appreciably lower in the
recent 10-year period at higher prices than were committed at lower
prices in the earlier period.
It is difficult to understand why we cannot obtain some indication
of supply-price elasticity. There is a logical inconsistency between
contending that new supplios ai'e lagefing because prices are inade-
quate, and the failure to objectivity the costs associated with the
claimed required price.
T'^'ndoubtedly. producers are aware of the costs incurred in the past
and they can estimate future costs associated with a project.
433
It is the estimato of future costs that should translate into supply
elasticities at varying price levels. It is the incremental cost of bringing
forth new supplies of gas that is relevant for the firm in an operational
context.
This is tlie motivating factor behind the regulatory determination
of a new gas price equating incremental costs plus fair rate of return
Avhich would conform to the concept of an equilibrium price in a
competitive market.
The importance of determining the supply-price elasticity is evident
by examining table 5. AVhile most economists agree that supply is rela-
tively inelastic in the short run, the main uncertainty is the supply-
price elasticity in the long run.
[The table referred to appears at the end of Dr. Schwartz'
testimony.!
Dr. Schwartz. If we assume that the current commitments of new
additions of 10 trillion cubic feet will be obtained with a 25-cent-per
thousand cubic feet price and if we increase the price to 37.5 cents per
thousand cubic feet with a 0.1 elasticity, the supply increase would be
one-half of a trillion cubic feet.
The resulting cost of the supply increment will equate to $2.87 per
thousand cubic feet. What this means is that the consumer would be
better off if the price were kept at 25 cents per thousand cubic feet and
supplements or alternative fuels were purchased to satisfy the incre-
mental need of i/o trillion cubic feet as long as they could be obtained
for something less than the equivalent of $2.87 per thousand cubic feet,
assuming a supply-price elasticity of 0.5. And, if you recall, this was
the range that Chairman Nassikas felt was appropriate. There was
some micertainty among the academics and others as to what it was
in the gas producing industry. If we assume the top of the range of O.o,
an increase in price of 37.5 percent per thousand cubic feet will result
in a supply increase of 2.5 trillion cubic feet.
The cost of the increment will be 87 cents per thousand cubic feet.
Here again, if we can ol)tain equivalent supplies for alternative fuels at
anything less than 87 cents, the consumer would be better oif by keep-
ing the price at 25 cents per thousand cubic feet than permitting the
price to rise to 37.5 cents.
The table also illustrates the supply increases when the price is in-
creased from 25 to 50 cents per thousand cubic feet with the cost of in-
crements varying from $3 at the lowest elasticity measure to $1 per
thousand cubic feet assuming the highest price elasticity, depending
upon the supply elasticities from 0.1 to 0.5.
This is another illustration that the consumer would be better off by
holding price to 25 cents per thousand cubic feet and pui'chasing alter-
natives at anything less than $3 in the case of a 0.1 elasticity, in contrast
to a 0.5 elasticity reflecting incremental costs of supply of $1.
The same analytical framework applies to the lower portion of table
5. Assuming that 10 trillion cubic feet of new additions will be com-
mitted at 35 cents per thousand cubic feet, a price increase to 45.5
cents per thousand cubic feet with an elasticity of 0.1 results in a cost
of increments which would be $1.15 per thousand cubic feet.
It is obvious that if new supplies could be brought on at something
less than $3.95 if elasticity were 0.1 or $1.15 if elasticity were 0.5 that
consumers would be better off if the pri(;e wen; held to 35 cents and
alternative sources of fuels could be obtained at lower consumer costs.
434
Lastly, there is an illustration of increasin*>- the price from 35 cents
to 59.5 cents per thousand cubic feet. With an elasticity of 0.1, the cost
of incremental supplies Avould be $-}-.09. "With an elasticity of 0.5, it
would be $1.29 per thousand cubic feet.
The example illustrates, again, the reference points where consumer
costs would be minimized.
To measui-e the potential dollar impact on consumer costs a num-
ber of assumptions are necessary regarding the base price level from
which gas purchased from domestic producers would vary.
For example, in 1972, producers received $4.5 billion or a little
more than 20 cents per thousand cubic feet for total natural gas
produced.
If all gas were repriced to reflect the current price levels based on
the commodity value premise of producers, this would equate to
double or triple the average price paid in 1972, and result in an in-
crease to consumers ranging between $4.5 to $9 billion annually.
A conservative procedure for determining potential consumer im-
pact is to ascertain the effect of conti'act expii'ation.
Table fi shows by year of expiration, 1973 through 1980, the number
of contracts, the volumes sold, and the revenues collected. For the 623
contracts expiring in 1973, the average revenue received for all pro-
ducing areas is 17.89 cents per thousand cul)ic feet. If we assume that
these prices will escalate to 35 cents — a modest assumption consider-
ing recent interstate or intrastate contracts for gas — ^then the incre-
mental impact on consumers will be over $192 million.
If we assume that the price will escalate to 45 cents for these volumes,
the additional revenues received will be over $300 million. If we assume
f)0 cents will be the price obtained by producers — and the industry is
looking for more than 60 cents, because one of the producers asked for
a price between 75 and 80 cents — the additional revenues received will
lie $472 million.
By the end of 1974, the contracts which will have expired in 1973
and 1974, and the volumes which were sold previously at 17.89 cents
and 18.22 cents, respectively, if sold at 35 cents would cumulatively
result in revenues of $410 million; if sold at 45 cents, would result in
cumulative revenues of $650 million; and at 60 cents, the additional
revenues would be over $1 billion.
[Table 6 appears at the end of Dr. Schwartz' testimony.]
Mr. Chumbris. If you can stand an intei'iection at this point, let's
look at the other side of the coin of not having sufficient natural gas.
Let's assume that we stay at 20 cents at the wellhead for 1.000 cubic
feet which was placed in the record by sevei-al of the witnesses and you
only have so much natural gas to use and, therefore, you have to use a
substitute. If you use oil in place of natural gas, you are paying 60
cents for a compai-alile amount. If you use synthetic natural gas or
liquified natural gas, it is running from $1.25 to $1.50 per 1,000 cubic
feet.
As a matter of fact, the Chairman used as an example yesterday a
Connecticut conti-act for LNG that is going for $1.80.
Xow, if these are tiue, then the consumer who is under this 20-cent
contract is in pretty good shape. But the Connecticut consumer who
iieods that svnthetic or liquified natural gas and must pay $1.80 is
getting beaten over the head to ]3rotect someone in Kansas City who
is lucky enough to receive it for 20 cents.
435
I am just throwing that out as one of the pi-oblems that has been
raised by some of the witnesses. How do you resolve this situation in
a manner which is fair to all the people ?
Dr. Schwartz. Very simply. You are talking about the increments
of supply of $1.80 or $1.20 as compared to a rolled-in price of 20 cents.
The assumption you are making
^Ir. CiiUMBRis. I am not making an assumption.
Dr. Schwartz. In your hypothetical, there is an assumption that
you will discriminate between certain consumers who are getting the
gas at 20 cents and others who will be paying more. This is not neces-
sarily so. All the pipeline has to do is roll-in the cost of the supple-
mental supplies of $1.20 or whatever tlie charge is and charges the aver-
age price to the distributor company and the distributor company
charges the average price to all consumers so there is no discrimination
between new consumers and old consumers under this procedure.
Tliis rolled-in price is generally used throughout the industry. They
do not have as yet the so-called incremental pricing tariffs which are
im]ilicit in the example that you gave.
Let me try to move on. ]\Ir. Chairman: I know the time is fleeting.
The cumulative annual effect of contracts of major producers, which
do not cover all sales, expiring by their own terms, will result in 1980
in additional reA^enues, assuming continued gas flows, varying from
approximately $3 billion at the 35-cent price to $7.6 billion at the 60-
cent price.
A corollary piece of information relating to table 6 are the sales by
the top five producers made under contracts expiring in the 1973-80
period. The companion table 7, consisting of four pages, indicates
that a significant proportion of the total volumes under contract expir-
ing in 1973-80 can be attributed to the top five producers.
[The tables referred to appear at the end of Dr. Schwartz' testi-
mony'.]
Dr. Schwartz. This varies from a low of 56.6 percent in southern
Louisiana to a high of 99.6 in the Permian Basin.
A fundamental point of departure for measuring the impact on con-
sumers of potential price increases is the distinction between flowing
gas and new gas.
For example, the latest information indicates that the average cost of
natural gas paid liy interstate pipelines to domestic producers is 21.73
cents per thousand cubic feet.
If average flowing gas rates were to increase to 30 cents per thou-
sand cubic feet, and the intrastate impact eciuated to the inter-state,
tlieii based u])on last year's volumes, the additional revenues received
l)y domestic producers would be approximately $2 billion annually.
In light of the price assumptions and various definitional distinc-
tions, this proliably represents a very conservative figure.
For example, there are a number of proposals to deregulate new gas
prices but to continue the regulation of gas flowing under contracts.
If the definition of new gas in the administration's bill is used, as will
be discussed subsequently, this will permit for a significant redefini-
tion of flowing gas as new gas.
The critical element in measuring the impact on consumers is the
awareness of the weak bargaining position of the pipelines.
Undoubtedly, there will be great pressure exerted by producers on
pipelines to renegotiate contracts. The producers argiie that if new
436
supplies are to be obtained at sifrnificantly higher prices — and plivsi-
cally, there is no distinction between old and new (ras — then tlie price
for flowin.o- gas sliould reflect the current market value of gas as a
commodity.
Of course, this reliance upon the physical similarity thesis by gas
producei-s completely ignores the economic considerations relating to
the significantly lower costs associated with finding gas in the past in
contrast to current costs.
The old gas is now flowing; and the costs were incurred years asfo
under different prices; tlie variable costs, the production costs, are
relatively small compared to flowing gas; and any inflationary impact
is relativeh^ minor.
"With a new gas price, obviously, you have to foresee the commit-
ments of new investment, and it has to be premised upon the marginal
or incremental costs.
To reprice old gas. T think, is a great inequit}^ to consumers and pro-
rides no rationale whatsoever.
I indicate here that there is a great danger tha,t pipelines will
acquiesce.
The acquiescence of pipelines to renegotiate old contracts is dem-
onstrated in the recent agreement between Gulf Oil Coi-p. and Texas
Eastern Ti-ansmission Corp., now before the Commission in docket
No. CI64-26, to alter the terms of the 10fi,3 contract in which they
agreed to a price increase from 19 cents to 20 cpnts ner M ft^ (initially,
southern Louis'ana). and subsequently am.ended the agreement to pro-
vide for a price based upoji tlie rate obtained by other producers under
the optional pricing procedure.
If the new agreement is approved the FPC staff estimates the po-
tential additional cost to consumers for incremental new field volumes
of gas at an initial price of 45 cents plus escalations of approximately
$000 million.
One of the reasons given by Gulf for its inability to continue making
deliveries at the old contract price was a deficiency of 1.5 trillion
cubic feet of gas originally estimated and committed as reserves under
a warranty agreement in the initial contract. Tliey had originally
estimated 2.5 T ft^ in the offshore area, but in 19G8 reestimated that
only 1 T ft' of reserves underlie this acreage.
As part of the arranfrement, Gulf agreed to commit all future gas
discoveries to Texas Eastern, within reach of its pipeliiio, and to
accelerate exploratory and developmental expenditu.res. Gulf justi-
fied the 2r)-eent conti-act price on. the liasis that tliis woidrl be the
price that they wouhl have to pav the SLA]M combire (Sif^'ual Gil,
Louisiana Land & Exploration, Amerada-TTess, and Marathon Oil)
for supplies to make up pai't of the contract deficiencies.
It is interesting to note that in the December 1972 offshore Louisiana
Federal domain lease sale, Texas Ea'-^tcT-n v\^as a member of the STiAlM
groui") in 25 bids for offshore acreage. In no inr-tance did Texas East-
e'-n }v(\ independently, but in evei'y instance it bid as a member of
SLAM.
Tins win cost the consumers $600 million alone for these volumes
becau'^^e the commitments under this contract were originally 2.5
trillion under the wai-rantv contract aiid they came up with a sh.ortage
of 1.5 trillion or a 60-perccnt estimating error. It was on the basis
437
of this sliortage that Gulf and Texas Eastern said they would try
to reheooiiate and see if they could provide the gas from other sources
and the} would have to pay more.
To summarize, the measurement of the impact on consumers of
potential price proposals relating to natural gas must be seen in the
light of tlie producer pressure to raise the price of flowing gas, as
^vell as obtaining higlier prices than current area ceilings for new
supplies.
In addition, the ability of the pipelines to withstand producer
demands for higher prices is significantly vitiated because of their
self-interest as producers of gas.
Lastly, in a period of short supply, the pipelines will most likely
acquiesce to contract renegotiation on flowing gas because this may
be the only way to obtain new supplies.
The administration's bill, submitted on April 18, 1973. by Acting
Secretary of the Interior John Whitaker, has been formally introduced
in the House as PT.R. 7507.
This bill, while purporting to exempt new gas from FPC regula-
tion, in fact provides a number of options that can significantly afi'ect
the rej:>ricing of gas presently under contract.
"Wliile it may appear esoteric to pursue definitionf>l distinctions, it
is critical for understanding the implications of the bill.
First, the pro]:)osed legislation i^rovides that gas will be exempt
from regulation if it is dedicated for the first time to interstate com-
merce, or rededicated upon expiration of an existing contract on or
after April 15, 1973, or produced from wells commenced on or after
the aforementioned date.
One of the detriments of tlie wells-commenced standard, while
superfically appearing to be new gas. in fact may lead to resource
waste because of the unnecessary drilling that may occur in order
to qualify for the deregulated price.
In addition, it may encourage producers to divert production from
existing wells to new wells in order to tap the same reservoir. The
wells-commenced approach is particularly inappropriate with regard
to developmental wells which can be easily drilled with a minimum
of econom.ic cos*".
In order to discourage the unnece'^sary drilling of new wells, as
well as the withholding of gas to obtain higher prices by qualifying
for the new gas price, we should use the date of new discoveries as
the guideline.
Another basic provision of the bill concerns the exemption from
regulation of renegotiated contracts. The earlier discussion indicated
the lack of incentive or bargaining power on the part of pipelines
and we can anticipate large scale renegotiation of contracts whose
present terms would permit continued regulation under the old gas
price.
Here again, it is necessary to insist unon regulatory constraints until
the full term of the cr>ntract has exnired.
The proposed le,q-is1ation pi'ovides for surveillance by the Se^^re^arv
of the Interior over the movement of prices once they are decontrolled.
It 2:ives him the authority for n B-year period after the enactment" of
the lerrislation to reimpose ceiling's if he deems it necessary but
specifies that he is to do so only after considering: (1) The current
438
and projected price of other fuels; (2) the premium nature of natural
gas and its environmental superiority ; (3) current and projected prices
for importation of liquefied natural gas and the manufacture of syn-
thetic gaseous fuels; and last, (4) the adequacy of these prices to
provide necessary incentive for exploration and production of domestic
reserves.
Placing this responsibility in the Department of the Interior seems
particularly inappropriate, "in light of the fact that the Federal Power
Commission has the background, staff, and expertise to monitor a sys-
tem of contract review.
The Commission currently obtains contract information from pipe-
lines concerning the prices paid producers.
Move importantly, the proposal for a 3-year review period, instead
of indefinite surveillance, could discourage the immediate commitment
of new reserves because of the benefit of postponement and the avoid-
ance of public scrutiny after the period has elapsed.
The proposed legislation also extends FPC jurisdiction to direct
sales by pipelines to ultimate consumers. This provision was included
with the suggestion that this would permit the Commission to adjust
industrial rates where necessary to reflect the value of this premium
In other words, it is anticipated that the Commission could allocate a
higher proportion of the cost to industrial users rather than residen-
tial consumers.
AAliile this may have superficial appeal, we should not forget that
industrial users will pass on a substantial portion of these higher
production costs to consumers in the form of higher prices wherever
it is feasible.
Finally. Congress should cou]:)le the consideration of any deregula-
tion bill with a review of specific antitrust action that may be required
because of the structural imperfections of the industry. Specifically,
the Justice Department should be instructed to undertake a thorough
and comprehensive i)ivestigation of the joint ventures and other inter-
locking relationships now prevalent in the petroleum industry to de-
termine whether, in fact, the blockage of effective competition requires
remedial action.
In addition, the Justice Department should more carefully scrutinize
any proposed merger or acquisititon in the future, not only of petro-
leum companies, but of firuis in other energy areas such as coal and
uranium.
One particular area which should be considered by the Justice De-
partment involves the practice of joint bidding for Federal leases
and the potential anticompetitive features of these joint ventures.
A companion review could be implemented by the Federal Trade
Commission by broadening its current investiaation of the petroleum
industry to consider the market sti-ucture question.
Undoubtedly, the special expertise of the Federal Trade Commis-
sion staff in the area of industrial organization, and their immediate
awareness of problems miique to the petroleum industry generally,
would enable them to ro\iew the gas producing sector with a high
level of professional skill.
Senator Hart. I am afraid we will have to suspend again for an-
other vote.
439
[A brief recess was taken.]
Senator Hart. All rioht, Doctor.
Dr. Schwartz. I will very quickly conclude, Mr. Chairman, by
considerino'tlie public interest alternatives.
At the outset it is important to stress that the solution of our supply
inadequacy nuist be seen in the context of a multifaceted approach in
order to assure the full de\'elopment of our domestic resource base and
provide for the expansion of exploration, development, and produc-
tion of natural o-as.
We must look for solutions along many paths which in combination
will enable us to overcome our present difficulty.
It is the interaction of new institutions, improvement in existing
institutions, and a combination of specific programs, which offer tlie
opportunity to resolve the current gas supply problem and provide
the i^romise for the future.
Specifically, the wellhead regulation of gas prices can serve the
public interest if it is administered fairly and firmly with the neces-
sary improvements which will be suggested shortly.
VVliat is needed is more reoulation, not less regulation nor a con-
tinuation of the status quo. When the issue of deregulation or con-
tinued regulation is postulated, it is usually done in terms of two
alternatives within a fixed institutional mold.
I will sulisequently indicate tlie basis for improved regulation and
the new institutional forces which should work toward assuring an
equitable framework for natural gas producers as well as consumers.
In order for regulation at the interstate level to operate successfully,
regulation has to be extended to the entire market.
In the recent period we have seen intrastate prices escalate above
50 cents per ^Mcf. Every increase in intrastate prices provides the ra-
tionalization for producers leveraging their request for ever-higher
prices before the FPC — as the administrative law judge stated in the
recent Permian II initial decision, docket No. AR-TO-1, December 20,
1972.
In fact, according to the evidence of record, several intrastate pur-
chasers in Permian have standing offers to the producers to better
interstate ceilings by 1 or 2 cents per Mcf .
The usual explanation given is that the pipeline must meet the intia-
state price in order to obtain the gas. While this may have some pra-v
tical appeal, it does not provide a valid basis for the determination of
just and reasonable prices in an imperfect market.
There is no more reason to think that the intrastate market is any
more competitive structurally than the interstate market. In fact, re-
cent testimony by one of the applicants in the Belco proceeding indi-
cated intrastate prices were above 50 cents per ]\Icf. In order to justify
the 45 cents per Mcf requested by the applicant, he pointed to the exten-
sive intrastate pipeline system operated by Continental Oil Co. and
the fact that they were paying substantially in excess of 50 cents for
gas for its intrastate network.
Obviously, Avhen Continental Oil seeks to commit supplies to the
interstate market, it is very simple to point to the price which is being-
paid intrastate for gas supplies. This is not an unusual example be-
cause many other major producers are intrastate purchasers of gas
supplies, as indicated in Dr. Wilson's testimony before this committee.
27-547 — 74 29
440
The producers' escalation of prices is illustrated by the recent intra-
state sale of natural gas by the Inexco Oil Co. to the Southern Union
Gas Co. at 52 cents per Mcf .
Evidence in the Bclco proceeding shows that Inexco is engaged in a
number of joint ventures with its major partners, Continental Oil and
Exxon Corp., in the joint ownership of State of Louisiana leases. To
the extent that Inexco can escalate intrastate prices, they, as well as
the major producers, benefit because of the insistence that interstate
pipelines must match the intrastate price.
Obviously, to the extent that producers insist that interstate pur-
chasers match the intrastate price, we will depart from a cost-based
determination and gravitate toward a monopolistic, market-deter-
mined basis for pricing.
In addition, it is a very easy step, after justifying matching intra-
state prices for short-term supplies, to take the next step — that long-
term commitments to the interstate market should be something above
the mtrastate price.
In this manner, the possibility of utilizing cost-based regulated rates
on the interstate level can be completely undermined.
The administrative law judge in Permian II concluded it was essen-
tial to extend regulation to the intrastate market because :
"The evidence of record here shows that regulation of the intrastate
aspects of producer sales of natural gas would result in more effective
regulation of the natural gas industry based upon the principles of
consumer protection balanced against setting a just and reasonable
return to the producers."
Last, the only way in which social priorities can be implemented on
a uniform basis is to regiilate both intrastate and interstate sales of
natural gas. It appears that we have a dual set of standards when sup-
plies of gas in the intrastate market are available for end uses which
are drastically curtailed in the interstate sector.
Broader social equities would dictate uniform curtailment priorities
in both markets. There is no doubt that the intrastate market can
always offer a little more than any price ceiling set by the FPC, and
those needs will be satisfied first, and only the differential supplies will
l)e available for the interstate sector.
While there have been many suggestions concerning tlie need to
increase the number of offshore sales and the size of the package made
available for bid. very few proposals have been made to improve off'-
shore leasing practices to accelerate supply availability or to mitigate
the domination by the majors of offshore reserves. From a public inter-
est standpoint, it is not good enough to stress the need for three or
more sales a year of offshore leases, but specific requirements are neces-
sary to assure more rapid development and production from these
leases.
In the licensing of producers in the Xorth Sea, the British Govern-
ment insists upon a work program which must be implemented by the
companies in order to assure rapid exploration and commitment of
gas.
In addition, there are many advantages to the royalty bidding sys-
tem used by the British Government in the Xorth Sea in lieu of our
bonus bidding arrangement for offshore Federal domain reserves. It
would appear that the Treasury could obtain as much revenue from
441
lioyalty biJdiii^i" aiTano-eiiients in Avliich tlie applicants could vary the
i-oyalty paid in place of the cash bonus bid with a one-sixth fixed
royalty that currently prevails.
In addition, the royalty bid could provide neAv entry for smaller
companies Avhich prexiously could not bid on Federal offshore acreage
because of the lar^e cash requirements.
This has been a particularly serious problem resulting in the major
petroleum companies dominating the development of offshoi-e acreage.
The only opportunities in the past for smaller firms were to join as
junior partners in a consortium leaving very little option for competi-
tive interplay.
Tlie modification of the bidding arrangement offshore provides the
Interior Department with a significant opportunity to enhance new
entry and infuse greater competition in the offshore area.
In addition. Interior should be encouraged, or directed, to modify
the leasing pi'ocedui'es to provide a more effectire means of assuring
rapid commitment of offshore reserves.
Legislation should be introduced in Congress providing for an inde-
pendent Government agency to determine on a reservoir-by-reservoir
basis our domestic natural gas reserves.
In order to lay to rest all of the controversy and uncertainty sur-
rounding proved reserve estimates, we should assure tlie public of
accurate, reliable, and uncontroverted reserve data which will enable
us to determine the amount of gas reserves. An effort should be made
to work toward greater uniformity in i-eserve estimation so that we
can determine the amount of proved reserves on an area-by-area basis
in such a manner that Ave can verify the associated and nonassociated
reserves with a minimum amount of uncertainty.
This is particularly important in light of the fact tliat. historically,
over 60 percent of new reserve additions are attributable to extensions
and revisions.
Of particular concern are tlie negative revisions, deductions, to
proved reserves in the last 4 years in the AGA proved reserve
estimates.
Finally, of crucial significance is the determination on a continuing
basis of the uncommitted reserves available for sale as part of the
total proved reserves.
The significance of an independent estimate goes beyond verification
of available supplies because it is basic to the determination of pro-
ductivity from the successful gas wells drilled, which in turn is one
of the most crucial factors that underlie the determination of the
nationwide cost of finding and producing new nonassociated gas in
the various area rate proceedings before the Commission.
Congress should give serious consideration to the formation of a
Federal corporation to operate offshore in order to assure new natural
gas reserves at reasonable cost.
Current estimates of potential offshore reserves run as high as 850
trillion cubic feet. Currently, approximately 2 percent of our offshore
lands have been leased.
One of the purposes of the TVA was to bring about significant new
development of low-cost energy in order to serve the country's needs-
The same problem exists today with even greater intensity.
442
The example of the British Gas Council in the Xorth Sea illustrates
the type of independence the Government agency could utilize because
'of the access to its own reserves.
A Federal corporation would be motivated to explore, develop,
and rapidly commit new supplies because of its sensitivity to broader
social needs.
In addition, this would provide objective information upon which
the Commission could rely as to the actual offshore costs of finding and
producing gas. The FTC has never received separate cost information
pertaining to offshore reserves.
Most importantly, a Federal corporation would provide a new com-
petitor to the major producing companies and prompt commitment of
available reserves and development of prospective reserves because of
the awareness that the new corporation could accelerate its efforts and
bring on independent supplies of gas.
In another sense, the Federal corporation could provide valuable
yardstick competition to determine the efficiency and performance of
the private operators' offshore operations.
Finally, a Government entity should be sensitive to the environ-
mental safeguards and conservation practices required in offshore
operation.
An initial distinction must be made regarding rate regulation of
flowing gas as distinct from that of new gas. An equitable basis for
price determination for old gas should be premised upon historical
costs incurred by producers and a fair return for the funds invested.
In those instances where area ceilings are inadequate, provisions
have been made in the area rate proceedings for special relief.
With respect to increments of new supplies, a rate must be deter-
mined which reflects incremental costs of gas, including a fair return
in order to assure efficient resource allocation and capital attraction.
Recent staff efforts to quantify nationwide costs provide estimates of
finding and producing neAv nonassociated gas ranging from 27.6 cents
to ?>^k1 cents, at 14.65 pounds per square inch absolute — excluding pro-
duction taxes but including a 15-percent rate of return — in the Belco
proceeding, to o2 to 35.5 cents, at 14.65 pounds per sfjuare inch abso-
lute in docket Xo. II-389-B. These are the relevant economic factors
whicli would conform to the supply-price required in a competitive
market.
These are the prerequisites for regulatory policy ; that is, in order to
meet market demands, a stable price must be established which will
promote orderly markets and reduce uncertainty for producers in
planning future investments for exploration, development, and
production.
Therefore. I would recommend that when a price is determined a
moratorium be imposed on future increases. In order to protect against
possible inflation and the erosion of rate ceilings because of future cost
increases, a mechanism should be developed to allow for adjustments
in the variable costs of the rate ceiling.
There has been a great deal of discussion concerning the advisability
of a single, nationwide area rate for new gas sales. While I think it is
essential to have a nationwide proceeding in which national costs are
determined for all new gas, it does not follow that one nationwide rate
for all producing areas is the optimal solution.
443
Xationwide costs slioiild be used to make adjustments to the existing
area rate ceiling-s. The difference in the area rate ceilings reflect im-
portant historical as well as institutional factors. More importantly,
there is locational difference depending upon nearness to market.
For example, because Appalachia is closer to the market the price
for this area should reflect the transportation differential. This is in
effect the cost avoidance of transporting gas from the Southwest areas.
In addition, there is the danger that if a single coiling price is set. it
will be the highest price required by any one area because to establish
a lower price would discourage the finding and production of gas from
higher cost areas, such as Appalachia. Yet, to set the price in the
Southwest at the level of the Appalachian price is to give this produc-
ing area the transportation differential and a premium which has noth-
ing to do with the costs of bringing gas to market.
Conversely, to set a nationwide ceiling price based upon the South-
west region would discourage exploration and development in Ap-
palachia and Rocky Mountains.
Therefore, the logic of the current variation in rate ceilings should
be maintained and a nationwide costing should be used to modify ex-
isting area rates.
This will permit the utilization of a nationwide proceeding to adjust
rates for all areas simultaneously and avoid the time-consuming, in-
dividual area rate determinations.
In addition, it is necessary to implement and expand the moribund
data collection rulemaking docket No. R-168-625, now '5 years in an
indecisive status, in order to obtain the needed information on a con-
tinuing and regular basis for meaningful producer rate regulation.
For effective and expeditious rate determination, it is essential that
the Commission have the relevant empirical data and cost information
which can be used to update and trend area rates.
There are three essential features of any new regulatory approach
which must be stressed.
First, a distinction between new and old gas must be maintained, and
the distinction should not be on the basis of the date on wliich the wells
are commenced or committed to contract, but on the date of discovery.
This would discourage holding gas off the market.
Second, an indefinite price moratorium is necessary to discourage
speculative anticipations in terms of future higher prices. Last, the
intrastate loophole, which has had a devastating impact on interstate
regulation, must be closed.
The evidence presented in the various proceedings before the Com-
mission on market structure in the gas-producing industry reflects
overwhelming imperfections that can lead to only one conclusion — the
gas-producing industry is not workably competitive. To deregulate the
])rice of gas, new or old, would result in billions of dollars of added
consumer cost.
The uncertaint}' concerning supply-price elasticity raises many
doul)ts whether we can be assured of a significant increase of new sup-
plies at higher prices.
In fact, the cost to consumers would be minimized by holding prices
to cost-ba.sed levels and purchasing alternative fuels at higher prices
as supplements.
444
In addition to a variety of causal factoi's. tliere is also evidence that
the present unavailability of supply is related to speculative expec-
tations on the part of producers.
There are a number of alternatives available which in coml)ination
would protect consumers against exorbitant prices and provide sig-
nificant new increments of gas supply.
Among these are the extension of controls to the intrastate market,
the improvement of offshore leasing policy, the organization of a new
Federal entity to infuse greater competition in the petroleum industry
and the improvement of producer regulation.
Senator Hakt. If we do as you say, will we get more gas ?
Dr. Schwartz. Yes, sir.
Senator Hart. If that is the objective, the price is reasonable. There
is a key question in all of this verbiage and it is the validity of the
natural gas shortage.
Is there oi- isn't there a shortage? In your prepared statement you
say, as I get it, that there is no question that the domestic resource base
in this country is substantial and there is no physical shortage of
potential gas supply.
Now. leased on your work at the Federal Power Commission, state
your opinion as to whether the shortage in fact exists.
Dr. Schwartz. Mr. Chairman, I tried to objectify what information
we could get by indicating the amomit of production that is shut-in in
offshore reserves. First, tliere are a substantial number of wells that
are shut-in.
Second. I have heard a great deal about it taking 3 to 5 years in
order to go from an exploratory effort to a final production. The truth
is, if you want to qnicklv develop gas in existing fields, this can be
done in significantly less time.
If _yon look at the Potential Supply Committee record and that 1,100
trillion cubic feet which is the conservative estimate- — and the ITSGS
does not break out the 2,100 trillion cubic feet to get this kind of
stratification — yon will find there are three categories iinder the term
"potential."' One is "probably." One is "possible." The other is
"speculative."
In that "probable" category there are 225 trillion cubic feet. That
is the reserve that can be developed quickly in much less than the
3 to 5 years we keep hearing abont all the time.
In fact, I see certificate applications come through the Commission
every day. and the indications are that in less than a year the re-
serves are brought on stream.
So I think the solution is very rapid development drilling. This
will bring us the gas flow, and not in 8 to 5 years. It is this "probable"
category that is significant in terms of immediate supply.
Senator Hart. I have a second question. They key to this debate
is whether there is workable competition in this industry.
Now. you heard the figures, and ^ou used some yourself. As aji
economist familiar with the industry, how significant is the regional
marketing concept befoi'e you can make a judgment as to concen-
tration or competition ?
Dr. Schwartz. Obviously, the pipelines are tied to a producing area.
They are fixed physical facilities. It is the regional market that pre-
scribes the relevant market for natural gas and not the national mar-
ket, which is just a conglomeration.
445
It is those regional markets because the pipeline cannot move its
facility from one market to the other.
Therefore, you have to look at the reo-ional markets and control the
suj'jplies in that regional market in order to estimate concentrations.
Senator Hart. Mr. Nash.
jNIr. Xash. Just some very brief questions. Dr. Schwartz.
As I understand it from the testimony of yesterday, although there
are significant regional markets, the pipelines are tied together through
natiouTvide interties.
Now, could you explain for the record why even though the regions
are intertwined through the nationwide pipeline system, we should
still not consider the relevant market as a nationwide market?
Dr. ScHAVARTz. Whate^'er you may have been presented with yester-
day ill teiTus of interties. I would like for someone to tell me if in
fact there is a tie l^etween El Paso and Colorado Interstate, which pull
gas out of the Permian in the Rocky IMountain area, and between
Transcontinental Pipeline and Texas Eastern in Tennessee, which
pull gas out of southern Ivouisiana to serve the east coast. There is not
an intertie among all jiipelines. obviously.
Certain pipelines secure gas in discrete geographical areas, and
others, in other geographical areas.
In addition to that fact, it is irrelevant whether or not there are
exchanges among pipelines when in fact you may have one line full
without any capacity. Therefore, you have to pick up the gas in that
market where you have capacity.
]Mr. Xash. Thank you.
Some witnesses indicated the difficulty in jirojecting the cost to
consumers from deregulation of new gas alone. Do you have any basis
for providing the record with a projection of what the cost to con-
sumers might be if only new gas were deregulated?
Dr. ScmvARTz. There is obviously a question of defining what we
mean by new gas. I think the industry's position is that gas is gas.
Physically there is no ditYerence from gas that is flowing now and
gas that may be coming on later, and the commodity value should be
the same.
But if you would try to legislate and say that everythino- under
the contract now stays under contract at those terms, and everything
which has been approved by the Commission, if they set aside con-
1 racts that are above ceilings, then you have a question of quantify-
ing in fact Avhat is the amount of new gas.
That is what we have been unable to obtain from the AGA. very
frankly.
I can't tell you because the proved reserves just encompass every-
thing, and you can't break out new gas from old gas.
INIr. Nasit. On page 17 you indicate you use a proxy for uncom-
mitted reserves in connection with testimony presented in the Belco
case.
"We have received information respecting actual committed reserves.
Can you tell me why your office used a proxy rather than uncom-
mitted reserve concentration ratios ?
Dr. ScHAVARTZ. Well, our office did try to obtain that information,
and a request was made of the people in the Bureau of Natural Gas
for that information. We told them that we needed the aggregate
forum for the Belco proceeding.
446
Initially, they provided us with information in ^yhich they found
some errors. When we went back to get corrections of those errors, we
found that a very long time period elapsed, and we could not obtain
the information in time for its inclusion in the Belco proceeding.
Mr. Nash. If you don't think you can answer my final question, Dr.
Schwartz, feel free to so state. I would like to know v^diether, in your
view, the chief economist of the Federal Power Commission, the assist-
ant chief economist of the Federal Power Commission, and tlie chief
for the Division of Economic Study all agree that the natural gas pro-
ducing industry is not workably competitive ?
Dr. Schwartz. It is my understanding that all three members of the
Office of Economics iii those positions you have cited agree that the
n:iarket is not structurally competitive.
Mr, Nash. Thank you,' Dr. Schwartz.
Mr. Chumbris. Dr. Schwartz, I have no questions to ask you for the
siinple reason that you are pretty strong in your views, whereas there
are others who have and will testify and "take a diiferent position.
Eather than debate the issue, we will "just leave it for the Senators up
licre to judge the testimony on its merits and make a determination. I
don't want to pit tlie staif against the Commission.
We on the staff level feel we have a good argument. We present it to
our Senators and they say it is a fine argument, but they vote the other
way. That is how these problems are sometimes resolved.
You have that problem with your Commission, I am sure. We are
glad to have you here, and as I say, your testimony will have to be
judged in light of the full record.
Dr. Schwartz. I think that is very appropriate, ]Mr. Chumbris.
^Ir. Chumbris. Thank you.
Dr. Schwartz. Thank you.
^ Senator Hart. I think I should make the comment, wliile Dr.
Schv.-artz is here and before we hear from Dr. Wilson, that we appre-
ciate getting your views, and we recognize that there is a difi'erence, as
Mr. Chumbris said, between your views and those voiced yesterday by
Chairman Nassikas — a difference in many areas.
To assist those of us on tlie committee to develop a judgment on the
complex problems that are involved, it seemed to us that we would be
much more likely to get that kind of a record or make that kind of
judgment if Ave had the opportunity to hear from you.
The more competing voices and diiferent ideas that a^-e fed into the
uiachine, in theory, the more likely sound judgments will result.
It doesn't always follow, but your statement does encourage a very
vigorous public debate, and we do that because we thiiik: that is the
way we get the truth.
I am sure the Chairman of the Federal Power Commission recog-
nizes that and understands it, and would not in any fashion want to
have either you or Dr. Wilson penalized for responding to this sub-
connnittee's request.
Mr. Chumbris. That was the main reason that I asked liim that
question originally, so it wouldn't appear as though he and his cowork-
ers were rumiing to us to present theii- point of view.
447
[The following tables, pveviously referred to, were appended to
Dr. ScliAvartz' prepared statement. Testimony resumes on p. 456.]
TABLE I.— TOTAL WELLS DRILLED FOR HYDROCARBONS, TOTAL GAS AND GAS CONDENSATE WELLS DRILLED
TOTAL GAS AND GAS CONDENSATE EXPLORATORY AND DEVELOPMENTAL WELLS DRILLED, TOTAL UNITED
STATES, 1963-72
Total wells drilled
for hydrocarbons
Number Thousand
of wells feet
Total gas and gas
condensate wells
drilled
Number Thousand
of wells feet
Total gas and
gas condensate
exploratory
wells drilled
Number Thousand
of wells feet
Total gas and
gas condensate
developmental
wells drilled
Number
of wells
Thousand
feet
Year:
1963 41,467 182,649
1964 42,293 187,420
' 1965 38,773 174,882
1966.. 35,730 165,420
1967 31,633 144,723
1968.. 30,255 147,721
1969 29,945 150,907
1970 26,784 135,951
1971 25,357 127,092
1972.... 27,087 137,765
Averages:
1963-67._ 37,979 171,019
1963-72 27,888 139,887
Percentage decline over 5-yr
average, 1963-67, com-
pared with 1968-72 26.6 18.2
,570
,694
,482
,321
,602
,329
,656
,225
3,399
4,777
24, 533
25, 597
24, 931
25,636
21,482
20, 152
21,829
19, 830
20, 046
26, 593
664
577
515
578
556
430
616
481
437
601
4,230
4,204
3,757
4,881
4,231
3,320
4,985
3,675
3,328
4,592
4,334
3,677
24, 436
21,690
578
513
4,261
3,980
3,906
4,117
3,967
3,743
3,046
2,899
3,040
2,744
2,962
4,176
3,756
3,164
20, 303
21, 394
21,174
20,755
17,251
16,832
16,844
16,155
16,718
22,001
20, 175
17,710
15.2
11.2
11.2
6.6
15.8
12.2
Source: World Oil, American Association of Petroleum Geologists, American Petroleum Institute.
TABLE II.— NATURAL GAS RESERVE, PRODUCTION, AND PRICE DATA, 1963-72
Natural
gas reserve and
production data '
Weighted
Weighted
Findings
average
average
Total
to
initial
rate
Net
reserve
production
contract
ceilings for
production -
additions -
ratio
price ■'*
new gas ^s
1963.
14.5
18.1
1.2
17.0
18.2
1964,
15.3
20.1
1.3
16.2
18.1
1965.
lb,2
21.2
1.3
17.4
18.1
1966-
17.5
19.2
1.1
17.4
18.1
1967.
Average,
1963-67
18.4
21.1
1.1
18.6
18.1
16.4
19.9
17.3
18.1
1968.
19.3
12.0
.6
19.0
17.9
1969.
20.8
8.3
.4
19.7
17.6
1970.
21.8
11.1
.5
20.8
18.0
1971.
21.9
9.4
.4
25.8
24.6
1972.
Average,
Percent c
1968-72
22.4
9.4
.4
30.4
24.9
21.2
10.0
23.1
20.6
hange
29.3
-49.7
33.5
13.8
' Total United States exclusive of Alaska.
-' Trillion cubic feet.
3At 14.65 1b in.-a.
* Cents per thousand cubic feet.
5 FPC orders and opinions.
Source: "Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the United States and Canada," American Gas
Association. Exhibit No. 24, Docket No. AR69-1, Southern Louisiana Area; FPC Form 301B, Billing Statements and Certifi-
cate Applications.
448
TABLE III.— WEIGHTED AVERAGE INITIAL PRICES UNDER LONG TERM PRODUCERS
CONTRACTS, BY AREA, BY YEAR OF AUTHORIZATION!
Year of authorization and area
Weighted
Number of
Total
Contract
average 3
contracts
volumes -
revenues
(cents)
1970:
Hugoton-Anadarko 44 30,996,755 $6,160,649 19.88
South Louisiana. 49 100,354,454 23,066,711 22.99
State 19 43,149.239 10,788,234 25.00
Federal Domain 30 57,205,215 12,278,477 21.46
Permian Basin 5 13.793,504 2,850,339 20.66
Rocky Mountain 12 36,964,356 6,103,165 16.51
Other Southwest 5 4,734,936 968,748 20.46
Texas Gulf Coast 8 12,083,990 2,254,857 18.66
State 8 12,083,990 2,254,875 18.66
Federal Domain
Total, 1970 123 198,927,995 41,404,469 20.8r
1971:
Hugoton-Anadarko 31 24,074,480 5,603,420 23.28
South Louisiana 76 233.066.139 64,753,464 27.78
State_ 38 75,282,695 19,620,725 26.06
Federal Domain 38 157,783,444 45,132,739 28.60
Permian Basin.. 31 65,312,760 16,782,245 25.70
Rocky Mountain 17 22,728,312 2,950,219 12.98
Other Southwest 22 6,153,000 1,475.206 23.98
Texas Gulf Coast.. __. 15, 66,540,400 16,123,292 24.23
State 8 13.080,000 3,198,000 24.45
Federal Domain.. 7 53,460,400 12,925,292 24.18
Total, 1971 192 417,875,091 107,687,846 25.77
1972:
Hugoton-Anadarko 39 24,742,500 6,504,523 26.29
South Louisiana ._ 56 309,607,898 96.749,836 31.25
State... 17 23.880,251 7,327,348 30.68
Federal Domain 39 285,727,647 89,422,488 31.30
Permian Basin.... 39 30,728,028 11,365,934 36.99
Rocky Mountain 28 15,943,300 3,481,304 21.84
Other Southwest 20 19,082,450 4,977,055 26.08
Texas Gulf Coast 12 32,172.000 8,523,360 26.49
State 12 32,172,000 8,523,360 26.49
Federal Domain
Total, 1972 194 432,276,176 131,602,102 30.44
1970-72 :
Hugoton-Anadarko 114 79,813,735 18,268,592 22.89
South Louisiana 181 643,028,491 184,570.011 28.70
State.. 74 142,312,185 37,736,307 26.52
Federal Domain 107 500,716,306 146,833,704 29.32
Permian Basin 75 109,834.292 30,998,518 28.22
Rocky Mountain 57 75,635,968 12,534,688 16.57
Other Southwest 47 29,970,385 7,421,009 24.76
Texas Gulf Coast 35 110,796,390 26.901,509 24.28
State 28 57,335,990 13,976,217 24.38
Federal Domain 7 53,460,400 12,925,292 24.18
Totall970-72 509 1,049,079,262 280,694,327 26.76
'Contract analysis based on large producer (annual sales over 10,000,000,000 ffS) rate schedules authorized by FPC
during 1970-72. Volumes based on FPC form 301-B. billing statements, and initial contract prices based on producer
certificate applications.
• Thousand cubic feet at 14.65 psia.
^ Initial price per thousand cubic feet.
449
TABLE IV.-OFFSHORE LOUISIANA FEDERAL OIL AND GAS LEASE SALES IN 1962 AND 1970
Wildcat lease sales dated
Mar. 13, 1962, ar
id Mar. 16,
V/ildcat lease sale dated
1962
Dec. 15,
1970
Number
Bonus paid
Number
Bonuses paid'
of leases
(millions)
of leases
(millions>
401
$445. 0
117
$845. 9
143
i218.0
9
$146. 2
35.7
49.0
7.7
17.3
55
$56.8
38
$346. 1
13.7
12.8
32.5
40.9
198
$274. 8
47
$492. 3
49.4
61.8
40.2
58.2
27.8
20.7
80.8
70.3
70
$353.6
59. S
41.8
(1) Total sold
(2) Currently producing
(Percent of total)
(3) Currently classified producing— shut-in
(Percent of total)
(4) Producing plus producing— shut-in
(Percent of total)
(5) Producing shut-in as a percent of producing plus
produci ng— shut-in
(6) Not classified
(Percent of total)
Source: Department of the Interior, Bureau of Land Management, serial register pages as of January 1973.
TABLE v.— THE COST OF INCREMENTAL GAS SUPPLIES UNDER VARYING SUPPLY-PRICE
ELASTICITY ASSUMPTIONS
ASSUMING 10 TRILLION CUBIC FEET (T FT 3) AND 25 CENTS PRICE PER THOUSAND CUBIC FEET (M FT')
Price increase to 37.5 cents
per M ft 3
Supply/ Cost of supply
increase increment
(T ft 3) per M ft s
Price increase to 30 cents
per M ft 3
Supply Cost of supply
Increase increment
(Tfti) per M ft 3
Supply/price elasticity:
1..
2
3...
4
5
0.5
$2.87
1.0
$3.00
1.0
1.62
2.0
1.75
1.5
1.21
3.0
.1.33
2.0
1.00
4.0
1.12
2.5
.87
5.0
1.00
Price increase to 45.5 cents
per M ft 3
Supply/ Cost of supply
increase increment
(T ft 3) per M ft 3
Price increase to 59.5 cents
per M ft 3
Supply Cost of supply
increase increment
(Tft3) per M ft'
Supply/price elasticity:
1
2
3
4
5
0.3
$3.95
•0.7
$4.09
.6
2.20
1.4
2.34
.9
1.62
2.1
1.76
1.2
1.33
2.8
1.47
1.5
1.15
3.5
1.29
450
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TABLEVII.-T0P5 PRODUCERS WITH THE HIGHEST 1971 VOLUME SALES UNDER CONTRACTS, EXPIRING BY THEIR
OWN TERMS FOR 1973 THROUGH 1980, BY YEAR
Year of expiration and company
Cumulative
Percent of
Percent of
percent of
annual
Number of
Volumes
annual
annual
Revenues
total
contracts
(IVIIVI fts)
total
total
(thousands)
revenues
SOUTH LOUISIANA!
1973:
Getty..
Texaco
Union Oil of California
Phillips
Atlantic Riciifield _
Total..
Annual total.
1974:
Humble
Amoco
Chevron
Kerr IVlcGee.
Continental..
Total
Annual total.
1975:
Shell....
Chevron
Union Oil of California.
Atlantic Richfield
Superior
Total
Annual totsl.
1976:
Chevron.
Amoco...
Getty....
Superior.
Gulf
Total..
Annual total.
1977:
Continental
Union Oil of California.
Humble
Phillips
Atlantic Richfield
Total..
Annual total.
1978:
Union Oil of California.
Sun Oil..
Amoco
Superior
Humble
Total
Annual total.
1979:
Shell
Humble
Getty
Union Oil of California.
Continental
Total
Annual total.
1980:
Union Oil of California.
Humble
Superior
Gulf....
Texaco
Total
Annual total.
53,375
48,215
42,317
25, 574
25, 524
15.5
14.0
12.3
7.4
7.4
29.5
41.8
49.2
56.6
19
65
195,005
344, 837
28.774
24, 733
1,373
1,014
975
56.6
49.8
42.8
2.4
1.8
1.7
92.6
95.0
96.8
98.5
10
22
21
47
20
11
2
13
3
9
38
16
9
4
3
4
36
27
56, 869
57,818
98.5
50,833
29,001
22, 833
16, 869
13,913
30.9
17.6
13.9
10.2
8.5
48.5
62.4
72,6
81.1
133,449
164, 597
81.1
48,213
39,048
38, 869
35,140
34,579
17.0
13.7
13.7
12.4
12.2
30.7
44.4
56.8
69.0
195,849
284,403
68.9
28, 155
20,152
19, 103
19,006
18,825
15.0
10.7
10.1
10.1
10.0
25.7
35.8
45.9
55.9
105,241
188, 277
55.9
75,517
67, 766
55, 720
48,714
30, 693
18.8
16.9
13.9
12.1
7.6
35.7
49.6
61.7
69.3
278,410
401,916
69.3
113,648
50, 550
41,276
35,770
33,218
30.1
13.4
10.9
9.5
8.8
43.5
54.4
63.9
72.7
274. 462
377,816
72.6
96, 066
84, 304
41,947
19, 598
19, 498
28.7
25.2
12.5
5.9
5.8
53.9
66.4
72.3
78.1
261,413
334, 908
78.1
$11,798
9,407
8,109
5,751
4,082
39, 147 54. 7
71,559
5,935
5,582
306 ....
226
212
12,261 98.4
12,466
11,281
6,553
5,095
3,783
3,186
29, 898 81. 7
36,580
11,000
8,704
8,424
8,176
7,657
43,961 69.7
63,068
5,948
4,148
4,031
4,451
4,004
22, 582 54. 9
41,114
15,708
15,619
12,432
11,261
6,294
61,314 69.3
88,472
22,872
10,166
9,113
7,739
7.840
57, 730 72. 1
80,094
21,579
16,600
9,616
4,385
3,839
56,019 77.0
72,710
453
TABLE VII.— TOP 5 PRODUCERS WITH THE HIGHEST 1971 VOLUME SALES UNDER CONTRACTS, EXPIRING BY THEIR
OWN TERMS FOR 1973 THROUGH 1980, BY YEAR— Continued
Year of expiration and company
Cumulative
Percent of
Percent of
percent of
annual
umber of
Volumes
annual
annual
Revenues
total
contracts
(MIVl ft3)
total
total
(thousands)
revenues
PERMIAN BASIN 2
1973:
Phillips Petroleum
Shell Oil
Warren Petroleum
Amoco --
Humble
Total-
Annual total.-
1974:
Warren Petroleum
Cities Service
Texas Pacific
Shell. _ -
Atlantic Richfield
Total
Annual total
1975:
Phillips
Atlantic
Union Texas
Gulf ._.
Mobil
Total
Annual total
1976:
Phillips
Shell
Hunt Oil
Gulf
Atlantic _.
Total
Annual total
1977:
Chevron Vi/est
Phillips
Amoco
Shell
Texaco
Total ...._ _
Annual total
1978:
Gulf
Phillips
Perry R. Bass
Humble
Atlantic Richfield
Total
Annual total
1979:
Union Texas
Phillips
Skelly
Cabot Corp
Chevron West
Total
Annual total..
1980:
Skelly
Continental
Texaco
Gulf..._
Marathon
Total
Annual total
7
12
2
16
10
66, 767
57,299
45,251
20, 528
17, 680
21.3 ...
18,3
14.4
6.5
5.6
39.6
54.0
60.5
66.1
9,961 ....
9,144 ....
8,647 ....
3,472 ....
3,119 ....
47
243
207, 525
313,832 ...
66.1 ...
34, 343
51,196 ....
67 1
1
1
2
1
2
9,438
1.583
1,052
947
800
58.8 ...
1,793 ....
224 ....
9.9
6.6
5.9
5.0
68.7
75.3
81.2
86.2
116 ....
175 ....
91 ....
7
20
13, 820
16,050 ..
85.1 ...
2,399
2,768 ....
86 7
2
2
2
1
2
113,780
7,507
4,147
246
215
90.0 ...
18,242 ....
1,116 ....
5.9
3.3
.2
.2
95.9
99.2
99.4
99.6
272 ....
45 ....
25 ....
9
14
125, 895
126, 457
99.6
19, 700
19,791
99 5
2
5
2
2
3
6,390
2,135
1,197
1,168
570
43.6 ...
1,150 ....
365 ....
14.6
8.2
8.0
3.9
58.2
66.4
74.4
78.3
202 ....
205 ....
74 ....
14
46
11,460
14,651 .._
78.2 ...
1,996
2,396 ....
83 3
2
4
4
1
4
22,950
15, 286
14,287
13, 173
9,983
21.6 ...
14.4
13.4
12.4
9.4
"""36."0"
49.4
61.8
71.2
3,035 ....
2,506 ....
2,573 ....
2,380 ....
1,718 ....
15
73
75, 679
106,282 ...
71.2 .__
12,212
17,534 . .
69.6
8
2
1
5
7
60, 073
40, 049
21,596
18,332
7,021
34.7 ...
9,096 ....
23.1
12.5
10.5
4.1
57.8
70.3
80.9
85.0
6,717 ....
5,899 ....
3,240 ....
1,040 ....
23
48
147,071
173,357 ...
84.9
25, 992
30,574 ....
85 0
1
1
2
2
5
58, 256
21,644
10,064 ;.
9,855
9,298
46.9
8,248 ....
3,700 ....
17.4
8.1
7.9
7.5
64.3
72.4
80.3
87.8
1,773 ....
2,106 ....
2,011 ....
11
42
109,117
124,083 ...
87.8 ...
17, 838
20,598 ....
86.6
1
2
3
2
1
16,235
2,843
1,928
1,608
1,605
56. 3 . .
2,691 ....
557 ....
340 ....
439 ....
329 ....
9.9
6.7
5.6
5.6
66.2
72.9
78.5
84.1
9
28
24,219
28,819 ...
84.0
4,356
5,217 ....
83.5
454
TABLE VII.-TOP 5 PRODUCERS WITH THE HIGHEST 1971 VOLUME SALES UNDER CONTRACTS, EXPIRING BY THEIR
OWN TERMS FOR 1973 THROUGH 1980, BY YEAR-Continued
Year of expiration and company
Cumulative Percent of
Percent of percent of annual
Number of Volumes annual annual Revenues total
contracts (MM ft-) total total (thousands) revenues
HUG0T0N-ANADARK0 3
1973:
Pfiillips 8 28,363
Cities Service Oil Co,.. 2 5,958
Texaco.. 3 3,380
Amerada Petroleum 2 3,331
V^arren Petroleum.. 2 2,644
Total. 17
Annual total.. 71
1974:
Signal Oil & Gas 1
Superior 10
Asfiland Oil & Refining 3
Marathon Oil 1
Mobil Oil 2
Total 17
Annual total 29
1975:
Texaco 2
Atlantic. 3
Atlantic Richfield 3
Mobil Oil 3
Superior.. 1
Total 12
Annual total.. 31
1976:
Skelly. 2
Texaco 3
Atlantic Richfield , 3
Champlin Petroleum 2
Sun... 7
Total 17
Annual total 47
1977:
Atlantic Richfield 7
Texaco 6
Diamond Shamrock.. 3
Mobil Oil 7
Helmerich & Payne. 5
Total.. 28
Annual total 69
1978:
Sun 1
Texaco 3
Humble Oil & Refining 3
Mobil Oil 5
Gulf Oil... 4
Total. 16
Annual total 48
1979:
Texaco. 2
Atlantic. 6
Diamond Shamrock l ,
Sun. 2
Shell ' 1
Total. 12 10,185
Annual total 42 14 751
52.4
11.0
6.2
6.2
4.9
63.4
69.6
75.8
80.7
43, 676 80. 7
54, 152 .y.""
6,075 71.6 .
1,006 11.9 83.5
852 10. 0 93. 5
225 2. 7 96. 2
113 1.3 97.5
8,271 97.5 ....
8,486
1,108 23.1 .
1,010 21.1 44.2
603 12. 6 56. 8
585 12.2 69.0
514 10. 7 79. 7
3,820 79.8
4,787
7,312 43.5
3, 266 19. 5 63. 0
1,917 11.4 74.4
908 5. 4 79. 8
548 3. 3 83. 1
13, 951 83. 1
16,785 ■"
12,007 41.1
6,147 21.0 62.1
2,971 10.2 72.3
2, 144 7. 3 79. 6
1, 089 3. 7 83. 3
24,358 83.3 .. .
29,234 '.'._
3. 299 23. 1
2,610 18.3 41.4
2, 223 15. 6 57. 0
1, 923 13. 5 70. 5
916 6.4 76.9
10,971 76.9 ....
14,264
4,495 30.5
3,119 21.1 51.6
966 6. 5 58. 1
807 5. 5 63. 6
798 5. 4 69. 0
69.0
4,279
1,138
617
638
506
7,178 ■ 81.8
8,780
911
155
128
34
12
1, 240 98. 3
1,262
135
153
95
87
77
547 78. 4
698
1,125
508
340
164
88
2, 225 83. 5
2,666
2,368
763
551
417
204
4, 303 83. 8
5,133
626
413
422
369
174
2, 004 77. 0
2,601
874
587
191
155
144
1,951 70.5
2,768
455
TABLE VII.— TOP 5 PRODUCERS WITH THE HIGHEST 1971 VOLUME SALES UNDER CONTRACTS, EXPIRING BY THEIR
OWN TERMS FOR 1973 THROUGH 1980, BY YEAR-Continued
Year of expiration and company
Number of
contracts
Volumes
(MM ft:)
Percent of
annual
total
Cumulative
percent of
annual
total (
Revenues
[thousands)
Percent of
annual
total
revenues
1980:
Shell
Cities Service .
3
2
12
2
.. • 4
28, 126
12,726
11,352
9,352
8,407
29.3 .
13.3
11.8
9.7
8.8
---g-
54.4
64.1
72.9
5,57P..
2,377 ..
2,183 ..
1,784 ..
1,635 ..
Pan American Petroleum.
Mobil. __ ,
Atlantic
Total
23
83
69, 963
96,012 .
72.9 .
13, 550
18,491 ..
73.3
Annual total
TEXAS GULF COAST*
1973:
Shell Oil
9
14
25
27
36
64, 638
60, 409
45. 898
40, 649
40, 007
15.8 .
14.8
11.2
9.9
9.8
11,377 .
10,710 .
7,636 .
6.914 .
6,525 .
Mobil. ,
Sun Oil..
Pan American Petroleum.
30.6
41.8
51.7
61.5
Atlantic Richfield
Total
Annual total
111
244
251,601
409,010 .
61.5 .
43, 162
69, 135 .
62.4
1974:
Champlin Petroleum
2
1
1
7
2
41,745
13, 604
4,866
3,482
2,845
56.3 ,
18.3
6.6
4.7
3.8
6, 338 .
2,699 .
813 .
544 .
431 .
Shell Oil ,
74.6
81.2
85.9
89.7
Texaco
Sun Oil..
Atlantic Richfield
Total ,
13
32
66, 542
74, 208 .
89.7 .
10, 825
12,025 .
90.0
Annual total
1975:
Gulf Oil
5
6
1
3
1
12, 799
6,621
2,675
1,920
1,820
41.6 ,
21.5
8.7
6.2
5.9
2,336 .
1, 162 .
446 .
359 .
266 .
Atlantic Richfield
Mobil Oil - ..
63.1
71.8
78.0
83.9
Shell Oil
Cities Service (1970)
Total
16
39
25, 835
30, 780 .
83.9 .
4,569
5,399 .
84.6
Annual total ,
1976:
Cities Service (1970)
1
2
5
1
7
9,594
5,192
2,351
2,293
2,196
29.2 .
15.8
7.1
7.0
6.7
1,412 ..
805 .
360 .
390 .
325 .
Coastal States
45.0
52.1
59.1
65.8
Mobil Oil.
Shell Oil
Atlantic Richfield
Total
Annual total
16
43
21,626
32, 898 .
65.7 ,
3,292
5,062 .
65.0
1977:
Texaco
Atlantic Richfield ,
2
1
1
1
5,655
807
62
43
42
85.3 ,
12.2
1.0
.6
.6
97."5"
98.5
99.1
99.7
903 .
122 .
10 .
8 .
7 .
Gulf Oil
Continental Oil
Tenneco Oil
1
Total
6
7
6,609
6,629 .
99.7
1,050
1,053 .
99.7
Annual total
1978:
Champlin Petroleum
1
2
1
2
2
21, 809
5,898
4,755
2,056
1,935
53.5
14.5
11.7
5.0
4.7
68.1'
79.7
84.7
89.4
3, 284 .
1,236 .
908 .
322 .
322 .
Phillips Petroleum
Shell Oil
Humble Oil
Getty Oil
Total..
8
22
36, 453
40,754 .
89.4 ,
6,072
6,801 .
89.3
Annual total
27-547 — 74-
-30
456
TABLE VII
-TOP 5 PRODUCERS WITH THE HIGHEST 1971 VOLUME SALES UNDER CONTRACTS, EXPIRING BY THEIR
OWN TERMS FOR 1973 THROUGH 1980, BY YEAR-Continued
Year of expiration and
company
Number of
contracts
Volumes
(MM ft3)
Percent of
annual
total
Cumulative
percent of
annual
total
Revenues
(thousands)
Percent of
annual
total
revenues
1979:
Cities Service Oil...
American Petroleurr
Mobil Oil..
1 of Texas...
2
3
1
1
3
1,851
1,360
1,127
509
496
28.1
20.7
17.1
7.7
7.^
48.'8"
65.9
73.6
81.1
327 .
217 .
174 .
94 .
97 .
Shell Oil
Texaco
Total
Annual total
10
22
5,343
6, 580 .
81.2
909
1, 142 .
79.6
1980:
Atlantic Richfield...
4
4
1
5
5
10,681
6,580
6,252
3,157
2,478
29.1
17.9
17.0
8.6
6.8
-----
64.0
72.6
79.4
2,096 .
1, 164 .
1,150 .
575 .
457 .
Tenneco
Austral Oil
Humble Oil
Sun Oil
Total.
19
34
29, 148
36, 688 .
79.4
5,442
6, 713 .
81.1
Annual total
' Volumes and revenues based on FPC form 301-B filings for 1971. Sources for area rate schedules, including date of
contract and initial contract term are for south-Louisiana, AR51-2, staff exhibit No. 28-B and AR69-1, staff exhibit No. 45.
2 Volumes and revenues based on FPC form 301-B filings for 1971. Sources for area rate schedules, including date of
contract and initial contract term are for Permian Basin, FPC, ADP file No. R/AC2001W2 (tape No. 2000 created Septem-
ber 28, 1972).
3 Volumes and revenues based on FPC form 301-B filings for 1971. Sources for area rate schedules, including date of
contract and initial contract term are for Hugoton-Anadarko, FPC ADP file No. R/AU1901W3 (tape Nos. 608, 380, and
1858 created March 1, 1972).
i Volumes and revenues based on FPC form 301-B filings for 1971. Sources for area rate schedules, including date of
contract and initial contract term are for Texas Gulf Coast, FPC ADP file No. R/AU1901W3 (taps Nos. 608, 380, and 1858
created March 1, 1972).
Senator Hart. Having been almost indirectly introduced already,
we welcome the Chief of the Division of Economic Studies of the Fed-
eral Power Commission, Dr. John Wilson.
As with Dr. Schwartz, the subcommittee had an earlier opportunity
to meet Dr. Wilson, and we are olad to have him back.
STATEMENT OF DE. JOHN W. WILSON, CHIEF, DIVISION OF ECO-
NOMIC STUDIES, OFFICE OF ECONOMICS, FEDERAL POWER COM-
MISSION; ACCOMPANIED BY GEORGE DONKIN, STAFF MEMBER
Dr. Wilson. Thank you, sir.
I am John Wilson, Chief of the Division of Economic Studies,
Accompanying me this afternoon is George Donkin of my staff. He
has played a major role in collecting and assembling the facitual infor-
mation and analysis that we are presenting today.
I realize that time is quite short and my testimony lenothy. I will
therefore, present only an oral summary, but I am willing to answer
any questions pertaining to any poi-tion of my statement.
Senator H.vrt. And the prepared statement will be printed in full.
Dr. WiLSox. Thank you. sir.
The fundamental conclusion that seems inescapable is that the
petroleum industry is not in any sense of the word either adequately
or workably competitive.
Whether or not a market is competitive depends on the degree of
seller rivalry, and whether these sellers are independent. The evidence
presented in my testimony shows, quite clearly, that sellers are not
457
independent: they are interdependent upon each other, and the prin-
cipal form of rivahy now prevailing in gas production markets is
rivahy between buyers. Thus, the producers sit back and phiy one
prospective buyer off against another and call this competition. The
twisted semantics aside, it is finite clear that whatever name we give
it. l)uvcrs' rivalrv does not foster consumer interests.
Initially, it sliould be observed that when we address the natural
gas producing industry, we are really discussing the petroleum in-
dustry. As shown in table 1. the top li natural gas producers in 19T0
were also amono- the top 15 oil and liquids producers and among the
top 17 petroleum refiners. These 14 leading gas producers were also
among the 17 largest sellers of gasoline and other refined petroleum
products and among the 17 largest sellers of natural gas to interstate
pipelines.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
These same companies' are the ones wliich face consumers from the
other side of the so-called energy crisis, in all petroleum markets, and
some of them also hold significant supply positions in the coal and
uranium industries.
To an economist, it is interesting, though not surprising, that the
energy crisis has not created obvious financial difficulties for these
firms.^ In fact, recent evidence suggests cjuite the opposite. Many of
these companies, as well as other firms in the petroleum industry,
experienced record profit levels in the first quarter of 1973.
Table 2 presents information on after-tax profits in this most recent
quarter as compared Avith the first quarter of 1972. Every company,
without exception, experienced substantial improvement, and the aver-
age earnings increase was between 25 and 30 percent.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
As for the concentration of our natural gas supplies, table 3 shows
that the top four producers in the major producing areas have gen-
erally accounted for 50 percent or more of the new gas sold to
interstate pipelines in recent years. The top eight have accounted for
GO to 80 percent or more of annual new commitments.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
A familiar rule of thumb is that in industries where the eight largest
firms have at least 50 percent of the sales, normal unrestrained market
forces are likely to be an insufficient guarantee against monopolistic
market performance. The eight-firm concentration ratios in table 3
are, of course, far above the 50-percent level. Another concentration
calculation is persented in table 4. The four-firm and eight-firm ratios
sliown there are based on an actual survey by the FPC of available
uncommitted gas supplies as of December 31, 1971, and June 30, 1972.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimonj-.]
These ratios are extremely high, and they tend to be remarkably
stalile over time.
Finally, the evidence presented in table 5 demonstrates that concen-
tration appears to be quite high even in a prospective sense. Over 80
percent of the Federal offshore leases acquired, weighted by bonus-
458
dollars paid, in each of 3 recent lease sales -were accounted for by the
top 8 bidders and their bidding partners.
[The table referred to appears in Dr. "Wilson's prepared statement
at the end of his testimony.]
In all 3 sales combined, the top 8 accounted for TO percent of the suc-
cessful bids.
It is also noteworthy that mergers and acquisitions during the last
two decades suggest that concentration is increasing over time. A listing
of major petroleum industry mergers is presented in table 6.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
In addition, there has been relative stability in the makeup of the
top firms in the industry.
In 1971, the 10 leading interstate natural gas suppliers were:
Exxon, Amoco, Shell, Gulf, Phillips, Mobil, Texaco, Union Oil, Atlan-
tic Richfield, and Continental. The first 8 of these were also among the
top 9 producers, 15 years earlier. The 2 new entrants into the top 10,
Union Oil and Continental, attained entry via merger — Union by ac-
quiring Pure Oil, and Continental through a variety of acquisitions.
In summary, virtually any reasonable measure of seller concentra-
tion in natural gas markets indicates that there is a substantial degree
of dominance by the large producers.
There is also substantial direct evidence of mutual interdependence
between virtually all of the major firms in the petroleum industry.
This interdependence includes joint ventures, interlocks, and institu-
tional interties in the following general areas of activity :
1. BIDDING COMBIXES
Table 7 lists the major bidding combijies which participated in Fed-
eral offshore lease sales in 1970 and 1972. Because various majors be-
longed to two or more of these combines, the web of interdependence is
far more pervasive than the membership of any single combine would
suggest. Figure 1 illustrates some of the mterties that exist between
the individual combines.
[The table and figure referred to appear in Dr. Wilson's prepared
statement at the end of his testimony.]
As for argmnents which allege a procompetitive effect emanating
from Federal offshore lease sales, there is very little appeal. In terms
of economic analysis, there is little or no substantive difference be-
tween the end result obtained from tlie formation of a bidding combine
and the end result of a conspiratorial agreement between oil companies
to rotate bids.
Legal authorities would have to be relied u]-»on for cogent reasons as
to why the former is warmly embraced by the Interior De]:)artment
while the latter is viewed as a per se violation of section 1 of the Sher-
man Act by the Justice Department.
My own view is that the offshore leasing program, as currently
administered by the Interior Department, has become one of the most
onerous anticompetitive cartelization devices at work in our domestic
gas producing industry. Not only is it a vehicle for further joint ven-
tures and the integration of intercorporate interests, but it has also
become an effective entry blockade for all but the very largest firms in
the industry.
459
I will mention in passing that table 9 lists potential U.S. onshore
and oli'shore petroleum reserves. Total estimated potential offshore
natural gas reserves alone are equal to more than 100 times current
U.S. annual production. Some of these reserves will, of course, require
technological advances in order to be economically recoverable. It
should be noted, however, that as of 1970, total onshore and offshore
proved reserves, plus estimated unproved natural gas reserves which
are believed to be recoverable under present technological and eco-
nomic conditions, were equal to about 6 times as much natural gas as
has been produced in our entire history, or nearly 100 times our cur-
rent annual consumption.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
2. BAXKIXG INTERLOCKS
It is illegal under section S of the Clayton Act for one person to
serve on the boards of two companies that produce the same goods or
services. Literally interpreted, this prohibition apparently does not
prevent two persons who work for and represent the same individual
or corporation from serving on the respective boards of two competing
companies.
Thus, a large firm in the financial community can assign two of its
vice presidents to serve as directors for two different oil companies.
For example, the most recently available evidence on corporate
directors from the banking community shows that, as of 1968, ]Morgan
Guaranty and Trust Company of New York had its employees serving
as directors on the boards of Continental Oil, Cities Service, Atlantic
Richfield, Belco Petroleum. Columbia Gas, Louisiana Land and Explo-
ration Company and Texas Gulf Sulphur. Morgan also held sub-
stantial stock ijiterests in Texas Eastern Transmission Corp. and Pan-
handle Eastern Pipeline Co. as well as nmnerous gas distribution
utilities.
A listing of certain interlocking directorates in the petroleum indus-
try by major banks, as of 1968, is provided in table 10.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
3. JOIXT OWXERSIIIP OF OIL TIPELIXES
Virtually all of the major integrated petroleum companies hold
joint interest with others in the transportation network that moves
crude oil and products from producing regions to refineries and
markets. A mnnber of these joint ventures and the participants in
each are listed in table 11.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
The fact that these specific corporate interties involve only oil does
not speak well for competition in natural gas markets. As is well
known, the important consideration is that a joint venture provides a
common meeting-place where supposedly rival firms may legally co-
operate, and, regardless of the purpose of the venture, the result will
be a close association and coUal^oi-ation between the parties involved.
This cannot help but spill over into tlieir other activities. Today when
460
one counts the common meetino-places wliicli pervade the petrolonm
industry, one is hardly surprised that there is considerable mutual
cooperation among- the major petroleum companies and little hard-
f ouglit competition.
4. JOINT rKODrCTIOX
Only 4 of the 16 lar<rest majors ^vith interests in Federal offshore
producing: leases own 50 percent or more of their leases independ-
ently. Conversely, 10 of the 16 own 80 percejit or more of their offshore
properties jointly with each other. In addition, very few companies
outside of the top 16 have any independent holdings at all.
In addition to the top 16, 2-3 medium- to large-size producers were
surveyed. Of these, only 2 hold as nmch as 2.5 percent of their leases
independently, and IT had no indej^endently owned leases at all.
A tabulation of these direct corporate interties is presented in table 12.
[The table referred to appears in Dr. "Wilson's prepared statement
at the end of his testimony.]
These direct relationships do not, of course, reveal the full degree
of mutual interdependence that exists in offshore petroleum produc-
tion. Table 12 shows, for example, that Mol)il Oil, which has 6 in-
dependently owned leases, is a joint partner with Continental in 19
leases; with Cities Service and Getty in 8 each; with Gulf in 7;
Chevron in 5 : and Avith Exxon and Amoco in 4 each.
[Tlie table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
In turn Continental. Cities Service and Getty have a substantial
numl)er of joint ventures with Atlantic Richfield and Tenneco, while
Gulf has four with Phillips. Amoco has 29 joint ventures Avith
Texaco. 12 with Union Oil of California, 8 with Southern Natural,
and 4 each with Kerr McGee, Superior, nnd Pennzoil.
Thus, tlie web of offshore production interties is even more encom-
passing than a superficial readino- of table 12 may suggest at first
blush. Figure 2 is a more vivid illustration of these complex connec-
tions.
The ownership of onshore producing leases is also highly intercon-
nected. Of the 18 largest major producers in the State of Louisiana.
14 have 5 or more direct interlocks with the other 17. Continental for
example, has 28 joint ventures with Atlantic, 27 with Cities Service, 27
with Getty, 16 with ISIobil, 13 with Exxon, and 11 each with Amoco
and Sun.
In addition. 38 other medium and large producers in Louisiana
were studied. All had substantial interlocking lease ownership ar-
rangements with the largest majors.
A complete tabulation of these Louisiana lease ownership interlocks
is reported in table 13.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
5. IXTERXATIONAT. .TOTXT VEXTFRES
In addition to the inten'elated domestic oneratious of the major
American petroleum companies, we should not lose sight of the fact that
461
it is largely these same corporate entities or their affiliates which make
up the international oil cartel.
While a limited quantihcation of 18 international joint ventures is
reported in table 15, a review of petroleum industry trade publications
over the past decade indicates that there is a far more extensive system
of international interties among the major American oil companies. A
simple tabulation of reports on international interties as noted in the
Oil and Gas Journal is presented in table 16.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
In general, it should be kept in mind that foreign supplies will floAv
to American markets through the same corporate conduits which are
already thoroughly interdependent both domestically and abroad.
G. VERTICAL IXTKGRATIOX
It is a well estal^lislied fact that vertical integration on the oil side
of the petroleum industry has served to inhibit workable competition
in crude oil production and gasoline retailing. In general, even the
most outspoken critics of natural gas regulation acknowledge the anti-
competitive shortcomings induced by vertical integration in oil.
The vertical integration issue on the natural gas side of the petro-
leum industry has not received equal or adequate attention by industry
analysts. As "shown in table 17, virtually all of the largest interstate
natural gas pipeline companies are also involved in petroleum ex-
l)loration and development — either dii'ectly or through corporate
affiliates.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
There can be little doubt that with pijxdines and their affiliates
heavily involved in petroleum production, the contention that arm's-
leng-th bargaining between producers and pipelines will be sufficient
to protect the public's interest in just and reasonable natural gas prices
is ludicrous. Clearly, this is still another major factual reason for deny-
ing that there is any semblance of workal)le competition in the natural
gas industry as it is presently structured.
All of these arrangements bring horizontally and vertically jux-
taijosed firms into close working relationships with each other. They
must work together to further their joint interests. Consequently,
each becomes familiar with the others and with each other's operations.
Men in such close working relationships learn to consider one an-
other's interests. This most assuredly is not the kind of institutional
setting within which a free market economy can be expected to function
efficiently.
The petroleum industry's rhetoric about letting free market forces
solve the energy crisis simply makes no sense within the present mar-
ket context. In order to function both efficiently and in the public
interest, free markets must be competitive.
This means that the participants must be structurally and belia.vior-
ally independent of each other. That precondition, quite apparently,
does not ap]:>ly to the petroleum industry. Consequently, given present
institutional arrangements the industry's free market prescription
would not produce a competitive end result.
462
7. POLICY PROPOSALS
Federal re,friilation of the field price of natural gas was supposedly
desioned to deal Avitii anticompetitive problems. Apparently, it is not
working well. As in the case of fuel oil and gasoline, natural gas
supplies are short and prices are rising rapidly. No one can deny that
policy changes are needed.
The prescription offered by the petroleum industry and its various
spokesmen is unrestrained market freedom. They prescribe a situa-
tion wherein the industry, not the public, would be free — free, that
is, to extract the maximum possible price that the market will bear.
Unless capitulation to the monopoly power of private economic
interests is now viewed as a national policy alternative, this prescrip-
tion makes no sense. Certainly, from the consuming public's view, it
cannot be described as a rational stratagem.
Both arrogant sellers and desperate buyers could respond to this
by saying: "What could possibly be worse for the consumer than
having no gas? "We might as well pay up and avoid the worst." Ob vi-
ouslv,"that position may make some sense from the point of view of
an individual consumer who has no recourse but to capitulate to
monopoly power, but Congress, presumably, is not so constrained.
The first and foremost step which must be taken in order to make
the regulatory system workable is to eliminate the intrastate exemp-
tion which producers are now able to use as a leverage device in the
interstate niiarket. The typical procedure these days is for gas pro-
ducers to whipsaw interstate prices to higher levels on the basis of
the highest prices that have been paid in unregulated intrastate
markets.
That this practice undermines the establishment of just and reason-
able cost-based rates for natural gas is obvious. Why should pro-
ducers A'oluntarily sell gas at competitive, cost-based price levels if
there is an alternative unregulated market where they can charge what
the traffic will bear and which they can use as a lever to force up
interstate prices?
What has not been as obvious, perhaps even unlaiown to some, is
the fact that interstate sellers are also intrastate buyers. They are,
therefore, in a unique position to manipulate the so-called market
pi'ice.
Senator Hart. Doctor, let me interrupt, there is a rollcall and it
is on a proposition that I am not familiar with. I want to give myself
as much time with it as I can.
Dr. WiLSOx. Yes, sir.
FA brief recess was taken.]
Senator PTart. The committee will be in order and we will resume
with Dr. Wilson's testimony.
Dr. WiLSOx. In the fall of 1072, the FPC collected data on large
intrastate gas commitments over the most recent 12 months from each
of the 75 largest interstate gas suppliers. Information concerning the
producers surveyed as well as aggregate quantities and prices Avere
published by the Commission in November 1972. However, the iden-
tity of the interstate buyers was not revealed at that time. Table 18,
presents such a listing.
[The table referred to appears in Dr. Wilson's prepared statement
at the end of his testimony.]
463
Dr. "WiLsox. Surely one can be forgiven for suspecting that when
Pennzoil, Amoco, Phillips, and Continental, acting as intrastate buyers,
bid up the price of gas, there may be some potential for certain fairly
obvious ulterior motives.
Second, Congress should seriously consider the merits of establish-
ing an independent public corporation to explore for and develop
petroleum hydrocarbons on Federal property.
Without a competitive threat, producers can well afford to move
slowly as the growing energy crisis builds support for higher prices.
"With a viable public corporation that can step in and do the job if
they don't, consumers would at least have a better bargaining position.
There are substantial indications that merely providing positive
incentives through higher prices is not working well. The FPC has
taken a number of significant steps to increase new natural gas prices
in the last 2 years, but proved reserves have not grown appreciably.
The result is tliat now the industry trade press talks about the im-
minent likelihood of future prices double those that have been insti-
tuted recently, which are, themselves, double those that prevailed only
a few^ years ago. In an economic climate such as this, it is seldom the
case that those who hold the valuable and rapidly appreciating assets
are in any hurry to liquidate tlieir holdings. Why sell today wlien the
price is x, if tomorrow it will be x squared ?
Thus, regulation is a scissors with one blade — fair rates can be
established, but if producers decide to hold out, regulators have little
authority to rectify the situation. The establishment of a viable,
Federarcompetitive threat would make this scissors functional.
Third, it would, of course, be possible to attempt to deal with the
anticompetitive features of the petroleum industry through the pas-
sage of new antitrust legislation or through the vigorous and creative
implementation of existing antitrust statutes. That this will be done
without a congressional mandate and sustained popular support seems
unlikely. Xo one familiar with our recent antitrust track recorcl could
be overly optimistic about the outcome witliout some new manifesta-
tion of the strongest possible congressional support.
Summary at this point is quite simple. The industry is not com-
petitive. Present regulation is not working well. There are a myriad
of wa3's in which competition can be increased : Eeformingthe Interior
Department's leasing practices; establishing a viable, independent
public corporation; vertical divestiture by producers of oil and gas
pipelines, and by refiners and gas pipelines of their producingand
marketing operations; splitting up of all but the most essential joint
ventures, where they remain (for example, unitization of producing
fields for conservation purposes), adequate public safeguards: some
horizontal divestitui-e of the largest producers, refiners, and marketers:
and others. In order for these reforms to be meaningful, they would
have to be many and thorough.
There are also ways of improving regulation : Closing the intrastate
regulatory gap : obtaining more and l^etter corporate information so as
to be better able to ascertain ]:)roducing costs: the establishment of a
clear understanding that just and reasonable prices should fairly
reflect no more than the costs of efficient operations ]-»lus a reasonable
rate of return : and, perhaps, formal institutional divorcement of the
investigatorv and public advocacy functions of regulatory agencies
from the adjudicatory functions.
464
There are two solutions that are clearly bad : Continuing as is as if no
change is needed, and turning control over to the private monopolists.
I believe that essential regulatory improvements are needed first;
they are the easiest to agree upon and can be implemented most rapidly.
At the same time, if it is possible, we should begin the long, hard proc-
ess of restructuring the petroleum industry so as to reform the under-
lying market structure and, liopefully, make it workably competitive.
But that is a longrun goal, not to be confused with the free market force
rhetoric whicli flows on like manna, as if unmindful of the facts and
unwary of their consequences.
Than.k you. That concludes my oral statement.
Senator Hart. Doctor, the subcommittee wants to thank you for the
enormous eifort that must have gone into the preparation of your state-
ment. I think it is fair to suggest that your statement really represents
the inost comprehensive collection of pul)lic and nonpublic data show-
ing the structure of the natural gas producing industry available.
I think the points you have made on the questions of concentration
ratios, the community of interest, and the lack of independence of the
companies, constitute major new evidence. This massive testimony. I
tliinlc. will be of enormous value. I simply want to thank you, and Mr.
Donkin as well, for the development of it.
Dr. Wilson. Thank you, sir.
Mr. Donkin. Thank you, sir.
Senator Hart. Now, we always like to reach out and find additional
reasons to prove that some earlier action was correct. I am going to do
that with your testimony.
Some time ago I introduced the Industrial Eeorganization Act. and
I suggested that half a dozen areas of our economy probably conld be
restructured to the benefit of all, and petroleum is one of them. What
you have presented here persuades me to think that that suggestion was
prol)ably sound.
The action whicli the press today suggested the Federal Trade Com-
mission may take, argues tlie same point.
Dr. Wilson. T am familiar with the act. sir. and if you would per-
mit me, I would like to make one observation with respect to the
petroleum industry.
I flo develop the point to some extent in mv prepared testirnony and
I didn't express it in the summary I gave. We have a verv unique situ-
ation in the petroleum industry, one that goes far beyond the structural
situation that can be factually identified and documented in the other
concentrated iu'^lustries that "tlie subcommittee has singled out for ex-
plicit investigation and corrective action.
I do not depreciate the value of concentration ratios. Concentration
ratios are a verv valuable piece of information from whicli deductive
logic can flow. AATien we see an industry that is highly concentrated, it
is reasonable to lielieve that the firms inthat highlv concentrated indus-
try cannot fujiction independently. Any action that any one of those
individual firms takes has a direct impact on the others; because of
this, the firms know there is going to be reaction when they take this
action.
Consequently, a community of interest develops and a live-and-let-
li\-e situation evolves. This is whv economists have always focused on
465
concentration i-atios as an inclicati\-e piece of factnal evidence that sug-
gests something about the lack of interdependence in an industry.
Xow, there is high concentration in our natural gas markets. But in
addition to that, thei-e is a vast, overwhelmfng amount of direct evi-
dence on the lack of interdependence, and I would submit to you that
this particular industry, because of the dual evidence that has been
de\-e]oped with respect to it. is particularly worthy of very careful
examination.
Senator Hart. Doctor. I ha\-e made the tentative decision that the
subcommittee should proceed to study one of those other industries
fiist. I gave the staff that indication only a week ago. and in light of
what you just said and the material you presented to us, I think I
should ask the statT to review the bidding and*see if perhaps we should
change signals and proceed to study the petroleum industry first.
T^r. WiLSox. It would certainly make me think that maybe some-
thing was accomplished here. Thank you for the compliment.
Senator Haet. Mr. Bangert.
Mr. Bangert. Mr. Nash has some questions.
Mr. Nash, You referred in your testimony to the fact that intra-
state gas prices were being used as proxies for free market in arguments
before the Federal Power Commission to increase the prices for inter-
state gas, and then you indicated that you have some information re-
specting wlio the purchasers of intrastate gas are, and you identified
them as some of the major iietroleum companies seeking high prices
before the Federal Power Commission, It would be helpful for the
record if you indicate whether it is unusual for the major petroleum
companies to be the big purchasers of natural gas as well as being-
producers of natural gas.
Dr. WiLsox. The answer to that is no, but apparently, it is not at
all unusual. The producers of natural gas, as I have already indicated,
are major petroleum companies that use large volumes of natural gas
in oil refining operations.
As a matter of fact, we have a number of applications coming into
the Federal Power Commission at the present time pertaining to off-
shore natural gas volumes, this gas being in the Federal domain and
thereby being, under the law, in interstate commerce.
HovN-ever, a number of interesting propositions have been made with
respect to some of these volumes. For example, certain producers have
indicated ; ""Well, we can make this gas available. We can pull it out of
the ground. It is interstate gas, but we will pull it out of the ground
and sell it only if you will allow us to take x percent of it and use it
in our refineries in Texas or Louisiana and sell only the remainder to
The interstate market."
So, it is not only that — as indicated in table IS of my testimony — ■
most of the large buyers in those areas are also sellers interstate,
and sell gas to a large variety of interstate pipelines all over the
country; in addition, what I am saying now is that they are also be-
coming significant buyers, in some cases, of certain volumes that are
being produced in the Federal domain offshore.
Mr. Nash. Is that a recent phenomenon — major producers purchas-
ing substantial quantities of gas in intrastate sales ?
Dr. WiLSOx. From the information that I have at my disposal,
I know of ordy the information available in this particular survey.
466
It is 1113'- impression, however, without having other studies that I can
bring in to back that up, that this is a fairly long term process. The
petroleum refinino; industrv has been around a long time and has been
using natural gas m rermeries.
Mr. Nash. If the seller of the product is the same as the buyer of
the product, why are intrastate sale prices pointed to as a proxie for
free market forces ?
Dr. WiLsox. Precisely, Mr. Nash !
Mr. Nash. I mean, why has this selling been accepted if the facts
are as you suggest ?
Dr. Wh.sox. I have not accepted it, ]Mr. Nash. I don't have an
answer to that question. I cannot comprehend an answer,
Mr. Nash. You referred a moment ago the Chairman's Industrial
Eeorganization Act and made a very good case for giving high priority
to the petroleum sector, and you did have some connnents in your
statement respecting what type of antitrust action ought to be taken.
Do you have any particular proposal in mind that you would suggest
be considered when and if a restructuring of that industry takes
place ?
I thought as long as you are here we might have the benefit of your
expertise.
Dr. WiLsox. I prefer not to shoot from the hip on that. That is a
A-ery important question and it is one on which I have some prelimi-
nary thoughts.
But it certainly deserves very significant study and recommenda-
tion and at some point I would be interested in getting into that.
Senator Hakt. Well, when we move in tliat area, we would cer-
tainly want to have your considered recommendations.
Dr. WiLsox. I would be pleased to give them.
Mr. Nash. As I understand it, vou are chief of the Economic Study
Division of the Federal Power Commipsion. Since I am sure the job
entails what the name implies, I would like your assessment of the
significance of the natural gas reserve study's conclusion that the
Nation is suffering from a substantial shortage of natui'al gas.
Dr. Wn.sox. First of all I should ])oint out that I did not partici-
pate in any way in the Natural Gas Survey. I, therefore, cannot offer
anv insights into that in any functional sense.
I think that as to the question of whether or not there is a natural
gas shoi-tage, however, clearly there is less gas being supplied at
the present time than consumers— and here I use the word comprehen-
sively to mean not only residential consumers l")ut industrial consum-
ers— than all consumers would, if they had their druthers, like to
consume. A^Hiether or not there is a natural gas shortage, I think, is a
somewhat more complex question than that particular factual obser-
vation yields an answer to.
I have indicat.ed in one of the tables in mv testimony which is on
)")aoe 36, ceitain estimates which were provided by the USGS to the
FPC's Natural Gas Sin^vey. They are broken down into past ]n-oduc-
tion (the first line) — that is, evervthing that has been produced in the
history of the Iliited States until December 31, 1970 — and the piwed
reserves remaining as of that date
Mr. Nash. Of course, that indicates a substantial amount of poten-
tial reserves?
467
Dr. Wilson". "Well, the proved vesQwes (the second line) is slig-htlv
more than a 10-year supply. You see. onshore we have 252, and olfshore
wo luiAO 39. Annual production is about 25. So we lia\e more than a
10-ycar supply as of that date.
At the present time it is hovering right around a 10-year supply.
Now, on the third line we have additional reserves which are defined as
recoverable under current technological and economic conditions. This
is over 2 trillion ISlcf. If you add the proved to those that are not
proved but recoverable, and divide that by 25 billion ]Mcf, which is our
current annual production, in that sense we have a 100-year supply, if
you can think of it in those terms. That, of course, is overly simplistic.
In addition — I should, I suppose, be explicit on what proved re-
serves are as against these additional reserves that are recoverable.
Proved resen^es are— there is a tei-m of art involved — essentially, I
ha\'e characterized it as being similar to a shelf stock in the retail
business. They are gas reserves into which wells have been drilled and,
therefore, are ready to flow. In addition, there are substantial addi-
tional reserves recoverable under cuiTent technological and economic
conditions, and we have darn good reason to believe they are there.
The fact is that they just haven't been drilled yet. If you are a pro-
ducer who is speculating against a 60- or 80-cent price in the future,
you don't drill wells into these reserves until you are ready to sell the
gas. Why put on all of these extra carrying costs prematurely? So,
you see, we have substantial gas and oil reserves yet to be developed in
this country.
Xow, the'question is, '"Why aren't they being developed ?•' The indus-
try would say, we are not giving it enough incentive. Alternatively. I
would say there is evidence that there is substantial market ]:)ower in
this industiT and a situation for very classical monopolistic behavior —
restrain the supply, prices go up.
The studies that the FPC staff has done on costs don't indicate any-
where near the 60- or 80-cent range that industry people are talking
about now on the basis of so-called demand justified prices.
]Mr. Xasii. Wiat are the costs approaching ?
Dr. Wilson. Well, in the recent Belco case, which is the most recent
hearing in which the FPC staff put cost information, the staff
i-ecommended 35 cents, which included a 15-percent rate of return after
taxes. I personally have not made cost studies.
One of our problems, quite frankly, is that we do not have all the
cost data that exists in compau}^ files. I think the companies know, to
some extent better than we do, what the tme costs are from their pro-
prietary information that we have not been able to obtain. But based
on present costing methodology, we are told that as of March 1973,
costs were somewhere in the 35-cent range.
Now, that includes a 15-percent rate of return after taxes. I have some
problems with the application of that methodology under present cir-
cumstances because it assumes an unusually low discovery rate per
foot drilled — unusually low in a long-term sense. Discovery has not
been very ffreat in recent years l^ecause there hasn't been an awful lot
of exploration and development during this period, and current costing
methods have used these most recent drilling results as a basis for cost
calculations.
468
I Avould prefer to use a longer term basis for estimating that factor
because I expect in the future, when drilling activities increase, that
our discovery rate, especially in the otfshore area, is going to be con-
siderably higher and we may find the cost even below current estimates.
Mr. Nash. Is that to say that estimated reserves and calculating the
price were kept low so that the unit cost must necessarily become
higher.
Dr. WiLSOx. No, sir, I do not think that necessarily follows. What I
am saying is that if there is not a large-scale exploration and de^elop-
ment activity going on, you are not as likely to find new large fields.
There tends to be primary emphasis on developing drainage properties.
Therefore, the absence of large-scale production of proved reserves in
the offshore area in recent years probably yields us an underestimate of
what discovery rates are going to be in that offshore area later on.
]SIr. Nash. It has been indicated that the returns afforded the pro-
ducers are insufficient to elicit supply. Can you give us an indication
of the ty])es of returns afforded producers that are now being quoted
as not sufficiently high ?
Dr. WiLSox. Well, as I indicated, it has been the Commission's
practice to allow for an after-tax rate of retui-n, on total investment
not merely on equity, of anywhere from 12 to 1,5 percent in recent
years. In the second South Louhmna case and the BeJco case the Com-
mission allowed for a 15-percent after-tax rate of return on total
investment. That, of course, means that if you have a company like
Tenneco with substantial debt in their total capitalization— this debt
money raised through lending markets; I think Tenneco's imbedded
debt cost is slightly in excess of 7 percent — if you have substantial
amounts of debt money in your capitalization that has been raised at
much lower costs than the 15-percent allowed rate of return overall,
then the rate of return actually earned on equity is much higher. So in
response to your question, apparently the rates of return that have
been allowed for in this 12- to 15-percent range on total capital have
not been appropriate as far as the producers are concerned. That
assumes, of course, that the cost calculations themselves are accurate.
Mr. Nash. When there is a rate proceeding going on, do you get
specific underljnng cost data from the companies to allow you to
calculate unit costs?
Dr. WiLsox. I never have been involved in an area rate case. It is
my understanding that that typically does not happen. It has not
liappened'in the producer rate cases in which I have been involved. In
area rate cases, company questionnaires have been sent out, but recently
we haven't collected anything like that.
Mr. Nash. My last question may take the position that the present
return afforded producing companies is adequate and, in point of fact,
gas is not being produced in adequate supply for one reason or another.
I would like to know if you have anj- specific recommendations as
to how we can get the gas flowing and get it flowing now rather than
several years from now.
Dr. WiLsox. Yes, sir. I think the antitrust solution to the problem
is long range rather than immediate. Surely there are some things that
the Government itself can do to stop being an accomplice in anti-
competitive activity. Interior could change its offshore leasing prac-
tices. That could be accomplished fairly quickly.
469
Also — and I am really speaking out of school here because I know
nothing about the internal functions of the Congress — but I don't see
why the Congress couldn't eliminate this intrastate regulatory gap
tluit creates a means of leverage by which the interstate prices arc
jacked to higher levels and creates a motivation for holding off. If
you have an unregulated, monopolistic market where you can charge
what tlie market will bear, you might be better off holding your gas
for several j^ears and selling it somewhere down the pike at high un-
regulated rates rather than selling it now at just the reasonable rates
in the interstate market. That would be one thing, I think, that would
be a definite help.
There are others listed in the conclusions to ]ny testimony.
Mr. Nash. Thank you very much. I have no further questions.
Senator PIart. Mr. Chumbris.
Mr. Chumbris. Thank 3'ou very much. ]Mr. Chairman.
I am going to make the same connnent to Dr. Wilson that I made
to Dr. Schwartz. You made some statements and observations; there
are other statements and observations in the record that would take
issue with some that you have made, and we will have to let the full
record speak for itself.
Dr. WiLSox. In addition to opinions, we would be glad to discuss
the facts with you, if you Avanted to do that, Mr. Chumbris.
Mr. CiiU3iBRis. Well, maybe there will be some response from those
who testified and you will have an opportunity to make further ob-
servations for the record at a later time.
Dr. WiLSOX. Thank you.
Senator Hart. Gentlemen, thank aou vqi-y much.
We are adjourning to resume in this room tomorrow morning at
10 o'clock,
[Whereupon, at 5 :35 p.m., the subcommittee adjourned, to reconvene
at 10 :15 a.m., Thursday, June 28, 1973, in room i2228, Dirksen Senate
Office Building.]
[Dr. Wilson's prepared statement follows. Testimony resumes on
p. 505.]
Testimony of Dr. John W. Wilson, Chief, Division of Economic Studies,
Federal Power Commission
i would like to thank the Chairman and Members of this Subcommittee for
once again inviting me to appear before you to present testimony on a most
important national economic policy matter.
I should, of course, preface my remarks today by indicating that they reflect
my own views and analyses and do not represent the views of the Federal
Power Commission.
Your invitation requested that I present testimony on the extent of competi-
tion in the natural gas producing industry, and it indicated particular interest
in the following matters :
1. The extent and degree of concentration.
2. Proposals to deregulate the price of natural gas at the wellhead.
3. The effect on consumers of deregulation.
4. An assessment of why we are experiencing a shortage of natural gas.
5. Policy alternatives to increase supply.
I shall, therefore, in compliance with your request, take up each of these
matters in some detail. Before embarking on detailed discussions, however,
allow me, at the outset and at the risk of undermining the suspense value of
my subsequent presentation, to set forth my fundamental conclusion. That is, the
petroleum industry is not, in any economically meaningful sense of the word,
either adequately or workably competitive.
470
I. COilPETITION
The ultimate test of seller competition in any industry or market is whether
there is a sufficient number of independent producers in that marl-cet to preclude
excessive seller influence and control over price, quantity, and the nature of
the product provided in the marketplace. There is an absence of adequate com-
lietition when, as in the petroleum producing industry, sellers are able to exercise
great discretion in establishing prices, supply levels, and other marketing strate-
gies. Where firms have such latitude, they possess excessive market power, and
the outcome of such a "free market," much to the detriment of consumers and
the public Interest, is monopolistic rather than competitive.
Competition, thus defined, focuses upon seller rivalry in the pursuit of con-
sumer satisfaction. This rivalry, though motivated by the seller's desire to ex-
pand his sales, serves the public interest in that the seller achieves his private
objective by outdoing his rivals in offering a better service or product to con-
sumers. Conversely, it is well known that the only rivalry now prevailing in gas
production markets is rivalry between buyers (i.e., who will pay the most for
availalile supplies?) Thus, the producers sit back and play one prospective buyer
off against another and call this "competition". The twisted semantics aside, it
is quite clear that, whatever name we give it, buyer's rivalry does not foster con-
sumer interests.
II. COXCEXTRATION
As shown below, market concentration in the petroleum industry is high. That
is significant, but given the institutional setting which we know exists in the in-
dustry, it should probably be viewed as an ancillary factual observation. Unfor-
tunatel.v. many of the analysts who have addressed the competition issue treat
concentration as being alpha and omega, and then rush headlong to judgment
without ever having weighed the critical direct factual evidence bearing upon
the industry's institutional framework. Concentration, after all. means virtually
nothing in and of itself; it is an important measure only in that it infers some-
thing else.
Let me be specific as possible on this point because it is quite critical, and it
appears to be the slippery plank where a number of otherwise learned and capa-
ble analysts seem to have fallen overboard. As I said just previously, whether
or not there is competition depends upon whether there is an adequate number of
truly independent, self motivated sellers. Independence is the key. Without inde-
pendence, self motivation will bind interdependent sellers together in the mutual
pursuit of common objectives at the expense of consumers. With independence
and the vigorous conflict of real competitive rivalry, the market system can serve
consumers admirably. Consequently, in attempting to determine whether a mar-
ket is workably competitive, economists search for evidence bearing upon the
presence or absence of seller independence.
Often times, howevei', good direct evidence on the degree of seller independnce
is unavailable, or that which is. is inadequate. Then, of course, it is necessary
and approju-iate to look for secondary evidence which may have inferential value
in assessing the primary issue — information from which one can obtain some
insight on the specific question at hand. Information on concentration frequently
provides such an insight on the question of seller interdependence in that it pro-
vides an analytical base from which probabilistic conclusions can be derived.
In other words, concentration serves as a basis for logical conclusions derived
via the classical deductive method of logic :
e.g.. in industries dominated by a few large firms, each of the participants
is aware of the fact that his actions ^ill affect the others in that industry
significantly, and that they, in turn, will react and affect him. They are
all interdependent ! Vigorous competition will therefore be stifled by their
own self-interest in peaceful coexistence.
Or, as stated more elegantly :
A large concern usually must show a regard for the strength of other large
concerns liy circumspection in its dealings with them, whereas such caution
is usually unnecessary in dealing with small enterprises. The interests of
great enterprises are likely to touch at many points, and it would be pos-
sible for each to mobilize at any one of those points a considerable aggregate
of resoiirces. . . . Hence, there is an incentive to live and let live, to cultivate
471
a cooperative spirit, and to recognize priorities of interest in the hope of
reciprocal recognition.^
Simply put, that is why economists (should) concern themselves with concen-
tration ratios. These ratios are an admirably designed foundation from which
deductive logic can proceed. If concentration is high, we deduce that firms are
not likely to behave independently, and if they don't behave independently the
market will not be competitive.
My point in belaboring this discussion is merely to establish the fact that
concentration ratios are particularly important when it is necessary to use
deductive logic to determine whether finns are interdependent. If the answer to
that question is known directly, then whether the four firm concentration ratio
is, say 0.3 or 0.6 is really quite moot.
Perhaps I should apologize for pursuing the obvious as if it were the revelation
of some great mystery, for I am aware that no one on this Subcommittee is an
economist buried in the quagmire of his own art form. It is quite apparent to
anyone who studies the petroleiun industry fully and objectively and who has
read the academic literature on this subject, that there are some economists who
seem quite unable to see the fore.st for the trees (in some cases, perhaps, mere
saplings of their own planting). Thus, there has been a good bit of twiddling
with concentration ratios as well as numerous sterile debates about what mar-
ket specification should be used when calculating them. Much of this jousting
has apparently been by analysts who have obliterated from their mind (or at
least their mind's eye) what the proper function of a concentration ratio really
is in the first place ; either that, or they are, as I suggested earlier, rushing to
judgment without assuming the burden of acquiring the available pertinent
facts. If devotion to art form and tunnel vision are curable in economists, per-
haps the factual information presented below will persuade some of the concen-
tration ratio contemplators that by removing one's blinders it is possible to
find some "pretty dam good" direct evidence, which should at longlast render
academic the remaining question of whether conventional forms of deductive
logic apply in this case.
ni. MEASURING COIVCENTRATION
Having stated the obvious : that concentration ratios are an inferential meas-
uring device which should be considered by economic analysts and policy makers
particularly in the absence of superior direct evidence, it is nevertheless appropri-
ate to at least address that subject in some detail insofar as so much of the
historic academic and policy debate over competition in the petroleum industry
has (dead) centered on this point.^
Initially, it should be observed that when we address the "natural gas pro-
ducing industry" we are discussing the "petroleum industry". The dominant firms
are the same, and these firms have fully integrated gas and oil producing and
marketing operations which can not be analyzed intelligently in isolation. As
shown in Table 1, the top 14 natural gas producers in 1970 were also among the
top 15 oil and liquids producers and among the top 17 petroleum refiners. These
14 leading gas producers were also among the 17 largest sellers of gasoline and
other refined petroleum products and among the IT largest sellers of natural
gas to interstate pipelines.
1 Corwln D. Edwards, "Conglomerate Bigness as a Source of Power," 1955.
2 The obvious redundancy notwithstanding, since I do choose to address the subject here,
I feel compelled to reiterate that, in view of the evidence presented in the subsequent sec-
tions of this testimony, the ultimate resolution of arguments over what is the appropriate
measure of concentration is not really essential to a determination of whether the petro-
leum industry is or is not competitive. While the concentration measures presented here are
indicative of market control as measured by the conyentional deductive method. I do not
base my conclusions upon them. This technique, at best, provides a circumstantial case.
While it does seem clear to me that this circumstancial evidence points to the same con-
clusions which I have derived directly from eyidence below, I would, nevertheless, welcome
further discussion in a non-policy context from those more concerned with the esoterics of
concentration ratio methodology than with the essential facts of this particular industry.
Improvements in the deductive approach should, of course, be encouraged and pursued
because that may be all that we have to go on in anlyzing other markets and industries
where direct evidence is less viable.
27-547 O— 74 31
472
TABLE 1.— RANKINGS OF LARGEST FIRMS IN THE PETROLEUM INDUSTRY (1970)
Natural gas producers
Natural gas
Oil and gas
U.S. refined
sales to
liquids
Petroleum
product
interstate
producers
refl
mng
sales
pipelines
1
I
1
1
2
2
2
7
6
6
4
4
3
5
7
2
12
11
9
5
8
3
6
6
4
7
3
3
7
8
8
8
11
9
10
12
5
4
5
11
9
10
11
9
10
15
17
17
13
14
14
10
15
17
13
14
1. Exxon
2. Texaco
3. Amoco
4. Gulf
5. Phillips
6. Mobil..
7. Shell...
8. Atlantic-Richfield.
9. Sun
10. Chevron..
11. Union Oil..
12. Getty....
13. Continental
14. Cities Service
These same companies are the ones which face consumers from the other
side of the so called "energy crisis" in all petroleum markets (e.g., natural gas,
fuel oil, gasoline), and some of them also hold significant supply positions in
the coal and uranium industries. To an economist it is interesting, though not
surprising, that the "energy crisis" has not created obvious financial difiiculties
for these firms. In fact, recent evidence suggests quite the opposite. Many of
these companies as well as other firms in the petroleum industry experienced
record profit levels in the first quarter of 1973. Table 2 presents information on
after tax profits in this most recent quarter as compared with the first quarter
of 1972. Every company, without exception, experienced substantial improvement,
and the average earnings increase was between 25 and 30 percent.
These are, of course, the same firms which have controlled the bulk of our
available hydrocjarbon resources in the past, and they are likely to continue to do
so in the future. Focussing for the moment on natural gas, much of which is
produced jointly in conjunction with the exploration for the development of oil,
it is estimated that the top four producers in the major producing areas have
generally accounted for 50 percent or more of the new gas sold to interstate pipe-
lines in recent years.
473
TABLE 2.— PROFIT RECORD OF MAJOR OIL COMPANIES
Percent change
In after tax
Percent annualized return
earnings 1st
on equity (1st quarter)
quarter 1972,
1st quarter
1973
1972
1973
11.6
16.6
+43.1
11.0
12.1
+10.1
12.8
14.7
+14.8
10.3
12.2
+18.8
9.4
11.7
+24.2
10.5
12.8
+21.5
7.4
11.0
+49.2
10.4
11.6
+11.5
4.4
6.8
+52.2
7.8
9.5
+22.1
2.7
4.3
+57.8
7.4
9.5
+28.0
7.9
11.2
+42.3
8.2
9.6
+17.4
12.2
15.2
+1 24. 8
4.4
6.5
+48.8
5.5
10.1
+85.6
6.4
9.0
+40.9
21.2
26.5
+25.1
8.2
12.3
+49.6
7.8
9.3
+20.2
6.3
11.5
+83.0
8.5
17.1
+101.2
5.8
6.5
+13.4
6.3
12.9
+ 105.1
3.9
23.5
+502. 0
Exxon
Mobil
Texaco
Gulf
Chevron
Amoco_
Shell
Continental
Atlantic
Phillips
Occidental
Union
Sun
Cities
Ashland
Sohio.
Signal __-
Getty
Amerada
Marathon.
Kerr-McGee
Diamond Shamrock
Universal
Commonwealth
American Petrofina
Clark.
Average
9.8
12.6
+28.7
' Based on the period of 6 months as reported in Moodys. The Oil and Gas Journal, May 14, 1973, reported Ashland's
1st quarter 1973 earnings as +40.7 percent.
The top 8 have accounted for over 60 percent (and, more often than not, for
80 percent or more) of annual new commitments. These estimates and an
explanation of how they were calculated are presented in Table 3.
As indicated above, concentration ratios such as these have frequently been
used as partial indicators of market power in studies of industry structure. A
familiar rule of thumb is that in industries where the eight largest firms have at
least 50 i)ercent of the sales, normal unrestrained market forces are likely to
be an insufficient guarantee against monopolistic market performance.*
3 See, for example, Carl Kaysen and Donald F. Turner, Antitrust Policy: An Economic
and Legal Analysis^ (Cambridge : Harvard University Press), 1965.
474
TABLE 3— CONCENTRATION OF NEW (NON ET AL.) GAS CONTRACT VOLUMES SOLD TO INTERSTATE
PIPELINES (1965-70) I
Percent
4 largest 8 largest
South Louisiana:
1965
1966
1967
1968
1969
1970..
Permian Basin:
1965...
1966
1967
1968
1969
1970...
Texas Gulf Coast:
1965
1966
1967
1968
1969
1970
52.1
68.9
63.8
82.6
76.9
86.2
51.6
68.9
41.6
60.9
41.1
68.1
67.0
88.8
89.0
94.3
61.7
76.0
76.5
84.7
52.4
81.1
66.8
82.7
86.9
92.3
95.9
98.9
71.3
89.5
83.7
98.6
43.9
71.9
64.9
74.2
1 Ratios calculated on the basis of natural gas volumes sold to interstate pipelines under non et al. vintage year contracts
in the 1st full year of sales following the vintage contract year. Thus, the 1970 concentration ratios ate based on actual an-
nual volu Ties in 1970 from new non et al. contracts culninated during 1969. The ratios are calculated by dividing the non
et al. volumes accounted for by the 4 and 8 largest producers, respectively, in each year by total non et al. volumes. The
implicit assumption in this calculation is that these producers shared proportionally in volumes sold under et al. contracts.
None et al. contracts generally accounted for over 75 percent of the total annual volume. To the extent that the largest
firms had either a disproportionally large share of the et al. volumes, or a disproportionally small share, the actual con-
centration ratios w/ould be either slightly higher or lower. In any event, the ratios reported here tend to underestimate actual
concentration to son-e extent as they do not take account of all corporate affiliations (e.g., Getty, Skelly, and Tidewater are
treated independently although all were controlled by Getty).
The 8-firm concentration ratio.s in Table 3 are, of course, far above the 50 per-
cent level, but there are industry spokesmen and consultants who have challenged
the theoretical basis upon which these are calculated. Foremost among the critics
are those who would rather calculate concentration ratios on the basis of "flow-
ing gas". That is, the.se industry spokesmen suggest, one should endeavor to
measure the percent attributable to the top firms on the basis of total annual
volumes flowing out of the ground. Quite obviously, as a market structure test,
that is absurd. Most flowing gas was contracted for (in effect, sold) years ago,
and therefore has no relevance at all with respect to supply conditions facing
prospective buyers in today's markets. What is relevant to objective market
analysis is what buyers are confronted with at the time when they are contract-
ing for new gas commitments. In other words, meaningful analysis should focus
on uncommitted gas reserves ; these are the supplies available to buyers when
purchase decisions are made.
The new gas concentration ratios presented in Table 3 may in fact be an under-
estimate of actual market control. First, these ratios are based on new gas
commitments over the period of a full year. Under present circumstances it
seems doubtful that an interstate pipeline which has decided that it needs new
reserves wiU be able to play one producer off against another for anything near
tw^elve months. Since there is no evidence to suggest that producers now have
to go begging for buyers over lengthy periods of time, accessible gas that was
for sale at the beginning of the year is, in all probability, sold within much less
time than a full year.
Incredibly there are those who attempt to argue that because pipelines in the
past quite naturally contracted for large blocks of gas at irregular intervals as
major new pipeline capacity was built (say, over 3-5 year intervals), concen-
tration ratios should now be calculated on the basis of gas sales over similar
3-5 year periods. Such an obvious non.sequitur is a flimsy attempt to distort the
data, and accordingly should be dismissed out of hand. Today's supply situation
does not center around the massing of large periodic gas bundles to su.stain new
major interstate pipeline construction nor are sellers of new supplies hard
pressed over long periods to find buyers. And, finally, the buyers themselves are
not in a position to sit by in tranquil contemplation of market offerings for
three years or more. In short, the argument has no relevance.
475
A second reason for suggesting that the ratios in Table 3 may be an under-
estimate of actual concentration is that they are based on calculations which
treat each vintage gas contract as though it were an individunl unrelated trans-
action. That is frequently not the case. For example, it has been shown in vari-
ous proceedings before the FPC that even though separate contracts are involved,
pipelines have often entered into these contracts simultaneously and in identical
fashion with a large number of producers in a specific field. Often the sellers
merely own joint interests in the same lease or leases from which the gas is
produced. The concentration ratios in Table 3 do not take account of that, but
rather treat each contract as an individual competitive transaction.
TABLE 4.— CONCENTRATION OF THE AVAILABLE NEW GAS SUPPLIES AS OF DEC. 31, 1971 AND JUNE 30, 1972'
(Percentage of reported uncommitted reserves controlled by 4 and 8 largest producers] 2
Producing area
Permian Basin
Hugoton Anadarko
Other Southwest
South Louisiana: 3
Onshore
Offshore (Federal)
Offshore (State)
Texas gulf coast:*
Onshore
Offshore (Federal)
Offshore (State)-.. _
Rocky Mountain
Appalachian
Unclassified:
Michigan
California
Miscellaneous...
Alaska 5
Total United Statess
1 Concentration ratios are based on individual company reserve reports. To the extent that 2 or more companies report
pro rata ownership shares of jointly held leasesfor which there is a single operation, the concentration ratios tend to under-
estimate the actual degree of seller concentration.
2 Reports were obtained from 79 large producers. These producers provide most of the gas sold to interstate pipelines
(e.g., in 1971 the top 22 supplied over 70 percent of all interstate gas). Nevertheless, to the extent that nonreporting small
producers may have had significant volumes, the ratios reported here tend to slightly overstate actual market concentration.
3 Combined concentration ratios for the south Louisiana area are not available. Onshore represents 44 percent of the total,
offshore (Federal) t3 percent, and offshore (State) 3 percent.
* Combined concentration ratios for the Texas gulf coast area are not available. Onshore represents 47 percent of the total ,
offshore (Federal) 51 percent, and offshore (State) 2 percent.
s Does not include 26,000,000,000,000 ft 3 in North Slope reserves reported in the aggragate for all companies by 1
producer.
Perhaps a better impression of actual concentration can be obtained from
Table 4. The four firm and eight firm ratios shown there are based on an actual
survey by the FPC of available uncommitted gas supplies as of December 31,
1971 and June 30, 1972. These ratios are extremely high, and they tend to be
rather stable from one period to the other. Some qualifications pertaining to
these data are noted in the footnote to the table. In particular, it should be noted
that these volumes represent only statements that producers have made for the
record. Of course, if reserve estimates are understated (or overstated) and if
everyone has a proportional propensity to be cautious (or overly optimistic),
the ratios would remain the same. Also, it should be observed that these reports
were filed by only 79 large producers. While this group has always accounted
for the great bulk of gas sales, it is not unreasonable to speculate that non-
reporting producers may have had some available supplies. If that was the case,
concentration tends to be somewhat overstated here.
In addition to the very high regional concentration reported in Table 4, it is
also noteworthy that the national 4 and 8 firm ratios are about 50% and 75%,
respectively. It has been urged by some industry advocates that because certain
large interstate pipelines reach into more than one producing area, multi-area
or national concentration ratios should be relied upon. This, too, appears to be
little more than a special pleader's manifestation of the producers' desire to
present an unrealistically low estimate of concentration. If, let us say, a pipeline
Dec. 31,
1971
June 30,
1972
4 largest
8 largest
4 largest
8 largest
63.6
76.6
93.3
86.4
94.5
98.6
80.6
62.6
94.4
94.2
83.3
99.3
96.9
57.0
84.5
99.6
83.3
100.0
92.3
49.6
94.9
98.4
74.9
100.0
89.4
98.5
100.0
63.4
99.6
96.7
100.0
100.0
82.9
100.0
84.4
100.0
100.0
70.4
100.0
92.4
100.0
100.0
86.0
100.0
100.0
100.0 ...
95.4
87.7
93.9
51.4
100.0
99.9
99.9
75.9
94.3
98.0
93.9
51.0 ■
100.0
100.0
99.9
73.9
476
company serving the Northeast has two lines, one going to the South Louisiana
Area and another to the Permian Basin and it needs additional volumes to
bring the South Louisiana line up to capacity, then South Louisiana is the only
relevant supply market. It is true that in the past, when the interstate pipeline
network was being established, prospective pipeline builders may have had a
great deal of flexibility in choosing between certain producing areas, but now,
with the lines already built, their flexibility is obviously diminished. Neverthe-
less, because there are some situations where particular pipelines may have
legitimate alternative sources in more than one producing region, it is instructive
to note that even on a nationwide basis available uncommitted reserves appear
to be highly concentrated.
Also, the evidnce presented in Table 5 demonstrates that concentration appears
to be quite high even in a prospective sense. Over 80 percent of the federal off-
shore leases acquired (weighted by bonus dollars paid) in each of three recent
lease sales were accounted for by the top eight bidders and their bidding part-
ners.^ In all three sales combined, the top eight accounted for 70 percent of the
successful bids. As shown below, these bidding partnerships generally become
producing partnerships, and consequently future prospects, for our offshore areas
at any rate, are for continued high levels of supply concentration.
Finally, it is also noteworthy that mergers and acquisitions during the last
two decades suggest that concentration is increasing over time. A listing of
major petroleum industry mergers (i.e., involving firms with assets of $10
million or more) is presented in Table 6. Since 1960 alone, there have been more
than 50 major acquisitions, a number of them involving the merger of two fully
integrated majois, each representing hundreds of millions of dollars of assets.
At the same time, no new fully integrated majors have etnered the market during
the last decade.
Table 5. — Concentration ratios for offshore lease acquisition'^
Dec. 15, 1970 : Percent
Largest buyer (and affiliates) 16.2
Top 4 (and affiliates) 53.7
Top 8 (and affiliates) 82.9
Sept. 12, 1972 sale :
Largest buyer (and affiliates) 42.8
Top 4 (and affiliates) 85.6
Tops (and affiliates) 96.0
Dec. 19, 1972 sale :
Largest buyer (and affiliates) 13.8
Top 4 (and affiliates) 48.5
Top 8 (and affiliates) 8L 6
All 3 sales combined :
Largest buyer (and affiliates) 14.9
Top 4 (and affiliates) 42.8
Top 8 (and affiliates) 69.9
1 Ratios calculated on the basis of bonus dollars paid by the largest buyer, four largest, or
eight largest buyers, as a percentage of total bonus bids paid by all buyers. "And affiliates"
means that the total includes the bonus dollars paid by affiliates where they bid jointly with
the primary firm. Thus, the ratio represents the percentage of acquisitions (as measured In
terms of bonus dollars paid) in which the largest buyers hold either a full or part interest.
Not only have the dominant majors been free from the threat of new entry,
but, except for merger, there has been relative stability in the makeup of the
top firms in the industry. In 1971, the ten leading interstate natural gas suppliers
were: Exxon, Amoco, Shell, Gulf, Phillips, Mobil, Texaco, Union Oil, Atlantic
Richfield, and Continental. The first eight of these were also among the top 9
producers fifteen years earlier, and the two new entrants into the top ten, Atlantic
Richfield and Continental, attained entry via merger — -Atlantic by acquiring
Richfield and Sinclar, and Continental through a variety of acquisitions.
In summary, then, virtually any reasonable measure of seller concentration in
natural gas markets suggests that there is a substantial degree of dominance by
the large producers. The only remaining question then is : Even if that is so, is
* Lease sales in December, 1970 ; September, 1972 ; and December, 1972.
477
this not also a characteristic of some other unregulated industries in our economy
(e.g.. automobiles, copper, computers, etc.), and if so, why worry about petroleum
any more than the others?
The direct evidence, which goes well beyond the probabilistic implications of
concetnratiou ratios, and the institutional reasons as to why the petroleum in-
dustry is. in fact, set apart from the others, is the subject of the following section
of my testimony.
TABLE 6.-RECENT MAJOR PETROLEUM INDUSTRY MERGERS
Date Acquiring company
Assets
(millions)
Acquired company
Assets
(millions)
1949 Union Oil Co $298.4
1950 Sunray Oil Co _ _._ 131.4
1954 Chicago Corp _._ 46.9
1954 General American Oil 1... _._ 36.0
1954 Monterey Oil Co.>... _ 33.1
1955 SinclairOil 1,186.8
1955 Tennessee Gas Trans.3._ 742.5
1955 Kerr McGee Oil _ 43.3
1955 Monsanto Chemical*. 376.5
1955 Sunray Oil Co.. 300.0
1955 Delhi Oil Corp.i 21.8
1956 Atlantic Refining.. 611.6
1956 American Petrofina 57.1
1956 SinclairOil...- 1,250.1
1956 Standard Oil of Indiana 2,332.4
1956 Gulf Oil Corp 2,160.8
1958 Mobil Oil _ 3,105.3
1958 Signal Oil & Gas 1 128.0
1958 Tennessee Gas Trans.3 1,096.8
1958 Texaco 2,729.1
1959 Signal Oil & Gas 1 210.0
1959 Continental Oil.... 619.7
1959 do 619.7
1959 do 619.7
1959 Sunray Mid-Continent... 540.8
1960 W. R. Grace Co.4 529.6
1960 Standard of New Jersey 9,894.7
1960 Union Oil & Gas 1 63.3
1960 Pure Oil Co 552.9
1970 Continental Oil 832.5
1961 Cities Service 1,342.6
1961 Standard of Indiana 2,925.7
1961 Murphy Corp. 1 _ 120.6
1961 Standard of California 2,782.3
1961 Delhi Taylor Oil 71.5
1962 Cities Service 1,405.7
1962 Standard 01 New Jersey... 10,494.4
1962 Marathon Oil 469.9
1962 Texaco 3,646.7
1962 Consolidated Oil & Gas 1... 4.9
1962 Union Oil of California 761.5
1962 SinclairOil _ 1,507.2
1962 Allied Chemical* 800.8
1963 Continental Oil 1,241.1
1963 American Petrofina 89.8
1963 SinclairOil.... 1,515.3
1963 Sunset International" 47.7
1963 SinclairOil... 1,515.3
1964 Livingston Oil I 19.1
1964 Continental Oil 1,462.8
1964 Tennessee Gas Tran..». 2,234.2
1964 Shell Oil Co 2,138.8
1964 Stanc-ard of Indiana 3,206.6
1S64 Mobil 4,659.5
1964 Sinclair 1,618.9
1964 Tennessee Gas Trans.3 2,234.2
1965 Panhandle Eastern'. 407.9
1965 Union Oil of California 916.5
1966 Husky Oil... 112.2
1966 Witco Chemical* 93.1
1966 SinclairOil 1,694.5
1966 Atlantic Refining 960.4
1966 Phillips Petroleum _ ._ 2,029.1
1967 Getty Oil Co...
1967 Husky Oil. 141.5
1967 Tenneco Corp 1,252.3
1967 Diamond Alkalai* 275.6
1968 Panoil Co.' .... 21.3
1968 Sun Oil Co... _ 1,598.5
1968 IntexOilCo.i 5.8
Los Nietos Co.i $13. 3
Barnsdall Oil Co 87. 2
Champlin Refining ...
Deep Rock Oil 12.. _
Fullerton Oil i... 23.7
Am. Republics Corp 41. 2
Bay Petroleum Corp 29.6
Deep Rock Oil Corp.3.... _ 12.0
Lion Oil Co _. 147.6
Mid-Continent Petroleum... 186.3
Taylor Oil & Gas 36.5
Houston Oil of Texas 1. 77. 5
Panhandle Oil 15.7
So. Production Co 77.4
Utah Oil Refinery _ 54.6
Warren Petroleum 163. 9
Freeport Sulphur 2 100.0
Hancock Oil Co 62.7
Middle States Petroleum i 29. 4
Seaboard Oil ' 93. 1
Bankline Oil Co 13.2
International Refineries 12. 1
Kewanee Oil 12
San Jacinto Petroleum 1 35. 6
Suntide Refinery 41.9
Cosden Petroleum 67.0
Monterey Oil 1 102.2
Texas Natural Gasoline • -.. 52.3
Woodley Petroleum ' 30. 1
Douglas Oil Co 18.2
Pel mont Petroleu m 1 2
Honolulu Oil ' 99.2
Ingram Oil & Refinery 14.8
Standard of Kentucky 141.9
Three States Nat.'.. 18.9
Columbian Carbon* 88.9
Olin Oil & Gas 57.0
Plymouth Oil Co 80.8
T.X.L. Oil' 36.7
Tekoil Corp.' 12.4
Tex. Nat. Petrol. Co.i 37.0
Texas Butadiene 42.7
Union Texas Nat. Gas 1.... 165. 2
Cities Service Gas>2
Cosden Petr./Grace2 73.9
Drill & Explor. Co.> 19.5
Sunoc Petrol.' 12.3
West Nat. Gas' 76.4
Crescent Oil' -..
Delhi Taylor Oil'2.... 52.4
Delhi Taylor Oi|i2 52.4
El Paso Natural Gas 2
Midwest Oil Corp." 62.7
Northern Nat. Gas Prod.'2...
Texab Gulf Prod. Co.' 69. 7
Wilcox Oil Co 13. 7
Ambassador Oil Corp.' 28.8
Pure Oil _ 766.1
International Oil & Gas' 11.8
Kendall Rehning 21.9
Barber Oil ' 2
Richheld Oil 499.6
Tidewater Oil 2 372.8
Tidewater Oil Co
Frontier Refinery 41.2
Kern County Land'.. 706.4
Shamrock Oil & Gas 173.7
Dorchester Gas Prod.'... 14.7
Sunray DX Oil Co 749.0
Tesoro Petroleum (Texas)' 12.3
478
TABLE 6.— RECENT MAJOR PETROLEUM INDUSTRY MERGERS-Continued
Date Acquiring company
Assets
(millions)
Acquired company
Assets
(millions)
1965
Swift & Co.*
Amerada Petroleum
757.8
. - 471.1
Bell Oil 8. Gas .. .
- . $18.6
1969
Hess Oil...
Hugoton Prod.i
Midhurst Oili..
491.5
1969
1969
Mesa Petroleum
Ashland Oil
14.5
846. 4
14.3
.. . - 14.7
1969
Atlantic-Richfield
2,450.9
Sinclair Oil.
British Petroleum Corp.^... _
Leonard Refineries
1,851.3
1970
Standard of Ohio
772.7
627.3
1970
French Petroleum Can.i
Ashland Oil -
^^;;]^!^"'"'846.'4'
56.1
1970
Northwestern Refinery
Petroleum Explor.'.
60.1
1970
Wiser Oil'
6.4
. .. .. 21.4
1970
Swift & Co.*
744.1
Transocean Oiji
47.3
> Primarily a producer. Firms without footnotes are integrated refiners.
2 Partial acquisition involving less than 100 percent of acquired firms total assets.
> Interstate gas pipeline company.
< Firm classified as being primarily in another industry (i.e., major business is not petroleum production or refining).
Source: Federal Trade Commission, "Large Mergers in Manufacturing and Mining 1948-71."
IV. JOINT VENTURES, INTEETIES, AND INTERLOCKS
There is substantial direct evidence of mutual interdependence between vir-
tually all of the major firms in the i)etroleum industry. This interdependence
includes joint ventures, interlocks, and institutional interties in the following
general areas of activity :
1. Joint lease acquisition (bidding combines).
2. Banking interlocks (directorates and common stock ownership).
3. Joint ownership of pipelines and gathering systems.
4. Joint ownership and production from oil and gas leases.
5. International joint ventures.
6. Vertical relationships between the producing, transporting, processing, and
marketing sectors of the industry.
Bidding ComMnes
In any given sale, it is obvious that when four firms such as the CATC group,
each able to bid independently, combine to submit a single bid, three interested,
potential bidders have been eliminated ; ie.. the combination has restrained
trade. This situation does not differ materially from one of explicit collusion in
which four firms meet in advance of a given sale and decide who among them
should bid (which three should refrain from bidding) for specific leases and,
instead of competing among themselves, attempt to rotate the winning bids. The
principal difference is that explicit collusion is illegal." (Walter Mead. "The
Competitive Significance of Joint Ventures," Antitrust Bulletin, Fall, 1967, p.
839; quoted n the Federal Power Commission Staff's Reply Brief in Belco
Petroleum Corporation, et al., Docket No. CI73-293, et al., April 20, 1973).
The logic of this observation is unexceptionable, and though it was made
some six years ago, the situation which it describes has grown substantially
479
since then so that today bidding combines tend to dominate even the acquisition
of federal offshore leases. Table 7 lists the major bidding combines which par-
ticipated in federal offshore lease sales in 1970 and 1972. Because various majors
belonged to two or more of these combines, the web of interdependence is far
more pervasive than the membership of any single combine would suggest.
Figure 1 illustrates some of the interties that exist between the individual
combines.
Virtually the only major firm which has maintained its independence in bidding
for federal offshore leases is Exxon.* The statistics reported in Table 8 suggest
that Sun Oil also bids independently, but in fact Sun has actually submitted
bids under its own name in behalf of a consortium including Clark Oil. Diamond
Shamrock, and the Anadarko Production Co., a subsidiary of Panhandle Eastern.'
Table 7. — Major bidding combines which participated in recent Federal offshore
lease sales
1. Tenneco,^ Texaco
2. Cities Service. Tenneco,^ Continental
3. Atlantic Richfield, Cities Service,^ Continental, Getty
4. Phillips, Skelly (Getty), Allied Chemical, American Petrofina
5. Getty, Placid, Superior
6. Superior, Placid, Hunt, Transocean,^ Ashland
7. Superior. Chevron, Murphy, Pelto,^ General American
8. Chevron, Mobil, Pennzoil '^
9. Chevron. Mesa, Burmah "
10. Mobil, Gulf, Pennzoil ^
11. Mobil. Gulf, Chevron
12. Ashland, Mesa, Pennzoil ^
13. Mobil, Burmah,- Mesa, Pennzoil ^
14. General American, Burmah.^ CNG ^
15. Burmah,^ General American
16. Amoco, CXG,^ Shell, Transco^
17. Amoco, Union, Texas Eastern ^
18. Amoco, Southern Natural,^ Champlin
19. Texas Gas.^ Union, Florida Gas ^
20. Signal, La. Land. Amerada, Marathon, Texas Eastern ^
21. Shell, Florida Gas '
1 An affiliate of a major interstate gas pipeline company.
* It is interesting to note that Standard Oil of Oliio (Sohlo) which also owns the B.P.
Corporation, and which is one of the largest holders of petroleum leases in North America,
does not participate in federal offshore lease sales. An investigation of this seemingly
curious phenomenon revealed the following : Pelto Oil and Southdown-Burmah are both
subsidiaries of the Burmah Oil Company which is incorporated in Scotland. Burmah, in
turn, owns approximately 25 percent of the common equity of B.P. Ltd., the international
giant, and B.P., Ltd. controls Standard Oil of Ohio which is the parent of B.P. Corporation.
s Exxon, of course, is involved in hundreds of joint ventures, involving all of these com-
panies in other endeavors.
« As shown in Table 12, Sun owns all of its offshore producing leases jointly with other
firms.
480
Figure 1_
OFFSHORZ BIDDING COMBINES
Phillips, SKelly (Getty)
Allied Chemical, Amer. Petrof.
^
AUantlc, Cities,
Continental Getty
Getty, Placid,
Superior
Superior, Chevron, Xurphy
PelCo, General American
Superior, Placid, Hunt,
Trafisocean, Ashland
Ashland, Mesa
Pennzoll
AoBOCo, Union
Texas Eastern
Chevron , Mobi 1
Pennzoil
7
Mobil, Gulf,
Pennzoil
I
Mobil, Burmah, ^—
Mesa, Pennzoil —
Cities, Tenneco
Continental
Tenneco, Texaco
General Ameri an
Burmah
General American,
Burmah, CNG
Midwest (Amoco)
So. Natural Champlin
Amoco, CNG, Shell
Transco
Texas Gas, Union
Florida Gas
Signal, La. Land
Amerada, Marathon,
Texas Eastern
Shell, Florida Gas
Oil industry spokesman, in the past, have pointed to rivalry in lease acquisi-
tion as alleged evidence of competition in the petroleum industry. That is, quite
clearly, a very weak argument, at best. Consumers can take little comfort from
the fact that leases are obtained in an auction market, if there is not adequate
competition in the sale of final products. As students of antitrust law will recall,
tobacco auctions did not guarantee competition between cigarette manufactures.
Similarly, the fact that Alcoa, in the years prior to World War II, was willing
to outbid all comers for bauxite deposits hardly served consumer interests. In-
deed, even today it can be fairly argued that firms like AT&T, Consolidated
Edison, General Motors, and IBM compete vigorously in capital markets and in
labor markets for managerial talent and technical expertise, and that they do
engage in various types of rivalry with other firms in product development ac-
tivities. But competition between two communications firms in factor markets
for capital and talented manpower or between two electric utilities for limited
low sulphur coal supplies is, as everyone knows, no assurance of workable com-
petition in end product markets.
481
TABLE 8.— JOINT BIDDING IN FEDERAL OFFSHORE LEASE SALES (1970-72)
Company
Number of
independent
bids Bidding partners
Number of
joint bids
with each
Amerada-Hess...
Amoco
Atlantic-Richfield.
Chevron
Cities Service.
Continental...
Exxon
Getty
Gulf.
Marathon
Mobil
Phillips.
Shell...
Sun
Texaco..
Union...
0 Signal 50
Louisiana Land 51
Marathon 51
Texas Eastern 16
6 Texas Eastern 117
Union %
CNG 79
Transco 15
Shell 14
12 Cities 106
Getty 73
Continental 114
79 Mobil. 25
Murphy 17
General American 17
Pennzoil 12
Pelto 13
Superior 9
Gulf.... 7
Burmah 4
Mesa.. 4
7 Atlantic 106
Getty 100
Continental 163
Tenneco 3
27 Atlantic 114
Cities. 163
Getty 102
Tenneco 5
80
0 Atlantic. - 73
Cities 100
Continental 102
Placid 4
Superior 2
17 Mobil 17
Pennzoil 8
Standard Oil of California (Chevron) 7
24 Signal _ 65
Louisiana Land 69
Amerada 51
Texas Eastern 29
8 Pennzoil 30
Standard Oil of California (Chevron) 25
Mesa.. 16
Burmah 13
Gulf 17
Ashland.. 2
0 Skelly (Getty) 69
Allied Chemicals 66
American Petrofina 34
59 Transco 47
CNG 15
Standard Oil of Indiana (Amoco) - 14
Florida Gas 17
115 Pennzoil... 2
15 Tenneco _ 32
0 Amoco 96
Texas Eastern 96
Texas Gas _ 48
Florida Gas 5
As for arguments alleging a procompetitive effect emanating from federal off-
shore lease sales, there is even less appeal. As indicated at the outset of this
section, there is little or no substantive economic difference between the end
result obtained from the formation of a bidding combine and the end result of
a conspiratorial agreement between oil companies to rotate bids. Legal authori-
ties would have to be relied upon for cogent reasons as to why the former is
warmly embraced by the Interior Department while the latter is viewed as a
per se violation of Section 1 of the Sherman Act by the Justive Department.
My own view is that the offshore leasing program, as currently administered
by the Interior Department, has become one of the most onerous anticompetitive
482
cartelization devices at work in our domestic gas producing industry. Not only
is it a vehicle for further joint ventures and the integration of intercorporate
interests, it has also become an effective entry blockade for all but the very largest
firms in the industry. As the president of an established oil company with annual
revenues of over $100 million recently testified in an FPC hearing, it would now
take a consortium of 15 or more firms like his to surmount the offshore entry bar-
riers which have been erected under Interior's watchful eye. Consequently, his
company and others like it have been effectively precluded from entering these pro-
ducing areas except by obtaining limited farmouts of unwanted acreage from
the dominant majors or perhaps by joining one of the established combines as a
junior partner. Neither is likely to have much of a procompetitive effect, and that
is most critical because our Federal domain contains a large portion of our
nation's remaining oil and gas reserves.
Table 9 lists potential U.S. onshore and offshore petroleum reserves. Total
estimated potential offshore natural gas reserves alone are equal to more than
100 times current U.S. annual gas production. Some of these reserves will, of
course, require technological advances in order to be economically recoverable.
It should be noted, however, that as of 1970, total onshore and offshore "proved
reserves" '^ plus estimated unproved natural gas reserves, which are recoverable
under present technological and economic conditions, were equal to about six
times as much natural gas as has been produced in our entire history or nearly
100 times our current annual consumption.
In summary then, our future production potential is great. While steps should
be taken to encourage efl5cient production at optimal rates, it is also true that
the public has an immense interest in assuring that these reserves, especially
those on Federal lands, are produced at just and reasonable prices.
TABLE 9.-U.S. POTENTIAL RESOURCES OF PETROLEUM i
^'' -- ■ |As of Dec. 31, 1970]
Onshore Offshore
Gas Oil NGL Gas Oil NGL
Past production 376 89 13 17 4
Proved reserves remaining 252 34 7 39 5 1
Additional reserves recoverable under current
technological and economic conditions.. 1,213 246 31 844 171 26
Additional potential reserves considered para-
marginal and submarginal under current economic
conditions 1,840 1,100 55 2,490 1,180 77
Total
Percent produced through Dec. 31, 1970
Percent of reserves remaining as of Dec. 31, 1970..
3, 680
1,470
105
3,390
1,360
105
10.2
6.0
94.0
12.4
87.6
.5
99.5
.3
99.7
0
89.8
100.0
1 Oil and natural gas liquids (NGL) in billions of barrels; natural gas in trillions of cubic feet.
Source: U.S. Department of the Interior, Geological Survey; Administrative Report, Natural Gas Resources of the United
States and the World, pt. I— United States, Prepared by the Geological Survey for the National Gas Survey, Federal Power
Commission.
Banking Interlocks
It is illegal under Section 8 of the Clayton Act for one person to serve on the
boards of two companies that produce the same goods or services. Literally in-
terpreted, this prohibition apparently does not prevent two persons who work
for and represent the same individual or corporation from serving on the respec-
tive boards of two competing companies. Thus, a large firm in the financial com-
munity could assign two of its vice presidents to serve as directors for two dif-
ferent oil companies. For example, the most recently available evidence on cor-
porate directors from the banking community shows that, as of 1968, Morgan
Guaranty and Trust Co. of New York had its employees serving as directors on
■^ "Proved reserves," as generally defined, can be likened to a retailer's "shelf stoclc." They
are reserves that have actually been drilled and are ready to flow. They do not include
highly probable quantities of sas that have not yet been drilled, and they are, therefore, an
insufficient measure of our economically recoverable resource base. Indeed, if a producer
does not intend tn sell his resource until prices have attained some anticipated level in the
future, it would simply be bad business to sink capital into development and production
facilities and bear the contingent carrying charges long before sales take place.
483
the boards of Continental Oil, Cities Service, Atlantic Richfield, Belco Petroleum,
Columbia Gas, Louisiana Land and Exploration Co., and Texas Gulf Sulfur.*
Continental Illinois National Bank and Trust had directors with Union Oil, Con-
tinental Oil, Amoco, Northern Natural Gas, and others, including major coal com-
panies which have been merged recently with Continental Oil and Standard Oil
of Ohio."
In addition, banks and their trust departments often own substantial amounts
of the common stock of rival firms in the same industry. For example, in 1968,
Boston's State Street Bank & Trust Co., owned 15 percent of the common stock
of Texas Oil and Gas, 6.3 percent of the common in Amerada Petroleum, 11.6 per-
cent of the common in Zapata Offshore, 10.1 percent of Kerr McGee, 7.7 percent of
Pennzoil, and 7.6 percent of Newmont.
A listing of certain interlocking directorates in the petroleum industry by
major banks, as of 1968, is provided in Table 10. This situation is a threat to
effective competition among these pertoleum companies not only because the
interlocks create a commonality between their boards, but even more so because
of the critical role of the financial community in providing the capital which
will be needed to expand energy production to meet future needs. Simply put,
vigorous economic competition would be better served if the same banks were not
represented on the boards of rival companies.
Table 10. — Bank director interlocks bettceen major firms in the petroleum
industry (1968)
La. Land and Exploration Co.
Belco Petroleum Corp.
Texas Gulf Sulphur*
Continental Oil
Cities Service Co.
Atlantic Richfield
Columbia Gas System
Morgan Guaranty Trust Co.^
Allied Chemical
Monsanto Co.
W. R. Grace Co.
Standard Oil of N.J.
Mobil Oil
Sinclair Oil
First National City Bank '
Standard Oil of N.J.
Standard Oil of Ind.
Chase Manhattan ■
Swift & Co.^
Shell Oil Co.
Standard Oil of Ind.*
First National Bank of Chicago *
Consolidation Coal *
Old Ben Coal Corp."
Swift & Co.^
FMC Corp.
Standard Oil of Ind.
Continental Oil
Union Oil of Calif.
Northern Natural Gas Co.
Continental Illinois National Bank &
Trust Co.*
Cabot Corp.
Mobil Oil
First National Bank of Boston
Diamond Alkali
Texaco, Inc.
Marathon Oil
Standard Oil of Ohio*
Consolidated Natural Gas
National City Bank (Cleveland)
8 Morgan also held substantial stock Interests In Texas Eastern Transmission Corp., and
Panhanrllp Eastern Pipeline Co., as well as numerous pas distribution utilities.
•This bank also owned 5.2 percent of the common stock in Coastal States Gas Producing
Co.
484
Table 10. — Bank director interlocks between firms in the petroleum
industry (1968) — Continued
Cabot Corp.
Consolidation Coal Co.
Union Carbide
Diamond Alkalai
Columbia Gas System
Canadian Export Gas & Oil Ltd.
Union Carbide
Mobil Oil
Continental Oil
General Crude Oil Co.
Texas Gulf Sulphur
Union Carbide
W. R. Grace Co.
Amerada Petroleum
Freeport Sulphur Co.
Texaco, Inc.
Cities Service Co.
Texas Gas Transmission Co.
Consolidation Coal Co.
Sunray DX Oil Co.
Consolidated Natural Gas Co.
Texas Gas Transmission Co.
State Street Bank & Trust Co.
ton) "
(Bos-
Melon National Bank (Pittsburgh)
Bankers Trust Co.
Manufacturers Hanover Trust
Chemical Bank '"
Pittsburgh National Bank
Northern Trust Co. (Chicago)
Harris Trust & Savings Bank
American National Bank (Chicago)
Central National Bank (Cleveland)
Swift & Co.
Union Carbide
Union Oil of California vx;i-: r-'.i'
Swift & Co.
Standard Oil of Indiana
Natural Gas Pipeline Co.
Standard Oil of Indiana
Natural Gas Pipeline Co.
Canadian Delhi Oil, Ltd.
Diamond Alkalai Co.
Standard Oil of Ohio
1 In addition to these companies whose Boards have one or more directors from Morgan,
the bank also owns substantial stock interests In Texas Eastern Transmission Corp., Pan-
handle Eastern Pipeline Co., and numerous gas distribution utilities.
2 In addition to these companies whose Boards have one or more directors from First
National City, the bank also owns substantial stock interests in Panoil Co., Phillips Petro-
leum, Panhandle Eastern Pipeline Co., Tenneco, Inc., and numerous gas distribution
utilities.
* Chase also owned 5.6% of the common stock in Panhandle Eastern Pipeline Go.
* First National of Chicago also held substantial stock Interests in a large number of
gas distribution companies.
3 Swift & Co. has several subsidiaries in the oil industry.
* Consolidation is a subsidiary of Continental Oil.
'' Old Ben is a subsidiary of Standard Oil of Ohio.
8 Continental Illinois also owned 5.2% of the common stock in Coastal States Gas Pro-
ducing Co.
"State Street Bank also owned 15 percent of the common stock in Texas Oil and Oas,
6.3% of the common in Amerada Petroleum, 11.6% of the common in Zapata Offshore Co.,
10.1% of the common in Kerr.McOee, 7.7% of the common stock in Pennzoil, and 7.6% of
the common in Netvmont Mining Co.
10 In addition, the Chemical Bank owned a substantial stock Interest In the Hugoton
Production Company.
♦The bank specified also owns a substantial equity interest in this oil company.
Source : Commercial Banks and their Trust Activities, Staff Report for the Subcommittee
on Domestic Finance, Committee on Banking and Currency, House of Representatives, 90th
Congress, 2d Session, July 8, 1968.
485
Taint Oivnership of Oil Pipelines
Virtually all of the major integrated petroleum companies hold joint interest
with others in the transportation network that moves crude oil and products
from producing regions to refineries and markets. A number of these joint ven-
tures and the participants in each are listed in Table 11.
It is well known that the control of crude oil pipelines by the Standard Oil
Trust was a key link in the power that Standard exercised over both independent
producers and refiners. It is still true today that independent producers must sell
their crude to these pipelines before shipment and that independent refiners,
with no other source of supply, must purchase crude from pipelines owned by
the integrated majors.
TABLE 11.— JOINT VENTURES IN THE OIL PIPELINE INDUSTRY
Pipeline company and coowners
Percent
held by
each
Pipeline company and coowners Percent
held by
eacn
Badger Pipeline Co. (assets=$12,400,000):
Atlantic-Richfieid
Cities Service
... 34
... 32
... 22
... 12
... 12.1
... 7.4
5.0
Clark
Marathon...
Cities Service
11
10
8
Texaco.
Union Oil
Dixie Pipeline Co. (assets=$46,400,000):
Amoco
Atlantic-Richfieid..
Cities Service
Shell..
Platte Pipeline Co. (assets=$33,000,000):
Continental
Marathon
Union Oil
Atlantic-Richfieid
7
20
25
15
Continental
Exxon
Mobil..
Phillips
Shell
Texaco
Gulf
Transco
Allied Chemical
Laurel Pipeline Co. (assets =$35,900,000):
Gulf.
Texaco _ _. _
Sohio. _-_
... 4.1
... 11.1
... 5.0
... 14.5
... 5.5
... 5.0
... 18.2
... 3.6
... 8.6
... 49.1
... 33.9
... 17.0
Gulf
West Shore Pipeline Co. (assets=$17,600,000):
Shell
Amoco
15
20
Ifi 5
Mobil
Texaco
Marathon..
Clark
Cities Service
Continental..
Union Oil
Exxon
Wyco Pipeline Co. (assets=$14,100,000):
Amoco..
Texaco...
Mobil
Yellowstone Pipleine Co. (assets=$16,000,000):
Continental
Exxon
Husky
Union Oil
14
9
9
8
8
6.5
5.5
3.5
Colonial Pipeline Co. (assets=$480,200,000):
Amoco
Atlantic-Richfieid .
... 14.3
1.6
40
40
20
Cities Service
14.0
Continental
Phillips
Texaco
Gulf
... 7.5
... 7.1
... 14.3
... 16.8
... 9.0
... 11.5
... 4.0
... 48.8
... 24.0
... 27.1
... 25
... 25
... 20
... 10
10
40
40
6
14
Sohio
Mobil
Union Oil
Plantation Pipeline Co. (assets=$176,100,000):
West Texas Gulf Pipeline Co. (assets=$19,800,000)
Gulf
Cities Service
Sun .
57.7
11.4
12.6
Exxon
Shell
Refiners Oil Corp
Four Corners Pipeline Co. (assets=$20,900,000):
Shell
Chevron.
Gulf...
Continental
Atlantic-Richfieid
Union Oil.
Sohio
Chicap Pipeline Co. (assets=$25,600,000):
Union Oil
Clark -.
Amoco..
Cook Inlet Pipeline Co.:
Atlantic-Richfieid
9.0
9.2
43.4
33.2
23.4
20
Superior.
... 10
Marathon
Union Oil
Mobil... _. - --
Texas-New Mexico Pipeline Co. (assets=$30,500,-
000):
Texaco
Atlantic-Richfieid.
30
Olympic Pipeline Co. (assets=$30,700,000):
Shell
Mobil _.
Texaco
Wolverine Pipeline Co. (assets=$21,800,000):
Union Oil.
... 43.5
... 29.5
... 27.0
... 26
... 21
... 17
30
20
45
35
Mobil
Texaco.
Cities Service
Getty
10
10
However, a notable difference between the past and the present is that
today's pipelines are jointly owned by the integrated majors. Whereas early in
this century Standard's control of the pipeline network gave it a distinct upper
hand over all of its rivals, today's joint venture arrangements, which dominate
the oil pipeline industry, draw ostensibly independent firms together into the
common pursuit of a mutual purjwse. Moreover, these jointly owned transporta-
486
tion links between producing, refining, and marketing operations (about three-
fourths of all crude and one-fourth of refined products move through pipelines)
require that producing and processing operations of the various partners be
coordinated with each other so that the while vertically integrated system
functions smoothly. Whatever redeeming features some may see as a result of
this mutual interdependence, there can be no doubt that it is not conducive to
vigorous economic competition.
Nor does the fact that these specific corporate interties involve only oil speak
well for competition in natural gas markets. As is well known, the important
consideration is that a joint venture provides a common meeting place where
supposedly rival firms may legally cooperate, and, regardless of the purpose of
the venture, the result will be a close association and collaboration between the
parties involved. This cannot help but spill over into their other activities. Today
when one counts the myriad of common meeting places which pervade the petro-
leum industry, one is hardly surprised that there is considerable "mutual
cooperation" among the major petroleum companies and little hard fought
competition.
Joint Production
Only four of the sixteen largest majors with interests in Federal offshore
producing leases own 50 percent or more of their leases independently. Onversely,
ten of the sixteen own 80 percent or more of their offshore properties jointly with
each other. In addition, very few companies outside of the top sixteen have
any independent holdings at all. In addition to the top 16, twenty-three medium
to large size producers were surveyed. Of these, only two held as much as 25
percent of their leases independently and 17 had no independently owned leases
at all. A tabulation of these direct corporate interties is presented in Table 12.
These direct relationships do not, of course, reveal the full degree of mutual
interdependence that exists in offshore petroleum production. Table 12 shows,
for example, that Mobil Oil, which has six independently owned leases, is a
joint partner with Continental in 19 leases, with Cities Service and Getty in 8
each, with Gulf in 7. Chevron in 5. and with Exxon and Amoco in 4 each. In
turn. Continental, Cities Service, and Getty have a substantial number of joint
ventures with Atlantic Richfield and Tenneco ; while Gulf has 4 with Phillips ;
and Amoco has 29 joint ventures with Texaco, 12 with Union Oil of California,
8 with Southern Natural and 4 each with Kerr McGee, Superior, and Pennzoil.
Thus, the web of offshore production interties is even more encompassing than
a superficial reading of Table 12 may suggest at first blush. Figure 2 is a more
vivid illustration of these complex connections.
TABLE 12.— JOINT OWNERSHIP OF FEDERAL OFFSHORE PRODUCING LEASES
Number of
Independently
Number of
Company
leases
owned
Major partners
joint ventures!
THE MAJORS
Amerada-Hess
15
0
Marathon
Signal
13
14
Louisiana Land
14
Atlantic-Richfield
94
3
Cities
Getty
Continental
Tenneco-
Standard Oil of California (Chev-
ron).
85
83
87
4
2
101
1
El Paso2
2
Cities Service
Atlantic
Getty
85
93
Continental
91
Mobil
2
Tenneco 2
7
Standard Oil of California (Chev-
2
ron).
Continental
119
1
Atlantic
Cities
Getty..
Mobil
Tenneco 2
Standard Oil of California (Chev-
ron).
Superior
Transocean
Southern Natural 2
87
91
87
19
8
2
2
2
2
487
TABLE 12.— JOINT OWNERSHIP OF FEDERAL OFFSHORE PRODUCING LEASES— Continued
Company
Number of
leases
Independently
owned
Major partners
Number of
joint ventures i
Getty - -
100
51
18
52
16
68
105
60
52
19
55
37
51
2
34
0
6
3
64
86
3
43
0
16
18
24
Atlantic
83
Cities
Continental
Mobil
Tenneco 5. ._
Standard Oil of California (Chev-
ron).
Phillips
93
87
8
4
3
3
Suoerior
2
Transocean...
So. Natural'
2
2
Allied Chemical
3
Gulf...
Mobil _
Standard Oil of New Jersey
(Exxon).
PhilliDs
7
6
4
Kerr-McGee
2
Marathon
Amerada
Signal.
Louisiana Land
Union
13
13
13
5
Mobil
Phillips...
Chevron
Amoco ,
Sun
Continental
Cities
Getty
Gulf
Standard Oil of California
(Chevron).
Standard Oil of New Jersey
(Exxon).
Standard Oil of Indiana (Amoco)..
Pennzoil'
Keer-McGee ..
3
19
8
8
7
5
4
4
2
7
Gulf....
Getty....
Standard Oil of Indiana (Amoco)..
Sun
So. Natural'..-
Allied Chemical
Standard Oil of California
(Chevron).
Mobil..
Getty -
Atlantic --
Cities
Continental
Texaco
Union
4
3
3
3
2
3
2
5
3
2
2
2
29
12
S. Natural
Mobil
Kerr-McGee
8
4
4
Superior
4
Tenneco'
3
Phillips
Pennzoil'..
Texas Eastern '.
3
4
2
Exxon
Gulf
6
Mobil
4
Sun
Burmah
Murphy
Kerr-McGee
11
10
4
Union .
3
PhilliDS .
3
Marathon
3
Cabot
3
Diamond Shamrock
Anadarko '
3
3
Texaco
Standard Oil of Indiana (Amoco)..
Tenneco' .
29
9
Union Oil...
Standard Oil of Indiana (Amoco)..
Marathon
12
5
Suoerior
4
Sun .
3
Texas Eastern'
2
SELECTED MEDIUM SIZED FIRMS
Tenneco Oil 2
Texaco...
Continental
Cities
8
7
Consolidated'
Columbia Gas'
6
6
Texas Gas Trans.'
6
Forest
6
2T-54T O-
-32
488
TABLE 12.— JOINT OWNERSHIP OF FEDERAL OFFSHORE PRODUCING LEASES— Continued
Company
Number of Inderencfentiv
leases owned
Major partners
Number of
joint ventures i
Kerr-McGee
Cabot Corp
Pennzoil2.
Consolidated 2
Columbia Gas'
Texas Gas'
Forest Oil
Murphy-Ocean
Burmah
Signal
Louisiana Land and Exploration.
Superior
Transocean
Hunt
Ashland
So. NaturaP
Allied Chemical
Anadarko2
Diamond Shamrock
Texas Eastern^
ElPasos
Placid
29
12
9
33
33
28
34
32
23
15
14
21
14
17
15
3
3
4
2
2
15
0 Phillips
Cabot.
So. Nat.'
0 Sun
Kerr-McGee
1 Standard nil of Indiana
0 Columbia Gas2
Texas Gas Trans.'
Forest
Tenneco'
0 Consolidated'
Texas Gas'
Forest
Tenneco'...
0 Consolidated'.
Columbia Gas'
Forest
Tenneco'
0 Consolidated'
Columbia Gas'
Texas Gas'
Tenneco'
1 Sun
Burmah...
0 Sun
Murphy-Ocean..
1 Amerada
Marathon
Louisiana Land
0 Amerada
Marathon
Signal
10 Standard Oil of Indiana (Amoco).
Union
Transocean
0 Superior
Hunt
Placid
Ashland
3 Transocean..
Placid
Ashland
0 Transocean.
Hunt
Placid
0 Standard Oil of Indiana (Amoco).
Ke rr-McGee
0 Getty
Phillips
0 Sun.
Diamond Shamrock
0 Sun
Anadarko'
0 Standard Oil of Indiana (Amoco).
Union
0 Atlantic
0 Transocean
Hunt
Ashland
7
12
8
3
12
4
26
25
26
6
26
27
33
6
25
27
28
6
26
33
28
6
10
21
11
21
14
13
14
14
13
14
4
4
7
7
7
7
7
7
9
7
7
7
7
8
8
3
3
3
3
3
3
2
2
2
7
9
7
1 May add to more than total number of leases when three or more firms participate in individual joint ventures.
' This company or an affiliate is a major interstate gas pipeline.
Source: U.S. Department of the Interior.
The ownership of onshore producing leases is also highl.v interconnected. Of
the eighteen largest major producers in the State of Louisiana, fourteen have 5
or more direct interlocks with the other seventeen. Continental, for example,
has 28 joint ventures with Atlantic, 27 with Cities Service, 27 with Getty, 16
with Mobil, 13 with Exxon, and 11 each with Amoco and Sun.
In addition, thirty-eight other medium and large producers in Louisiana
were studied. All had substantial interlocking lease ownership arrangements with
the largest majors. For example, in addition to Continental's major interties
listed above. Continental also had the following number of lease interties with
other producers in Louisiana :
489
Figure 2
Jointly Ovmed Leases (Federal Domain)
Amerada, Marathon
Signal, La. Land
Superior
Transocean
Amoco,
Southern "Natural
Texaco, Tenneco
Tenneco, Columbia Gas,
Forest, Texas Gas,
Consolidated Gas
Getty, Atlantic,
Cities, Continental
Atl«nlU-.
F. 1 Paso
Phillips, r.ili
Apache Oil
C & K Petroleum
Clonsolidated Gas
Diamond Shamrock
Dixilyn Corporation-.
Exchange Oil and Gas.
Fluor Corporation
Inexco
Monsanto
Murphy Oil
Newmont Oil
33
14
2
6
21
8
49
6
5
4
133
Ocean Drilling
Offshore Co
Pelto Oil
Pennzoil
Sea Drilling
Southdown-Burmah _.
Southern Natural
Zapata Offshore
Tenneco Oil
Gulf Oil
Occidental Petroleum.
28
17
21
22
45
29
17
43
3
3
21
A complete tabulation of these Louisiana Lease ownership interlocks is re-
ported in Table 13.
In addition to these studies of the ownership of Federal offshore producing
leases and State of Louisiana leases, a study has also been made of producing
units in the Permian Basin in West Texas. Again, what emerges is a picture of
extensive intercorporate interties. As shown in the following matrix, Table 14,
literally every one of the sixteen large major oil companies studied had a sig-
nificant number of joint producing arrangements with every other major.
490
TABLE 13.-J0INT OWNERSHIP OF STATE OF LOUISIANA PETROLEUM LEASES BY LARGE MAJOR PRODUCERS
Company and major partners
Number
of
jointly
held
state
leases
Amerada-Hess:
Phillips 36
Amcco - 10
Sohio 2
Atlartic-Richfield:
Cities. 27
Continental 28
Getty 26
Union 10
Marathon 7
Texaco 4
Tenneco 4
Amoco 3
Chevron.. 2
Sohio. 2
Cities Service:
Atlantic 27
Continental 27
Getty 31
Exxon 2
Continental:
Atlantic... 28
Cities 27
Getty 27
Mobil 16
Exxon 13
Amoco 11
Sun 11
Tenneco 3
Gulf..._ 3
Getty:
Gulf.. 51
Atlantic 26
Cities 31
Continental 27
Exxon 27
Sohio 4
Tenneco 4
Amoco _ 4
Mobil 3
Sun 3
Shell 2
Texaco 2
Gulf:
Exxon 62
Getty 51
Sohio... 13
Shell 12
Amoco 7
Texaco 6
Chevron 6
Tenneco 5
Mobil 5
Continental _ 3
Sun 3
Phillips 2
Amerada. _ 2
Marathon:
Atlantic _ 7
Tenneco 3
Mobil: '"
Continental _ 16
Amoco .._ 8
Gulf_ ...-l\\\"\""[ 5
Sun 4
Texaco 4
Tenneco 3
Getty 3
Exxon 2
Phillips:
Amerada 36
Sun 7
Amoco 3
Gulf "'" 2
Shell:
Gulf 12
Chevron 8
Company and major partners
Number
of
jointly
held
state
leases
SHELL— Continued
Exxon 5
Amoco. 5
Texaco 5
Getty 2
Chevron:
Shell 8
Gulf 6
Texaco 3
Exxon 3
Atlantic _ 3
Amoco:
Texaco 11
Continental 11
Amerada 10
Mobil 8
Gulf-. 7
Shell 5
Sun 5
Tenneco 5
Exxon. 4
Getty 4
Atlantic 3
Phillips 3
Union 3
Exxon:
Gulf. 62
Getty. 27
Continental 13
Texaco n
Tenneco 5
Shell 5
Amoco 4
Chevron 3
Mobil 2
Cities 2
Union. _ _ 2
Sohio:
Gulf 13
Getty 4
Atlantic 2
Amerada 2
Sun:
Continental u
Phillips 7
Amoco 5
Mobil 4
Getty 3
Gulf.. 3
Tenneco 3
Union.. 3
Tenneco:
Exxon. __ 5
Amoco 5
Gulf 5
Atlantic 4
Getty.. 4
Continental 3
Marathon 3
Mobil 3
Sun... 3
Texaco:
Exxon 11
Amoco 11
Gulf... 6
Shell 5
Mobil 4
Atlantic 4
Chevron 3
Getty 2
Union 2
Union Oil:
Atlantic 10
Amoco 3
Sun 3
Exxon. 2
Texaco 2
491
TABLE 13 A— JO'NT OWNFRSHIP nr sTflTF OF Lnm?;iANfl I.FASF«;i BYTHF LARGEST INTEGRATED PETROLEUM
COMPANIES AND OTHER SELECTED PRODUCERS
Producer
NumbT nf
Number of
St^te
ioint
leases
Major partners
ventures
15
Getty.... _...
4
Sun
3
9
Atlantic
3
Marathon
3
Tenneco
3
35
Continental
33
Mobil..
33
Amoco
21
6
Amerada
2
Cities _-
2
Gulf __._
2
16
Continental
. 14
Mobil
14
Amoco
8
Texaco
2
43
Sun
. . 8
Gulf
4
Getty
2
Exxon
2
37
Gulf
7
Chevron
6
Union
6
Marathon
5
Continental
2
Mobil..
2
Exxon
2
Texaco..
2
2
Gulf....
2
Exxon
2
10
Mobil
6
Continental
6
21
Continental
21
Mobil
21
Amoco
21
49
Mobil
9
Continental
8
Gulf
7
Atlantic.
5
Chevron
3
Amerada
2
Exxon..
2
Sohio
2
5
Amerada
2
Exxon
2
58
Continental
49
Mobil
49
Amoco
23
37
Sun
9
Gulf
3
Atlantic
3
19
Sun.._
9
7
Continental
6
Exxon
4
23
Phillips
10
Amoco..
3
Union ..
3
47
Phillips...
35
Texaco
30
Amoco
18
Getty
8
Gulf
4
Tenneco
4
Exxon
2
Union
2
8
Sun . .
6
Continental
5
Gulf
3
Marathon..
3
Amoco
3
Tenneco
3
Texaco
3
6
Sun
6
17
Sun. . .
6
Mobil
4
Continental
4
Sohio
2
Allied Chemical...
Anthony Oil.
Apache Oil
Austral Oil _.
C. & K. Petroleum.
Clinton Oil
Consolidated Gas..
Delta Development..
Diamond Shamrock.
Dixilyn Corp
Exchange Oil & Gas.
Forest Petroleum
Fluor Corp
General American of Texas
General Crude
Inexco _
Kerr-McGee... _..
Louisiana Land & Exploration Co.
Monsanto Chemical.
Munoco
Murphy Oil.
492
TABLE 13A.-J0INT OWNERSHIP OFSTATE OF LOUISIANA LEASES i BY THE LARGEST INTEGRATED PETROLEUM
COMPANIES AND OTHER SELECTED PRODUCERS— Continued
Number of
Number of
State
joint
Producer
leases
Major partners
ventures
Natural Gas & Oil
21
Tenneco...
Chevron
3
2
Newmont Oil
139
Continental
Mobil
133
118
Amoco
23
Texaco
5
Chevron...
4
„. 16
Exxon .
3
North Central
Mobil
Atlantic
3
2
Chevron
7
Sohio..
2
Occidental Petroleum
37
Continental
21
Amoco..
21
■ - *
Mobil
20
Union
6
Sun
2
Phillips
2
Ocean Drilling
55
Mobil
28
Continental
28
Chevron
5
Gulf
4
Texaco
2
Offshore Co
17
Amoco -
Continental
17
17
Mobil..
16
Pejto Oil
28
Continental
21
Mobil
14
Atlantic
4
Chevron
3
Pennzoil
44
Continental..
22
Mobil
22
Amoco
-. 22
Sohio
7
'
Gulf
5
Exxon
4
Atlantic
3
■
Getty
3
Marathon
2
Placid Oil
49
Gulf....
Exxon
6
6
Texaco
5
Shell
5
Getty
4
Mobil
4
Amoco.
4
4
Tenneco
4
Sun
3
Cities ..
2
Samedan Oil
Atlantic
Sun
?
2
Sea Drilling
45
Continental
Mobil...
45
45
Amoco
21
Signal Oil
14
Exxon -
Shell
4
3
Texaco...
2
Gulf
2
South down-Burmah
46
Continental
Mobil.. _
29
14
Atlantic
4
Southern Natural
. . 32
Amoco
20
Mobil
17
Continental
17
Sun
5
Atlantic .-
2
Phillips
2
Chevron
2
Southwest Gas Prod
.. . 8
Sohio
Gulf
8
6
Amerada
2
Transocean Oil
15
Gulf.
4
Phillips
2
Zapata Offshore
53
Continental...
43
Mobil.
43
Amoco.
15
> Includes disputed leases in the Federal Domain.
' Totals may add to more than the total number of leases when more than two producers have interests in jointly held
leases.
493
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494
It may, of course, be argued that these Permian Basin interties, through
unitization agreements, are ancillary to legitimate and desirable conservation
purposes." It is known, for example, that the unitized operation of an oil or gas
field can serve to discourage inefficient production practices and may permit
greater ultimate resource recovery. This is why. for example, the State of
Louisiana requires mandatory unitization of producing areas under certain
circumstances. That laudable purpose notwithstanding, it should be noted that
the arrangement also provides a framework within which petroleum producers
make joint production decisions. To argue that we should not be concerned about
the anticompetitive consequences of certain interlocks because, in addition to un-
dermining competition, they may serve a legitimate purpose, is rather like
arguing that because an electric utility monopoly may be the most efficient
means of serving a specified market we should conclude that the incident lack of
competition does not require regulation. Both arguments are obviously illogical.
International Joint Ventures
In addition to the interrelated domestic operations of the major American
I)etroleum companies, we should not lose sight of the fact that it is largely
these same corporate entities or their affiliates which make up the international oil
cartel. As was pointed out before this Subcommittee in 1969,
The directors of the Standard of New Jersey [now Exxon] and Socony-Vacuum
[Mobil], who determine the policies of the Arabian American Oil Co.. [the larg-
est international combine in Saudi Arabia] are the same men who shape the
behavior of the Iraq Petroleum Company. The directors of Anglo-Iranian Com-
pany [now British Petroleum, Ltd. which controls Standard Oil of Ohio], who
assist in making high oil policy for Iraq and Iran, participate along with the
directors of Gulf, in planning the price and production policies in Kuwait."
This earlier testimony does not go far enough in descril)ing the extent of the
international interties that exist between multinational oil companies like
British Petroleum, Shell, Exxon, Mobil, Gulf, Texaco, Chevron and others.
Table 15 lists some of these, though it too is far from complete. As in so many
other cases in the petroleum industry, full and accurate data are not publicly
available.
While a limited quantification of 18 international joint ventures is reported in
table 15, a review of petroleum industry trade publications over the past decade
indicates that there is a far more extensive system of international interties
among the major American oil companies. A .simple tabulation of reports on
international interties as noted in The Oil and Gas Journal is presented in the
following matrix table 16).
This evidence indicates that, unlike the situation in certain ineffectively
competitive domestic industries, we cannot rely upon the elimination of interna-
tional trade barriers to greatly improve competition in American petroleum
markets. While the abandonment of import barriers, such as the recently aban-
doned oil import quotas, will provide some supply relief, we should recognize
that foreign supplies will flow to American markets through the same corporate
conduits which are already thoroughly interdependent both domestically and
abroad.
Table 15. — Selected major international joint ventures of large integrated
petroleum companies
[In percent]
1. Abu Dhabi Petroleum Co., Ltd. :
B.P. 23.75 I Exxon 11.875
Shell 23.75 I Mobil 11.875
1970 crude production — 155 million barrels.
2. Arabian American Oil Co. :
Texaco 30
Exxon 30
Chevron 30
Mobil 10
1971 crude production — 1,449.05 million barrels.
w Producing units In Texas do not necessarily conform to the geographic and geological
boundaries of a producing field. Moreover, when they do, they do not necessarily Include
all producers in that field. This, of course, undermines the conservation defense.
" Abstract of the Report on the International Petroleum Cartel b.v the Federal Trade
Commission in Hearings before the Subcommittee on Antitrust and Monopoly of the Senate
Judiciary Committee, "Governmental Intervention in the Market Mechanism — The Petro-
leum Industry," 91st Congress, 1st Session, pt. 1, at 5.^3 (1969).
495
Table 15. — Selected major international ventures of large integrated petroleum
companies — Continued
3. Australasian Petroleum Co., Pty. Ltd.
B.P. 38
Mobil 12
Capital equals A$48.6 million pref, plus A$46.4 ordinary.
4. Basrah Petroleum Co., Ltd. :
Oil Search 50
B.P. 23. 75
Shell 23.75
Exxon 11. 875
Mobil 11. 875
1971 Crude production (first 6 months) — 100 million barrels.
5. Bataan Refining Corp. :
Exxon 57 | Mobil 43
Capacity equals 39.4 million barrels per year.
6. Caltex:
Texaco 50 1 Chevron 50
1971 Gross Operating Income equals $2.3 billion.
7. Gewerkschaft Brigitta and Gewerkschaft Elwerath :
Shell 50 I Exxon 50
1970 gas production equals 250 million Mcf .
1970 crude production equals 15 million barrels.
8. Iranian Oil Participants, Inc. :
Mobil 7
Exxon 7
Chevron 7
Texaco 7
Gulf 7
B.P. 40
Shell 14
Atlantic 1.67
Signal .83
Getty .83
1971 crude production equals 1.3 billion barrels.
9. Iraq Petroleum Co. :
B.P 23.75 Exxon 11.875
Shell 23.75 Mobil 11.875
10. Irish Refining Co., Ltr. :
Shell 40 Texaco 20
Exxon 40
1970 throughput equals 17.8 million barrels.
11. Kuwait Oil Co., Ltd. :
Gulf 50 B.P. 50
1971 crude production equals 1.27 billion barrels.
12. Lavan Petroleum Co. :
Atlantic 12.5 Sun 12.5
Murphy 12. 5 Union 12. 5
1970 crude production equals 51.8 million barrels.
13. Oasis Oil Co. of Libya, Inc. :
Marathon Shell
Amerada
1970 crude production equals 345 million barrels.
14. Oberriheinische Mineraloelwerke Gmb H :
Texaco 45 Continental 10
Refinery throughput equals 51 million barrels/year.
15. N. V. Xederlandse Aardolie Maatschappij :
Shell 50 Exxon 50
1970 gas production equals 1.18 billion Mcf.
1970 crude production equals 13.1 million barrels.
16. Pakistan Refinery, Ltd. :
Exxon Chevron
Shell Texaco
1970 throughput equals 21 million barrels.
17. Petroleum Refineries Pty. Ltd. :
Mobil 65 Exxon 35
Capacity equals 51 million barrels per year.
18. Raffinaderej Shell Mersin, N. V. :
Shell 27 Mobil
B.P.
Capacity equals 34 million barrels per year.
496
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497
other Interties
The evidence presented above was obtained entirely from public sources. In
addition, American Petroleum Institute records indicate that there are sub-
stantial crude oil exchange agreements among the majors, ranging from more
than 50 percent of their total domestic liquid hydrocarbon production for some
companies down to only a few percentage points for others. During 1971 and
1972, for example, Ashland Oil was heavily dependent upon Getty for crude and
Standard of Ohio was significantly dependent upon Shell. Other significant crude
exchanges took place between the following :
Amerada-Hess and Shell
Cities Service and Chevron
Continental and Gulf
Marathon and Atlantic
Mobil and Phillips
Tenneco and Getty
Union Oil and Exxon
In addition, it is known that there are substantial product (e.g., gasoline)
exchange agreements among the majors which draw them still closer together
within their complex ring of mutual interties. Details on these product exchanges
are not presently available, but it is hoped that the current FTC investigation of
the domestic petroleum industry will provide us with these and other pertinent
data.
In summary, factual information presented here is based solely on public
records and, therefore, probably substantially underestimates the full extent of
mutual interdependence among firms in the petroleum industry. This informa-
tion, nevertheless, discloses a pervasive pattern of interrelated interests, and it
demonstrates that the industry is not suflSciently competitive to serve the public
interest.
Vertical Integration
It is a well established fact that vertical integration on the oil side of the
petroleum industry has served to inhibit workable competition in crude oil pro-
duction and gasoline retailing. In general, eveu the most outspoken critics of
natural gas regulation acknowledge the anti-competitive shortcomings induced
by vertical integration in oil. For example, one such critic who, unencumbered
by the pertinent facts, concluded that natural gas production "must be highly
competitive," acknowledged with respect to oil :
Vertical Integration : The major companies dominate the market and are
likely to continue to do so ... .
Since there do not appear to be great economies in vertical integration,
it seems likely that the industry would be more competitive and perform
better without the existing vertical integration . . .
Not only is vertical integration troublesome, but the increasing number
of joint ventures involved in exploration, development, and in transporta-
tion creates a community spirit not conducive to vigorous competition.'-
Other analysts have been even less equivocal. For example, the authors of a
recent book on gasoline marketing concluded that :
Vertical integration in the petroleum industry has thus become a malig-
nant force for harnessing monopoly power and for transmitting it to markets
which would otherwise be workably competitive. So long as the present struc-
tural arrangement persists, workable competition in refining and marketing
will always be frustrated. . . . The petroleum industry is becoming more con-
centrated in the hands of those vertically integrated oil companies having
strong crude-oil positions. If the petroleum industry is permitted to continue
to administer artificially high crude oil prices, competition in the industry
will become still more limited."
The vertical integration issue that I wish to discuss here, specifically vertical
integration on the natural gas side of the petroleum industry, has not received
equal or adequate attention by industry analysts. As shown in Table 17. virtually
all of the largest interstate natural gas pipeline companies are al.so involved in
petroleum exploration and development — either directly or through corporate
"Thomas G. Moore. "The Petrolenm Industry, " in Walter Adams, The Structure of
American Triffuxfru. (Ne^ York : Mncmillanl, IflTl.
"Fred C. AUvlne and James M. Patterson, Competition Ltd.: The Marketing of Gasoline,
Indiana University Press, 1972.
498
affiliates. In some instances (e. g., El Paso which serves the West Coast and
Florida Gas which serves the Southeast) the producer affiliate is a pipeline
subsidiary, while in other cases (e.g., Colorado Interstate which serves the
Mountain States and Cities Service which serves the "West Central States) the
pipeline is a producer subsidiary. In still other cases (e.g., Tennessee which
serves the Northeast and United which serves the South) the producer and the
pipeline are both affiliates of the same corporation. In any event, there can be
little doubt that with pipelines and their affiliates heavily involved in petroleum
production, the contention that arms-length bargaining between producers and
pipelines will be sufficient to protect the public's interest in just and reasonable
natural gas prices is ludicrous. Clearly, this is still another major factual reason
for denying that there is any semblance of workable competition in the natural
gas industry as it is presently structured.
Table 17. — Major interstate gas pipelines and their producing affiliates
Exploration, development, and producing
Interstate Pipeline Co. affiliates
Arkansas Louisiana Gas Co Arkla Exploration Co.
Cities Service Gas Co Cities Service Oil Co., Cities Service
Gas Resources Co., Hydrocarbon
Production Co., Inc.
Colorado Interstate Gas Co Coastal States Gas Producing Co., LO-
VACA Gathering Co., Colorado Oil
and Gas Corp., Nueces Industrial Gas
Co.
Columbia Gas Transmission Corp Columbia Gas Development Corp.
Consolidated Gas Supply Corp CNG Producing Co.
El Paso Natural Gas Co Odessa Natural Gasoline Co., Odessa
Natural Corp., Trebol Drilling Co.,
Pecos Co.
Florida Gas Transmission Co Florida Gas Exploration Co.
Lone Star Gas Co Lone Star Producing Co.
Michigan Wisconsin Gas Co American Natural Gas Production Co.
Natural Gas Pipeline Co. of America — Harper Oil Co.
Northern Natural Gas Co (Produces under its own name)
Panhandle Eastern Pipeline Co Anadarko Production Co., Pan Eastern
Exploration Co., Panhandle Western
Gas Co.
Southern Natural Gas Co SONAT Exploration Co., The Offshore
Co.
Tennessee Gas Transmission Co Tenneco Oil Co.
Tennessee Gas Pipeline Co Tenneco Exploration, Ltd., Tenneco Off-
shore Co., Inc., Tenneco West, Inc.
Texas Eastern Transmission Corp La Gloria Oil and Gas Co., Texas East-
ern Gas Supply Co.. Texas Eastern
Maroc, Inc., Texas Eastern Explora-
tion Co., Texas Eastern Oil Co.
Texas Gas Transmission Corp Texas Gas Exploration Corp.
Transcontinental Gas Pipeline Corp Transcontinental Production Co.,
Trans-Gulf Transmission Corp.
Transwestern Pipeline Co.^ Transwestern, Inc. Transwes>tern Gas
Supply Co.
Trunkline Gas Co.^
United Gas Pipeline Co Pennzoil Producing Co-, Pennzoil
Petroleums, Ltd., Pennzoil Louisana
and Texas Offshore, Inc., Pennzoil
Offshore Gas Operator, Inc.
1 Subsidiary of Texas Eastern Transmission Corp.
* Subsidiary of Transcontinental Gas Pipeline Co.
This direct evidence on vertical integration presents only a partial picture of
the economic interties involved. Actually, the economic impact of vertical inte-
gration goes well beyond the dealings between a pipeline and its production
affiliates. As was shown above in Table 8. fifteen of the twenty-one major off-
shore l)idding combines included a major interstate pipeline producing affiliate.
In addition, as shown in Table 12, ten of the sixteen largest majors with
499
producing acreage in tlie Federal domain engaged in joint production with inter-
state pipeline affiliates. Finally, there are a multiplicity of financial interlocks
through which interstate pipelines have, in effect, provided hundreds of millions
of dollars in interest free loans to natural gas producers in order to speed new
exploration and development.
All of these arrangements bring horizontally and vertically juxtaposed firms
into close working relationships with each other. They must work together to
further their joint interests. Consequently, each becomes familiar with the
others and with each other's operations. Men in such close working relationships
learn to consider one another's interests. This process of learning to live to-
gether is, of course, quite laudable in certain social and political contexts. The
success of our Nation's international relations, for example, depends greatly
upon this process. But it is, most assuredly, not the kind of institutional setting
within which a free market economy can be expected to function efficiently. Real
economic competition is made of tougher stuff. The petroleum industry's rhetoric
about letting "free market forces" solve the energy crisis simply makes no
sense within the present market context. In order to function both efficiently
and in the public interest, "free markets" must be competitive. This means that
the participants must be structurally and behaviorally independent of each
other. That precondition, quite apparently, does not apply to the petroleum in-
dustry. Consequently, given present institutional arrangements, the industry's
free market prescription would not produce a competitive end result. That
brand of "free enterpri.se" means merely the removal of public constraints upon
the operations of their thoroughly interrelated operations, and the end result
would certainly fail to conform to what is in the public interest.
V. POLICY PROPOSALS
As shown above, market control in the petroleum industry, including the nat-
ural gas producing sector, is held by a closely knit consortium comprised of the
large, fully integrated oil companies and their jointly interlocked affiliates.
These firms, working in cooperation with each other, have the ability to control
petroleum supplies and, in so doing, to maneuver for monopolistic market price
levels.
Federal regulation of the field price of natural gas was supposedly designed
to deal with this problem. Apparently, it is not working well. As in the case
of fuel oil and gasoline, natural gas supplies are short and prices are rising
rapidly. No one can deny that policy changes are needed. The prescription
offered by the petroleum industry and its various spokesmen is for unrestrained
"market freedom" — a situation wherein the industry (not the public) would be
"free" ; free, that is, to extract the maximum possible price that the market will
bear." Unless capitulation to the monopoly power of private economic inter-
ests is now viewed as a national policy alternative, this prescription makes no
sense. Certainly, from the consuming public's view, it cannot be described as a
rational stratagem.^
Alternatives to capitvlation
1. The first and foremost step which must be taken in order to make the
regulatory system workable is to eliminate the intrastate exemption which pro-
ducers are now able to use as a leverage device in the interstate market. The
typical procedure these days is for gas producers to whipsaw interstate prices
to higher levels on the basis of the highest prices that have been paid in unreg-
ulated intrastate markets.
That this practice undermines the establishment of just and reasonable cost-
based rates for natural gas is obvious. Why should producers voluntarily sell
gas at competitive, cost-based price levels if there is an alternative unregulated
market (1) where they can charge what the traffic will bear and (2) which they
can use as a lever to force up interstate prices?
1* It should be noted that the industry is fond of urging: petroleum prices which reflect
"commodity valne' rather than cost. Commodity value, however, is really nothing other
than the monopoly price ; even a total monolithic monopolist would be unable to charge
more thnn his product is worth. The essence of monopoly is the ability to extract a price
equal to full commodity value, regardless of how exorbitant the profit.
IS Both arrogant sellers and desperate buyers could respond to this by saying : "What
could possibly be worse for the consumer than having no gas? We might as well 'pay up'
then and avoid the worst." Obviously, that position may make some sense from the point
of view of an individual consumer who has no recourse but to capitulate to monopoly
power, but Congress, presumably, is not so constrained.
500
What has not been as obvious, perhaps even unknown to some, is the fact
that interstate sellers are also intrastate buyers! They are, therefore, in a
unique position to manipulate the so-called "market price" :
e.g., Producer X buys gas in the intrastate market from another producer,
Y, at a high price (perhaps X uses this gas as fuel in his oil refinery).
Then X and Y both turn to the intrastate market (and to the FPC) and say,
"Look at the high price level that has been established in the intrastate
market; it's only reasonable that interstate prices keep pace."
In the fall of 1972. the FPC collected data on large intrastate gas commit-
ments over the most recent 12 months from each of the seventy-five largest
interstate gas suppliers. Information concerning the producers surveyed as well
as aggregate quantities and prices was published by the Commission in Novem-
ber, 1972. However, the identify of the intrastate 'buyers was not revealed at
that time. Table 18, below, presents such a listing. It is most instructive.
For example, there were 14 large intrastate buyers identified in the Permian
Basin. They are as follows :
1. Pecos Growers Oil Company — This buyer is a subsidiary of Texas Oil and
Gas Corp., which is also the parent of Pecos Growers Gas Co.. Delhi Gas Pipeline
Corp.. Nueces Co., and the Tonka wa Gas Processing Co. Four of these corporations
are major interstate sellers. In 1971 Pecos Oil sold .5.6 billion cubic feet to inter-
state pipelines, Pecos Gas sold 18.6 billion cubic feet, Delhi sold 8.5 billion cubic
feet, and their mutual parent, Texas Oil and Gas, sold 14.2 billion cubic feet
of gas in interstate commerce.
2. Pecos Growers Gas Company — See Pecos Growers Oil Company.
3. Intratax Gas Company — This company is a subsidiary of Houston Natural
Gas which is also the parent of Houston Pipeline Co. and HNG Oil Corp. Houston
Natural Gas also is a co-owner of Oa.sis Pipeline Co. along with its partners,
Dow Chemical and Tengasco, a subsidiary of Tenneco, Inc. Houston Natural
sold 9.1 billion cubic feet of gas to interstate pipelines in 1971, and through its
subsidiaries controls substantial production acreage.
4. Llano, Inc. — No information available.
5. Lo Vaca Gathering Company — Lo Vaca is a subsidiary of Coastal States
Producing Co., one of the largest intrastate producers. In 1971 Coastal States
sold 34.1 billion cubic feet of gas to interstate pipelines and Lo "Vaca soM 64.7
billion cubic feet in interstate commerce. Another Coastal States subsidiary, the
Nueces Industrial Gas Co.. had 1971 interstate sales of 45.2 billion cubic feet.
6. Texas Utilities Fuel Co. — This company is a subsidiary of Texas Utilities
Co., which is also the parent of Bi-Stone Fuel Co. It also owns, with Lo "Vaca
(a Coastal States subsidiary), an intrastate pipeline system reaching from the
Permian Basin to Dallas.
7. Delhi Gas Pipeline Corp. — See Pecos Growers Oil Co.
8. BTA Oil Producers — This company is an indenendent gas producer. In
1971, BTA sold 2.1 billion cubic feet of gas in interstate commerce.
9. Lone Star Gas Company — Lone Star's subsidiary. Lone Star Producing Co.,
sold 70.8 billion cubic feet of gas in interstate commerce in 1971.
10. Pioneer Natural Gas Co. — Pioneer is the parent of Pioneer Production Co.
which sells gas in interstate commerce to Michigan "Wisconsin Pipe Line Co..
Natural Gas Pipeline Co. of America. Northern Natural, Panhandle Eastern, and
Transwestern.
11. Amoco Gas Co. — Amoco is a subsidiary of Standard Oil of Indiana. To-
gether with Midwest, another Indiana Standard subsidiary, Amoco ranks second
behind Exxon in natural gas sales to interstate pipelines.
12. The Dow Chemical Co. — Dow is an independent natural gas producer.
13. Houston Pipeline Co. — See Intra tex Gas Co.
14. Pennzoil Pipeline Co. — Pennzoil Pipeline is a subsidiary of Ignited Gas
Pipeline, which is a subsidiary of Pennzoil United, Inc. Pennzoil United, Inc. is
also the parent of Pennzoil Producing Co., Pennzoil Petroleum, Ltd., Pennzoil
Offshore Gas Operator-s, Inc., and Pennzoil Louisiana and Texas Offshore, Inc.
Pennzoil United and its affiliates were the largest bu.ver of Offshore Louisiana
leases in the December 1972 Federal offshore lease sale, and in June 1973 they
had high bids totalling over $800 million in the Texas Offshore lease sale (out
of a $1.6 billion total of high bids). Pennzoil is therefore one of the largest poten-
tial offshore gas producers. Their 1971 interstate sales totaled nearly 250 billion
cubic feet.
These then are the ttiyers who are bidding up the intrastate price in the
Permian Basin. Surely one can be forgiven for suspecting that when Pennzoil,
501
Amnco. roastnl Stafes. et nJ.. artinar as intrastate buyers, hid np the price of gas.
there may he some potential for certain fairly ohvious ulterior motives. A com-
plete list of all the major intrastate buyers in major producing areas who were
identified by the FPC in the 1972 intrastate price survey is presented in Table 18.
It wou'd be quite incredible, in view of this information, to permit these parties
to go on establishing so-called intrastate "market prices" which they and their
own corporate affiliates subsequently press upon the interstate market. Surely
this gaping regulatory loophole must be closed if regulation is to work. The ex-
emption presently undermines the Federal government's ability to regulate inter-
state commerce.
TABLE 18.— INTRASTATE BUYERS IDENTIFIED IN THE 1972 FPC SURVEY OF INTRASTATE NATURAL GAS PRICES
(Docket R389A)
Area and intrastate buyer
Also a
gas pro-
ducer?!
Interstate pipelines served in 1971 1
2. Pecos Growers Gas Co Yes.
3. Delhi Gas Pipeline Corp Yes.
4. Intratex Gas Co Yes.
5. Houston Pipeline Co Yes.
6. Dow Chemical Co.. _ Yes.
7. Lo-Vaca Gathering Co Yes.
PERMIAN BASIN
1. Pecos Growers Oil Co.. Yes Lone Star Gas Co., Natural Gas Pipeline Co., El Paso Natural Gas Co.,
Arkansas Louisiana Gas Co., Cities Service Gas Co., Colorado Interstate,
Florida Gas Trans. Co., Michigan Wisconsin Pipeline Co., Northern
Natural Gas Co., South Texas Natural Gas Gathering Co., Tennessee Gas
Pipeline, Texas Eastern Trans. Corp., Trunkline Gas Co., Transcontinen-
tal Gas P.L., United Gas Pipeline Co.
. See Pecos Growers Oil Co above.
Do.
. Consolidated Gas Supply Corp., Natural Gas P.L. Co., South Texas Nat.
Gas Gath., Texas Eastern Trans. Corp., Texas Gas Pipe Line, Trans-
continental Gas Pipeline Corp., Valley Gas Trans. Inc.
. See Intratex Gas Co. above.
. None in 1971.
Cities Service Gas, Columbia Gas Trans., Consolidated Gas Sup., Lone
Star Gas Co., Natural Gas P. L., Co., South Texas Natural Gas Gathering
Co., Tennessee Gas Pipeline, Texas Eastern Trans., Transcontinental
Gas Pipeline Corp., Trunkline Gas Co., Arkansas Louisiana Gas, El Paso
Natural Gas Co., Northern Natural Gas Co., Colorado Interstate Gas,
Florida Gas Trans. Co.
8. Texas Utilities Fuel Co.. Yes None in 1971.
9. BTA Oil Producers... Yes El Paso Natural Gas Co.
10. Lone Star Gas Co Yes Arkansas Louisiana Gas, Lone Star Gas Co., Natural Gas P.L. Co., Pan-
handle Eastern P. L., Texas Eastern Trans., Transcontinental Gas
Pipeline Corp., United Gas P. L Co.
11. Pioneer Natural Gas Co Yes Michigan Wisconsin P.L., Natural Gas P. L. Co., Northern Natural Gas Co.,
Panhandle Eastern P. L.
12. Pennzoil Pipeline Co Yes United Gas Pipeline Co., Arkansas Louisiana Gas Michigan Wisconsin P. L.,
Natural Gas P. L. Co., Sea Robin P. L. Co., South Texas Natural Gas
Gathering Co., Southern Natural Gas Co., Tennessee Gas Pipeline, Texas
Eastern Trans., Texas Gas Trans. Corp., Transcontinental Gas Pipeline
Corp., Trunkline Gas Co., United Gas Pipeline Co., Columbia Gas Trans.,
Consolidated Gas Sup., Transwestern P. L. Co.
13. Amoco Gas Co Yes Arkansas Louisiana Gas Co., Cimarron Trans. Co., Cities Service Gas Co.,
Colorado Interstate Gas, Columbia Gas Trans., El Paso Natural Gas Co.,
Florida Gas Trans. Co., Lone Star Gas Co., Michigan Wis. P. L. Co.,
Miss. River Trans. Corp., Montana Dakota Utility Co., Mountain Fuel
Sup. Co., Natural Gas P. L. Co., Northern Natural Gas Co., Northern
Utilities Co., Panhandle Eastern P. L., Sea Robin P. L. Co., Southern
Nat. Gas Co. Tennessee Gas Pipeline, Texas Eastern Trans. Corp., Texas
Gas P. L. Corp., Texas Gas Trans. Corp., Transcontinental Gas P. L.,
Transwestern P. L. Co., Trunkline Gas Co., United Gas P. L. Co., Valley
Gas Trans., Inc.
14. Llano, Inc No N/A.
TEXAS GULF COAST
1. Amoca Gas Co Yes See Amoco Gas — Permian Basin.
2. Atlantic Richfield Co Yes. Arkansas Louisiana Gas Co., Cimarron Trans. Co., Cities Service Gas Co.,
Colorado Interstate Gas Co., Columbia Gas Trans. Corp., El Paso Natural
Gas Co., Florida Gas Trans. Co.. Kansas Nebraska Natural Gas Co., Lone
Star Gas Co., Michigan Wisconsin Pipeline, Montana Dakota Utility Co.,
Mountain Fuel Supply Co., Natural Gas P. L. Co., Northern Natural Gas
Co., Northern Utilities Co., Panhandle Eastern P. L. Co., South Texas
Natural Gas Gathering Co., Southern Natural Gas Co., Tennessee Gas
Pipeline, Texas Eastern Trans. Corp., Texas Gas Trans. Corp., Trans-
continental Gas P. L. Co., Transwestern P. L. Co., Trunkline Gas Co.,
United Gas P. L. Co., West Texas Gath. Co.
502
TABLE 18.— INTRASTATE BUYERS IDENTIFIED IN THE 1972 FPC SURVEY OF INTRASTATE NATURAL GAS PRICES
(Docket R389A)— Continued
Also a
gas pro-
Area and Intrastate buyer ducer? i Interstate pipelines served in 1971 1
3. Channel Industries Gas Co Yes Arkansas Louisiana Gas Co., Cimarron Trans. Co., Cities Service Gas Co.,
Columbia Gas Trans. Corp., El Paso Natural Gas Co., Florida Gas Trans.
Co., Michigan Wisconsin P. L. Co., Mississippi River Trans. Corp.,
Montana Dakota Utility Co., Mountain Fuel Supply Co., Natural Gas P. L.
Co., Northern Natural Gas Co., Oklahoma Natural Gas Gathering Corp.,
Panhandle Eastern P. L. Co., South Texas Natural Gas Gathering Co.,
Southern Natural Gas Co., Tennessee Gas Pipeline, Texas Eastern
Trans. Corp., Texas Gas Trans. Corp., Transcontinental Gas P. L.,
Trunkline Gas Co., United Gas Pipeline Co., Western Trans. Corp.,
Kansas Nebraska Nat. Gas Co.
4. Coastal States Producing Co... Yes See Lo-Vaca Gathering Co.— Permian Basin.
5. Texas Gas Utilities Co Yes Do.
6. Texas Southeastern Gas Co... Yes Do.
7. Lo-Vaca Gathering Co Yes Do.
8. Continental Oil Co Yes Arkansas Louisiana Gas Co., Cascade Natural Gas Corp., Cities Service Gas
Co., Colorado Interstate Gas Co., El Paso Natural Gas Co., Florida Gas
Trans. Co., Kansas Nebraska Natural Gas Co., Lone Star Gas Co.,
Michigan Wisconsin P. L. Co., Montana Dakota Utility Co., Mountain
Fuel Supply Co., Natural Gas P. L. Co., Northern Natural Gas Co.,
Northern Utilities Co., Panhanlle Eastern P. L. Co., South Texas Natural
Gas Gathering Co., Southern Natural Gas Co., Tennessee Gas Pipeline,
Texas Eastern Trans. Corp., Texas Gas Trans. Corp., Transcontinental
Gas P. L., Transwestern P. L. Co., Trunkline Gas Co., United Gas P. L.
Co., West Texas Gathering Co.
9. Delhi Gas Pipeline Corp Yes See Delhi Gas Pipeline Corp.— Permian Basin.
10. Dow Chemical Co Yes None in 1971.
11. Houston Pipeline Co Yes See Intratex Gas Co.— Permian Basin.
12. Lone Star Gas Co .-. Yes See Lone Star Gas Co.— Permian Basin.
13. Pennzoll Pipeline Co Yes See Pennzoil Pipeline Co. — Permian Basin.
14. Phillips Petroleum Co Yes Arkansas Louisiana Gas Co., Cities Service Gas Co., Columbia Gas Trans
Corp., Delta Gas, Inc., El Paso Natural Gas Co., Florida Gas Trans. Co.
The Jupiter Corp., Lone Star Gas Co., Louisiana Nevada Transit, Michigan
Wisconsin P. L. Co., Mississippi River Trans. Corp., Natural Gas P. L,
Co., Northern Natural Gas Co., Panhandle Eastern P. L. Co., Southern
Natural Gas Co., Tennessee Gas Pipeline, Texas Eastern Trans. Corp.,
Texas Gas Trans. Corp., Transcontinental Gas P. L. Corp., Transwestern
Pipeline Co., Trunkline Gas Co., United Gas Pipeline Co., Valley Gas
Trans., Inc., Western Gas Interstate Co.
15. American Smelting & Refining No N/A.
Co.
16. Goodyear Tire & Rubber Co... No N/A.
17. Houston Chemical Co No N/A.
18. Clin Corp No N/A.
SOUTH LOUISIANA
1. Continental Oil Co Yes See Continental Oil Co.— Texas Gulf Coast.
2. Allied Chemical Corp Yes El Paso Natural Gas Co., Lone Star Gas Co., Natural Gas Pipeline Co.
Northern Natural Gas Co., Oklahoma Natural Gas Gathering Corp.,
Panhandle Eastern P. L. Co., Southern Natural Gas Co., Texas Eastern
Trans. Corp., Texas Gas Pipeline Corp., Texas Gas Trans. Corp., Trans-
continental Gas P. L. Corp., Transwestern Pipeline Co., United Gas
Pipeline Co.
3. Monterey Pipeline Co Yes Arkansas Louisiana Gas Co., Colorado Interstate Gas Co., Columbia Gas
Trans. Corp., El Paso Natural Gas Co., Florida Gas Trans. Co., Kansas-
Nebraska Natural Gas Co., Lone Star Gas Co., Louisiana Nevada Transit,
Michigan Wisconsin P. L. Co., Montana Dakota Utilities Co., Mountain
Fuel Supply Co., Natural Gas P. L. Co, Northern Natural Gas Co.,
Panhandle Eastern P. L. Co., Plaquemines Oil & Gas Co., Southern
Natural Gas Co., Tennessee Gas Pipeline, Texas Eastern Trans. Corp.,
Texas Gas Trans. Corp., Transcontinental Gas P. L. Corp., Transwestern
P. L. Co., Trunkline Gas Co., United Gas P. L. Co., West Texas Gathering
Co., Western Gas Interstate Co.
4. Louisiana Intrastate Gas Corp. No N/A.
OTHER SOUTHWEST
1. Arkansas Western Gas Co Yes None in 1971.
2. Arkansas Louisiana Gas Co... Yes Arkansas Louisiana Gas Co., Arkansas Okla. Gas Corp., Mississippi River
Trans. Corp., Texas Gas Trans. Corp.
3. Western Gas Corp Yes Kansas-Nebraska Natural Gas Co., Cities Service Gas Co., Texas Eastern
Trans. Corp.
4. Delhi Gas Pipeline Corp. Yes See Delhi Gas Pipeline Corp.— Permian Basin.
5. Bi Stone Fuel Co Yes None in 1971.
6. Lone Star Gas Co Yes See Lone Star Gas Co.— Permian Basin.
7. Oklahoma Natural Gas Co Yes Arkansas Louisiana Gas Co., Cities Service Gas Co., Michigan Wisconsin
P. L. Co., Natural Gas P. L. Co., Northern Natural Gas Co. Oklahoma
Natural Gas Gathering Corp., Panhandle Eastern P. L. Co., Tr?>'.3western
Pipeline Co.
503
TABLE 18— INTRASTATE BUYERS IDENTIFIED IN THE 1972 FPC SURVEY OF INTRASTATE NATURAL GAS PRICE S
(Docket R389A)— Continued
Also a
gas pro-
Area and Intrastate buyer ducer? ' Interstate pipelines served in 1971 •
8. Oklahoma Natural GasStorage Yes. See Oklahoma Natural Gas Co. above.
Co.
9. Pioneer Natural Gas Co Yes Michigan Wisconsin P.L. Co., Natural Gas P.L Co., Northern Natural Gas
Co., Panhandle Eastern P.L. Co., Transwestern Pipeline Co.
10. Kansas-Nebraska Natural Gas Yes See Western Gas Corp.— Other southwest.
Co., Inc.
11. Anadarko Prod. Co Yes Arkansas Louisiana Gas Co., Cities Service Gas Co., Colorado Interstate
Gas Co., Kansas-Nebraska Natural Gas Co., Lone Star Gas Co., Micni-
gan Wisconsin P.L. Co., Natural Gas P.L. Co., Northern Natural Gas
Co., Panhandle Eastern P.L. Co., Texas Gas Transmission Corp., United
Gas Pipeline Co., Panhandle Producing Co., Colorado Interstate Gas Co.
12. Phillips Petroleum Co Yes See Phillips Petroleum Co.— Texas Gulf Coast.
13. Southwestern Gas P.L No N/A.
14. The LBA Co., Inc No N/A.
15. Coastal Chemical Corp No N A.
16. Oklahoma Gas & Electric Co.. No N/A.
17. Transok Pipeline Co No N/A.
18. Reynolds Metals Co_ No N/A.
19. Mississippi Chemical Corp No N/A.
20. Mississippi Power & Light Co. No N/A.
ROCKY MOUNTAIN
1. Amoco Gas Co _.. Yes See Amoco Gas Co.— Permian Basin.
2. Colorado interstate Gas Co Yes See Lo-Vaca Gathering Co.— Permian Basin.
3. Koch Industries, Inc. Yes Arkansas Louisiana Gas Co., El Paso Natural Gas Co.
4. Koch Oil Co Yes See Koch Industries above.
5. McCulloch Gas Processing Yes McCulloch Interstate Gas Corp., Montana Dakota Utilities Co.
Corp.
6. Mountain Fuel Supply Co Yes None in 1971.
7. Southern Union Gas Co Yes El Paso Natural Gas Co.
8. Cody Gas Co _. No. N/A.
9. Texas Gas Corp No N/A.
10. Thomas G. Vessels No. N/A.
> Either the company named or an affiliate.
2. Second. Congress should seriously consider the merits of establisliiug an in-
dependent public corporation to explore for and develop petroleum hydrocarbons
on Federal property. The creation of TVA assisted in improving performance
in the electric power industry after the di.scovery of major private corporate
abuses in the 1920's. There is every reason to believe that a vigorous, independ-
ent, public petroleum production corporation may similarly be a major assist in
breaking the monopolistic market power currently in the hands of our privately
owned and thoroughly interlocked petroleum companies. Without a competitive
threat, they can well afford to move slowly as the growing energy crisis builds
support for higher prices. With a viable public coriwration that can step in and
do the job if they don't, the.y would be far less likely (or able) to behave like a
stodgy cartel. The Federal domain, after all, belongs, quite rightfully, to the con-
sumers of this country, and there is little reason why its minei-al wealth should
be treated as the private preserve of the big oil companies.
It is true that the rich history of this Nation is steeped in the merits of com-
petitive private enterprise. But when private enterprise is not competitive, it
ceases to serve the public, and then it must be controlled, corrected, or replaced.
The corrective measure which must be taken in this regard is to establish a
force which will obligate producers to render service at prices reflecting just and
reasonable rates. A public corporation, by virtue of the fact that it would pro-
vide for an indeijendent alternative source of supply, would constitute such a
force. At the present time there is none, and the consequences of this void are
serious.
For example, if in response to a supply shortage regulators raise prices in
hopes of eliciting new supplies, but the producer combine recognizes that con-
tinued shortages may bring still higher prices, regulatory authorities cannot
compel them to produce gas at reasonable price levels. Moreover, if conditions
develop so that producers have strong reasons to speculate that prices are likely
to continue to rise rapidly in the future, there will be strong economic pressure
for them to hold off on proving up new reserves until their anticijiations are met
and further speculation subsides.
There are substantial indications that this is hrippening at the present time.
The FPC has taken a number of significant steps to increase new natural gas
27-547—74 33
504
prices in the last two years, but proved reserves have not grown apprecial)ly.
They have declined. The result is that now the industry trade press talks about
the imminent likelihood of future prices double those that have been instituted
recently, which are, themselves, double those that prevailed only a few years
ago. In an economic climate such as this, it is seldom the case that those who
hold the valuable and rapidly appreciating assets are in any hurry to liquidate
their holdings. Why sell today when the price is X, if tomorrow it will be X"V
Thus, regulation is a scissors with one blade — fair rates can be established,
but if producers decide to hold out, regulators have little authority to rectify
the situation. I should hasten to note that this discussion of the institutional
failures of producer regulation is not intended to whitewash the way in which
the institutions, as weak as they are, have been implemented. In all candor,
implementation too has had its shortcomings. Even if legislative or other in-
stitutional restrictions prevent or inhibit the effective implementation of the
most efficient public policies, it is nevertheless possible to identify those road-
blocks and to work aggressively for their removal. That is one of the purposes
of this testimony.
In any event, it should be rather obvious that it is somewhat unfair to ex-
pect outstanding results if the tools provided are inadequate to the task, and it
is perhaps also unfair to expect great enthusiasm from those assigned a task
if the overriding conditions make that task next to impossilde. In short, regu-
lation and regulators could be far more successful if the institutional blockages
noted here are eliminated.
3. Third, it would, of course, be pos.sible to attempt to deal with the anti-
competitive features of the petroleum industry through the passage of new
antitrust legislation or through the vigorous and creative implementation of
existing antitrust statutes. That this will be done without a Congressional
mandate and sustained popular support seems unlikely. The situation described
herein has existed for some time, and the Justice Department and the FTC
have long maintained their supine position at the feet of the oil industry, aris-
ing feebiy from time to time to nip at a stray hair, but not since 1911 arousing
enough muscle (or a remedial plan) to take on the real task that is required.
Under the pi-esent leadership the Antitrust Division, if allowed, may be able
to carry forth the required effort. But that would be possible only with the
strongest conceivable Congressional support. It has been said that the celebrated
IBM antitrust case is now absorbing a great bulk of the Antitrust Division's
best resources. To assess the present problem in perspective, one must recall
that in 1967, IBM ranked behind Exxon, Texaco, Gulf, and Mobil in total
assets, not to mention Chevron, Amoco, Shell. Tenneco, and Phillips, which
come right behind, and the others that will have to be taken on simultaneously
if the required burden is assumed. No one familiar with our recent antitrust
track record could be overly optimistic about the outcome without some new
manifestation of the strongest possible Congressional support.
Summary, at this point, is quite simple. The industry .is not competitive.
Present regulation is not working well. There are a myriad of ways in which
competition can be increased : reforming the Interior Department's leasing prac-
tices ; establishing a viable independent public corporation ; vertical divesti-
ture by producers of oil and gas pipelines, and by refiners and gas pipelines
of their producing and marketing operations ; splitting up of all but the most
essential joint ventures, and, where they remain (e.g., utilization of producing
fields for conseiwation purposes ) , adequate public safeguards ; some horizontal
divestiture of the largest producers, refiners, and marketers: and there are
others. In order for these reforms to be meaningful, they would have to be
many and thorough. There are also ways of improving regulation : closing the
intrastate regulatory gap; obtaining more and better corporate information
so as to be better able to ascertain producing costs; the establishment of a
clear understanding that just and reasonable prices should fairly reflect no
more than the costs of efficient operations plus a reasonable rate of return;
and perhaps formal institutional divorcement of the investigatory and pul)lic
advocacy functions of regulatory agencies from the ajudicatufy functions.
There are two "solutions" which are clearly "bad" ; continuing as is as if
no change is needed, and turning control over the private monopolists.
I believe that essential regulatory improvements are needed first; they are
the easiest to agree upon and can be implemented more rapidly. At the same
time, if it is possil)le. we should begin the long hard, process of restructuring
the petroleum industry, so as to reform the underlying market structure and,
hopefully, make it workably competitive. But that is a long-run goal, not to
be confused with the "free market force" rhetoric which flows on like mana,
as if unmindful of the facts and unwary of their consequences.
THE NATURAL GAS INDUSTRY
(Competition and Concentration)
THURSDAY, JUNE 28, 1973
U.S. Senate,
Subcommittee ox Antitrust and Monopoly
OF the Committee on the Judiciary,
Washington-^ B.C.
The subcommittee met at 10:15 a.m. in room 22:28, Dirksen Senate
Office Building, Hon. Philip A. Hart (chairman of the subcommittee)
presiding.
Present : Senator Hart.
Staff present: Charles E. Bangert. general counsel: Bernard Nash,
assistant counsel; Patricia Bario. editorial director: Janice Williams,
chief clerk ; Peter X. Chumbris, minority chief counsel ; and Stanley
Hackett, minority counsel.
Senator Hart. The committee will be in order. Those ■udio were with
us yesterday witnessed the inconveniences that were caused our wit-
nesses, and indeed the unsatisfactory nature of the hearing because
of the almost constant interruption due to action on the floor of
the Senate. And today, I apologize in advance. I think this will be — •
at least later in the day — even worse. Also, at some point during the
day — and it's impossible to know when — I will be required to handle
an amendment on the floor. And at that time, we'll simply have to
recess for so long as the debate on that amendment goes on.
And with that unhappy prognosis. I will ask the witnesses, if at all
possible, to attempt to summarize their testimony. Our first witness to-
day will be Mr. Monte Canfield. Jr.. who's the deputy director of the
Ford Foundation's energy policy project. Mr. Canfield is accompanied
by Mr. Charles Eddy. Good morning.
I should explain for the record that from 1969 until 1972, Mr. Can-
field was in charge of the Department of the Interior's mineral resource
leasing program, and prior to that, had been with the Office of Man-
agement and Budget. Mr. Canfield, welcome.
STATEMENT OF MONTE CANFIELD, JR., DEPUTY DIRECTOR, EN-
ERGY POLICY PROJECT, FORD FOUNDATION, WASHINGTON,
D.C.; ACCOMPANIED BY CHARLES EDDY, STAFF MEMBER
]\Ir. Canfield. Thank you, ]Mr. Chairman, for the opportunity to
appear before you todav.
I have with me Mr. Charles Eddy, of the EPP staff. Mr. Eddy has
been concerned with Outer Continental Shelf resources development
for a number of years, and has helped me prepare this statement.
(505)
506
My remarks will be limited, generally, to some of the more important
implications of possible decontrol of wellhead prices if applied to
natural gas obtained from offshore provinces.
I have been associated for the past several years with the j)roblems
of offshore oil and gas leasing and development, both while working
with the EPP, and previously as chief of the Division of Energy and
Minerals of the Interior Department's Bureau of Land Management.
After some brief observations about the impact of price on the
demand for natural gas, I will limit my statement to the issue of price
controls on future gas to be obtained from the Outer Continental Shelf,
the OCS.
My views on these issues do not reflect the findings of the Ford
Foundation's energy policy project. When the results of our work
are complete, I may well change my mind on this and other issues.
As a nation, we are faced with a number of serious energy resource
policy issues. While many of these issues are fairly evenly spread
throughout the economy, others are more nearly the province of a
limited number of actors.
For example, the best estimates available indicate that well over
50 percent of the remaining energy resources in the United States
are under Federal public lands. Development of similar resources
under State and private lands will be influenced b}' Federal Govern-
ment policies.
Proponents of decontrol of natural gas prices put forth a rather
basic economic argument. They theorize that the Federal Power Com-
mission's control of wellhead prices is an unjustifiable constraint on
the marketplace.
Wellhead prices, it is argued, have been held artificiallv low while
demand for natural gas has continued to rise, a result itself due in part
to the low gas prices.
Both the supplies of natural gas and the demand for it are assumed
to be relatively "elastic," to use the economists' term. That is, with
an increase in price an increase in supply, coupled with a reduction
in demand, will result.
If normal market factors are allowed to come into nlay, decontrol
proponents argue, the market will clear. That is, supply and demand
will come into an equilibrium state at a hia'her price.
Two basic arguments have developed in support of this thesis, each
concentrating on a separate aspect of the sunply-and-demand equation.
The first is what I would term the "higher price equals lower de-
mand" proposition. In addition to believinsr that increa'^ed price will
result in decreased demand for natural gas. supporters of tliis arp-ument
feel that more efficient use of natural ffas will result from higher
prices, principally because lar.o^e industrial i^^ers will find gas too
costly for "under boiler" and similar uses, and will therefore switch
to other fuels.
The beneficiaries are seen to be smaller residential and commercial
users who will be assured adequate supplies, albeit at hio-hpr prices.
I am skeptical of this "higher price equals lower demand" theory.
Such an argument assumes a free and competitive market in which
prir'p can act as the single pivot and clear future transactions.
One key. of course, to any such clearance, is whether or not there are
other sources that can be used. Experience to date with the Clean Air
Act indicates that fuel switching might not be a reasonable expectation.
507
Clearly, industry cannot use oil or coal if the environmental con-
straints preclude it. What if they can't burn oil and coal to meet air
quality standards? Most utilities now claim this to be the case, and
future burning of coal depends heavily on new technological
development.
Low sulfur oil is also in short supply, as short as natural gas. In fact,
oil in general seems to be fairly fully allocated, what with heating oil
shortages last winter and gasoline shortages this summer.
So. it seems to me. demand in this case occurs in an imperfect market,
one constrained at least as much by air quality laws and the lack of
environmentally suitable alternative fuels at anything like reasonable
prices, as by the price of natural gas.
However, if it were determined that price, indeed, would help curb
demand, the increase could be in the form of a tax, either on the pro-
ducer or the end user, which might in turn be used to develop better
information on additional natural supplies or to finance research and
development on new supplies from coal and h3^drogen.
If, on the other hand, as I argue, the market is imperfect, certain
other options to at least allocate supply among the demanding publics
should be considered, includinging possible end-use controls applicable
both to interstate and intrastate markets to assure that available sup-
plies go to certain classes of users first — for example, to residential and
commercial users — or that they not go for certain classes of industrial
use. such as the generation of steam and/or electricity.
Xow, the second decontrol argument takes what I call the higher
price equals greater supply perspective. This is the thrust of" the-
President's 1973 Energy Message and is also the stated view of the oil
and gas industry.
This position is based on the argument that artificially low prices-
haA-e greatly reduced the incentive to explore for and develop new
reserves of domestic natural gas. The additional dollars from higher
gas prices, it is argued, will not be windfall profits to the industry^but
instead will be plowed back into increased exploratory efforts for
natural gas. which in turn, will increase supplies.
How well can this argument be supported? There are several im-
portant variables which must be examined. These include the geo-
graphic location of the resources, principally whether they are offshore
or onshore, and whether they are likely to be in or near the Atlantic
coast, the Gulf of ]\Iexico, the Far West, or Alaska.
It's important to understand that there are wide divergences in
the estimates of the potential remaining supply of gas in this coun-
try. For example, in 1973, the Potential Gas Committee placed this
figure at 1,146 trillion cubic feet of natural gas, while in 1972 the U.S.
Geological Survey estimated the figure to be 2,0.58 trillion cubic feet.
Xow. of this, the Geological Surve}^ estimated that there are poten-
tially 844 trillion cubic feet in the United States offshore areas out to
200 meters, which would include the Outer Continental Shelf. How-
ever, both the Geological Survey and the Xational Petroleum Coun-
cil agree that about 40 percent of the remaining domestic resource gas
procluction could come from offshore areas, including the Outer Con-
tinental Shelf.
Therefore, given its potential significance, gas pricing policies for
the Outer Continental Shelf should be given special attention. The
508
following points regarding decontrol of prices for gas from the OCS
must be addressed.
First, the nature of the resource as it is found in place. Second, the
existing and projected competitive situation for OCS leases. Third,
the ability of the Federal Government to evaluate new regions and
make them available for leasing and production. Fourth, the type of
exploratory activity conducted by the companies. And fifth, the limi-
tations on companies in bring-ing new regions into production.
In managing the Outer Continental Shelf, the Interior Department
makes no legal or managerial distinction between oil and gas. Leases
entitle the lessee to produce either oil or gas or a combination of both.
Now, in fact, natural gas is usually found in combination with oil,
in wliich case it is referred to as associated or associated-dissolved gas.
It may be found in gas deposits only also. Then it is called nonassoci-
ated gas.
When gas is associated it must be developed in conjunction with the
oil. Traditional conservation practices dictate that the gas be retained
in the geologic structure to help maintain field pressure and assure
maximum possible recovery of the oil.
As the oil is produced, a certain amount of the gas is produced as
well. But it cannot normally be developed until after production of
oil is well underway if it would in any way detract from the optimum
recovery of the discovered oil.
ISJ'ow, this leads to an overriding issue which must be carefully ad-
dressed, whether exploration for new resources on the Outer Conti-
nental Shelf can or will be specifically limited to gas. and whether
companies are likely, in fact, to pursue such a course of action.
This issue is called, in the jai'gon, ''directionality." Now, if you
drilj for gas solely with the hope of finding gas, not oil, you are
drilling directionally for gas. Needless to say. it\s a most difficult issue
to come to grips with, a combination of geologic prescience and moti-
vational psych olog;\^
A friend of mine has put it "After studying directionality for
about 20 years, I concluded that if a man drills in the middle of a gas
field, he is drilling directionally."
So, while we can never be sure of the motivations behind any deci-
sion to drill, we can get important clues by looking at the probability
of findino- nonassociated gas in a given area.
Only if large deposits of nonassociated gas exist under the Outer
Continental Shelf can the concept of directionality come into play. To
my mind, the existing information on OCS resources is insufficient to
make such a judgment.
In its most recent release, the Potential Gas Committee, a main gas
industry voice in estimating gas resources, does not show gas resources
in associated or nonassociated categories. However, in its IOT'2 U.S.
Energy Outlook, the National Petroleum Council estimated that non-
associated offshore natural gas resources may amount to 30 percent of
estimated domestic resources, exclusive of Alaska.
Considering the critical importance of this issue, it would be useful
to compare such industiy estimates with those of Go^•ernment. TTnfor-
tunately, as in most other energy data areas, there aren't independently
derived published Government figures available.
Accordingly, I asked the Geological Survey to provide some in-
formal "guesstimates." These were derived from previously published
509
Geological Survey data. They're simply extrapolations of past trends,
•zeophysical information and published data. They are certainly not
supposed to be definitive, only illustrative.
They show in essence, however, that only about 10 percent of the
remainino; unproved potential OCS eras resources are likely to be
nonassociated. This is about 4 percent of the total domestic resources,
as compared to 30, in the estimate of the NPC.
The vast majority of these nonassociated resources appear to lie in
two (reologic trends otf of the State of Alaska in the Outer Continental
Shelf.
I'm not here to argue which estimate is right or which is wrong. In
one case we have a formal detailed analysis by industry. The other
is only an informal estimate because Government really has no ongoing
capability to make such a study on an independent basis.
So, what I am suggesting is that the present data base available
to the Government is inadequate to determine whether, in fact, suffi-
cient nonassociated gas exists in the Outer Continental Shelf to sup-
poit gas only exploration. .
Improvement of this data base is an important step in determining
whether decontrol should be extended to the Outer Continental Shelf
in order to increase significantly the exploration for gas as gas, on the
Outer Continental Slielf. Now, this brings us to a very related issue.
The pace of exploration and development on the OCS at this time.
Bidding has been highly competitive for recent OCS sales. The
last two lease sales are illustrative. In a lease sale held in December of
19T'2. lo2 tracts were offered; 690 bids were received, for an average
of about 5.2 bids per tract.
Of the 110 leased, the total high bids approximated $1.7 billion, or
about $14 million per tract. In a sale held only 10 days ago, on June 19,
a similar situation occurred, in which high bids totaled $1.6 billion
or an average of about $16 million per tract for the 104 leases oh which
bids were received.
The reason I mention these two sales is they are very important in
understanding this issue because the tracts were believed to be pre-
dominantly valuable for gas production.
Xow, to my mind, this is e\idence of a highly active bidding situation
for oil and gas leases on the Outer Continental Shelf, even when those
leases are thought to be largely gas leases.
It is a competitive situation wliich can be expected to increase
rather than decrease as more and more domestic production shifts
from onshore to offshore provinces.
Given this situation, and the veiy substantial bids in recent lease
sales, it seems unlilvely to me that decontrol of wellhead prices would
provide much additional incentive to either explore or develop new
OCS regions.
The question that remains unanswered is whether decontrol would
significantly increase leasing and development activities leading to
additional production of reserves; that is, reserves which would not
otlierwise come on line.
In connection with this, it is important to understand the nature
of the exploratory activities conducted by tlie companies. Under the
existing system, OCS exploration is conducted in two distinct phases.
Geophysical exploration is undertaken to measure the general un-
510
deriving geologic formations over a wide area. This costly process is
conducted using specially equipped research ships.
The costs, when compared to the potential benefits, often prohibit
one company from going it alone, and so a large number of companies
will group together in a joint venture. The use of joint ventures has
assured that adequate funds have been available to explore new OCS
areas.
Increasingly sophisticated seismic techniques make it possible to
determine with some degree of assurance whether a geological forma-
tion is of a type which might contain oil or gas. But not until actual
drilling is conducted can it be finally determined that there are re-
sources actually in place and whether or not they are oil or gas or both.
This full-scale, deep exploratory drilling from large rigs takes place
only after leasing. Again, tlie principal question remains, would exten-
sive additional deep exploratory drilling take place that would not
otherwise take place in the absence of decontrol ?
Both the rate that new areas are leased and the ability of the
companies to bring in the equipment to develop the leases has been
constraining influences in the past, and will likely continue to be
constraining influences in the future.
For example, the energy message calls for a tripling of annual
OCS lease oiierings by 1979. However, the Interior Department has
had considerable difficulty developing a system for managing the
OCS in a manner which insures full protection of the public interest.
The resource data base is poor, understanding of the environmental
impacts from offshore oil and gas development, especially in new
provinces, is highly limited, and the system for regulation of lease
operations continues to be subject to criticism.
To triple in 6 years the amiual amount of acreage placed under
lease while insuring proper management of these public resources
will be a task of extraordinary dimensions.
It should be noted here that tripling the acreage offered will not
likely triple the expected supply. In the Gulf of Mexico some 20
years of leasing experience based largely on company nominations
of tracts means that the best tracts have already been leased, with
ver}^ few exceptions.
If other constraints such as enviromnental management preclude
or delay movement into new areas, this will, by definition, force more
offerings in the known areas of the Gulf of Mexico. The impact of
this constraint on reducing supply elasticity should not be overlooked.
Even if the rate of leasing can be greatly accelerated, the companies
must be able to bring a sufficient number of drilling rigs into service
to explore and develop their leases. There currently exist a significant
shortage of drilling rigs. The cost of rigs is tremendous, and the
shipyards where they are constructed are full.
Significantly, increased OCS exploration will require many more
rigs than can be constructed under present conditions by existing
facilities. So, we must ask again whether increased wellhead prices
will result in a construction program which will ameliorate this situa-
tion any faster than would the incentive of sunk investments of bil-
lions of dollars already paid for OCS leases as yet undeveloped.
Further, the simple "fact of the matter is that as the air quality
law constrains the demand side of the market, so do other, nonmarket,
non-price-oriented social goals constrain the supply side.
511
Tlie Interior Department rightly pays allegiance to difficult-to-re-
solve public interest goals for OCS lease development: the achieve-
ment of a fair market value return for resources offered, the orderly
and timely development of such resources, and the protection of the
environment in the process.
But any attempt to lease massive amounts of new acreage to open
virgin territory of the OCS off Alaska or the Atlantic, or to renew
southern California leasing will bring a host of other interests to
bear upon the leasing questions, and few of these will care very much
about the price.
One again, the market will be severely constrained by important
social forces other than price.
In summary, the Outer Continental Shelf may contain 40 percent
of more of the remaining domestic gas resources. Seismic surveys in
new provinces will be conducted regardless of controls on gas prices.
There is little evidence to suggest that decontrol would result in
significantly increased exploratory drilling for new gas reserves.
The extent of nonassociated gas in new provinces is at best subject
to widely different estimates. Competition for leases is currently in-
tense, and the rate of development is limited by factors which are not
directly related to wellhead price control.
It is my judgment that a general decontrol of wellhead prices which
would extend to the Outer Continental Shelf resources would be pre-
mature until careful study is made of whether decontrol would, in fact,
lead to significant increases in exploratory activity and subsequent
development on the Outer Continental Shelf.
In the meantime, if there's a mounting concern about the failure of
companies to dedicate supplies to interstate commerce, perhaps con-
sideration should seriously be given by the Interior Department that
it requires as a lease condition that all natural gas found as a result
of drilling on Federal lands be dedicated to interstate commerce for
residential and commercial uses only.
Under such circumstances, we would discover at the next sale
whether sufficient interest existed to explore and develop the potential
oil and gas resources of the Outer Continental Shelf. Thank you very
much, Mr. Chairman.
Senator Hart. Thank you very much. Let me attempt to summarize,
and in doing so, if I have not understood the thrust of your testimony,
correct me.
First you tell us that more than 40 percent of gas reserves are located
offshore in the Outer Continental Shelf. And except for an area near
Alaska, which accounts for only about 10 percent of that total, these
reserves are oil associated. That is, they would be developed in con-
nection with or in conjunction with oil.
So if the Geological Survey estimates and assumptions are correct,
higher natural gas prices wouldn't elicit additional gas supplies be-
cause the incentive to explore and develop isn't dependent upon the
price of gas.
And you point to other elements which constrain the ability, sub-
stantially, to increase the development rate, whatever the price might
be. Is that correct ? Is that what you're saying ?
Mr. Caxfield. Senator, that's essentially correct, but a couple of
minor changes. We're talking here about potential recoverable
resources, not reserves. It's a technical term, but reserves are those
512
resources wliich are known to be in place, recoverable, and at current
prices with existing technology.
The second thing is — the burden of my argument is that these
resources would, even given a higher price of natural gas, not appear
to come on any quicker ofl'shore, because there seems to be a great deal
of competition and activity offshore right now with over some $3 bil-
lion in the last 2 years going to OCS leasing.
So essentially, that is the burden of my argument. I think you picked
it up accurately.
Senator Hart. And j'ou told us that there is an increasing shift to
the offshore?
Mr. Canfield. Yes, sir.
Senator Hart. A\^iat is your judgment as to the onshoi-e reserves,
whether oi' not there's a shift away from it? WUat is your information
as to the onshore reserve? Maybe you would w^ant me to say "resource"?
Mr. Caxfield. T have very little information on the onshore reserves.
I have not studied them carefully. I don't, for example, know what
portion of remaining ofl'shore — excuse me — onshore reserves are on
Federal lands and which ai'e not. I do know that a sizable amount of the
anticipated discoveries onshore are expected to be in the northern
Alaska area.
The remaining onshore reserves — there, I used it — the remaining
onshore resources yet to lie discovered are much more difficult to dis-
cover because most of the good areas have already been w^orked out.
Senator Hart. In any event, most of the future gas supply will come
from offshore?
Mr. Canfield. I think there's no question aliout that. The onshore
areas are fairly heavily worked over with the exception of northern
Alaska, and the opportunities for discovering large major fields lie
primarily on the offshore areas.
Particularly, in addition, after the next one or two more lease sales,
they will lie in new provinces which liave yet to be opened up and which
have serious questions of whether they will be opened up because of
environmental constraints.
Senator Hart. To ask this question invites you almost to repeat your
testimony and extend it by another 2 days. I'm afraid. But if it's pos-
sible to lump an answer, given the j^otential su])ply that you descrilied
the resource is there, why is there today an inadequate supply of natu-
ral gas in the marketplace ?
Mr. Canfield. I think T agree with your preliminary statement.
A number of things ought to be considered. If it is true that most
of the remaining larsfe resources for natural iras will be found offshore,
it should be remembered that after Santa Barbara, there was an exten-
sive moratorium on offshore leasing, and that in far-t. the offsliore
leasing situation has only opened up to a leasing starting in September
of 1972. So that we did have a period of time in which offshore leases
were not being developed. We also have a situation in Avhich offshore
leases in new })rovinces are not possible.
I w^ould i)oint out this, however, wh^n we were developing an OCS
leasing schedule in the Department of the Interior, preparatoiy to the
1071 energy message, we took a demand estimate and drew a line which
was not linear, but exponential- — it was curving upward fairly se-
verely— in terms of demand for resources both of oil and gas.
513
And as early as 1969, late 1969, early 19T0, ^ye knew full well that
at no rate of anticipated OCS exploration could we anticipate that we
would close that o-ap between supply and demand for natural gas with
Outer Continental Shelf leasing;.
So it was ne^•er anticipated that OCS leasing at any reasonable rate
could have closed the gixp. And that was 3 years ago. I know of noth-
ing that changed that situation. Today it's going — in fact, the gap is
getting wider.
Senator Hart. Well, given the kind of question that I asked, I think
3'our answer is bettei- than we even hoped for.
]Mr. Caxfield. Thank you.
Senator Hart. Mr. Xash ?
^Ir. Xasii. "Witli respect to the onshore supply, Mr. Canfield, do you
ha\e an appraisal as to why production was not speeded up respecting
that supply, in order to forestall the shoi'tage ?
Mr. Caxfield. I have no information on that at all.
]Mr. Xash. Do you have an appraisal as to whether the returns
allowed by the Federal Power Commission, and which I understand
to be 1.5-percent retui'n on investment, and most recently a STVi P^i"'
cent return on in^-estment in the BcJco proceeding, provide sufficient
incentive or an insufficient incentive to supply required supplies?
Mr. Caxfield. Both of those figures. ]Nlr. Xash, exceed considerably
the amount of average return for the oil and gas industry as a whole
the last 3 years, on an annual basis.
Mr. Xash. "What do you conxlude from that ?
^fr. Cax'field. It sounds like there's some incentive in that.
Mr. Xash. I noted in. your testimony that at the last two Interior
lease sales you indicated substantial gas tracts were bid for, and com-
panies paid somewhat in the area of $3.3 billion for the privilege of
drilling.
Can you relate that to the arginnents we've been hearing about
inadequate incentives to produce?
Mr. Caxfield. I think that there's — as far as OCS production, I
would have to continue to repeat that given the high competitive nature
of the l)ids — these are averaging $14 to $16 million i)er tract,
per 5,000-acre tract — in these last two sales, which were explicitly de-
signed to open up acreage thought to be natural gas — and as a matter
of fact, it's turning out very much to be the case in the December of
1972 sale. The anticipated geologic occurrence has turned up with
production to be essentiall}' the same.
I see no evidence in that whatsoever to indicate that there isn't any-
thing except highly competitive incentive to go out and get these re-
sources on the Outer Continental Shelf.
Xow, this stems in part because the opportunities for getting re-
sources on the Outer Continental Shelf, for finding large additional
resources and pro\ing u]) large amounts of reserves, are much, much
greater than they are onshore, in the lower 48 particularly.
Mr. Xasi[. I take it therefore you believe future supplies will be
coming predominantly from the OCS ?
Mr. Caxfield. Yes, sir. The opportunity — when you go out and put
down a drill hole — the opportunity of finding a significant, large find
is much greater offshore than onshore in most cases. Xow, there are
exceptions to any rule, but generall}- speaking this is true. And I think
514
the bids, the transaction evidence clearly indicates this, are where
people are putting their money.
Mr. Nash. The $3.3 billion figure is quite an interesting figure. Can
you tell us the rapidity with which companies have worked tracts
that they have successfully bid for and paid for?
Are they going into production as rapidly as is possible and bringing
supply upon the market, or are they not ?
Mr. Canfield. The only evidence I have seen indicates that, unlike
during the middle and late 1960's when production was held back to
the end of the initial lease period, in many instances, if companies can
get drilling rigs, they have tended very'^much to go out and try to
produce them before the end of the initial period.
Its possible to receive an extension of your lease for 2 years if you're
diligently drilling on the 3G4th day of the fifth year. And those^inds
of extensions have been granted almost automatically in the past.
But right now I do not feel that the constraints — that you ever have
to get to the question of whether or not these companies are getting out
there as quickly as possible. The simple fact of the matter is that in
order to get out there at all they have to have drilling rigs, and thev
have to have these opportunities tied up well in advance. I don't see any
evidence that tliey're not drilling.
Mr. Nash. You seem to have indicated two different periods.
One period in which you believe they are drilling as rapidly as
possible — and that is now — and a prior period when you implied that
may not have been the case.
Can you tell me what point in time you think the practices changed?
]Mr. Canfield. I think that the practices were different prior to
rSanta Barbara. We then had a 2 '/q -year moratorium on leasing, and
there was a great anxiety to get out'and get oil and gas on the Outer
fContinental Shelf when tJiat moratorium was lifted.
I think that the supply-demand situation was much different prior
to Santa Barbara. There was not the urgency expected. In 1968 very
few people were clairvoyant enough to determine that we were going
7to have problems with either— any kind of energy supply, let alone
^natural gas supply at that time.
Mr. Nash. Was Santa Barbara 1970?
Mr. Ca^-field. 1969?
Mr. Eddy. February.
Mr. Canfield. February, 1969.
Mr. Nash. Subsequent to that, you believe companies commenced
drilling rajDidly?
jNIr. Caxfield. Subsequent to that there wasn't any leasing for 2l^
years.
Mr. Nash. So, subsequent to •
Mr. Canfield. There was, of course, drilling on leases which had
been issued prior to it.
Mr. Nash. So we're talking about 1972, essentially, when companies
started producing offshore in substantial amounts?"
]Mr. Canfield. Not producing, but drilling with vigor.
Mr. N.\ SH. Drilling. Drilling. Now, can you tell us a little more about
the Interior leasing practices and spell out for the record, if you can,
the amount of tracts that were held, the amount of acreage that was
held by companies under leases, and which were not worked?
515 ^
You come from Interior. Do you have any information? Does In-
terior keep records to tell us who's been drilling and who's not been
drilling and what the status of leases are?
Mr. Canfield. I do not personally have that information myself.
That information should be obtainable because we laiow, for example,
which leases are in drilling status, at what point during the lease term,
and whether or not extensions have been granted. It would be a fairly
simple process to develop data which would indicate by years of lease
how many of those leases were extended and for how many extensions,
and over what period of time.
Mr. Xash. Well, Avhy would the companies have bid for large tracts
and invested large sums of capital and not rapidly worked the leases ?
Mr. Canfield. I have no infoi'mation on why they make decisions
like that.
Mr. Xash. But you know, or you believe that they did make
such decisions in the past ?
Mr. Canfield. You can't — I can't say what motivations of such deci-
sions are. "\"\niat you can do is look at the data, at the evidence, and
indicate whether or not more companies on the average and on the
whole were asking for and receiving extensions in the period of the
middle to late sixties than is presently happening.
I don't have that data, but access to that data should be fairly easy
to obtain, and I think it would be revealing.
Mr. Nash. When you were at the Interior Department, what were
the internal discussions that went on and how were policies made
respecting whether requests for extensions should be granted or
whether the company should be told "No, we need product, you know,
start working" ?
Mr. Caxfield. Mr. Nash, I should explain that the Interior De-
partment responsibilities in this area are divided between the Geo-
logical Survey, which is responsible for the management of the leases
after they are issued, and the Bureau of Land ]Management, which is
responsible for developing the leasing schedule, holding the lease sales,
and its responsibility ends at that point.
It's also responsible for developing the environmental studies. Now,
I was — unfortunately for your question — I was in the other half of the
Department of the Interior, so I don't know the answer as to what
the rationale for granting or not granting the extensions was.
I wasn't privy to any of those conversations.
Mr. Nash. As I understand the British system, they have a very
rigorous work program where they require very rapid development.
And if the work schedules aren't met, there are forfeitures. There
are penalties, indeed, the ultimate penalty could be forfeiture. Do you
think that we need such type of program here in the United States to
assure rapid development ?
oNIr. Caxfield. I think vigorous enforcement of a 5-year initial lease
period would have very much the same effect. The real question is if
you can go in and get extension and then get another extension, the
initial period is meaningless.
You see, it takes a little while for them to get out and drill, even
in the most vigorous situations. It certainly wouldn't hurt to add
production exi^enditure requirements, drilling expenditure requii^-
ments to the lease.
516
But I really think yon would obtain mncli of what j'ou're looking
for with a vigorous enforcement, that if — you know, you either have
drilled to production by the end of the 5 years or you forfeit your
lease, there's a great deal of incentive to di-ill to production.
Mr. Nash. Do you know for how long a period of time extensions
have been granted ?
]Mr. Caxfield. How many extensions can you gret. Chuck?
]Mr. Eddy. T believe it's almost indefinite. It's a very liberal interpre-
tation of the OCS Lands Act bv the.Geological Survey. And if you are
actually drilling — and that is any type of drilling, exploratory drill-
ing— at the time your lease or your particular extension is due to ex-
pire, the lease is extended by, I believe, a 2-year term. But I would have
to check that.
Mr. Canfield. I know the terms are 2 years. I not privy to how
inany extensions. I'm acquainted with situations in which 9 years
from the initial issuance of the lease have taken place before there
was vigorous drilling on the tracts.
Mr. Xasii. Let's turn to the question of costs for a moment, since
that seems to be relevant to what price consumers might have to pay
and whether producing companies are getting a fair return.
Based upon your work, can you give us an indication as specifically
as possible, respecting what the costs are on a unit basis for olfshore
gas i
]Mr. Caxfield. ^Ir. Xash. I can't give you estimates of what they
are. As far as Government estimates go. or Government analysis of
the costs, when we were working in this area we used to read the Oil
& Gas Journal.
]Mr. Xash. Do you mean when you were working at the Interior De-
partment the Interior Department did not develop independent cost
estimates?
]\Ir. Canfield. They did not develop independant cost estimates
that I was privy to. There is no requirement to develop independent
cost estimates for drilling.
When I was in that division of Bureau of Land ^Management I asked
some of our economists to try to develop some cost information, but in
essence they then fell back on the fairly typical situation whicli is you
look at secondary industry data.
The Geological Survey does not require a su])mission of cost informa-
tion on drilling for Outer Continental SheJf leases. To my knowledge
they also use industry data.
^fi'. Xash. You're pretty far along now. I think, in your energy
policy i)roiect. In that connection have you come up with anything
you Avould consider to be reliable cost data so we can assess just what
costs might be ?
]Mr. Caxfield. I'm afraid not. We're, say, halfway along or three-
quarters the way along in tei*ms of time. I wi-^h I could say we were
that far along in terms of a product. The typical situation where time
is running out before the product arrived.
We don't have information in this area yet. I will say that we're
doing a series of analyses on the structure of the energy industiies
and on the various economic aspects. And we also will be initiating this
summer a study of Federal resource management programs, with an
517
emphasis on the Outer Continental Shelf. ]Mr. Eddy is going to con-
duct that study with the help of consultants.
]\rr. Nash. If a firm is drilling primarily for oil offshore and dis-
covers gas, Avhat might be the approximate additional cost of develop-
iiiir the iT'^s by order of mao-nitude^
Mv. Caxfield. I don't really know. It can't be very large,
;^[r. Nash. You say it cannot be very large?
Mr. Caxfield. It cannot be very large. The question, of course, is
the relative location of the particular well to existing pipelines so
that you can plug in.
To this extent the Geological Survey — when this issue came up
back in 1970 or so — did a number of analyses as to the number of
wells which were shut in. And the criteria they used was 10 miles
or more from an existing pipeline. So, there may be a clue in that as
to where the cost break was, at least in 1970.
At that time it, as I recall, was under 150 wells that they indicated
were shut in. The problem with that is that it's not really relevant
how many wells are shut in. It's relevant how big the fields are under-
neath those wells. And there wasn't any data available in that area.
So. you could say only loO, 150 wells are shut in that are more than
10 miles from an existing connection. But that doesn't tell you a great
deal unless you have a pretty good estimate of potential reserves there.
And again, that situation is prior to drilling. It's very difticult.
Mr. NAsti. In the past we've had estimates furnished by the Amer-
ican Gas Association respecting available supply and, of course, by
the Potential Supply Committee.
Most recently, the Federal Power Commission filed a report in
May titled "National Gas Reserves Study."
Based upon your experience, do you consider that the Consrress has
sufficient reliable gas reserve information upon which to make i^olicy
decisions ?
Mr. Canfield. No, sir. I think that the burden of my testimony
was that in the particular area in which I have some exper-tise, and
in an area in which we are moving for oil and gas drilling, I am con-
vinced at this point that I, for one, would not be able to make a recom-
mendation in this area based on the data we have available.
Mr. Nash. We've had people tell us the FPC's National Gas Reserve
Study, you know, is a tremendous work verifying tlie substantial
amount of the shortage that exists, and other people have told us well,
it's got all kinds of problems. It wasn't really independent, and if you
compare the intei-nal company estimates of gas supply, why they
differ by 1,000 percent and more from what they revealed to that
study.
Do you have any appraisal of the differing views respecting the
validity of that particular survey?
Mr. Canfield. No, sir, I do not.
Mr. Nash. Changing the subject for a moment, we've heard a lot
of statements — not necessarily at this hearing, but throughout — that
environmental constraints play a large role in preventing develop-
ment of adequate gas supply, especially in the offshore area.
Can you give us your appraisal about the extent to which environ-
mental constraints have exacerbated the natural gas supply shortage ?
518
Mr. Canfield. The situation, again, prior to Santa Barbara, was
such that it would be very difficult to argue that any leases which were
obtained prior to Santa Barbara and not part of the restricted Santa
Barbara leases were not developed because of environmental
constraint.
In other words, those leases were already issued, a contract existed,
and there would be no reason to assume that those leases shouldn't be
developed.
There's no question in my mind that environmental goals which are
social goals of this Nation, will in fact constrain future leasing, es-
pecially in situations in which oil and gas are leased together because
you can't convince someone wlio lives on Cape Cod that you're going
to be able to put a drill bit down and not come up with any oil.
And as long as you have some probability that you'll come up with
oil, and as long as most of this gas is associated with oil, you're going to
have considerable constraint placed upon the drilling for that gas.
Mr. Nash. As I understand your testimony, you indicated that we
have substantiallj^ more drilling going on post-Santa Barbara than
pre-Santa Barbara however.
]Mr. Caxfield. Yes, sir.
Mr. Nash. Does that mean that while we may not have reached the
maximum limit that we could have, we do have substantially more
drilling going on now despite environmental constraints?
Mr. Canfield. Where the drilling takes place is critical. In the Gulf
of ]\Iexico, off the provinces of southern Louisiana and eastern Texas,
the people there want this drilling. So that the real question then is
that you can't look at the OCS in general or in the abstract.
You've got to look at where the resources are likely to come from
in the future. To the extent that there's any logic in my testimony —
that the better areas of the Gulf of j\Iexico in the traditional known
areas are already drilled, to the extent there's any logic in that testi-
mony, it would imply to me that you must then move to virgin areas.
I fincl it extremely difficult to see how we are going to move rapidly
into drilling for oil or gas or anything. In the areas off the Atlantic,
the Gulf of Alaska has enormous environmental and geologic problems.
The Santa Barbara area is obviously verboten. Tlie question of beyond
the Channel Isles in southern California is getting a lot of local" con-
cern. And it just strikes me that to assume'that we'll just simply be
able to say, "There is a gas shortage. Therefore, we will open up the
Federal domain and we will solve the problem" is just mirealistic,
wholly unrealistic.
^Mr. Chumbris. If I may interject, Bernie, I guess it was around
New Year's this year, early part of the year, I happened to be in
New Orleans_ checking on the very problem we're talking about.
I was talking to the people in the Interior Department at New
Orleans, and it appeared thnt several Congressmen and Senators and
public officials from New England were going down to New Orleans
to see how they were meeting the problem of offshore drilling, because
of the en^dronmental complaints.
And the understanding that I received from these Interior Depart-
ment people was that the officials were almost astounded at the way
tliey saw it in New Orleans — the offshore — and the way it was por-
trayed to them in their area. And some of them were impressed because
519
tlie idea, as you pointed out, the people off New England may be
against the idea of offshore drilling because of the enA'ironmental
problem.
It was rather interesting. I don't know what the complete develop-
ment of that project was, and how well it carried when these people
went back home. But they went to the trouble to go down to New
Orleans to see how it affected the environment in that area.
]\Ir. Canfield. Yes. I'm familiar with that trip. And I think they
also went out to a so-called ''clean-refinery"" in Washington State and
looked at it and were very impressed with that.
I would simply say that it doesn't appear yet that there is an over-
whelming groundswell to lease off New England. I testified last week
before the Massachusetts Marine Boundary Commission, and the oil
representative was given a very hard time at that hearing.
]Mr. Nash. Let me ask you one competitive question and one wrap
up question. Based upon 3'our extensive experience and your knowledge
of the industry, do you consider the natural gas producing industry
to be workably competitive so as to render unnecessai-y the need for
Federal Power Commission regulation?
iSir. Canfield. ^ly initial judgment, not based on analysis, is that
the answer to that question is no. "We are doing an analysis today of
the structure of the industry, including the structure of the natural gas
industiy. And it's possible that in the next 6 months I will change my
mind, because that study is just now miderway.
We will also be looking at the behavior of that industry in terms of
the competitive or noncompetitive nature of it.
]\Ir. Nash. Your answer in the negative meant that you do not con-
sider the industry workably competitive? Is that right?
Mr. Canfield. I don't — you asked, in essence, is it sufficiently com-
petitive— I thought you asked is it
Mr. Nasii. It was a double negative, and I apologize.
jNIr. Canfield. Is it sufficient
Senator Hart. The question is, Is there a level of competition in the
industry sufficient that we don't need FPC intervention ?
jMr. Caxfield. My preliminary judgment on that is that we do need
price control.
Mr. Nash. What can we do to get sufficient quantities of natural gas
now, without paying monopoly prices ? Do you know ?
Mr. Caxfield. Well
Senator Hart. That starts us all over again.
Mr. Caxfield. I think if I laiew the answer to that I could run out of
here and sell it somewhere.
I think the answer, in part is, to my mind, we are not going to be able
to get sufficient quantities of natural gas to meet the demands that we
are now anticipating.
If we insist on continuing on the traditional American gluttony of
energy consumption, we will have mini-gas shortages, mini-gasoline
shortages, and we will continue to go from one mini-crisis to another.
The real solution to this issue is something we were not particularly
asked to address here, and I'll tr}^ to be very brief. We need a two-
phase program of consen-ation of these energy resources, coupled with
research and development to develop gas supplies from substitute
27-547 — 74 34
520
sources, such as coal, gasification of coal, and potentially, at a later
date, the use of hydrogen for our gas supplies.
Until we've got the kind of research and development effort to come
up with these substitute sources I think we're going to be in for hard
times as far as natural gas goes.
Mr. Xasii. Thank you.
Senator Hart. Mr. Chumbris ?
Mr. Chumbris. Thank you, very much, Mr. Chairman. I have no
questions for ^Ir. Canfield. He stated very clearly that these views are
his own views, that the pi'oject has not yet been completed, and when
the results of the work are completed, and I'm quoting you "I may well
change my mind on this and other issues.''
Another thing significant about ]Mr. Canfield's statement is the fact
that he prefaced many of his answers to statements that other people
have made, which, in a sense, gives us two viewpoints, the viewpoint
you've used as your basis, and then your reply to it, which is the type
of thing I think that we need in hearings so anyone who reads the
record will feel tliat it's a one-sided issue until possibly the next round,
when the othei" side will have their opportunity to respond to many of
these very, very significant issues.
And we appreciate very much your coming, both of you, !Mr. Eddy
and Mr. Canfield.
Senator Hart. Gentlemen, thank you.
Mr. Canfield. Thank you, Mr. Chairman.
Senator Hart. Let me suggest a recess for just a few minutes here.
[A brief recess was taken.]
Senator Hart. Our next witness is one who knows the Hill so well
that he probably expected to have the hearing messed up this way.
"We do welcome him, and included in his earlier experience, of
course, he was the Chairman of the Federal Power Commission.
He is ]Mr. Lee C. White, and today he is appearing as chairman of
the energy policy task force of the Consumer Federation of
America.
Lee, I am sorry we had to take that interruption.
STATEMENT OF LEE C. WHITE, CHAIRMAN, ENERGY POLICY TASK
FORCE, CONSUMER FEDERATION OF AMERICA
Mr. White. Mr. Chairman, the vicissitudes of this business are, as
you say, well known. I think the subject is sufficiently important that
no one could be offended at delay of any type at all.
I would hope, however, that the delay for the witnesses would not
signify any further delay on the part of Congress in acting on some
of those issues.
One of the distressing aspects of the energy situation and certainly
the natural gas situation, is that we have not really just discovered
it this year or last year or the year l)efore.
Tliere have been some specific proposals, and I think that we could
perhaps plan to have an additional year or two of hearings and debates
and reports and conferences and symposiums: but I think we are
really way beyond the time when we should have acted.
Although I am jumping to the end of my statement, it really is a
plea for some action from Congress. I think that is where the action
belongs.
521
If I may now revert to the beginning-, I will, if it is agreeable, ask
that the full text of my statement be included in the record, but it is
entirely too long to read and 1 would rather just hit some of the high
spots and then go to some of the points that, in addition, I would like
to make as a result of hearing the questions here this morning.
.Senator Hart. The record will contain the statement in full.
I The document appears at the end of Mr. Whites testimony.]
Mr. White. I am here in my capacity, as you suggest, as chairman
of an Energy Policy Task Force of the Consumer Federation of
America.
We have come into being and represent about 15 major national
organizations, some with very large memberships. The purpose of
our organization is to see to it that a consumers voice is involved
in the policy debates that are now going on.
We are not so presumptuous as to believe that Ave knoAv the mind
of every consumer or that consumers' positions do not have conflicts.
Yet our base and our bias is consumer-directed. We believe it is
appi'opriate for 3'ou to hear from the industry, from the Government,
and also from those of us who undertake to speak from consumer
viewpoints, recognizing the qualifier that I mentioned.
My past experience as chaii-man of the Federal Power Commission
has also some relevance here, and in my formal statement I have
undertaken to set forth what I regard as some of the basic factors
that have contributed to the shortage.
I do not happen to subscribe to the basic suggestion offered by
many that the reason we have a national gas supply imljalance, or
shoi'tage, is because the Federal Power Commission kept prices "arti-
ficially low" during the Kennedy-.rohnson era.
I simply do not think that is the case, and those factors are spelled
out in my prepared statement.
If when I am finished there are questions, I will, of course, be glad
to elaborate on that point.
I think it is worth spending just a few moments on the frustrations
that the Government and particularly the Federal Power Commission
has when it deals Avith the industry that it is expected to regulate in
accordance with the Xatural Gas Act of 1938.
Tlip fnndamenal problem that I Avas aware of when I was with the
Commission was the lack of adequate data. It is extraordinarih^ frus-
trating, I can tell you. Mr. Chairman, to haA^e the responsibility for
spf'ing rates ai^d not belieA'e that you haA'e adequate and accurate data.
The statute does not say anything about A'our putting off the respon-
sibility of settin.Q- "just and reasonable" — which is the statutory
phrase — rates until a'ou cnn "-et the data.
You realh' haA^e an olilip-ntion to keep moA'infr, and it is quite pain-
ful to hfive to set those rates and feel that you are operating somewhat
in tlif^ dark.
,Wlver«;!irA' henrinofs went on for years to proA'ide the data for the
PpripT-fil Po"-or C'^mmission to nse in the maior area rate case that I
participated in, the Southern Loirhlana rate case.
I think there were probably 8 years of adA-ersary hearings, in which
thp focus was on such items as the elements that constituted the cost
of producing the gas, Avitli OAer 30,000 images of transcript, with the
522
hearing examiner's 100-page recommendation. Then the Commission
went about its job.
We sat in a Commission hearing room and had before us what T
thought was a competent staff, some of the people even gifted. One of
the best was a fellow by the name of O'Leary, John O'Leary, who had
come from the Interior Department and subsequently became director
of the Bureau of Mines and is now an official of the AEC.
Pie was then the chief of the Bureau of Natural Gas, and the ques-
tion put to him by the members of the Commission, w^ho were honor-
able men trying to do a tough job, was, "Jack, if we raise the price 1
penny, how much gas will be elicited, how much additional gas?"
He said, "I do not think any."
"Well, how about 2 cents?"
He said, "No, I do not think so."
"Well, then, how high do we have to go before more gas will come?"
He said, "That is a very difficult question."
I said, "I know", but we have a difficult job. How are we going to
handle that?"
The answer was, "There is no way."
And I gather that was the testimony of the current chairman before
you earlier this week.
That does not mean, I think, that regulation ought to be scrapped be-
cause it is difficult. I think what it signifies to me is that we need to
take a look, first of all, at the system and, above all, more information.
I cannot be sure, but I have a hunch that the testimony you had yes-
terday from the Federal Trade Commission, Mr. Halversen, may be
the most important testimony you have had in a very long time. It
sounded like a blockbuster to me, and I have been extraordinarily cau-
tious and conservative in responding to the question of "Is there a
conspiracy?"
]\Iv formal statement today takes that very cautious line, because
that is a heavy charge to level at anybody, and I do not think it ought
to he done lightly.
Yet, I must say, when I read Mr. Halversen's statement this morn-
ing, I think that the Federal Trade Commission ought to be, if any-
thing, not unleashed, but prodded even more.
I know that you take some comfort in the fact that it has been this
subcommittee that initiated the inquiry. Even though it has dragged
on for a couple of years, at least you are beginning to see some fruits
of it. I hope that it can be accelerated, because it is critical.
The problem that you posed for Mr. Canfield was — assuming that
everything you have heard is right, how are we going to get more gas
in this country ? — a fair question and a tough one, but I think that is
really one of the important elements of this entire energy discussion.
Putting it in general terms, it seems to me there are a few things that
might be done.
The first is to make sure that the supply that we do have, that is
available, is used better. In other words, we can, in effect, generate
or find or have or secure additional gas by diverting it from where it is
now being used if there are acceptable substitutes, and if we are able
to slow down or reduce the growth in the use of it.
For exam])le, I think that it is a national disgrace that natural gas
can be used in some States where it is jjroduced for the most inferior
523
of uses — namely, to fire boilers for any purpose; for example, to gen-
erate electricity — if there are alternative fuels that can be used.
So it seems to me that one of the considerations is to focus on what
was put into the Natural Gas Act in 1938 as a rational approach;
namely, a distinction between interstate and intrastate gas.
I think if it made any sense then, it certainly makes none now. When
you have a scarce resource, it ought to be regarded as a national re-
source.
People in Oklahoma and Louisiana and Texas, I think, understand-
ably believe that they ought to have the benefit of their natural re-
sources and that they should not be required to spread their resource,
natural gas, across the Nation.
When, as now, we are in a critical situation, however, I think that
principle fails in considering the greater national need.
Then, too, may I say, they do have some advantage of location. Gas
that costs 20 cents in Oklahoma can be purchased by Oklahoma con-
sumers a great deal cheaper than it can be in New York, because they
do not have to pay the transportation charge. Of course, the people in
New York will be paying the transportation charge.
I think, in short, one of the suggestions that I would make which
will not produce more gas, but I think will help us use it better, more
efficiently, would be to eliminate that distinction between interstate
and intrastate gas.
I am pleased to note that your colleague. Senator Griffin, last year
introduced a bill that would accomplish that, and has reintroduced
it this year, I hope that the Senate Commerce Committee which has
jurisdiction over that bill will soon hold hearings on it, because I think
it has something to offer.
Next, I think that we do loiow that there are some resources avail-
able to the Government. We do know that right now the Government
is frustrated. There is no authority that anybody is aware of that
would permit the President or the Secretary of Interior, the Federal
Power Commission, the Federal Trade Commission, Congress —
through any individual or a coimnittee — to require companies to go
out and drill for oil and gas. It is simply not the way the industry
is structured.
I do not know that we are at the point in time yet where the in-
dustry ought to be made a public utility. There are people who think
of gas as a public utility comparable to or analogous to electricity. It
is not quite that way.
A utility. I am told, in New Jersey was told that they had to build
an additional generating station. They said, "Well, yes, it probably
is necessary, but we do not think we are going to be able to get around
to that until the State Commission has acted on our application for
a rate increase."'
The New Jersey Board of Public Utilities Commissioners said,
^'Well. that is very interesting. Perhaps we had better get somebody
else to handle that franchise."
And the utility said, "Well, really this can be worked out."
The point is that, in addition to having the rights and the benefits
of serving in a monopolistic situation, the utility had the obligation
to provide service. There is no corresponding obligation on the part
of the producers of natural gas.
524
The distributors of natural gas have evei^^ obligation to attempt to
get as much gas as they can to meet the needs of the area they serve.
But you cannot mandate the impossible. They can only do what they
can do, althougli may I say I have a few unkind words to say about
distril^ution companies, too.
I tliink that simply because tlie wheel turned in the late sixties.
about 1968. when they stopped being buyers in a buyer's market and
became buyers in a seller's market, they truly did cave.
T am sure that within the industry there was some disagreement
as to the wisdom of that course, but I dare say you will have a arreat
deal of difficulty gettingf anybody from the distribution industry to
come in today to tell you what they think is wrong with the produc-
ing industry, so long as they want to buy gas from the producers.
I am not sure I would be quite so brave either if I happened to be
the head of a distribution companj'. But I think that that is ini-
portant to understand the dynamics that are taking place today and
which. I think, in part explain why we are in the situation where Ave
are.
So one alternative — and I do not necessarily advocate it — is the
public utility format which says that somebody can compel a certain
percentage of investment from pi'ofits or a certain dollar volume of
drilling each year by the major petroleum companies which, after
all, exercise a very important role in our economv and in our wav of
life.
Certainly even before that, there is tlie possibility of nationaliza-
tion. I do not think nationalization of the industrv is called for. I
do not think it is desirable, and T believe, realistically, it is politically
impossible anyhow. T would not advocate it.
One approach that has been bandied about — T do not think it is
particularly likely to catch fire, but at least for the purposes of the
record let me mention it — is the one that goes something like this:
Tt is very difficult to tell what the right pi'ice of natural gas ought
to be in advance. The industry says, "'Put it high enough, and the
higher it is, the greater the incentive, and chances are we will reach
a balance one day between supply and demand."
Well, we are in a sort of critical or perhaps even in a crisis situa-
tion. During World War II we believed we had to fire up our econ-
omv in order to wage a war, so we said, ''Go to it, industrv." But,
in fairness, it is almost impossible to knovr in advance what is going
to be tlie right price. We do not want vou to make a killing, a wind-
fall. We do not want you to be underpaid. We will have a concept
known as renegotiation of contract after the fact.
"You bring into us all of the data you have, because you are en-
titled to a fair, reasonable profit, but not an excess profit, especially
during war time."
Well, that did not work perfectly, but it worked. ISIavbe. just maybe,
somebody ought to say to the gas industi-y, "I will tell you what, fel-
lows., woidd vou settle for IS percent profit ?
"If vou will, go ahead and whatever you do. you bring your records
in and we will see if we cannot work out a mechanism whereby you
will be assured of that, but no more."
As I say. I do not necessarily advocate that to you. but it is another
notion on the spectrum.
525
Xow I get to tlie one that I do advocate, and ratlier vigforouslj. and
that is the estalilishment of a T'.S. Fuels Corpoi-ation. a Government-
owned corporation that would go into the business of trying to de-
velop the resources that we own, as citizens.
Some of the most valuable resources, as Mr. Canfield suggested, are
on public lands that all of us own.
I would like to see a cor}>oration go into the business of trying to
h'nd those resources and make them available. I do not believe that it
ouglit to be exclusive. I do not think we ought to say, "No longer shall
Exxon. Phillips and Marathon and the others have anything to do."
I am just saying that, in addition to all of those. I would like to see
the U.S. Fuels Corporation operating. I think it would perform some
very worthwhile functions, aiid I would like to tick them off Aery
briefly.
First, T would like to see somebody who is motivated not solely by
the profit motive. There is nothing wrong with the profit motive, but
when that is the dominant motivation. T think sometimes we put a
strain on people who are in the business of making money.
If you. ]\rr. Chairman, or T happened to be the chairman of the
board of a maior peti'oleum company and one of our people came to
us and said, "We need gas. Let us go in and di-ill as much as we can.''
and somebody else said. "AVell. if we do, we may find it and we may
find it at the wi-ong time, because it looks like Congress might dereg-
ulate, it looks like the prices are always going up, why do it now?
'\"\niat are some of the other alternative places we can put our money?"
In short, I would like to see a board making decisions that maxi-
mize the discovery and the exploitation of the r&source, rather than
the profi.tization of it.
Second, as I suggested at the very beginning, our greatest frus-
tration is the inability to have adequate data and information.
We are entitled to that information, as the public, and certainly
GoveruTnent and, above all, the people who have some responsibility
and interest.
If I'.S. Fuels Cori:)orntion is in the business. I have a hunch we will
fiet all of its data and infoi-mation.
You may remember that the United Kingdom entered into a part-
nership with some oil producers to find oil and gas in the Xorth Sea.
"When they did find oil and gas. the question was. How much should
the British Gas Council itself pay for that gas in order to distribute
it to the people in the country ?
They set a rate, and when the company said it wa=! too low, the
British Gas Council could say, "Well, according to all the data we
have, that seems like a iust price and hei-e is the proper profit motive
based in the data" and that was the end of it.
Xow, T am not sure that the experiment is all that perfect and
analogous, but I think it is instructive to us.
In short. I do know that if the U.S. Fuels Corporation had in-
formation, it ^vou1d be avnilal)le to this r-ommittee. the Federal Trade
Commission, the Federal Power Commission, and the public.
Xext. ]Mt'. Canfield suggested that we liave some valuable resources
offshore, the Atlantic and the Pacific, as well as the Gulf of ]Mexico.
I think that is true.
526
I think, also, that we will see that that is where the drilling will
take place. I will not say that it is inevitable, but to the extent that
one can forecast or predict, I think it will happen.
I suspect that the American public, especially the group along the
coastal areas who would be most concerned, would have some greater
degree of confidence in that type of exploration being undertaken by
a Govermnent-owned corporation than by a privately owned corpora-
tion.
Again, because profit maximization would not be at the top of the
list — and I personally have no objection to the United States Fuels
Corporation making money; in fact, I would expect it to make a great
deal of money — I would prefer the motivation of meeting a national
need.
Nobody has really suggested to us that this is a business where the
bankruptcy rate is high and where people go into it and lose money.
As a citizen, I would regard it is a pretty good investment and I
would not mind seeing my Government invest in it. I would like to
see some of those profits plowed back into research and development
and especially in the field of environmental technology and protection
of the environment.
I think that it could be done, and I think that there would be some
considerable acceptance by the public. I cannot envision any party of
community people welcoming the United States Fuels Corporation
with open arms. But as compared to Texaco and Exxon and others, I
think that such a Government corporation may be more welcome.
Finally, and perhaps most important of all, is the prod to the
industry.
The Tennessee Valley Authority did a good job, I think. We can
wrangle over whether the rates were set too low and whether they
did not return the right amount of income to the Federal Government
in lieu of taxes. But I do not think anyone has questioned the technical
competence of TVA. If anything, we have now found ourselves criti-
cizing it because it is too much like a private utility, and has not paid
enough attention to the environment.
I think that the analogy is there. It has been relatively successful. In
fact, just because I understate things, I use the word "relatively." I
think it has been a very excellent experiment and successful, and well
evaluated as such.
That, then, is another way in which I think we can expedite our
securinc: of the necessary gas for this country.
Another suggestion is the use of the proprietary interest of the
United States. The United States owns a great deal of public lands.
I remember one incident that presented itself when I was on the
White House staff and the question was, "When an electric utility
needs a right-of-Avay aci-oss Federal lands, should that right-of-way
be conditioned upon the applicant for that right-of-way, whether it
is privately or publicly owned, conforming to some public policy posi-
tions that the Government regarded as desira])le ?''
One of the specifics was the wheeling of power for preference
customers.
And the answer that came out of the Kennedy administration was,
"Yes. If you are going to use the public land and ask foi- a right-of-
way, then you must, as a condition to that, agree to wheel if we regard
that as a useful public policy."
527
OK, now we go to our oil and gas deposits on the offshore. It
seems to me that in setting up a leasing arrangement, it is appropri-
ate to demand of those who would bid and be successful some activi-
ties that will be in the public interest, as the Government sees it, and
as is promulgated by those who have the responsibility for and interest
in wliether we hii\e adequate energy resources; not only those that
are among the current leasing provisions, but also others.
Again, I would prefer that the Congress require data be made avail-
able to the Government. If, for any reason the Congress does not do it
liead-on. I would like to see it done indirectly by the use of the leasing
technique.
May I say on that score, Mr. Chairman, the Federal Power Commis-
sion, for the last l-t or 15 years, both during Republican and Demo-
cratic administrations, has sought from the Congress legislation which
would give it much broader information-gathering authority.
To some extent, I think the Commission may have been remiss, be-
cause it was not skillful enough to get the attention of CongTess. But
to some extent I think tliat the Congress was remiss in not, in itself,
acting on the specific reconnnendations which were part of the Com-
mission legislative program — and again, this was not partisan, this
was done during both Republican and Democratic periods.
In short, though, I would say that we should use our proprietary
rights as owners of public lands — the "we" meaning the public and
the Government — to see to it that some objectives, if we can agree on
them — and I think some are easily agreeable — are fulfilled.
A couple of minor questions in terms of how to get more gas, but
perhaps major in terms of how to get more policy' — our group does
support enthusiastically the notion of a consolidation of energy func-
tions within the executive branch.
"We gather that the President will submit a new proposal and it
sounds, from what we have read in the newspapers, like a reasonable
one.
I would hope that the Congress, itself, could use that as a golden
opportunity to take a look at itself. May I say, respectfully, Mr.
Chairman, there is nobody — no committee chairman, no subcommit-
tee chairman — who really feels that he is under the gun if we do not
have an acceptable energy policy in this Congress.
You can read the Congressional Digest day by day and learn of this
hearing — and there will be another one, I am sure, some place else,
and some other subcommittee will have hearings — but hardly anybody
can go to Chairman X and say, "You know, you do not have a policy."
Xow, in education, you know who to get after. In agriculture there
is somebody who has got a hot seat. He is either congratulated for
having clone somethmg or blasted for not.
I am told — 1_ cannot vouch for this — when Congressman Boiling's
committee looking into committee jurisdictions had hearings, there
were 9 or 10 chairmen who testified before them. Curiously, eVery one
of them asked for more jurisdiction.
I do not have the solution for this. All I can see is a problem, and
if there is some way that the Congress can either create a joint Atomic
Energj' Committee counterpart or maybe give the jurisdiction to it
or create energ;\- committees within each of tlie bodies, I really think
it would be useful.
In the past and up until, I would say, 4 or 5 years ago, we really
did not think of energy as a discrete problem.
528
President Kennedy sent a message to Congress on natural resources,
and we prided ourselves that it was the first message ever sent by a
President on natural resources.
Then, 2 years later, we sent a message on conservation. And then,
finally, I think Pi-esident Nixon got the credit for sending the first
energy message, and I think he deserv^es credit for tliat.
Energy has emerged now as a first-class problem. It is high on the
domestic agenda, and I think that Congress owes itself the obligation
to take a look at it and see how it can best handle it.
These problems are not simple, and they do not all break down into
single committee responsibilities because, for example, one of the
critical elements, which I did not talk about, is tax policy.
Well, obviously, that is not going to be taken out of tJie Finance
Committee and stuck in an Energy Committee. But at least a lot of
these functions can be consolidated and centralized, and I urge that
that be done.
I think I have said more — I ha^-e taken more time than if I had read
my statement, but that is the way it goes, jNIr. Chairman.
Senator Hart. It is really a superb summation.
I have made some notes. At one point I was w^riting down what I
tliought would be a question for you to answer. Tlie question was,
Vrhat ])rice will bring more gas ? I am disappointed in not being able
to ask it as later you explained that we cannot be sure of that.
On this last point, the goad to Congress, you say let us keep goading
tlie Trade Commission, the Power Commission and, of course, we
will.
But you wind up by saying to Congress. "What are you doing about
it ? How can you get a handhold on the resi)onse to the energy prob-
lem?" ' "...
I do not know how we can. The idea of a joint committee on energy,
given all the jealousies around here, may be the most likely to move
us in that direction.
But then you immediately make the comment that tax policy has
an important influence on both the protection of resources and tlie
development of resources. How are we ever going to get that aspect
into a joint energy committee?
Probably never.
Just your recital of the chronology of Presidential messages — if my
notes are right, the first natural resources message came from Presi-
dent Kennedy and on that one I am sure you had a hand.
Then you followed with a message on conservation, a first, and
President Nixon now comes in with an energy message.
And all three are part and parcel of the same problem, really.
Mr. White. Yes: they certainly are. They are all woven together.
Senator Hart. Having said that, they are part and parcel of some-
body's committee up here, each: and liow you massage the vanities
and, at the same time, achieve results, I am darned if I know.
You are right- — ^it has to be done.
Mr. Chumbris says there is a bill in the House to create a Com-
mittee on Energy.
^Ir. Chumbris. It was just introduced about two weeks ago.
Senator Hart. There again, what Avill it do ? From whom will it take
jurisdiction and will he stand still, and will it gather?
529
I mean, this is the problem.
]\rr. Chumbris. It was pointed out that it will not conflict with the
jurisdictions of the other committees.
Senator Hart. Well, he is sure going to have a very narrow based
energy committee.
Mr. White. I guess the way these things normally happen is one of
two ways, as I can recall. One is because a jn'oblem is of such a char-
acter— for example, the development of atomic energy— that it just
rises above normal obstacles and has to be done.
For example, the creation of the Space Committee took that route,
I think. There was a recognition that everybody had a little piece of
it, but it was a national commitment that had been made or was about
to be made and the way to do it was to create a new committee.
It takes a lot of political muscle. I think it was Senator Lyndon
Johnson who put that together and who, oddly enough, turned out to
be the chairman of it.
The other way that these things happen is through general legisla-
tive reorganization. Every once in a while, about every 20 or 25 years,
the Congress moves and then there is a lot of shuffling around and trad-
ing-off and they lop off a few committees and maybe add one.
But I think those are the two principal techniques for achieving
reform. I think it is going to be quite some time before the Boiling
committee is through and there is a reshuffling.
But we do what we can and, for all I know, there has been some
recognition that the character of the problem is becoming so important
that something must be done.
If I were aMember of Congress, I think I Avould want to go back
home having voted for some energy legislation, because if the shortage
situation in gasoline and fuel oil that we project comes along, just
about where we expect it to be, it is going to be pretty bad.
If we get a severe winter, then I tell you, Congressmen are going to
have an awful lot of questions put to them by their constituents, antl
I think fairly, because in our mechanism Congress is the body that
makes our policy decisions.
I know the industry is proud of its past performance and believes
that the less intervention, the less interference from Government, the
better things are going to be and the i-eason we ai-e in all this mess
now is because of this little touch of Federal regidation of the natural
gas prices.
But, again, I think if I were a Congressman, I would be just a little
bit leery of believing that that is the answer that is going to be satis-
factory to the people at home ; that, yes, it is those fellows' fault in
regulating gas rates.
When we had the big l^lackout in 1005 in the Xortheast, you cannot
imagine how many people had to discover where tlie Federal Power
Commission Avas so they could raise hell with it. People just did not
know, and they assumed it was a go^'ci-nmental responsibility.
The Government really did not believe it had much responsibility,
]My predecessor, Joe Swidler, one of the most able men ever to serve in
that post, had to admit that it had not even been focusing on this ques-
tion of reliability of service very much.
They had just finished a national power survey, and I do not think
the word "reliability'' had even been mentioned in it. It did not regard
530
that as its function until it went "kaflooey/' and then ConoTess jumped
on it, the press jumped on it, and the citizenry jumped on it. And
it began to focus on reliability and, hopefully, play a constructive i"ole.
The point, I think, is that private industry does beautifully so long^
as things go along nicely. When they do not go so well, that is when
Government gets looked to.
That is the reason I just ticked off for you a whole series on the spec-
trum of what the Goverment might do. But I do not think the Govern-
ment can do nothing, and that it what I am afraid we are about to do.
I want to take one of your principal points of focus, deregulation
of natural gas. I think the point that Mr. Schwartz made yesterday
and that is in my statement today is that it is really not fnir to the
industry to leave them kind of in suspense, believing that there might
be deregulation and that prices might go up.
It is very difficult to invest under those circumstances, and I do )iot
think Congress ought to decontrol gas rates. But I do not tliinlc it
ought to not decontrol ])y default, j think you ought to tell them—
this is the way it is going to be.
Let them, either way, know so they can go on about their business.
I M-ould like to see some spur and some prod and some competition
from a Government-owned corporation.
But basically, I think they are entitled to some kind of an answer
as to what the situation is going to be in the next phase of our
existence.
Senator Hart. You did acknowledge the really heavy responsibility
that you would have or I would have if we were the chief executive
officer of a major petroleum company.
My stockholders would wonder, perhaps, why I had committed a
lot of ca]5ital to bringing gas on the market on the eve of what that
stockholder believed to be an announcement of deregulation.
Mr. White. Absolutely.
Eight now, we are about to see the resolution by the Pi'esident of
a question : Should the allocation of fuel be on a voluntary or a
mandatory basis ?
The Senate, by a vote of 85 to 10, said that it had to be mandatory.
The House has not yet acted. The President, we believe, has authority
under the Economic Stabilization Act to adopt a mandatory program
if he wishes.
He announced on May 11 a vohmtary program, and there has l^een
a lot of discussion as to how effective that has been. It seems to me
that it is almost improper, a little cruel, to stick on the head of a
big oil compan}' executive the responsibility for doing something on
a voluntaiy basis that he believes and can demonstrate is inimical to
the interests of the stockholders, especially if he does not know if
his buddy — if they are truly competitive — and he does not know
what his buddy down the street is going to do.
Why should he take tlie lead and find himself exposed, because he
may find that next year they want a different type of guy as president.
His whole lifestyle, his whole experience has been developing in
maximizing profits, and the test of how good a job he does is that
annual statement called P. & L., profit and loss. And it does not say
too much about all of the social responsibilities that may have been
met.
531
If the profit figure is g-ood and lie lias also done a good job environ-
mentally and socially and in minority employment and everything
else, then that is fine.
But if those social aspects and existence and life in the United States
today are perfect, but he has not got any profits, I think we will find a
new executive running that company very soon.
So it seems to me that it is most humane to tell these people what
has to be done.
You will be very interested, ^Ir. Chairman, in an experience that I
mentioned to the Oil Policy Committee when they had hearings on
this very question.
I was in Attorney General Kennech''S office when he was meeting
with a group of chainstore executives mostly from the Xortheast, who
operated chains that had outlets in the Sotith. These were hotels and
tlieater chains and lunch counters at dime stores, bowling alleys, that
sort of thing.
He said to them — this was 1963 — "We have come to the stage in our
national life Avhere you people have got to take some leadership. We
are going to make progress, but if you will take the leadership in the
connnunities in the South where you serve, it will really do the trick."
They said to him, ''Well, that is an extraordinary thing you are
asking us to do. We do not have any problem with what you are
attempting to achieve. But how do you believe we can properly, in an
area whei-e we are regarded as outsiders, be leaders and perhaps run
the risk of losing money at the same time for out stockholders.
"Tell you what, Mr. Attorney General, why do you not enact legis-
lation that will make everybody do it evenly and uniformlj'^, and we
will support it T'
I must say that is pretty appealing to me, and that is what happened.
Senator Hart. We used that argument in support of civil rights
legislation all through the sixties.
]Mr. White. Elxactly.
Senator Hart. It enables the fellow who wants to do right to say,
^T was compelled to do right."
Ml'. White. And not to put him at a disadvantage.
Senator Hart. If it offends the community's conscience, do not shoot
him, be mad at the lawmaker.
In a sense, it is the same theory that was included in the arguments
for truth in packaging and lending — make a minimum performance
level so that you do not have to worry about what the fellow down the
street is about to do to you, either in styling or cutting a corner on
disclosure.
:Mr. Bangert ?
Mr. Baxgert. I just have a couple of questions. ^Ir. White, to see if
we can iret some of your expertise based upon your tenure as Chairman
of the Federal Power Commission.
This goes with regard to the type of information that the Commis-
sion gets in natural gas rate cases. Does the Commission obtain specific
reserve data from companies with respect to rate cases?
Mr. White. Well, the answer is yes. but I think you probably want
more than that, because do not forget these are — at least the way the
area rate proceedings have been held — they are adversary proceedings.
Somebody puts in a case, and somebody else has an opportunity to
532
throw rocks at it, and to tear it apart. So to the extent that the appli-
cant for a rate, the producer in particular, if he wants the rate to be
hig-her, will try to demonstrate why it ought to be higher and why
the cost of producing the gas is higher.
But those who believe that it ought to be lower or are neutral and
just want to know what the truth is or where they believe the truth
to lie, will then have an opportunity to take him apart.
So to some extent it depends upon who puts what data into the
record.
Mr. Bangert. Well, how about reserve data, for instance, how does
that come in to the record in a Federal Power case ?
Mr. White. Well, reserves. I am sure, come in for a number of dif-
ferent reasons. One of them is to demonstrate how the prior cost may
not be adequate because that gas was acquired at— the cost of finding
it and producing it was. for example, at one particular level. But if
those reserves are not proved adequate in order to meet the require-
ments of the interstate market, there will have to be additional gas
discovered in order to meet that need. Therefore, the production of
that gas will cost more money, in all likelihood, than the product cost
earlier, simply because of inflation and because the easier and least
expensive gas is found first.
So it becomes one of the integ^i^al elements. And I say "one'' because
I do not want to mislead you. There are a wdiole spectrum of them, and
that is just one of them.
Mr. Bangert. Well, you alluded earlier to the Trade Commission's
testimony yesterday, when they indicated that on the basis of the rec-
ords that they had subpenaed so far — and I do not want to misquote
them, but as t understand it. they believe that the AGA reserve report-
ing figures had been seriously underestimated.
Now, would those AGA ifi^ires be the figures that would be used
in a rate case before the Power Commission ?
Mr. White. I would say yes. that those would be the basic figures
about which the controversy Avould swirl. As far as I am aware, in
every cost item it elicited great conflict and controversy. Those, I think,
would be the base or the starting point.
]Mr. Bangert. Would part of the determination as to the rate to
be set be based upon the quantity of reserves ?
Mr. White. I do not believe it would be that direct, no. I think it
would have some impact on the production cost. But conceptuallv. it
is the cost of producing the gas in a cost-based pi-icing mechanism that
is the critical thing, plus a reasonable rate of return.
So the proponents and the opponents would dispute over how much
each particular element of the process actually did cost or could be
predicted to cost.
So the reserves are important on some of those elements, but it is
not an element in its own right.
jNIr. Bangert. Would the amount of gas to be recovered, potentially
to be recovered, would that bear on the cost ?
jMr. WiTiTTE. Do you mean potentially to be recovered from wells
alreadv in existence or from those to be discovered in the future?
Mr. Bnngert. Tn existence.
Mr. White. Well, I would sav yes. Again, T would have to run back
to that indirection. Tt is not a factor in its own right that has a dollar
value or a fraction of a cent value on it.
533
Mr. Bangert. "Well, are you satisfied with the metliod in which the
Power Commission obtains this reserve information from the AGA?
Mr. White. No. As I have suggested, I believe the whole process of
data collection is one of the prime needs — we ong-ht to do something
about it. It has been terrible.
I think that the industry's general attitude has been that this infor-
mation has a confidentiality about it for business purposes, competi-
tion between various major integrated petroleum companies.
For all I know, there is something legitimate to that.
It strikes me, however, that even if it is legitimate, when you weigh
it in the balance, it does not weigh verj^ heavily when weighed against
the need for the public to know.
For all I am aware, some of this information can be handled on a
blind basis, where the confidentiality is protected, so long as we have
reliable, aggregated information. And I think that the (jovernment
has a pretty good reputation for its capacit}' to handle sensitive and
confidential data without too much difficulty.
So, fine, you are right, Mr. Industry, we ought to be vei-y careful
about the type of information we get. But I think we have got to have
that information.
If it was important before, when there were not critical times and
people were not complaining, now I think it becomes even that much
more essential.
I'he industries have to make their own judgments — and they are not
individual judgments in the sense they all agree, but for whatever it is
worth, I think^they are pi'obably experiencing a great loss of confi-
dence by the American public.
This "is a period of time when all establishments and institutions
seem to be shaking pretty drastically. ]My own sense is the petroleum
industry is right with them.
If there was ever a time when they ought to be forthcoming, it seems
to me it is now.
I do not know what there is to conceal, whether it is only business
confidentiality; but certainly what Mr. Halversen testified to yester-
day ought to whet the appetites of those who have been claiming that
there luis been a conspiracy.
I have never made that claim. I do not have enough data yet to do
it. But certainly it is sufficient evidence when the Federal Trade Com-
mission says that they want to go forward and complain about the
reluctance they have had in getting data. It seems to me that it is
appalling.
Mr. Bangert. Well, did you ever attempt to sul^pena this type of
information when you were Cliairman ?
Mr. White. No. That was in a milder period, and I guess we did not
think of it. I do not lvnow\ We did not, though.
There are an awful lot of other things that with the benefit of more
time, statf and wisdom we might have done, but we did not.
Mr. Bangert. But the Power Commission does have subpena
power, and I would assume it would be applicable to getting reserve
data ?
^Ir. White. No, uo. no. I misunderstood tlie question. You have got
subpena power for those items that it can secure. But it does not have
statutory authority to go out and get all the information that it needs.
Tliat is 'what we have been— when I say "we," I am talldng about a
whole trail of Connnissions, 15 years— asking the Congress for.
534
It would require an amendment to the Natural Gas Act.
Mr. Baxgert. Would it require an amendment to subpena reserve
data ; is that correct ?
Mr. White. I am sorry, I cannot be quite specific on that. I think
the answer is yes.
Mr. Bangert. As you know, there are
Mr. White. Before we leave that, as I recall, there are forms where
the data, that data is expected to be submitted. And, as a consequence,
I have to believe, therefore, that that is within the data that can be
obtained — with proper statutory authority, and it may well be that the
answer is yes, it could have been subpenaed.
I am not sure, but I have enough confidence in the Power Commis-
sion, that if you ask them that question, that legal question, it will
gTve a precise answer.
Mr. Bangert. But there is clearly, as you indicate in your state-
ment, other evidence that you feel the Power Commission needs that
you cannot get at this time.
Mr. White. Yes, absolutely.
Mr. Bangert. "\'Vlien you were Chairman, what were the Power Com-
mission's practices respecting returning documents and data to com-
panies or destroying them ?
Mr. White. I do not recall that that problem ever presented itself.
I am sure that some information may have been received on a con-
fidential basis. As far as I know, it wouhl still be in the files.
But I do not recall that we had a policy of returning them. But it is
conceivable that that happened. If it arose I simply either was not
apprised of it or no issue had been raised about it.
But I rather think that something as important as that would have
come to the Commission's attention and since we did not destroy or
return it, I believe, therefore, the material is probably still in the
files.
There is, of course, some destruction of files simply because they
accumulate and become old. But I do not think there was any con-
scious effort to take information and then destroy it once it had been
composited or aggregated.
I simply cannot recall of a situation where that was presented to
the Commission for a policy decision. I am relying, therefore, only
on my recollection.
Mr. Bangert. You, as chairman, never gave any orders or indica-
tion that material should be destroyed, I take it.
Mr. White. No, I think not. I am not so certain that before Water-
gate that I woidd have been quite as conscious of the problem. I just
do not remember the situation having presented itself.
It may well be that we did destroy some data, Init it simply does not
register in my personal recollection. But I rather doubt it.
Mr. Bangert. Just one other area, and that is the optional pricing
method.
Now, as I understand it, this method of rate determination is not
cost based, is that correct, under o'^tioiii\l nvicing?
Mr. White. Well, that is my imderstanding, too, although there is
some language in the rule under which oiitional pricing proceeds which
says that costs ought to be taken into account.
535
But it is not. It is primarily a "contract" approach which says what-
ever the parties have agreed to, if it is reasonable, will be regarded as
the just and reasonable rate.
^Ir. Bangert. And this is, as I understand it, based upon the theory
that there is a shortage and this is an incentive attempt to develop
more case. Is that right ?
^Ir. White. I assume that is correct, and I think, if I recall the rule,
it suggests tliat that is the rationale for it.
I should make it clear, as my formal statement does, I think that
is without statutory authority. I think the Commission does not have
the authority to do that, and that, of course, is now being tested in
tlie courts.
There is a case before the Court of Appeals for the District of
Columbia Circuit.
But even if it were permitted, I just do not happen to think it would
be a wise course to follow. All I can see it doing is increasing the price
to consumers, drastically, without any assurance of corresponding
benefits in the way of additional supplies or investment in securing
additional supplies.
I just think it is a bad one from the beginning.
Mr. Baxgert. Does this, in fact, amount to de facto deregulation?
]Mr. White. Well, unless the courts reverse it, it could. I think it is
really oiitrageous. in a sense. There is a need for more gas and to some
extent I have compassion and sympathy for the present members of
the Federal Power Commission. I told you how I sat there trying to
Hgure out what a reasonable rate was.
It is not an easy job, and I know that these men must feel an enor-
mous pressure to do something constructive. I think what they have
decided to do and what is running through the President's message
is — ^there is an easy solution. Let the price do it. The price will solve
our problems.
I just do not think so. I think our problems are more difficult, more
complex than that, and they are going to require different and more
sophisticated approaches.
So if the FPC Commissioner is sitting there with that kind of an
attitude — that what the countr}- needs is to let the marketplace clear
this problem up — then he will, I guess, grope for everything within
reach, maybe even beyond reach, in an effort to get the darn prices up.
I have just never believed — and Mr. Canfield is a little more re-
strained in his presentation, but I gathered he, too, did not believe
that price was our salvation.
]\Ir. Bangert. If we had a truly competitive market — and this is the
last question — in natural gas, would you as much defavor deregula-
tion?
Mr. White. I think there is nothing magic about it — regulating nat-
ural gas was not revealed to Moses on Mount Sinai, it was not on
tablets of stone. It was a piece of legislation, and even then, there was
a big conflict as to whether the Natural Gas Act applied to producer
rates.
By a 5 to 4 decision of the U.S. Supreme Court, the answer was "Yes."
So it was a close one. It could have been the other way.
I do not know how things would have gone. Nobod}^ knows how they
.would have gone. But today we are in a situation where we have got to
27-547—74 35
536
have regulation. I must admit, as one who was a participant in it, it is
very difficult, very complex.
The Commission in the beginning of 1960 tried to do it on a com-
pany-by-company basis, and gave that up and went to an area rate
basis. The area rates took an interminable amount of time. It was un-
conscionable and nobody who participated in the proceeding ought to
feel good. They just ran too long.
But that does not mean that conceptually it should not be done. I
think that the big work has been done.
I rather would see regulation than no regulation. I think at this
moment in national history, it is essential. I think when we are going
to not need regulation is when a number of things happen.
One of them is when there is liquefied natural gas or synthetic gas
that is mobile.
The first question I bumped into when I went to the Commission
was, some fellow said, "Why do you think there ought to be regulation
of the prices of natural gas when there is none for coal and oil ? They
are all hydrocarbons used in the same way — you burn them and this
creates energy. So why should three out of five fellows say what the
rate ought to be for natural gas, and the marketplace sets the price for
coal and oil?"
The answer given was the answer given to the Federal Power Com-
mission ; that is, that natural gas, by its physical properties, is differ-
ent. Today we have millions of people who are at the end of distribution
systems and pipelines.
I have a gas stove, a heating unit, and a water heating unit that de-
pend upon natural gas, and I am there. I cannot say, "Well, look, maybe
I will use some coal."
My local distribution company, the Washington Gas Light Co., has
got to get natural gas in order to supply me. It cannot say, "I will get
coal today," or "I will give you some oil today."
There may come a time when they will not have to buy natural gas
from a pipeline. They will be able to buy synthetic gas because there
are synthetic gas producers who have mobility.
It is the enonnous investment of hundreds of millions of dollars in
pipelines that made us believe that it made more sense to have regula-
tion attempting to set the rates rather than competition, because com-
petition simply was not as dependable and reliable in that particular
commodity as compared to others.
Mr. Bangert. Thank you very much, Mr. White.
Senator Hart. Mr. Chumbris?
Mr. Chumbris. Thank you.
Mr. White, the Senator has to vote in a few minutes, but there are
quite a few things I would like to take up with you, some of which you
have already answered.
I would like to get to one point, and I have used this previously — in
a hearing on November the 13th and 14th, 1969, natural gas supplies
was studies before Senator Moss' Subcommittee on Minerals, Mate-
rials, and Fuels.
537
There was a small producer by the name of Carey McGuire whose
testimony begins around page 65 on through T3.
In it he pointed out, "Costs vary widely from one producer to
another," and he goes on and he says, "In 10 years drilling slumped
32 percent, approximately 47,000 wells in 1958 to approximately 32.000
wells in 1968," a 10-year period.
"Some companies, fearing that we are in a hopeless quagmire of
energy policy for the domestic exploration, have already been seeking
foreign sources," and he is talking about 71, 68 cents liquefied natural
gas.
Then he goes on to say that there are less rigs that are being drilled :
"If there are 29 less rigs drilling, do not expect an increase in gas
reserves," et cetera.
So he was complaining that for over a 10-year period, he was trying
to get his gas increased from 13.3 to 16.6 cents per thousand cubic feet,
and he could not get anything out of the Federal Power Commi^-sion.
Of course, each case is based on the record of each case?
Mr. White. Right.
Mr, Chumbris, But the way he put it, nobody was getting raises in
those days anyway, from 1958 to 1968 which were the figures he used.
Reflecting back, now, had those rates
Senator Hart. In fairness both to Mr, Chumbris and the witness,
let me, if there is no objection, leave. Continue and conclude your point,
at which time we will recess because there are two votes to follow this,
I am told. We will recess until 2 o'clock,
]Mr. Chumbris, All right, thank you, Mr, Chairman,
Reflecting back, now, would the situation be different today if, dur-
ing the sixties, an increase, let's say, from 13,3 to 16,6 — if that had
been — he points out, "If I had gotten that, I would have been in a better
position to explore and discover new gas."
Would that have resolved the problem we are facing today ?
Mr, White, Well, it is extraordinarily difficult to figure out what
might have happened had something been different in the past.
I, of course, have no personal recollection of that individual situa-
tion or case. But there were emergency situations where the Conmiis-
sion permitted prices to go above the area rate, and of course, the area
rate itself provides a mechanism for people to demonstrate to the
Commission that this is the situation.
Part of the problem back then, when it was in effect a buyer's
market, was that if there was enough gas being sold at 13.3, his
being able to sell it at 16.3 would not have done much good anyhow.
Why would people pay him 16.3 if they could buy it for 13.3 ? So even
though the Commission did
Mr. Chuimbris. He was referring to his own situation.
Mr, White, Yes, but I am saying he has got to sell it to somebody,
and if they can buy it for 13,3 from other suppliers and producers, he
may have had a difficult time selling it.
I am only suggesting that the Commission, in 1960, embarked on an
areawide basis, recognizing there would be some imperfections and
perhaps even some inequities.
538
It said, for anybody who is unduly burdened by this, they have the
option to come in and make their case.
As I just explained to you, I do not know how much help it was
to the guy to be able to say that he could sell his gas for 3 cents higher,
if tlie supply-demand balance was about even.
This was one of the problems of averaging, and I am sure there were
some marginal producers who were either wiped out or went out of
business and refused to go back into that business because it was not
as lucrative as it might have been if the rates were higher.
But on the average — and that is what we are really talking about
in assessing supply problems — take, for example, the Permian Basin
case, and I have a hunch tliat is wliere that fellow was operating. The
Commission came out with an area rate for Permian and, instead
•of production going off, it went up. People were drilling and invest-
ing and finding gas on the basis of the rate set by the Federal Power
Commission.
Mr. Chumbris. He used this illustration as the impact that it would
have on the consumer, because Senator Moss had commented, "Well,
the consumer was saving 3.3 cents per thousand cubic feet."
He countered that with the point that the consumers of America are
not really saving, because — because of the inability to get enough
natural gas — tliey had to go to liquefied natural gas which, at that time
I think they used the figure of 68 cents which today is $1.25.
He was using that as a point to show that it is a penny-wise but
pound- foolish type of philosophy.
Mr. White. But as Mr. Canfield suggested and as I suggested, I
think we have pretty well — well, I will not speak for him, but I will
speak for myself — I am pretty well of the belief that 3 cents would not,
at that particular point in time, have elicited any more natural gas.
I related the experience to you that I had when I was trying with
the other membere of the FPC to set the southern Louisiana area rate
case.
Econometrieians have tried their darndest to come up with a model
which says, "If you increase the price of gas, the following things will
happen," and then they say that there will be more exj)loration and
more gas discovered.
Xot a one of them is worth a darn. They have not withstood tests.
So we just do not laiow.
]Mr. McGuire may have been correct that had that price been 3 cents
higher we would not find ourselves in the natural gas crisis situation
today. But I have to tell you the truth — -I do not think so.
]Mr. Chtj]Mbris. AVell, time is short. I think this would be a good
place for us to stop.
There are thousands of questions we could ask you because of your
expertise with the Federal Power Commission, but we appreciate very
much your coming here today.
Mr. Nash. We will recess until 2 o'clock.
[Whereupon, the subcommittee recessed, to reconvene at 2 p.m. this
same day.]
[The following was received for the record. Testimony resumes on
p. 550.]
539
MATERIAL RELATING TO THE TESTIMONY OF LEE C. ^VHITE
Exhibit 1 — Excerpt From Hearings Before Subcommittee on Minerals, Materials,
and Fuels, November 13, 14, 1969
Mr. McGurRE. It would only be human nature to feel that the job you were
doing was appreciated by more people than it actually is. Similarly, it is human
nature in the oil and gas business to overestimate your reserves. Just as you
could modify your own sense of ix>pularity with the results of an actual poll,
I tliinli the committee should dispel from its mind, and I thinli it has already
done that from the testimony today, any thought about hidden reserves and
instead be prepared for the possibility of overguess of popularity which in this
business is equivalent to being overly optimistic about one's own reserves.
The price battles that the FPC fought in the name of consumer interest have
been losing the war for new supplies. It has been said that in order for the
industry to have a comfortable reserve in relation to its immediate demands,
that the rate of annual reserves additions would have to be doubled immediately.
But how are we going to double the annual reserve addition if we are bogged
do«ni in paperwork? On a schedule attached to this testimony I have shown
what is Involved in a typical gas discovery for the independent producer. This is
exhibit B at the end.
We discovered this field in 1953 and finally got our first check in 1956. In
1957. the FPC started putting in suspense the annual two-tenths of 1 cent per
M c.f. escalation in price. Twelve years later and 10 different FPC dockets
still haven't solved the problem.
Are we talking here about 68 cents per M c.f. like the cost of imported gas
from Algeria? Most certainly not ! What has been in suspense here all these years
is the difference between 13.3 cents and 16.6 cents. Is this the way to encourage
the producer to look for new domestic gas reserves ?
One leading economist, Paul MacAvoy of MIT, castigates regulations for result-
ing in social benefits of 10 million but social costs of 100 million. The picture of
regulations since the Supreme Court decision of 1964 requiring the FPC to regu-
late the producer has been one of harried regulators buried in paper.
The questionnaire mailed by the Commission in 1964 had the questionable honor
of being the "largest Government form ever produced," and weighed some 10
pounds. The Commission initially tried to fix a return based on costs. But the
amount of gas discoveries in return for a given expenditure is often no more pre-
dictable than the spin of a roulette wheel.
Costs vary widely from one producer to another. The policy was doomed from
the beginning, and in 1960 was abandoned with over 2,000 unsettled eases. After
that, an "area pricing" policy was adopted. After 8 years, only two area rate
cases have been decided. One of the cases took 4 years of proceedings and 35.000
pages of transcript.
The result of this FPC quagmire is that today when the producer finds gas. the
first thing you do is to make every effort to sell the gas to an intrastate market —
that is. to a purchaser who agrees to use the gas within the same State in which
it is produced — as opposed to selling it in interstate markets.
What kind of national policy do we have when the results encourage you to
keep the gas in your own State and not move it across State lines to the East,
where it is badly needed ?
I would like to comment on the effects on domestic drilling.
In 10 years, drilling slumped 32 percent, from approximately 47,000 wells in
1958 to approximately 32,000 wells in 1968. Some companies, fearing that we are
in a hopeless quagmire of energy policy for domestic exploration, have already
been seeking foreign sources.
It has been said that liquified gas to be delivered from Algeria in 1971 will cost
68 cents per Me.f.. which is nearly twice the price for gas deliveries by pipelines
in this country to New York.
A national policy which results in less exploration for domestic gas is going to
end up costing the consumer huge amounts, the worse the shortage becomes.
If something isn't done, we will be forced to rely on foreign shipment of gas and
all the uncertainties that go with that. If the oil import program is changed, not
only will we be dependent on the whims of the Arabs for oil, but we will also be
dependent on them for liquefied gas.
540
While there is still some hope that the provision affecting the oil industry in the
tax bill will be softened, the mere possible threat of tax erosion on the profits in
this business has caused drilling to decline. For example, there were 29 less
drilling rigs running in the United States on November 4 of this year than there
were at the same time last year. Gentlemen, if there are 29 less rigs drilling, don't
expect increases in gas reserves.
I would like to talk a little bit about the timelag necessary in this business.
Many people have the mistaken idea that we can turn our gas supplies ofE and
on like a spigot, that when we have a serious gas shortage, all we have to do is
quickly change some governmental policy and presto, we have new gas supplies.
People in the industry, of course, realize that this theory has no merit whatso-
ever. The facts of the matter are that, like ha\dng a baby, the timelag between the
thought and the actual delivery of the baby is a long time. The time required
between the first lease acquisition on a given gas prospect and the receipt of the
first check for gas sales can be appalUng.
Someone said that it is well before a committee such as this to have some
specific illustrations. With that in mind, we have put on a schedule some statistics
on the six gas discoveries that we have been involved in which resulted in new
field designations.
I have some extra copies of this schedule if anyone would like to see it.
Senators, if you would like to turn to exhibit A, I think that explains my point.
This schedule shows the dates from the first lease acquisition, date of well
completion, date of signed gas contract, date of FPC approval, date of completion
of the pipeline, and finally, the date the first check was recieved.
This schedule shows that of our six gas discoveries, four currently have a
market and two are shut in, waiting on a pipeline. As to the producing leases,
the average length of time from the date of first lease acquisition to date of first
check was 6.4 years. Gentlemen, 6.4 years is a long time.
As to our two shut-in-gas discoveries, which are in remote areas, the average
time so far is 13.8 years, and still no pipeline connection or checks.
These figures prove, in our mind, that the timelag is tremendous in gas explora-
tion, and, incidentally, these are not exceptional cases, since other industry
figures clearly demonstrate this timelag. If we recognize that this timelag does
exist and that you cannot turn this business on and off like a spigot, now is the
time for creating a meaningful national policy before it is too late.
POSSIBLE SOLUTIONS
We have discussed here the crisis of supply, the question of I'eserve estimates,
the resutls of FPC regulations, the end effect of all of this on domestic drilling,
and finally, the timelag necessary in this business.
Are we going to do anything about it? Or is this merely going to be added
to the millions of words already spoken on this subject?
We appreciate vei'y much the committee calling this hearing and taking the
time to listen to this testimony, and the following are a few suggestions as to
the solution of these problems.
The only real solution, of course, is one that creates more incentive to explore
for gas. As stated earlier, I would mention first what I would consider as an
ideal incentive ; second, alternative incentives if the first is not possible ; and
third, if Congress is going to do nothing, some suggested incentives the FPC
could use under existing laws.
IDEAL INCENTIVES
1. What would be an ideal solution to the problem of the pending shortage of
natural gas? My answer would be an overall coordinated national energy policy.
A coordinated national policy, of course, would not flood the country with
imports or make unreasonable changes in the tax laws affecting the oil and gas
industry if, in fact, the purpose of the national policy was to encourage incen-
tives for exploration.
Finally, a study from a national policy point of view would have to conclude
that Congress was right when it originally excluded the producer from regula-
tions in the Natural Gas Act; that the FPC regulation of the utilities in the
industry is suflacient and that the Supreme Court ruling requiring the FPC to
also regulate the producer only resulted in chaos.
Such a policy would conclude that legislation was necessary to reverse the
Supreme Court interpretation of the Natural Gas Act, and free the producer
from regulation.
541
ALTERNATIVE INCENTIVE
2. The above would be vpbat I consider an ideal solution. If, on the other hand,
the climate is not yet right to return to a system where, under free comi)etition,
supply and demand for gas is determined in the marketplace instead of in 35,000
pages of testimony, then I would suggest the following alternative solution :
namely, that Congress enact legislation which would compel the FPC to regulate
natural gas as a commodity.
Exhibit 2.— Prepared Statement of Mr. White
Pkepaeed Statement of Lee C. White, Chair^ian of the Energy Policy
Task Force, Consumer Federation of America
My name is Lee C. White, and I am here today in my capacity as Chairman of
the Energy Task Force of the Consumer Federation of A merica. Our Task Force
currently has 15 member organizations (Appendix A), and our expressed pur-
pose is to ensure that the consumers' views are expressed and considered in the
energy policy debates currently taking place publicly and, in particular, within
the Congress. We recognize that there is no necessary single "consumer interest"
in any of the numerous issues that comprise the energy policy debates ; never-
theless, we have undertaken to do the best job possible in assessing and stating
the views of the consuming public and, as the broad base of our membership
suggests, we do indirectly represent millions of Americans.
Quite obviously, consumers throughout the country have a very real interest
in the energy shortages now being experienced. Our Task Force has attempted
to focus on many of the problems and especially welcome the opportunity to ap-
pear before this Subcommittee which is exploring the natural gas facet of the
energy crisis. Certainly this is an area deserving of study and legislative and
administrative action.
I think one of the aspects of the current energy situation that i?^ now becoming
evident is the interdependence and interrelationships that are involved. There
are, of course, the different fuels, tax policies, the role of government, the close
relationship of environmental factors, international relationships, etc. Perhaps
symptomatic is the large number of Congressional committees that have some
jurisdictional interest and yet no single one of them has the responsibility, inso-
far as the public is concerned, for the fact that the problems are still largely
unresolved. Our group supports a centralization of energy functions within the
Executive Branch and, it seems to me, a corresponding consolidation of basic
energy functions and jurisdiction into existing Senate and House committees —
or perhaps new committees or a joint committee — is equally desirable and, in-
deed, essential in the legislative branch.
The natural gas part of the mosaic is an important one, and I will try to spend
some time on what I regard as the principal factors that have led to an imbalance
between supply and demand for natural gas and some of the steps I believe could
be taken to help the situation. Additionally, I would like to discuss in a general
sense the suggestion made by the President and others that natural gas be
decontrolled at the producer level.
HISTORICAL background
It may be helpful to an understanding of the situation to spend a little time
on a brief background of the natural gas industry in this country. Although manu-
factured gas was used in a number of cities in the early twentieth century, it
was not until the late 20's and 30's that considerable quantities of natural gas
were discovered in connection with the discovery of oil in major oil producing
areas, particularly in the southwest. At that time, gas was a disagreeable by-
product that was burned off — or flared — simply to get rid of it as part of the
process of extracting oil from the ground. Its use as a fuel, however, soon be-
came sufficiently important for it to be piped into areas where it could be used.
During the 1930's, the Congress recognized that the spread of pipeline networks
across the United States made it necessary to protect the consumers of natural
gas against their becoming captives of the industry in light of the enormous in-
vestments in pipelines and in the equipment purchased by consumers to use gas for
space heating, water heating and cooking, as well as for commercial and indus-
trial purposes. Thus, in 1938, the Natural Gas Act was enacted, with the ad-
542
ministration of the Act being assigned to the Federal Power Commission which
was then administering the Federal Power Act.
The initial determination of the FPC was that the Act did not give it juris-
diction over the prices at which gas was sold at the wellhead into interstate
commerce. The U.S. Supreme Court, in the landmark Phillips case in 1954,
brought by the Public Service Commission of the State of Wisconsin, held that
the Natural Gas Act did cover such sales. From that time until August 1960, the
FPC undertook to establish wellhead rates on a company-by-company basis. In
August 1960, it concluded that the traditional or classic form of public utility
regulation was simply not workable insofar as wellhead prices were concerned
and embarked on an area rate basis. By this process, the Commission undertook
to divide the producing areas of the nation into separate major areas and to
establish rates for each of those areas on the basis of the average costs of pro-
ducing gas in the area plus a reasonable return. This approach was ultimately
confirmed as appropriate and legal by the Supreme Court in 1968.
In late 1968 and early 1969, it became appai-ent that an imbalance between
supply and demand was developing, not in the sense that there v/as no gas left
or that reserves could not supply existing loads, but in the sense that the proven
gas reserves being added annually were less than the volumes of gas being con-
sumed nationally. We were using more than we were finding.
Most industry officials and many observers blame the shortage on "artificially
low" prices set by the FPC during the 1960"s. What is '"artificially" and what is
"genuinely" low is, of course, an extraordinarily difficult question. The statutory
assignment to the FPC is to set "just and reasonable rates" which has been in-
terpreted to mean those rates that are the lowest possible which will provide the
necessary incentive for adequate supplies of gas to be produced. I believe the
simple statement of the requirement is sufficient to indicate its inherent diffi-
culty of implementation. In any event, even if one accepts the premise that higher
rates would have produced more gas, I believe that is not very helpful and, in-
deed, there are numerous other factors that have contributed to the current
situation in which there is a gas shortage. Briefly. I would like simply to list a
number of those that I think are among the most important, recognizing the
virtual impossibility of assigning a qualitative weight to any one or any group of
these factors.
Inadequate industry data. — For over 15 years, different memberships on the
FPC have unanimously and continuously sought statutory authority to permit
it to acquire greater information and data on reserves, costs and other aspects
of the natural gas industry. These efforts have thus far been in vain, although
there is reason to be somewhat optimistic that Congress may now enact such
legislation. Additionally, the producing segment of the industry, at least until
1970, refused to submit any data on intrastate operations. One factor contributing
to the long drawn out area rate proceedings was the difficulty of securing from
the industry adequate information upon which to determine the cost of produc-
ing gas. According to those better schooled in accounting principles than I, the
accounting practices used by the producers left a great deal to be desired.
The National Gas Survey.— The FPC, recognizing the need for a study and
survey of gas reserves, demand and other important factors relating to the na-
tion's natural gas industry, requested Congressional approval and funds for a
National Gas Survey starting in 1966. Each year for 4 or 5 years, the Congress
expressly disapproved the idea and provided that no FPC funds could be used
for that purpose. The sui-vey is now underway, and although there has been some
controversy about the composition of the advisory committees working on it,
at least work is proceeding. It is, of course, late, but we cannot turn the clock
back.
The role of the pipeline industry. — As the middle man in the operation, the
pipelines held themselves aloof from the area rate cases in the 1960's refusing
to antagonize their suppliers on the one hand and customers on the other. Per-
haps their situation is understandable, but their criticism of the regulatory proc-
ess and in the results of that process came mighty late. During the era of plen-
iful gas, their concern was to keep their pipelines full, not necessarily the spread-
ing out or the most efficient use of what is a finite and, therefore, limited
resource.
The role of distribution companies. — The natural tension that exists between
buyer and seller led the distributors generally to seek the lowest price, and today
we find them in the somewhat awkward position of urging that the sellers be
permitted to raise rates, or, indeed, to have no regulatory control of those rates
at all.
543
Otfslwre leasing policies. — A great deal has already been said about the fact
that the Federal Government established — and continues to employ — its oil and
gas leasing policies in connection with federal offshore areas on national budget-
ary considerations, rather than on the basis of wise and eflBcient use of a natural
resource.
The decline in oil discoveries. — To those who ascribe the gas shortage either to
the fact that gas rates are regulated or that they were set too low, the question
must be asked, "How do you explain the fact that exploration for oil and dis-
coveries of new oil reserves also declined during that period without any Federal
or state control over the price of oil?"
The failure to anticipate the dramatic increase in consumption. — In my view,
the FPC, as well as all segments of the industry, were at fault in not anticipat-
ing the fact that an industry, which had been increasing in consumption at the
rate of about 4% or 5% annually, jumped in 1968 to nearly a 9% increase over
the preceding year and these higher levels of increase persisted until this past
year. One will never know whether a national gas survey undertaken on a timely
basis might have enabled this type of forecast to have been made, but it must be
evident that this shai-p increase in demand w,as one of the critical factors con-
tributing to today's shortage.
Settlement proposals offered by the industry. — Recognizing the long time de-
lays involved in the area rate proceedings, elements of the industry entered into
settlement discussions with the thought that they could ofCer the FPC agreed
upon rates which, if adopted by the Commission, could save a great deal of time
and expensive litigation. Because of the nature of the industry, with numerous
producers in any single area and numerous customers at the end of the pipeline
networks, 100% agreement was regarded as an almost impossible goal. Never-
theless, 85% of the producers in Southern Louisiana, measured by the volume of
gas produced and roughly 85% of the distribution companies again by volume,
agreed upon a proposed rate schedule and offered it to the FPC in 1968. The FPC
did not accept the precise schedule offered, but in the view of most observers,
came somewhat close to the agreed schedule. Rates set by FPC were lower, but
not by much. Subsequently, in the same proceeding, the industry reached sub-
stantial agreement on a much higher rate schedule, increasing the rates by more
than 30% ; since these rates were agreed to by the producers, the assumption
followed that they would provide adequate incentive for producers to explore for
gas in the Southern Louisiana area. If, then, the only factor was rates, it is diffi-
cult to understand why there would not be increased drilling and new gas dis-
covei-ies. Perhaps the producers, in their own requests, had not asked for "enough"
during the 19G0's.
Alternative investment opportunities. — Of great significance, in my view, has
been the fact that so long as there are attractive alternative investments that
petroleum companies can make, either in petroleum efforts ,around the world, or
in nonpetroleum fields (for example, the acquisition of coal companies, uranium
<;ompanies and nonenergy business opportunities), there is no heavy pressure on
them to invest in natural gas drilling, especially at a time when rates are rising.
Certainly one cannot contend that the area-rate proceedings have been models
of administrative practice or that their results were necessarily "right", but I
trust that the listed factors will indicate the complex character of the problem
that faces this Committee and the nation as efforts are made to remedy the gas
supply situation.
THE FEDERAL REGULATORY SCHEME
The Natural Gas Act requires the FPC to regulate wellhead prices for gas
moving into interstate commerce, rates pipelines charge for transpotration serv-
ice, and rates at which they sell gas to local distribution companies. State regu-
latoiy bodies fix the rates at which gas is sold to the ultimate consumer.
Although the characteristics of monopoly which gave rise to the Natural Gas
Act. in my view, still justify regulation, the regulatory process does not follow
the classic regulatory scheme insofar as it relates to the producing segment of
the industry. The basic difference is that the FPC must fix the rates at which
producers sell gas, but there is no obligation on the part of the producers — or
authority on the part of the FPC to compel them — to drill a single well, produce
a single cubic foot of gas, of, if the producers have gas, to sell it to the interstate
market. By contrast, an electric utility which is given a franchise in a geograph-
ical area undertakes to provide service in return for that franchise, and regula-
tory bodies have the authority, within liimts, to compel the necessary investment
to provide that service.
544
One can readily sympathize, therefore, with the FPC which, under the existing
framework, can only try as best it knows how to induce the petroleum industry
(and for the most part, we are talking about a relative handful of major com-
panies that produce the great bulk of the nation's natural gas) to make the
necessary investments.
Econometricians have struggled to produce econometric models of the natural
gas industry so that they can tell the regulators how much additional gas will
be producted if they, the regulators, increase the price of gas 1 cent, 2 cents. 3
cents. 25 cents, 40 cents, 75 cents. So far, this has proven to be a fruitless and
frustrating effort.
In focusing on policy changes that ought to be considered, including both
legislative and regulatory, it may be useful to refer to the overwhelming dis-
balance now existing between buyers and sellers. Until the late 1960's. the dis-
tribution companies, or the buyers, were in a favorable position, but now that
the situation has shifted, pipelines and distribution companies are almost im-
ploring the producers to sell them gas. It is understandable that anyone in the
gas distribution business today would believe there is no alternative to accepting
the producers' viewpoint and to agree to almost any inducement to get them
to make the necessary investments and then sell the gas to the interstate market
so the distributors can meet existing and future demands. This is obviously not a
very comfortable background, but though somewhat oversimplified and overstated,
in my view, it is about the way it appears to be.
Another factor to bear in mind in evaluating the existing situation and pro-
posed solutions is the finite character of our nation's gas supply. Thus, we must
focus on how strenuous our effort should be to discover and use our own gas re-
serves in light of our sharply increased attention to alternatives, namely, the man-
ufacture of the equivalent of natural gas from coal and the importation of liquefied
natural gas from North Africa, A^enezuela and elsewhere. Additionally, there
must be folded into the analysis the possibilities of increasing Canadian gas
imports, both short term and perhaps longer term. Similarly, the ma.ior role that
nuclear energy will play 25 years from now enters into the assessment.
Setting out these questions does not. of course, answer them. But they are
pertinent and provide the background for considering possible approaches to
the gas shortage problem.
RECENT FPC POLICIES AND DECISIONS
The FPC has a tough job in trying to establish "just and reasonable" rates
which have been held to be those that are necessary to produce the required
supply of gas at the lowest possible rates. Basically, it seems to me, the Commis-
sion has, in recent years, been embarked on a course of raising rates that pro-
ducers may receive for their gas in every way they could. As a represent<itive
of a group of consumer-oriented organizations, I have no built-in problem with
consumers having to pay a higher price for gas. What is disturbing is a set of
policies that would put the millions of gas consumers who have already made
their investment in equipment and facilities and are, therefore, captives in an
untenable position where there is no alternative to paying "what the market
will bear." I think it is generally accepted among observers of the industry that
it is an oligopoly, and that it does not function on a competitive basis. It may
well be that sometime in the future it will be competitive, but today the producing
end of the industry is dominated by a relative handful of major producers and
consequently the captive consumers at the end of the interstate pipelines and
the associated distribution systems need protection.
Recent FPC decisions suggest that it is embarked on a course of attempting
de facto deregulation without the benefit of Congressional action. Perhaps the
frustrations of a shortage situation compel members of that agency to seek to
short-circiit the legislative processes, but. in my judgment, this is an inappropri-
ate way to proceed. Especially outrageous, in my view, is the Rule adopted by
the FPC which provides a so-called "optional procedure" for fixing prices for
which natural gas can be sold by producers at the wellhead.
Basically, the "optional procedure" provides that whatever price for gas is
arrived at between the producer and the purchaser (primarily pipeline com-
panies) will be considered by the FPC and presumably adopted. The only possible
interpretation of the Rule is that it is an attempt by the Commission to ignore
the Congress and, in effect, to accomplish deregulation -udth respect to new
gas by administrative fiat. The effort is probably illegal in the sense that there
545
is no apparent statutory basis for the Rule ; the authority is being challenged,
in the Courts, one of the plaintiffs being a group of 21 Congressmen. It is. on
the basis of past experience, not likely to produce the intended results. And,
most surprisingly, the Rule was adopted when the Congressional committees
with jurisdiction over the Natural Gas Act and the energy situation generally
were engaged in serious reviews of these very issues and considering legislative
changes.
The most distressing aspect of the Rule is that it provides no assurance that
additional gas will be made available for the consumers of the country ; it
only assures that they will pay greatly increased prices for gas. During the
past few years, as a result of FPC decisions, total gas prices have increased
markedly, and during that time decreasing reserves have been discovered, and
a decreasing percentage of gas has been made available to the interstate market.
According to FPC figures, the price paid at the wellhead for gas in interstate
commerce (approximately three quarters of all gas produced) has increased
from 17.75 cents per 1,000 cubic feet in 1969 to nearly 22 cents in April 1973,
the latest figures available. Even more meaningful to users of natural gas in
consuming areas is the increase in the prices received by pipelines from local
distribution companies. In three years, the average price has increased from 36
cents to 46 cents per 1,000 cubic feet, an increase of 28%. The recent decision
of the FPC approving a 45 cent per mcf (1,000 cubic feet) price for ^as in
South Louisiana represents a 73% increase over the area rate of 26 cents agreed
to by the producers and distributors and set by the FPC less than 2 years ago.
Although in terms of pennies, these increases do not seem meaningful, they
take on a totally different character when applied to the tremendous volumes
of gas that are involved. For example, the total U.S. consumption in 1972 was
approximately 22 trillion cubic feet. Assuming that the same price factors
applied (and it is a very fair assumption) to intrastate gas which is a part
of that 22 trillion total, the American consumer will pay over $200 million
annually for each penny of increase. Thus, applying the 10 cents increase for
the pipeline sales (and limiting it to interstate gas) for 13 trillion cubic feet,
American consumers paid nearly $1.3 billion more for gas in 1972 than in 1969.
If the figure relates to the total volume of gas including intrastate, we are
talking about more than .$2 billion. Despite this greater price paid by consumers,
the volumes of gas discovered have continued to decline.
There are vast discovered (and undiscovered) reserves not yet dedicated to
the interstate market and until they are, the price is open. Thus, any increase
in rates automatically increases the value of those reserves. If we take 1,000
trillion cubic feet as a base figure, a very low and conservative base, a one
cent increase per 1,000 cubic feet lifts the value of those reserves by $10 billion.
It seems to me that as willing as consumers should be to pay more for their
energy, they should not be expected to pay more than the cost of producing
it plus a reasonable rate of return on the investment where there is a noncom-
petitive or oligopolistic situation. Thus, I believe that it would be a major
mistake to eliminate controls on the price of gas paid to producers at this
time. When the liqiiefied natural gas and the synthetic process have developed
to the point that there is adequate mobility, and distribution systems will not
be at the mercy of their suppliers but will have real options, I think then there
will be no need for regulation.
It would be anomalous, at the least, for Congress to decontrol natural gas
rates at a time when inflation has obviously gotten out of hand in this country
and when a price freeze is on and price and wage controls of some contiiming
character are being contemplated. To take an item as essential to this nation
as natural gas and put it at the mercy of the market place when we are fixing
the price of food, clothing and other items, simply makes no sense at all.
With the type of situation that exists today, it makes sense, therefore, to focus
on the uses of natural gas. This is obviously a jungle that no self-respecting regu-
lator would want to get into, and yet I believe it is the responsibility of govern-
ment to perform those tasks that are disagreeable, complex, difficult, contro-
versial and maybe even impossible to do well. The FPC has, to some extent, en-
tered into this thicket, and I believe it is appropriate and desirable that it do so.
SUGGESTED LEGISLATIVE AND REGULATORY POLICY APPROACHES
The following are a number of specific suggestions that, in my view, merit the
attention of the Congress. Some could be accomplished with relatively little dis-
location ; others are certainly far-reaching and even controversial in character.
546
.1. The Creation of a National Energy Resources Corporation. — Although there
are some exceptions, basically our energy i-esources industry in this country, and
this is particularly true of natural gas, is in private ownership, with government,
both Federal and state, playing some regulatory roles. A number of gas distri-
bution systems are municipally owned and operated, but most production of gas
is performed by privately owned corporations. There is, of course, nothing in-
herently wrong with the system, and it has served this nation quite well, "par-
ticularly if the basis for judging its success is our standard of living and the
degree of industrialization of our nation. Where the profit incentive proves to
be inadequate, either on a continuing basis or an intermittent crisis basis, con-
sideration should be given to alternatives that do rest solely on the profit motive.
I do not believe it would be in the best interest of the nation to recommend
nationalizing the petroleum industry or the natural gas segment of the industry.
I do not believe it would be in the overall public interest to grant to govein-
mental agencies the authority to require private investors to mnke the necessary
investment to explore for and develop oil and gas reserves in this country. I do
think, however, the time has come to consider arrangements whereby the oil and
gas deposits owned by the American public, through its ownership of public lands,
inchT.ling the Federal portion of the Outer Continental Shelf, can be discovered
and made available to meet national needs in times of crisis.
I am unaware of any petroleum company executive who has stated that the
need for natural gas to meet increasing demands is so great that his company
is willing to invest X percent of its annual exploration budget or a specified
dollar limit to ensure that the requisite volumes of gas will be discovered. And
I can understand why this is the case. It would be very difl5cult for one who must
report to his stockholders and where profit is the basic, if not the sole, criteria
in evaluating investment alternatives. But I don't believe this is good enough
for a nation dependent upon energy and which today has a gas shortage and
which sees no immediate relief in sight.
The experience of the electric utility industry demonstrates that there is no
single ownership form required to meet our national electric energy require-
ments. In fact, there are those who believe that the competition among privately-
owned utilities, those that are Federally owned (TVA and the Bonneville Power
Administration), the 1,000 cooperatively owned rural electric utilities, and the
nearly 3,000 municipally-owned utilities, has been beneficial for all elements
of that pluralistic industry.
A government-owned corporation to explore for and develop petroleum re-
sources on publicly-owned lands could serve to supplement the privately-owned
segment of the petroleum industry and, although it should manage the nation's
resources in an efficient manner and on a profit-making basis, it would also be
expected to be strongly motivated by the need to meet national energy require-
ments. One of the recurring problems faced by the FPC and the government gen-
erally has been the reluctance of the natural gas industry to make available data
relating to their gas operations. This has made even more difficult the FPC's
job of establishing area rates, and although I continue to believe the Congress
should enact legislation (sponsored by the FPC for at least 12 years and through
4 different Administrations), the existence of a National Energy Resources Coi--
po!-ation operating in these areas would be extremely useful in supplying infor-
mation and data on actual costs and operations in a field that has proved to be
most difficult to regulate. This nation has been willing to use its wealth and its
resoiirces in a proprietary manner when convinced that such an approach was the
best solution to a national problem — stockpiling of strategic goods, development
and ownership of nuclear devices, and operation of the Alaska railroad, to name
a very few.
2. Acquisitvon of Indepenfleut Geological Data by Gorcrnmcntal Agencies. —
Disputes over geological data and over the sources of those data are bound to
continue nnd to plague government policy-makers until there is an independent
source of information. Governmental agencies should, if it is necessary, be given
legislative authorization and adequate funding to enable them to conduct in-
dependent test drilling to provide a body of data essential to evaluation of vari-
ous aspects of the natural gas supply situation. Whether their efforts should
be on a total basis or a spot-check basis, or some combination, is not as important
as the fact that this effort should be undertaken and with taxpayer funds fi-
nancing the effort.
The National Gas Survey, currently being undertaken by the FPC — a proposal
which I supported while at the Commission — is apparently already suffering
547
from lack of public acceptance because of criticisms leveled at the membership
of the Advisory Committees and some of the ground rules. I do not know whether
tliese criticisms are valid, but this matter of credibility with the public is vital.
Congress should take steps necessary to assure the public that these issue are
being investigated comprehensively and fairly,
3. Modification of the Federal Tax Structure to Discourage AmeriGan Petro-
leum Divestment in Foreign Countries. — Federal tax policies have encouraged
American petroleum companies to invest vast sums of money in exploring for oil
and gas in areas outside of the United States. Obviously, there are some national
interests that are served by such efforts, and yet when one examines our need
today for investment funds in the United States to discover and develop petro-
leum deposits, it seems evident that our tax policies should be modified to reduce
incentives for overseas investments and correspondingly to make investments in
this country more attractive. As noted above, I do not believe the Congress
should compel privately-o\vned companies to take any particular course of action.
However, Congress, as the policy-making mechanism in our society, should adapt
and modify the rules to achieve national objectives. If, therefore, there is a desire
and a need to stimulate greater investment in this country, it is appropriate, if
not essential, to "tilt" the tax factors in a fashion that will achieve that objective.
4. Encouragement of Individual Field Pricing Outside of the Area Rate SyS'
tern. — The area rate concept of regulating gas moving in interstate commerce at
the wellhead was substituted for the traditional utility approach initially under-
taken by the FPC following the Supreme Court Phillips decision in 1954 which
was found to be unworkable. Fundamental to the area rate is the principle that
averaging the costs will provide a rate that will be generally satisfactory to all
operating within that area. Perfectly consistent with that approach is the option
available to individual producers to demonstrate that the area rate is not satis-
factory and, thereby to seek a rate keyed to the particular circumstances of the
applicant. I do not know that legislative action is required to permit this concept
to operate, but when there are purchasers willing and able to pay higher rates
simply to be able to meet thi^ir own supply problems as is the case today, it is
consistent with the regulatory scheme and, indeed, with the balancing of con-
sumer and investor interests to permit special rates, provided that the gas pro-
ducer is willing to make available to the FPC all pertinent data about the par-
ticular field. Although I have not attempted to confirm the facts. I am advised
that some x-ecent discoveries of highly prolific gas wells were so costly because
of the deep drilling involved that simple arthimetic will disclose that at the
prevailing area rate for that particular basin, the investors cannot even recover
their actual costs. If that is correct, there should be some opportunity for those
willing to make all of their data available and to permit complete scrutiny to
sell their product at a rate which will return them a fair and reasonable profit.
5. Modification of Policies Governing Offsiiore Leasing. — Here, too, the sug-
gestion has been made in numerous ways and on numerous occasions that a shift
to a "royalty" basis should stimulate the interest of investors in discovering
deposits in the Outer Continental Shelf. Additionally, there should be tougher
requirements on production schedules. I do not necessarily accept the thesis that
the gas shortage is artificial or that it is the result of actions by leaseholders
sitting on gas reserves that have already l>een discovered and proved. Never-
theless, policies which require early production should have a beneficial impact
on the short range gas supply problem.
6. Impact of State Conservation Practices. — Conservation practices imple-
mented by gas-producing states have a considerable impact on the supply picture.
If natural gas is a premium fuel, currently in short supply, and if this shortage
has an adverse impact on national well-being and industrial development, the
Federal Government should control this activity insofar as it relates to natural
gas to ensure that there are no state policies operating to diminish the flow of
gas for any improper purpose. Sound conservation practices are, of course, to be
encouraged. But when state interests, particularly in the case of tax revenues
and other interests, such as state-received royalties, are permitted to influence
state agency decisions on the volume of gas that can flow, there is an obvious
conflict with the national interest. Such action which is undesirable at any time
becomes intolerable in times of gas shortage.
7. Distinction Between Interstate and Intrastate Gas. — In 1938, one could
understand why the Congress would distinguish between gas moving in Interstate
commerce and gas produced and consumed within a single state. Today that dis-
tinction has created a situation which serves to exacerbate the gas supply prob-
548
lem. Botli interstate and intrastate gas should, in my view, be treated alike.
Neither category should be subject to Federal regulation, or both should. I recog-
nize and sympathize with the view of the gas-producing states that they should
have the benefit of a natural resource that fortuitously is located within their
boundaries. And they should have the natural advantage of very cheap transpor-
tation costs to move the gas from where it is to where it is to be consumed. I do
not believe a premium fuel should be priced in such a fashion as to be available
for the most inferior uses within the state where natural phenomena happened
to place it. Rules that were tolerable and even practical at one point in time
should not be continued when circumstances are so altered that the same rules
subsequently result in policies and practices contrary to the broad public in-
terest. I believe that the distinction between interstate and intrastate gas meets
that description and the distinction between them should no longer exist.
8. End-Use Controls. — As implied in the point regarding the distinction between
interstate and intrastate gas, I believe we have come to that point in time in the
■development of the natural gas industry where there must be distinctions made
on the purposes for which gas is to be used. Undeniably, it will be one of the
most difficult, complex and controversial assignments that could be handed to
any regulatory body, and yet I believe the Congress must impose that responsi-
bility on some regulatory authority if we are to use more wisely and effectively
the finite amount of gas which is available to us in this country. In a free market
economy, pricing techniques develop priorities. Other techniques of allocation are
required, however, w^here, as in the natural gas industry, monopolistic character-
istics require some form of regulation to supplant, in a most imperfect fashion,
the dynamics, restraints and forces normally supplied by competition. The use of
gas for residential purposes — space heating, water heating, cooking — must have
priority. And yet, when gas shortages result in industrial stoppages, there can be
severe economic disruption and dislocation. Thus, we have to create priorities
and arrangements which will make it possible for alternative fuels to be used.
It is apparent that larger and industrial users will be better able to use 'alterna-
tive fuels and in a way that will be acceptable environmentally. The magnitude of
the assignment is obvious, and one must sympathize with any agency assigned
the burden of implementing such policies. But, frankly, I think we have no
acceptable alternative.
9. Liquefied Natural Gas, Sunthetie Natural Gas avd Mnrffinal Pricinfj. — The
Committee will hear a great deal about the extraordinarily difficult problem of
natural gas selling for 25 cents per 1,000 cubic feet at the wellhead, at about 50
cents per 1,000 cubic feet to the distribution company on the east and west coasts,
and the $1.25 price for 1,000 cubic feet of liquefied natural gas, and perhai)S
$1.50 for 1,000 cubic feet of synthetic natural gas. Because the gas industry
operates on the "rolled in" basis, it will be claimed that relatively small per-
centages of the very highly priced LNG and SNG will have very little initial im-
pact on rates paid by the ultimate consumer. It is in this area where the concept
of distinguishing among the uses to which gas will be put mil bo a most signifi-
cant consideration. Residential consumers, especially those that are already
using gas, are not able to convert to other fuels on a very convenient or eco-
nomical basis. Accordingly, the Congress should consider a policy which would
place the primary burden of the higher costs of liquefied and synthetic gas on
industrial users which, by the nature of their activities, are better able to adapt
to alternative fuels. To the extent that this takes place, there will be a greater
burden on them which will inevitably be passed on in the form of higher costs for
products and services they provide. Nevertheless, this is more likely to be the
least undesirable handling of what we must be prepared to accept in our nation ;
namely, increased costs for energy. The marginal price at which gas will be
abandoned for alternative fuels will obviously be reached more readily by in-
dustrial users, and thus the burden of the higher priced natural gas products"
ought to be weighed toward them.
SOME ADDITIONAL OBSERVATIONS
1. Is the energy shortage, and partieularly the natural gas shortage, the result
of a ronspirarjt. — 'Increasingly the question is raised as to whether the shortages
of fuel, and particularly that of natural gas, are the results of a conspiracy,
either direct or indirect, on the part of industry to create the shortage and
thereby achieve some commei'cial I)enefits: the demise of independent producers,
the elimination or diminution of federal regulation and a desire to exploit a
549
uoncompetitive market and thereby earn higher profits. This Subcommittee and
the Federal Trade Commission, as well as the Justice Department, are inquiring
into this issue. Additionally, the House Select Committee on Small Business
explored this question in 1971. So far as I am aware, there have been no facts
yet obtained that indicate that there is an industry-wide conspiracy of the type
that would warrant prosecution under the antitrust laws, although the recent
action filed against Texaco and Coastal States may produce some useful data.
The most unfortunate aspect of this entire question of conspiracy has been the
continuing inability of government to secure from the industry adequate data
upon which to assess the market structure and to offer a determination to the
Congress and to the public. Despite this absence of adequate, extensive and
reliable data, it is not surprising that companies will respond in a parallel or
identical fashion to the same stimuli. After all, one of the fundamental charac-
teristics of the private enterprise system is to maximize profits, and it is hardly
unusual, therefore, that companies would adopt tactics and act in a way to
achieve that objective. As indicated above, I believe one of the important needs
is to make less attractive the incentives for alternative operations by the industry
in overseas situations. It is even more essential during times of shortage that
there be public confidence in the industry and in the role played by government.
I do not believe that business confidentiality which the industry offers in support
of its unwillingness to provide information weighs suflSciently heavily to deny
the necessary data to government and to the public.
2. Is the industry noncompetitive. — Certainly insofar as the production of
natural gas is concerned, there are a large number of producing companies, but
the concentration in the industry of the integrated petroleum companies is
ovei-whelming. Moreover, I have not been aware of any situation in which a
producer obtained a sale by selling at a lower price than his "competitors." The
basic area rate decisions adopted by the FPC and aflSrmed by the courts rests
on the assumption that the market is grossly imperfect and that reliance, there-
fore, on contract prices (those agreed to by the buyer and the seller) simply are
not acceptable as free market operations. In part, this is because of the heavy
concentration of gas production in a few major companies ; and in part, because
the purchasers, the interstate pipelines, have producing affiliates and are per-
mitted to pass on to their buyers the full cost of the product that they purchase,
or put differently, there is no real incentive on the part of the pipelines to bargain
rigorously on a price basis. Perhaps one of the most persuasive documents
offered in the recent "optional pricing" case before the FPC by the FPC staff
economists demonstrating in great detail the interlocking relationships among
the major companies and some smaller producers in joint bidding for offshore
federal leases, in bidding for Louisiana State leases, in their joint production
from offshore tracts, in joint ownership of foreign subsidies, in joint ownership
of oil pipelines and in unitization agreements. One of the most important con-
tributions that a United States Government-owned fuels corporation could per-
form would be to provide a prod and perhaps a "yardstick" for the industry ; it
would not require a very large production or operation of any large proportion
of total production to make its competitive impact felt.
3. Waiting for the second shoe to drop. — If the FPC has recently made any
contribution to the shortage, it is by way of holding out the promise to industry
that if they will simply hold off, decontrol will come, either through Congres-
sional action or through indirect activities by the FPC itself. This has the obvious
effect of inducing delay. Hardly a single one of us would be enthusiastic about
making commitments of enormous amounts of money for exploration and
development at a time when we believed that the golden period was at hand. It
seems to me, therefore, that Congress should act affirmatively, one way or the
other. It should decontrol producer rates (a position that our Task Force op-
poses), or it should tell the industry what the rules will be for the time being.
I do not think that the decision not to deregulate should be made by default,
but rather by conscious and affirmative action — in fairness to the industry, to
consumers and to the public at large. The idea of a moratorium on gas rate
increases lasting until the end of this year, proposed by Senator Moss and
Chairman Staggers of the House Committee on Interstate and Foreign Commerce,
should be adopted, provided that such action constitutes at least an informal
commitment on the part of Congress to face up to the natural gas issues and to
reach some definitive position on these issues. As I noted earlier, one of the
difficult problems has been the inability to saddle any committee with respon-
sibility, but the situation is sufficiently critical that action must be taken this year
by Congress.
550
^. Should we let the market place allocate natural gas. — To those who believe
we are consuming too much natural gas and that the market place should serve
as the allocator by forcing those who can use alternative fuels to do so by the
simple device of letting the price go where it will go, my response is that such
an action taken today, aside from being disruptive in a period of steep and wide-
spread inflation and when there is a shortage of supply, is not the most efficient
and desirable allocation process. It seems to me that a national policy ought to
preclude the use of natural gas for some "inferior" uses regardless of the ability
of the users to outbid the residential consumers of the country.
CONCLUSION
These hearings on the nature of the natural gas industry, on the responses of
the FPC to the diflicult problems facing it and on possible solutions are appro-
priate and hopefully will be constructive. I must note, however, that almost every
day's Congressional Digest reports that one or two hearings on the energy situa-
tion have been conducted. I do not, however, detect that any basic legislative
approaches to the natural gas aspect are beginning to gather sufficient steam
for us to be hopeful that meaningful legislation will be on the President's desk
prior to the adjournment of this session of Congress. We have studies, hearings,
statements, positions, including a Presidential Message, and I think that, if I
may say so respectfully, the time is overdue for serious legislating with regard
to natural gas. Whatever this Subcommittee can do to stimulate action will, I
am sure, be appreciated by the consumers of America.
APPENDIX A
Membership of Energy Policy Task Force
American Public Gas Association
American Public Power Association
Consumers Education and Protective Association International
Consumers Union
Cooperative League of the United States
Industrial Union Department of AFL-CIO
National Farmers Organization
National Fanners Union
National League of Cities
National Rural Electric Cooperative Association
New Populist Action
Oil. Chemical & Atomic Workers International Union
Tennessee Valley Public Power Association
United Auto Workers
United States Conference of Mayors
AFTERNOON SESSION
Senator Hart. The committee will be in order.
This afternoon ^ye welcome Mr. Cliarles H. Frazier, who comes to
us with a background that is rich and full, and I am sure that the
readers of this record as well as the subcommittee will be the better for
hearino: from him.
STATEMENT OF CHAEIES H. ERAZIER, INDEPENDENT PUBLIC
UTILITY CONSULTANT
Mr. Frazier. Senator Hart, I appreciate the opportunity of appear-
iiijcr here, but even move I appreciate the challeno-e of having to put
down on paper some distillation of thoughts on this very complex and
interrelated problem.
We tend to react to different phases of it 'and different questions,
and tlie problem of putting together an answer that makes sense from
all directions, or attempts to make sense, is an extremely difficult one.
551
You iindei'stand. Senator Hart, that I am not appearing here for the
Associated Gas Distributors or for the National Economic Kesearch
Associates, but rather as an individual consultant. I would appreciate
it if my statement could be incorporated in the record.
Senator Hart. The statement will be printed in full.
]\Ir. Frazier. And I will attempt now to liighlight some of the fea-
tui-es of it.
Senator Hart. That's even tougher than putting it down.
^Ir. Frazier. Well, I realize that, and when you summarize it you
end up by perhaps overrunning your time, but I have put my watch in
front of me.
Senator Hart. No, I was not suggesting that you do that.
[Mr. Frazier's prepared statement appears at the end of his oral
testimony.]
Mr. Frazier. Your problem as a subcommittee of the Judiciary
Committee on antitrust problems relates essentially to the problem of
competition within this rather complex industry. In addressing myself
to that, I wanted to make the point that there is no such an entity as the
"oil and gas industry," which has been referred to by several wit-
nesses earlier in the hearing.
Nor is there, indeed, a gas industry, as spoken of as having three
sectors : The distributors, the pipelines, and the producers.
The producers essentially are members or participants in the oil
industry, which is a competitor of the gas industry as I know it ; the
entity is made up of the distributors and the pipelines, in the ultimate
marketplace.
And to call it one industry implies essentially that there is some anti-
trust activity going on between the gas distributing companies and
the oil companies with whom they have to compete in the marketplace,
and I have seen no evidence of that at all.
It is the fact that they come together in the producing sector, where
the gas transmission companies and distributors have to purchase from
the oil industry, that produces the complication.
The speakers this morning, I think, underestimated one element of
this industrial structure that I think is quite important, and that is that
it is basically the oil industry considerations which must motivate the
oil industry, the oil producers in their economic decisions.
I think the revenue from natural gas at the wellhead is in the order
of 3 to 4 percent of the total revenues of the oil companies.
Essentially, their problem is to compete with each other, and very
actively, for the end markets of gasoline, fuel oil, et cetera. They need
the supplies to compete with each other, the liquid supplies, and they
need to make their investments in seeking for those liquid supplies in
the most economical, to them, fashion.
They are not going to explore in the United States if it is more — if
they can find gas — excuse me, find oil — more readily and more cheaply
in some other place. They would be poor competitors if, indeed, they
didn't seek to do this; so I think that the emphasis, the attempt to
change their policies by the lever of gas price is like trying to manipu-
late a large boulder with a toothpick. This may be an exaggeration,
but the example is there.
Now, one of the witnesses this morning was asked about the pro-
portion of nonassociated gas to associated gas.
27-547—74 36
552
This is, of course, an important question, and the question of whether
you can drill separately for gas is a very important one and one as to
which we really don't know all the answers yet.
There are some places where this is the case. "\Ylien you drill in the
Delaware Basin in west Texas, you're looking for gas, and there are
other places like that ; and there are, of course, similar places for oil.
But there is a very large middle ground, and whether it's 60 percent
of the drilling, or whether it's 80 percent of the drilling, or whether
it's 55 percent of the drilling really doesn't make too much difference.
There's a very large middle ground where it has to be a joint search.
The wells offshore Louisiana often go through nonassociated gas
reservoirs and oil reservoirs in the same well, so that you can't say
that a given area is this or that.
So that I think this facet of the industry is important to keep in
mind.
Now the next thing I would like to address is the shortage and
perhaps a little bit about where it's been and where it's going.
In the first place, the shortage is of two elements. There is an element
of reduced production — excuse me, reduced exploration and develop-
ment— which has been going on now for a number of years, 4 or 5
years.
But there is an even more important element, which is the imposition
of an absolutely staggering demand on the gas segment of this coun-
try's much greater attention to the environment.
The price of boiler fuel used to be, as I recall it, not too many years
ago, let's say 5 years ago, around $2 a barrel, and with the insistence
that boiler fuel meet certain sulfur restrictions that $2 a barrel has
become $5 a barrel, roughly, for low-sulfur oil.
Now, this increase of 150 percent has completely changed the eco-
nomics of the gas industry. Before this happened, the sale of boiler
fuel to industry, and furnace fuel, was largely confined to the areas
nearest to the producing States and to summer sales to even out pipe-
line flows.
With this change in the value of low-sulfur boiler fuel, there is
practically no use for fuel in the whole United States which couldn't
be met more economically with gas, until gas goes up to a figure at
least double what the present wellhead cost is now considered to be,
thinking of the Federal Power Commission's most recent findings of
between 35 and 40 cents.
Now, no degree of stimulation of the gas finding activity within
the resource base estimated by the Potential Supply Committee, which
is the official industry committee which attempts to measure these
things, no degree of stimulation within that resource base will pro-
duce enough gas to meet what you might call the total fuel require-
ments of the United States, the total sulfur-free fuel requirements of
the United States.
So essentially you have two problems. The first is to stimulate addi-
tional search, and that, of course, is desirable. But the second problem
is to limit demand for this relatively scarce fuel to the uses for which
it is most valuable, and I don't want to make a distinction between
residential, commercial, industrial uses as such.
But it is a fact that gas is least replaceable when it is used in rela-
tively small quantities in urban communities where there is a very
^
553
high investment of the consumer, say a thousand dollars a house in a
residential situation, or a good many thousand dollars in an industrial
situation.
This is where gas is more valuable, because the cost of replacing it
would be the most serious. If you reverted to oil heating in most of the
cities of the United States, I venture to say the traffic jams would cause
other problems in Washington, compounding the ones that they have
now.
So that what we need to do, it seems to me and several witnesses — ■
I think Lee White touched on this — is to direct the uses of gas as best
we can to the uses for which it is most valuable to the people of the
United States ; and by definition of "most valuable,'' again is the fuel
use that is least replaceable, and without sacrificing a good deal of such
investment.
Now, I say that is the situation now. That is the situation also —
which I say in the attached report — which I believe is going to last
for the next 20 years and as far on as we can look.
[Tlie report referred to appears as app. A of Mr. Frazier's prepared
statement at the end of his oral testimony.]
We are faced in the United States, and I believe the National Petro-
leum Council agrees with this, with a period of time when we are go-
ing to move out of l3oth gas and oil in the direction of other fuels.
Gas is going to be short, and it is going to have to be supplemented
by substantial quantities of manufactured gas; substantial quantities
of gas made from coal, oil, and naphtha ; substantial quantities of gas,
we hope, imported from the Arctic regions, where there is real prom-
ise of tremendous reserves but which we can't be too sure we're going
to get from our Canadian friends, unless we take a more active role in
trying to arrange it ; and also imported LNG.
As I see this future picture, it is really just more of the same, but
it is oversimplification to say that we are going to cure it by stimulat-
ing U.S. findings. We should — ^many things we should do to_ stimulate
U.S. fbidings, but it is not going to cure the problems without the
rather massive supplements from these other sources.
I have estimated that by 1990. I think it is, some 60 percent of the
gas used on the eastern seaboard will have to be made from supple-
mental sources. So much for the shortage.
Now. the question then comes back to what are the steps that need
to be taken, first of all. to induce supply or some increase in supply,
and second, what steps can be taken to curtail demand for the less sig-
nificant uses of gas.
Now, as to the question of whether the oil industry is competitive, I
think our problem basically here is one of definition. It is intensively
competitive if by that is meant do they compete with each other.
They certainly do compete with each other for end markets for oil
and for supplies. What they don't do is try and bid lower prices against
each other to capture a gas market. They don't need to.
That market is so wide open that at virtually any price, they can dis-
pose of the gas that they find, in important part, as a by-product of
searching for oil.
So that I think we have to recognize that price competition is not a
means of keeping price down. Now this does not mean that any fed-
erally set prices shouldn't be amply rewarding for the search. They
554
should. But it does mean that you can't rely, in my judgment, on the
competition between the oil companies to keep that price within rea-
sonable limits.
Now, I want to — I have to repeat myself in this sense, that I think
the important thing to keep in mind here is that we have this man-
created difference in values. We decided that we didn't want to have
polluting fuels burned in the atmosphere, and therefore we have, en-
tirely irrespecti '(^ of any of the economics of the oil industry or the gas
industry or anything else, all of a sudden increased the value of gas as
a boiler fuel by something like 150 percent.
Now this is an increase in value whicli comes neither from the eco-
nomics of producing gas — it isn't a reason why it costs more to produce
gas. It comes entirely from the circumstances of the attitude of the
American people toward the environment.
And I think it's important to realize, when we talk about possible
excess value and possible windfall profits, that this differential has
been created by social and political action rather than economic
action.
Now, I want to turn from that, from the inducing of supph' — and I
think we can do a great deal with the Department of the Interior on
that, because it is true that the offshore areas are the really significant
ai'eas — to the question of curtailing demand.
There are essentially three means that I have been able to discern
of reducing the rather substantial demand for boiler fuel, which de-
mand is the reason why you have seen ^]iese cliart.-- witli requirements
going up and gas supply going down and a tremendous gap in between.
You can do it by Government action. You can say "We are not going
to allow you to use gas boiler fuel." It's a rationing procedure ; it's been
used in the war ; it's a directive procedure.
We could say to Exxon, for instance, if it found gas in this field, that
we are going to order you to deliver it to the XYZ pipeline, because
they need the gas more than somebody else. It is direction of the demand
oi- control of the demand by Government fiat.
I haven't a great deal of faitli in it. I would like to think that we
were wise enough to select alternative values : That it is more impor-
tant to use a little bit of gas here than a little bit of gas there, and we
think this gas should be directed to that particular market; but I'm
not confident we have that wisdom.
I think the Government can set broad guidelines, and I think it
should, but I don't think it can do tlie specific kind of rationing that
Ave got into, in World War II, let's say, for gasoline and meat with
coupons and this, and that and the other thing.
I'm not happy with that course. I do want to say, however, if it
were the one that were selected tliat obviously the Federal Power
Commission has not now got the power to do it, because they do not
have the power, as was stated this morning, to regulate intrastate
sales and to direct a gas supply found within a State to particular
markets in that State.
I^e Wliite pointed that out, and he recommended, indeed, that you
broaden the authority of the Federal Power Commission. Now, I do
think there is an element of that authority whicli might be broadened,
and that is the regulation of the so-called intrastate pipelines.
555
You have all been reading, as an example of this, about the troubles
tliat the firm known as Coastal States has been having recently with
the SEC.
There you have a firm which essentially sells both interstate and
intrastate gas, and it's really a bit of a fiction to carve out this aspect
of the business and say it is business that doesn't affect interstate
commerce.
I think tliere are elements of the FPC authority that could be
broadened and perhaps could be broadened without even legislation.
1 am not a lawyer and I wouldn't want to be too firm on that.
All right. So we have the alternative of rationing by Government
fiat. "We also have the alternative of total deregulation, which is the
one that is ad\ocated by the oil industry. They say that with total de-
regulation the price of gas would rise to the point where it would be
too expensive to use, under boilers presumably, and we would produce
a Jialance between demand and supply in that way, and everything
would be hunky-dory.
I really don't feel that is a viable solution for several reasons. First
of all, we're not going to totally deregulate. We are still going to
regulate oil imports, we are still going to regulate the gas transmis-
sion companies, we are still going to rogidate the gas distribution
companies and the electric distribution companies who are also com-
petitoi's, so there is no such thing as total deregulation.
You"re going to have these prices set in a very controlled market,
so that I think to think of a free market operating here is really too
fanciful to be taken seriously.
Another concern that I have with deregulation is that if it does — •
and it would — set a market value for gas that was equal to this $5 a
barrel that I mentioned or more, maybe $6 by the next couple of years,
jou are creating what I think can properl}' be characterized as "wind-
fall profits"; that is they are profits that have no relationship to the
economic cost of producing the gas, particularly for the gas that is
produced in the offshore area.
I think that gas is going to be produced, is going to be found and
produced in that area, as a result of Government leasing. The oil
companies will have to go into those areas to get oil supplies, because
they are probably the most economical oil supplies in the United States.
And if they don't, the pipelines and now the gas distributors will fill
in any falling off of interest that the oil companies demonstrate.
So that I think you would be giving to these oil companies this,
what I'll call windfall profit which was created by social action, that is
the upping of the value of the low-sulfur fuel, without any com-
mensurate gain to the consumers of gas or the people of the United
States ; so I think that is a reason against total deregulation.
Finally. I am concerned that we are unlikely to get total deregula-
tion. We're going to get, if we get anything, some kind of a compromise
bill, and from mj- observation of the Natural Gas Act it's going to
take 10 or 15 years to understand what that compromise bill means and
what the courts will sa}' it means.
And I'm afraid that we are going to be in for another 10 years of
indecision, and indecision in this instance is one of the causes, at least,
for the falling off of exploration activity in recent years. It is the
556
hope that ma3^be things will be better later which defers investment
decisions.
Now, while there seems to be a lamentable lack of enthusiasm for
an alternative which I am about to propose, I have suggested a
modification of what the economist would propose in such a
circumstance.
He would say well, if there are these windfall profits allow them
to the oil companies but impose an excess profits tax — I believe Lee
White more or less hinted at that today — and recapture all those
"excess profits" in the form of taxation so that the people of the
United States will be the ultimate beneficiary. HoAvever, I doubt very
much whether anybody could write such a law, and I don't tliink it
would be particularly attractive.
My alternative suggestion is that the Congress impose a tax,
and I am not a lawyer, as I said, and I am not a tax expert, but I
will call it an excise tax or severance tax which would tax away
what I will call the excess between the market value for low-sulfur
fuel, which I have called $5 a barrel, and let's say, in terms of gas
price, 80 cents per thousand cubic feet, and the cost — the reasonable'
cost, including highly adequate returns and incentive to produce and
everything else, of producing gas.
And impose that tax, if it is constitutional, on the use of boiler fuel,
which is what we're attempting to restrain, otherwise on the use of
all gas ; but pay either the whole tax or half of it — and this would have
to be worked out in terms of the amounts of money required — into what
I will call a "gas improvement fund."
I have taken as my model the highway improvement fund, of course,
where the gasoline tax funds the Interstate Highway System.
There are a number of uses to which this fund could' be put. First
of all, there is, of course, E. & I). We do need research into the manu-
facture of the supplemental sources of gas, from coal, from oil. We're
proceeding along rather slowly and in a rather cautious fashion in
this direction now. We could go and we need to go very much faster.
Second, I think that the Dei^artment of the Interior could and
should be supported in a much more vigorous fashion to oversee the
offshore leasing program. One of the witnesses this morning spoke of
the rather limited extent to which they had been able to get into this
overnight. "Well, they really didn't know whether this was happening
or that was happening." I think they should be on top of the explora-
tion and development work in these leases to a far greater extent. I
believe the law is adequate. It does require the prompt making avail-
able of the reserves in these areas.
I think they should extend their geological and geophysical ex-
ploration work. I think this could even extend to the drilling of test
holes in various areas like the Atlantic Ocean to prove out some of the
theories that have been advanced as to what might or might not be
in these areas. I would like them to be far more informed about
what the resources really are in the United States.
I think it could finance this atomic stimulation program.
And then I think the fund could also be made available as a loan
fund for the tremendously capital intensive, supplemental gas sources
that are going to be required : $400 million for one plant to make gas
from coal. If there are 176 plants, which is the number which is rat-
557
tling around in my head, I can't multiply 176 times $400 million, but
it's a lot of money.
There are 40 ships which MARAD says are required at $120 million
apiece by 1980. There is a $5 billion pipeline, or more, to the Arctic
islands.
The capital requirements to bring gas supply up to what is needed
are going to be perfectly enormous, and the gas industry is not going
to be a kind of glamour industry that the investment market is going
to rush into.
And in order to keep financing costs from going through the roof,
it seems to me a fund like this, administered by the Government and
perhaps with some industry representation, could make loans on
stated terms for these very capital intensive projects that are going
to be required to match the reduced demand with supply.
I think that is my prescription, but I want to list a few other things
that it seems to me have to go with this kind of a program.
In the first place, I subscribe to everything former Chairman
T\niite said about data gathering. We just don't have good data. Now,
it isn't that the oil companies are necessarily hiding anything when
they report reserves to the AG A. They aren't hiding anything; but
they have a definition.
The definition says that if this amount of proving has been done,
then you can call it a proven resem^e. But in baclv of these proven
resen^es, the Potential Supply Committee has estimated roughly an
equal amount of probable reserves, and there are possible resen^es,
and so on.
Really we are in a definition problem, but what we do need to know
to the fullest extent is what all of these kinds of reserves are, and we
don't know it now.
I think we need to know more about costs. There is no good data on
offshore versus onshore costs. The Federal Power Commission has not
insisted that it be gathered in that way, and there is simply no way
of showing what we believe, that the offshore area is more prolific;
that the increased findings offshore more than offset the increased costs,
but we don't know, and the FPC doesn't Imow, and it's got to know
in order to regulate effectively.
Mr. Chumbris. May I ask you a question at this point ? Can you be
definitive with costs? I quoted earlier today, and perhaps you heard
it, that Mr. Magiiire, a producer from Dallas, Tex., a small producer,
at page 67, he said "Costs vary widely from one producer to another."
Mr. Frazier. That's, of course, quite right, and when you say can
you be definitive, can you say it costs exactly 38.3 cents to find a
Mcf of new gas, it's silly. It's an estimate, the best estimate that
knowledgeable people can make, but it's still an estimate. It's not de-
finitive, and it's not going to be the same onshore versus oft'shore.
Mr. Chttivibris. The reason why I asked the question, we were talk-
ing about how can you get facts and fig-m-es on costs. Now, this sub-
committee, in practically every hearing that it delves into^ — automo-
biles, oil, milk, bread— we've gone into questions of price and cost.
You get into the question of confidentiality there.
Would we have a problem in this instance of confidentiality ?
Mr. Frazier. I don't really think so.
558
It would be burdensome on the industry to have to report periodi-
cally, but I thinli it should — I'm not asking for any reports that aren't
similar to what reports are being made now.
It's just regularity of reporting and, if you will, breaking out the
costs, particularly of the offshore versus the onshore.
I would like to talk about costs in a minute, I've just got about
four or five more items I'd like to run through, I am talking about
increased data gathering that I think probably can be done within
existing powers of the FPC, certainly not too much expanded.
But it does require cooperation of the industry, and tliey have rather
naturally resisted the filing of 10-pound questionnaires, and this kind
of thing, from time to time.
I can understand their resisting it; on the other hand, I think the
information, much information, is required.
I think, passing from data gathering, I think we've got to increase,
as I stated, our research and development expenditures because we're
going to have to move away from what now seems the good old natural
gas days.
I thin]-: tliat the Interior Department leasing program has to be made
much more directive, have much more oversight, and I would hope
they would get away from the lump-sum bidding process, which makes
it almost impossible for anybody who doesn't have $50 million to enter
into this field of exploration.
I think we, as a part of that effort and as a general ongoing inves-
tigation, I think we should try and find out much more than we now
know about the resource base. We can't have the Department of the
Interior in one bureau saying that there's 6,000 trillion Mcf of gas to
be found, and in the industry saying there's 1,000 trillion. It makes
an awful lot of difference whether it's 6 to 1 or 2 to 1 , and I think we've
got to get decent information on this point.
I don't know what the Department of State is doing with the Cana-
dian Government. We know that the Canadians offered an agreement
of some sort a year ago. which apparently wasn't responded to by
our Department of the Interior,
I don't know whether there are. any efforts going forward to develop
an energy concordat with the Canadians. I know that there are tremen-
dous problems there.
The provinces of Canada are at odds, if 3'ou will, with the central
Government, the eastern provinces are at odds with the western pro-
vinces. They've got some of the same problems of nationalism that
every country has. However. I don't know whether we have exhausted
all our efforts to develop what I will call an energy concordat with
Canada, but I'll bet we haven't. And I wish some of our efforts to
arrive at an agreement with the Russians would be directed to the
north, because it is thought that the kinds of reserves that are in Siberia
eonld be under the enuivalent areas in tliis continent to those Siberian
fields, the Arctic Circle reserves. The reports that we see are very en-
couraging.
I think the Government^ — whatever the appropriate agency is, and
they change every year — should develop a much more sympathetic at-
titude toward the development of supplemental gas resources; such
as the importation of feedstocks from the manufacture of gas and the
speeding up, if you will, of the applications to import LNG.
559
These fuels are going to be needed, no matter what happens to
domestic supply. The foot-dragging evidenced in the case of the recent
action of putting a rather large fee on improving of feedstocks, im-
pede the efforts of the gas industry to attempt to meet their franchise
obligations.
Finally, I would hope that the Federal Power Commission would
change its apparent policy of discouraging distributors from engaging
in exploration and development of gas reserves themselves.
It is the gas distributors of this country who have the franchise
obligation to supply their people, their customers, with gas. and they
can be counted on, I believe, to do so. We are seeing it now — you see
this development in all parts of the country really, of distributors
entering into this field. I think it's very important that they do so.
The same thing, of course, applies to the pipelines who have a
financial obligation, if not a franchise obligation, to meet their con-
tracts.
And I think our emphasis — the Commission's emphasis — should be
on encouraging the distributors and the transmission companies to go
into the exploration and development field themselves, rather than, as
it is apparently doing now, discouraging this effort, because according
to some elements in the Federal Power Commission this leads to ver-
tical integration.
I thinlTit's rather silly — for 125 years the gas industry was vertically
integrated. They made the gas, they distributed it. And so it's only
beeii^in the last 20 years or so that the gas distributors have depended
on natural gas rather wholly, and now they are going back to a former
style of life, which does include in this respect increasing their ex-
ploration efforts.
That's a little shopping list I have of some of the things I think
might be done to improve the situation. Thank you.
Senator Hart. Thank you for the shopping list and the style and
ease with w'hich you presented it.
On the question of controlling intrastate gas — you comment on it in
your prepared testimony as well, and you suggest that could be accom-
plished without too much difficulty.
Based on your experience, how would it work — how would you do it?
Mr. Fkazier. I don't think I said it could be accomplished without
too much difficulty. I said there was an element of it, which was the
sales of these raf^her small handfuls of i:>ipelines, called intrastate
pipelines, which by some rather broader definition of pipelines that
could be controlled, could be brought under the jurisdiction of the
Federal Power Commission, I believe.
The Federal Power Commission has already done this in respect to
one pipeline, the United Gas Pipeline, the Pennzoil Company, it's
called now, in which they have brought in a rather large hunk of in-
trastate gas sales under their certificate jurisdiction.
I don't think the total control of the market is going to work. Sen-
ator. I don't think you can take, in our kind of mixed, free-enterprise
government system. — T don't think you can order Fxxon, if it finds
some gas in a field in Texas, to deliver that gas to a particular market,,
which essentially seems to me what the control of intrastate — total
control of intrastate sales — ^means.
That's why I prefer the price mechanism to do this.
560
Senator Hart. And you did remind us that the gas business until
the very recent past was a completely integrated, vertically integrated
operation.
Mr. Frazier. I was with it in that form for more years than I've been
with it since — no, that's not quite right. Fifty-fifty, 25 years manu-
factured and 25 years natural.
Senator Hart. But I'm certain that this subcommittee would be
unlikely to join you in that part of your prescription, even though
we concede that historically that's the way it was.
Mr. Frazier. Well, it's certainly not so now, and it's never going
to be so totally again, because the major oil companies are going to
find gas, and they "are going to provide a very important number of the
trillions of cubic feet that will be required to meet supply.
All I am saying is they are not going to meet even a very shrunken
and restricted measurement of demand, even with the boiler fuel
squeezed down, shall we say. And again, all these things require time —
there couldn't be any immediate cessation of boiler fuel nor should
there be.
The most that you can do at this point, it seems to me, is to restrict
growth in that market and perhaps gradually, as nuclear takes over,
see a falling off of the present use.
Senator Hart. And that energy concordat that you talked about,
we haven't heard that before. Wliy not? You know, let's try.
Mr. Frazier. Well, I like to think. Senator, that people are reason-
able. I like to think that we could talk to the Canadians as reasonable
people at a very high level and point out some of the advantages.
After all, we are putting all the money up essentially ; not all the
money but a very large proportion of the exploration expenditures in
the Arctic is made up of U.S. dollars, and I hope we're not doing it just
for fun.
But I suppose there's $100 million. $200 mililon, that's been_ spent
up there, and I don't think we have any assurance that it's going to
come back in the form of gas. It worries me a little bit though I don't
have any of my money there.
Senator Hart. In so many areas, though, we have learned the Cana-
dian sensitivity about the presence of American capital or their as-
sociation with it is enormously high.
Mr. Frazier. I quite agree. And you have other problems in Canada
in the English-speaking, French-speaking problem, but it seems to
me so important that a really major effort is required, and if there
is such an effort it's not -^^sible.
Senator Hart. I think there isn't — the reason it isn't visible is there
isn't that kind of effort. INIr. Frazier. I agree with you there should be.
Mr. ]>^ash?
Mr. Nash. No questions. Senator. Thank you.
Mr. Frazter. You were going to ask about cost and
Senator Hart. INIr. Chumbris was.
Mr. Frazier. Yes, I would like to say one thing, I think, that would
set the record straight a little bit as to Chairman White's testimony.
The amount of reserves found is a very important factor in deter-
mining what is called the cost of new gas. This is essentially made up
of two measurements.
One is the measurement of the cost of drilling a certain number of
feet of successful gas well, and the other, divided into that, is thft
Mr
561
measurement of the reserves that were found, and it is that division
wliich is highly important to determining whether gas costs 30 cents
or TO cents.
So it makes it tremendously important and the two measurements
are made on a consistent basis, and I rather stronglj^ suspect that the
reason why the majority of the Federal Power Commission come out
with a rather large figure for cost is because they have taken a measure-
ment of reserves found, which rather inadequately measures what actu-
ally has been found in the last couple of years, keeping in mind this
"proven," "probable" business, and stacked it up against a very much
higher cost of drilling wells which has taken place again in the last
couple of years.
So I think we have higher finding costs that have outspeeded, out-
stepped, shall we say. the collection of data on what has been found.
That's why this whole question of definition, of accurate reporting,
of prompt reporting of findings is important in the measurement of
cost, of the unit cost of finding gas.
Mr. Chtjmbris. When I raised the question of cost, I did it primarily
because it was raised by some of the witnesses in the last 3 days.
As I understand it, in the Belco case the two economists for the Fed-
eral Power Commission in effect agreed that 35 cents per thousand
cubic feet would be reasonable because of the costs involved, and the
majority" voted for 45 cents, if I read the record correctly, and
Mr. Frazier. Not necessarily based only on cost.
Mr. Chumbris. Yes, I understand. That was the figure they reached,
and Chairman Nassikas dissented to that increase to 45 cents.
You mentioned something about getting data on cost. The reason
I raise the question is how would you go about obtaining that data in
such a way that wouldn't violate the trade secrets of each individual
company ?
Xow. we have had that problem before this subcommittee time and
time again. As a matter of fact, during the automobile hearings the
records were subpenaed and the companies negotiated with the sub-
committee, and the subcommittee agreed, ISlr. Chairman.
These were in 1953 hearings, so the chairman wasn't here at the
time, and I remember distinctly Senator Kef auver called a brief recess
and the Senators got together and agreed that if the automobile com-
panies could submit the data of each of their respective companies
for a period of about 5 years, so that in doing so it would reach a total
so that Ford wouldn't know what the costs of General Motors were and
American Motors wouldn't know what the costs of Ford were, and
soon.
Because each of those companies felt that those costs were confiden-
tial and trade secrets and didn't want them divulged in the public
hearings. That's what I'm saying.
Mr. Frazier. That has been solved. That has been solved, in more
or less the same manner, by the Federal Power Commission, in that they
have received those confidential reports and composited them in such
a way that the individual costs of each company could not be identified.
But that is the outgo of those costs, and what I'm concerned with
is not the outgo but what is found, and I tliink a lot more attention
needs to be paid to this definition.
How are you going to match these reported numbers of what we
spent with what was found as a result of spending this money — I think
562
that is the area that needs work, and I think it can be done without
infringing on the confidentiality of the various operators.
Mr. CiiUMBRis. I wanted to say, ^,h\ Frazier, I read with great in-
terest your entire paper and some of the exhibits that you have placed
into the record also.
It brings back memories to me, because I have mentioned it before
during these hearings, I was assistant attorney general for the State
of New Mexico when the Phillips Petroleum case started in Bartles-
ville, Okla.. back in 1951, and followed it on through the court of ap-
peals and then I left it at that point.
So many of the things you were saying, and ]Mr. Lee "White was
saying in his paper, going back to the days when they were flaring
gas because you couldn't '^even get 3 cents per thousand cubic feet,
much less 5 and 6 and went up to 8 and on up, as we have had related
during these hearings.
You did have a very interesting paper. I imagine there are some
views that vou liave expressed in here that some of the succeeding wit-
nesses may disagree with, but that's up to them to pick it up out of
the record and respond in such a way as they deem necessary.
Mr. Frazier. Well, that's why I said it was a personal statement and
not subscribed to necessarily by anybody.
Mr. Chumbris. And I thank you for coming.
Senator Hart. Again, Mr. Frazier, thank you for what I believe to
be as helpful a presentation as we have had in the 3 days.
Mr. Frazier. Thank you, sir,
[Mr. Frazier's prepared statement folloAvs. Testimony resumes on
p. 589.1
Prepared Statement of Charles H. Frazier
My name is Charles H. Frazier. I am an independent public utility consultant,
associated with National Economic Research Associates, Inc. (NBRA). Both in
this capacity and in respect to prior employment with the Philadelphia Giis
Works, for some twenty-five years, and earlier employment with other public
utilities, I have been associated with or retained by gas and electric companies
since 1927. During the period 1947 to date this experience has taken the form
of participating in many proceedings before the Federal Power Commission, in-
volving producer and pipeline rate and certificate proceedings. I have testified in
virtually all the area rate proceedings, beginning as the "Examiner's witness
in the Permian Basin proceeding in the early '60s. / *riTA
While NERA is currently retained by Associated Gas Distributors (AGD), a
group of some sixty East coast distributors serving some ten million customers,
this statement is not submitted on behalf of any one client, or even group of
clients : nor is it submitted on behalf of National Economic Research Associates.
Rather, it stems from a distillation of my own experience with the gas industry
and its regulation over the last quarter century. , , ^^.
T can best lead into the statement by quoting from Senator Hart s letter out-
lining the areas of interest for which the Subcommittee has scheduled these-
hearings, as follows :
"The Subcommittee has scheduled hearings on the nature and extenr of com-
petition, the degree of concentration, and the extent of concentration of control
of reserves in the natural gas producing industry. We are most interested in the
relationship of the foregoing to present proposals to deregulate the price of
natural gas at the wellhead and the effect of such industry structure and action
on consumers. This obviously also requires an assessment of uhy we are experienc-
ing a natural gas "shortage", proposed alternative solutions, the adequacy and
effect of FPC regulation over the past 5 years, and the consumer effect of recent
FPC decisions and proposals. We are also interested in obtaining information vsdth
respect to the adequacy of information on reserves as well as the recent FPC ac-
tions and proposals aimed toward de facto deregulation."
However, before responding to the specific questions, it seems to me desirable
to devote a prefatory section of this statement to the nature of the structure of
the "industry" which is here referred to.
563
GAS INDUSTRY STRUCTTXEE
When people speak of the gas industry, it has been customary to divide it
into three segments : the producers, the pipelines, and the distributors. Essen-
tially this seems to me to be a singularly unhelpful analysis. The gas industry
per se, in my view, consists of the transmission and distrilnition segments. The
.so-called producing segment is not, except to a relatively minor degree, a gas
industry "segment," but rather a part of the much larger c'l industry.^ A few
"integrated" distribution companies do produce a small fraction of their gas
supply and some "integrated" transmission companies do produce a similarly
sized fraction of the gas which they transmit. However, by and large, natural
gas in America is now produced from reserves controlled, in large part, by the
major integrated international oil companies.
There are two reasons why it is essential to make this distinction. In the
first place, the activities of the latter group of companies are dictated in large
part by considerations relating to oil prices, supply, and marketing. It is these
considerations which, by and large, determine the scale of the industry's efforts
in the exploration and production field. Essentially it is the field price of oil
which makes domestic production profitable and it is the demand for physical
volumes of oil which determines the scale of the effort at any given time. It is
the relationship of domestic to foreign production costs which governs, to an
important extent, the industry's choice of location for its E & D efforts. As is
well known, gas is discovered and produced to a significant extent from the un-
differentiated search for hydrocarbons. It is true that there are some areas
such as the deeper reservoirs in West Texas and certain producing areas in
the mid-continent area which are predominantly "gas areas," and there are other
ai'eas where gas is more likely to lie found in greater quantities than oil. In
such areas gas price may be a relatively effective device for eliciting gas supply ;
liut this represents only a fraction of total gas supply. By and lai-ge" it is the
oil wellhead price which is the most significant determinant of the scale and
profitability of the exploration effort.
The second reason why this distinction is important is that virtually through-
out the range of markets served by the gas industry, oil is one of the principal
competitors. Thus when people talk about letting gas reach the "market clear-
ing price" it is important to realize that this price again is determined, impor-
tantly, by considerations within the oil industry. The extent to which this is
so requires a brief analysis of the nature of sales at the retail level within the
gas industry. I am attaching hereto a report (Appendix A) recently issued by
Associated Gas Distributors containing tables ^ showing the breakdown between
different classes of customers in the gas industry, nationally and on the East
Coast : and a similar set of tables as to the projected source of the gas. Finally,
a chart is appended (Appendix B) showing the geographical description of gas
sales in the latest report of the Future Requirements Committee. This latter is
important because historically gas has had no competition in the West-South
Central States — generally speaking, the producing areas in the United States —
and little competition at retail in the states within, say, a 1000-mile radius. Now,
however, with the "shortage" (which will be discussed subsequently) it is the
industrial and electric generating requirements in these states which will, in
important part, determine the "market clearing price" for gas nationally, i.e.,
the prices at which gas can be sold in competition with low-sulfur oil.
In the large nonproducing area, essentially the whole area between the Rocky
Moimtains and the Appalachian Range and north of roughly the 3Sth parallel,
gas has also had relatively little competition in recent years ; but long before
gas is priced out of the residential and commercial markets in that area, it
will be the industrial price which will in major part detei-mine the size of the
gas demand in those states. Along the East and West coasts, however, gas is in
close price competition with either oil or, in some cases, electricity. Particularly
on the East coast the market clearing price would be, importantly, determined
by the price at which home heating oil is sold. To a significant degree, there-
fore, this so-called market clearing price derives from intra-oil industry con-
13.3 percent of the oil industry's revenues In 1970 were from gas wellhead sales (The
Chase Manhattan Bank. Financial Analysis of a Group of Petroleum Companies 1970,
August 1971.)
- Good statistics in this area, as elsewhere in relation to hydrocarbon reserve matters,
are hard to come by, as they are closely held industrial secrets ; whether it be for fear of
antitrust prosecution, or deri'-ed from competitive concerns, the result is the same.
3 Tables appearing at pages 4 and 5 of the text, and Tables I and II of the Appendix.
564
siderations. Furthermore, in a period of short supply the oil industry determina-
tion of the market clearing price for industrial sulfur-free fuels (also, at least in
the near term, in short supply) in the producing states will determine, in im-
portant part, what share of the gas there discovered is, likely to be made
available to the interstate, national market.
It is important to note at this point also, the essentially geographical distinc-
tion between the "interstate" and "intrastate" markets. Roughly one-third of the
gas supplied and sold is beyond the jurisdiction of the Federal Power Com-
mission, as being consumed in the state of production, generally in the South
Central states. With oil prices restricting demand for boiler fuel and enough gas
for all, this distinction was of little importance. Now with the ability of the
intrastate gas market to outbid the interstate market, virtually regardless of
FPC action, the distinction becomes vital.
THE SHOETAQE
Another prefatory note needs to be directed to the nature of the gas shortage
This shortage is, of course, quite real, in that gas distributors in a number of com-
munities are curtailing the amounts of new gas business which may be attached,
and in those communities and others, sales to industry, largely in the inter-
ruptible category, are also being reduced.
It has an induced quality, however, at least in this respect, that with the
greater attention to air quality presently being paid and, beginning most inten-
sively two to thre eyears ago, the whole nature of the "market for gas" has
changed. Up to 1970 price did limit the market for gas as an industrial fuel,
in most of the country. This can be seen from Appendix B which shows the far
greater proportion of gas sold in the South Central region, in comparison with
the rest of the country. It used to be that in most of the country, and until 1970,
gas could not be sold for major industrial and boiler fuel uses, except to fill
summer valleys, at the cost of producing and delivering gas to those markets.
This automatically restricted the gas market for industrial and boiler fuel
use to a "manageable" proportion of U.S. fuel requirements. Now, however, with
limits imposed as to the sulfur content of fuels which can be burned, the price
of industrial fuel has increased by between one hundred fifty and two hundred
percent. Therefore, almost no assessment of gas demand at prices which can be
justified by cost consideration will bear any reasonable relationship to the
amount of supply which even substantially higher prices could be expected to
elicit. In sum, therefore, we have what might be called a "tractable" shortage
produced by a dip in the volume of new reserves currently being made avail-
able, but a virtually "intractable" shortage being produced by the nature of the
market which gas could now reach, given current environmental concerns. It is
important to make this distinction.
REASONS FOR THE SHORTAGE
Having touched on the nature of the gas shortage, and particularly that por-
tion of it which has been termed "tractable," it is important to sort out some of
the basic reasons therefore, if we are to consider what remedies there may be.
In contradistinction to the gas industry which is nearly 150 years old, the nat-
ural gas industry as we know it today is essentially only 25 years old. Natural
gas did serve many markets pre-World War II, but it did not become the
national gas fuel until the post-war period during which time the great major-
ity of the major pipelines spread out to serve most of the rest of the countrv.
The underpinning for these pipelines was the tremendous volume of proven
reserves which was made available by the enhanced oil drilling of the '40s, and
the wartime restrictions on pipe production. Consequently, for the first half of
the life of the current phase of the gas industry, reserves were never a prob-
lem. Moreover, while the stated proven reserves could only take care of a
finite number of years of the gas supply for the then market, it had been an estab-
lished fact in the oil industry that this measurement, i.e., x years supply, was no
indication of the oil that could yet be found, and it was reasonable to suppose
that the same circumstance would pertain to the gas segment. During the first
period, say from 1948 to 1960, gas field prices mounted rapidlv. Whereas the
early gas sales to the first pipelines were on a 5-cent and 6-cent Mcf basis (and
on the basis of which the pipelines were deemed feasible), this had mounted
roi^hly four-fold by the time FPC regulation began to be marginally effective
(1960). It is true that the Phillips decision was rendered in 1954, but the Eisen-
565
hower years were marked principally by an apparent desire on the part of the
Federal Power Commission that the problem would go away.
The decade of the '60s represented a transitional period. Supply was still
adequate and, indeed, in the first part of that decade, appeared at least to exceed
demand. However, this was apparent rather than real, as early as 1957, the
post-war surge of oil industry exploration and development activity reversed
itself. This was principally apparent in the overall industry's drilling statistics
which, importantly, reflected oil values ; the successful gas-well data only turned
down some years later as the need for development drilling declined.* One of
the reasons for the "shortage" — the tapering off of rate of discovery of do-
mestic supplies — could thus have been foreseen a number of years ago. This same
period of decline in oil industry activity was followed, some four years later
by the appointment of a Commission marketl by a stiffening of regulatory atti-
tude; although regulatory uncertainty was prevalent throughout (and, of course,
still is).
At the end of the decade of the '60s, additions to proven reserves started to
turn down, in very important part as a result of the steady decline in oil in-
dustry activity in the contiguous 48 states, but probably influenced by regulatory
uncertainty and by the effect of regulatory lag on justifiable price increases.
Regulatory lag plagued decision-making in the '60s and rendered it almost
certain that the prices then found, and particularly the new gas price, which
was supposed to be the supply-eliciting factor, probably lagged behind cost
realities from 1965 on. In essence we can say of this period (the '60s) as far
as regulation was concerned, that the fact of regulation probably had some
effect on gas finding (most impoi'tantly, because of the factor of regulatory
lag) ; though this was not the principal reason for the decline in oil industry
exploratory activity.
The beginning of what might be termed the shortage period, i.e., 1968-1969,
might be said to be marked by a confluence of three important factors : the
first was the marked increase in gas demand caused by air quality considera-
tions mentioned at an earlier point ; the second was a near paralysis in regulatory
ability to keep new gas prices abreast of current costs; and the third was the
beginning of a new phase of regulatory uncertainty. As to this third factor,
beginning in 1969 producer expectations could be said to have improved very
considerably either on the basis of hoped-for relaxation of regulation" or on
the basis of improved market expectations resulting from environmental pres-
sures. These substantialy improved expectations would, paradoxically, have had
the tendency to delay investment in gas development until the improvement
expected became a reality, at least insofar as this factor affected investment deci-
sions.* The effect on the volume of new gas reserves reported annually was startl-
ing, and this at a time when demand was stimulated because of environmental
concerns. The shortage surfaced only a year or two later ; thought it was fore-
seen well before them.
THE DURATION AND FUTURE COURSE OF THE SHORTAGE
From a discussion of the shortage and the pai't which the FPC did or did
not play in bringing it about (mostly the latter), I turn to the question of the
duration and nature of the shortage in future years. Submitted as Attachment A
is a report prepared by Associated Gas Distributors, which looks ahead, essen-
tially for the visible future (to 1990). In sum, the forecast envisages stabiliza-
tion and then gradual decline in domestic natural gas supply, a limiting of
demand increases by pricing policy, regulatory or other action to increases in
the "high priority areas," though with some falling off of total boiler fuel
demand, and a resulting degree of marked shortage continuing until toward the
end of this decade. By that time should come the fruition of various investment
decisions already made, or to be made, which will supplement natural gas sup-
ply by various other sources of gas, notably gas from coal, in increasing quan-
tities beginning aroimd 1980; gas imported from the Arctic regions, beginning
perhaps a year or two earlier ; synthetic gas made from oil and its products, be-
* Well drlUinfr Is of two types, wildcat or exploratory wells, and a much larger volume
of development wells if the exploratory well proves successful. Most of the former drilling
results In dry holes some 90 percent of the time, so the only fact-based division of drilling
into oil and gas categories is in the successful well category, dominated by the development
wells.
^ This same period saw a recrudescence of deregulation legislation long dormant.
* The same factor applies, of course, with respect to oil.
566
ginniug in significant quantities by 1975; and substantial imports of LNG,
largely from Algeria, beginning in the latter '70s. In terms of the actual volume
of the supplemental sources, which will make up over a third of U.S. gas supplies
by 1985, these are listed in roughly the order to which they can contribute the
difference between domestic demand and supply. It should be noted, therefore,
that federal action in relation to these various other sources is probably more
important to a determination of total supply than the differential effect of what is
done with respect to field price regulation. These actions will be summarized
at a later point in this statement.
So much for the gas industry background, leading up to the current interest in,
hopefully, remedial legislation. The most immediate question confronting the
Congress is the legislation proposing the "deregulation" of new gas prices.
There are also measures proposing total deregulation, but attention to these
measures appears to be less imminent because of its staggering cost to the con-
sumer and lesser value in eliciting new supplies. It is, of course, the new gas price
which is most important, of all gas prices, in eliciting supply.
WORKABLE COMPETITION IN THE NATUBAL GAS PE0DUCIN6 SECTOR
If there were effective price competition in the field, this might be the easy
solution, but for various reasons this is not what the record shows.
In the Permian Basin ^ proceeding, the lead area rate case, the Commission
heard competent, well-tested testimony on this subject, from all major parties to
the case. On the basis of that record, pre-shortage, it concluded that while the
concentration ratios for the producers were not disturbing in themselves, the
industry structure (previously referred to) and the institutional and regTila-
tory cii'cumstances in which it operated were such that price competition could
not be relied on to produce the lowest reasonable cost of gas to the consumer, the
Congressional goal in passing the Natural Gas Act. Until recently, it has never
disturbed this finding. In a recent proceeding,' in the face of the evidence of an
FPC Staff economist reaching the same (Permian) conclusion, however, it went
to extraordinary lengths to excoriate the Staff for even considering the issue
(Chairman Nassikas vigorously dissenting), and on the basis of little, if any,
evidentiary support, citing only the Fifth Circuit Court's paraphrase of Pennian,
found the producing industry to be "structurally competitive"' (which is not the
issue) and by implication reversed the Pei-mian conclusion that the market can-
not be relied upon to produce the lowest "just and reasonable" prices.
There is little point, I conclude, in retreading the gi-ound as to concentration
ratios; they haven't changed tliat much over the last decade. The Staff finding
that the eight largest producers made 64 percent of the 1969 sales is representa-
tive of all the analyses that have been made as to concentration, and indicates
the dominance of this small group of majors. The most recent Staff report, stat-
ing that the largest four companies control nearly half the uncommitted supply
is of the same nature. However, in this connection I would like to refer to a
data gap which is disturbing, if one seeks relevant information as to future price
behavior. The significant factor, however, is not the degree of control which has
existed in the past. There, in the days when the pipelines were scrambling
for supplies, the handful of majors possessed an influence over the "birth rate"
of pipelines to a very significant extent since no pipeline could be "put together"
without their cooperation. Now the situation is rather different, biit the degree
of control may be just as marked. It is not now particularly important who con-
trols existing proven reserves. These are already committed, in very important
part. What is important is who controls or is aware of the "probable" reserves.
Probable reserves is a descritpion adopted by the Potential Gas Committee " to
lying) i-eserves which are currently being produced, but have not been exactly
quantified for purposes of the "ofBcial" definition of "proven reserves." These
reserves are estimated to be 212 Tcf (trillion cubic feet) for the contiguous 48
states.^" This represents the next ten years' supply of natural gas for the United
designate the reserves which are known to be adjacent to (or overlying or under-
■^ Permian Basin Area Rate Case, 390 U.S. 747 (1968).
s Belco Petroleum Corporation, Agent, et at, Docket Nos. CI73-293, et al.. Opinion No.
659. issued May 30, 1973.
. e Potential Gas Committee, sponsored by the Potential Gas Agency, Mineral Resources
Institute, Colorado School of Mines Foundation, Inc., Golden, Colorado. "Probable" supply
refers to the unproved portions of existing fields.
1" The Potential Gas Committee has two other "less likely" categories which, however,
will require substantial additional exploratory effort to make available. These are defined
as "Possible" supply, i.e., that which will result from new field discoveries in areas of
established production and "Speculative" supply, i.e.. that which may result from new field
discoveries in areas where sediments are present but have no prior production history.
567
states. Concentration with respect to these reserves is totally unknown to the
Federal Power Commission (or to anyone else except perhaps the companies
contributing information to the Gas Supply Committee).
Furthermore, much of the acreage providing access to reserves is also con-
trolled (leased) by the prospective producers, and this information as to con-
centration in this area is likewise totally missing. This, of course, is equally
important since it is only with the cooperation of those who control the acreage
that the future reserves \^ill be discovered.
Irrespective of whether these concentration ratios are disturbing in themselves,
the problems in relation to industry structure are. if anything, more severe
than they were ten years ago because of the changed circumstances of the
oil industry, with domestic supplies running down, and the related gas shortage.
We may assume that under today's conditions the major integrated oil companies
are finding and producing all the oil in the contiguous ^8 states which their
circumstances indicate is economic; and that because of the dominance of oil
in their computations, an upward shift in the gas price would have to be astro-
nomic to produce a significant change in this level — another way of saying
that gas supply is price inelastic." Who then will be the entrants if the new
supply is to be raised by, say. 50 percent — a reasonable improvement target.
Simple mathematics would tell us that the effort of the nonintegrated oil com-
panies would have to treble. Again considering the dominance of oil price in
the exploration scene and failing a major increase in oil-wellhead prices, this
is highly unlikely."^ We are left with the conclusion that in the domestic hydro-
carbon shortage' era. price competition will be ineffective in controlling the
price of gas, short of gas prices meeting the several hundred i>ercent increase
in the market value of low-sulfur fuel.
PROPOSED LEGISLATION
Despite this conclusion there are plausible reasons advanced supporting decon-
trol. Principal among these reasons is the desirability of achieving a balance
l>etween demand and supply, without action by government fiat. We have seen
that if a balance is to be reached, the control of demand Is likely to be the most
important factor. The inducement of added supply is. of course, important, but
as we have shown under the discussion of the nature of the shortage, no visible
enhancement to supply, constrained by the limitation of tlie size of the resource
base in the United States, is likely to satisfy potential demand at any cost-
related price (and if not cost related, what can be the basis for regulation?).
I have al.so argued, and this is a point where most oil industry sources agree,
that it is basically oil price and supply conditions which will be the principal
regulator of gas supply. Here the outlook for an enhancement in domestic activity
is not favorable, since the U.S. oil supply resource base is in worse shape than
the gas supply base and the world market is vastly more important and acces-
sible. I would sum up my conclusions as to the influence of price on supply as
l)eing that under either regulation as now practiced or nonregulation. we may
expect prices high enough to have a positive effect on gas supply, but constrained
by resource base and other limitations. This supply effect by itself, however, will
come nowhere near to bridging the current gas between supply and true demand
at current prices.
Let me turn next to the shaping of the market to lie in accord with the reali-
ties of the situation. If gas supplies, both natural and supplemental, have a
'1 The price elasticity of supply is a significant factor in determining which course is the
least expensive for America to follow in bringing supplemental supplies to market. Some
discovery activities will proceed at present prices. If, say, a 20 percent increase in those
prices produces as much as a 10 percent increase in supply (an estimate of some competent
economists) the cost of that increment will be higher than the costs, often cited as justi-
fying a price increase, of LNG and manufactured pas. Incremental cost may be computed
using the following formula :
^ , ^ ^ New Volume O New Price minus Old "Volume @ Old Price
Incremental Cost= • = — ; — :=—^
Increment in Volume
For example, 1 Mcf, with a 20 percent increase in price producing a 10 percent Increase in
findings, and using 45 cents as the base price, yields the following incremental cost :
T ^,^ ^ 1.1 McfX45^X120 — 450 ci ^^ /at f
Incremental Cost = ^ „ ^ =$1.44/Mcf
.1 Mcf
Under these circumstances, the latter might be the more economical course to follow.
^ An exception to this general rule is a heightened interest in exploratory activity by gas
distributors and pipelines where the sheer need for physical volumes of gas to meet fran-
chise and contract requirements is an important make-weight in the decision making.
27-547 0—74 37
568
long-run incremental cost vastly in excess of current average costs, this limited
supply should be preserved for uses for which, from the standiwint of national
interest, it is least replaceable. This excludes the vei-y large fraction of gas
which is used simply as boiler fuel, or other similar industrial uses, which can
be replaced by low-sulfur oil, to be made available in increasing quantities, by
coal as technology permits, and by nuclear fuel. There are basically three ways
in which the size of the gas market can be contained to a size reasonably com-
mensurate with probable gas supply (including supplements). The most ob\aous
way is by government rationing, not now legally possible since the FPC does not
control a very large fraction of this market," though Congress could, of course,
broaden its authority.
The second course, the alternative to such government rationing, is the course
of deregulation. The market would then "bid up" the field price of gas to the
limit set by low-sulfur oil value equivalency, and demand could thus be limited
to new supply made available. For the first part of this period, tlie intrastate
market would be satisfied, and while the demand-supply balance is being achieved
(1980?), the interstate market, particularly on the East and West coasts, may
receive a shrinking portion of total supply. We may then expect price increases
to confine and even shrink the demand for boiler fuel, at which point the re-
maining demands will be satisfied, though at a substantially higher price.
Whether firm gas demands will be importantly affected depends on many im-
ponderables during this period — the price and availability of competing fuels,
and the availability of supplemental gas supplies.
The third course of action (to which I will return at a later point) is in the
nature of a compromise between these two, where the Government would, by
taxation, increase the field price to a point where it is essentially equal to this
"market-clearing price" and attracts, at the least, no new industrial boiler fuel
demands. The distinction between this course and the former two courses is, with
respect to the first alternative, that the Government woiUd not be making ration-
ing decisions as between all the various uses ; rather, it would allow differential
pricing action to accomplish this (aided, of course, by taxation). Second, the
windfall profits, i.e., those which perform no proportional supply-eliciting func-
tion would be taxed away to accrue to the public benefit.
I would like to turn now to a fuller discussion of each of these alternatives.
The first is FPC regulation as is, with more comprehensive and permanent ration-
ing. I have pointed out that the present, i>artial regulation cannot really accom-
plish the desired result if it does not reach out into the intrastate market. It is
up to the Congress, of course, to determine whether the latter is feasible and
appropriate. As one who has learned a certain amount of economics by osmosis,
I do, however, have grave concern for the success of a rationing policy by a fed-
eral agency which is presumably designed to go on forever. While I do not think
that adding jurisdiction over the so-called intrastate pipeline companies is in-
appropriate, since their actions do indeed importantly affect interstate commerce
in gas, which is regulated, my basic objection to permanent government ration-
ing and allocation procediires remains.
As to the second alternative, abolition of new gas field price control, I would
point out that, in important part, this has already been accomplished — though
not court tested. Tlie ad hoc adjustments to the shortage situation which the
FPC has adopted in effect force the pipelines to meet the market requirements
and prices of the intrastate market, irrespective of "reasonable price" considera-
tions. The reason why prices have increased from 2.t cents, thought reasonable
two years ago, to 45 cents, talked about today and 60 cents approved on emer-
gency bases, has little to do with increasing cost" and is essentially due to the
up-to-two hundred percent increase in low-sulfur boiler fuel value. N'o change in
the system of regulation is apparently needed, in respect to the onshore gas
supplies, if the present system is followed, and the effective price is determined
b.v the intrastate market. I emphasize onshore gas supplies because, from the
standpoint of the increasingly important offshore areas, the FPC and the De-
partment of the Interior can, between them, control and direct the price and
market for these supplies under their present grants of authority. Indeed this
dc facto compromise between a reasonable standard of regulation (offshore)
13 Much of this market, unquantifiahle however by lack of publicl.v available data, could
he controlled b.v FPC if it extended Its jurisdiction to a handful of major intrastate pipe-
lines, a stretch "of its jurisdictional authority which in the shortage situation could be ruled
permissible under the Natural Gas Act as now written.
1* I liave included as an appendix liereto (Appendix D) a discussion of the problems in
respect to current cost finding.
569
and nonregulation (onshore) may he about all that can be accomplished in this
field, given the indi^stry strxicture, where essentially the oil company producers
are, in the major part, unregulated entities. I conclude, in respect to deregula-
tion, that legislation requiring the deregulation of new gas prices charged by
independent producers has three major disadvantages: (1) by changing the
Act it would introduce another ten-year period of uncertainty as to how the
new legislation would be interpreted and administered; (2) it would increase
the price of offshore supplies to the ultimate consumer without any supply-en-
hancing virtues not presently attainable; and (3) would ix^rmit the economic
rents resulting from the environmentally related increase in value to be re-
tained by the oil industry.
As to the third alternative that has been suggested, which subsumes the con-
tinuing of regulation, its usual form has taken the i^rt of suggestions by econo-
mists that excess profits of producers be siphoned off so that the windfall profits
above described, resulting in major part from environmental considerations,
would essentially go to the benefit of the public at large. No one has, however,
yet come up with a device by which this can be done, given the nature of the
oil industry — indeed it may be rather totally impossible of accomplishment.
The suggestion which I have advanced is that much the same result could be
achieved by the imposition of a federal severance tax, or excise tax, imposed
at the first point of sale, which would "sop up" the margin between low-sulfur
fuel value and the cost of production." This tax could be imposed in stages, to
soften the consumer impact. A feature of this tax is that it could, if deemed
constitutional, be differential and that it might be imposed on gas intended for
boiler-fuel use and thus eventually raise the cost base of such sales to that mar-
ket-clearing price without burdening all consumers.
I should note at this point that this reference to boiler-fuel use does not imply
that I am arbitrarily putting residential consumers ahead of industrial con-
sumers in an exercise of imposing what on the surface would apiiear to be social
(or political?) values on an economic function. Rather. I am recognizing the
fact that natural gas is a wasting resource which will have to be replaced by
some much more expensive synthetic fuel for those uses (including industrial)
where its form is of particular value, and it makes no sense to use up enormous
quantities of it for uses (largely under boilers) where other fuels can be sub-
stituted during the temporary period (a decade or so) when electric plants
and other large industrial users are adjusting themselves to the age of nuclear
or fusion-derived energy — or learning how to use coal in an environmentally
acceptable manner. Government energy policy should be concentrated on hast-
ening that transition.
Another feature of such a course would be that all or part (say, one-half) of
thi.s tax fund could be paid into a "gas improvement fund" similar in nature
to the gasoline tax which now goes to support the interstate highway system.
The funds so made available could thus be retained within the gas industry and
accrue to the benefit of the consumers thereof. It does not need to be elaborated
on that R&D in gas manufacture from coal is seriously underfunded ; that a
different form of R&D — the exploration activity by the proprietor of lands in
the offshore areas, the federal government, is seriously underfunded, and that
the new supplies of gas required to supplement traditional sources will require
vast amounts of capital which could be devoted to loans to the industry units
who are required by this situation to make these extraordinary investments. This
could include the coal to gas plants, potentially a national grid system to make
such gas available, perhaps investment in the Arctic gas pipelines, and in shap-
ing required for LXG supply. The sums so made available, mounting to over
two billion dollars a year, would not. during the next five years or so, begin to
exhaust the possiI)ilities of gas-improvement funding of such a nature.
The essential difference then between alternatives two and three relates to
the uses to which excess revenue generated from higher gas prices will be put.
Under deregidation they will largely accrue to the oil companies and will gener-
ate either windfall profits or foreign oil exploration. While foreign oil explora-
tion, if it takes place, will increase the supply of fuels and so help relieve the
energy crisis, supply in this form presents two difficulties. It increases our re-
liance on foreign sources thereby potentially contraining our political indepen-
dence in foreign affairs. Secondly, it increases our reliance on oil, a fuel which
has substantially more adverse environmental impact than gas.
_^ A rough computation is that with cost estimated bv the FPC Staff to approximate
•io cents per Ccf. a 25-eent gap remains between cost and "value" in terms of lowsulfur
fuel (as measured in the field).
570
The third alternative would direct these excess revenues either to the general
public or to the development of new domestic sources of gas — either natural or
manufactured. Assuming no additional supplies are to be forthcoming, distribut-
ing excess revenue to the general public is to be preferred to increasing the
profits of the oil companies. If additional supplies are forthcoming, I feel that
there is a legitimate public interest to be served in producing some part of those
supplies in an environmentally sound and politically reliable fashion.
My legislative prescription theerfore would tend to favor the imposition of a
tax of this nature, supplemented by a very simple amendment to the Natural Gas
Act to accomplish the essence of the "contract sanctity'' goal.
OTHER RECOMMENDATIONS
I would conclude with a summary of what does seem to be possible of accom-
plishment, aside from this particular area. My prescription would run to these
items: (1) Improving FPC information-gathering,^" as required if any regula-
tion is to be effective, in at least these areas :
a. Full information as to the intrastate market including sources and uses of
gas and price information, gathered on a regular basis.
b. Periodic cost reports to make the FPC's cost finding more effective and more
current.
c. Differentiation between, at least, offshore and onshore costs and results.
d. Prompter and fuller reporting in respect to reserve reporting, including the
"probable" as well as the "proven" category.
The FPC can probably accomplish this without legislation. (2) Improving the
funding of R«&D in respect to manufactured gas. (3) Improving Department of
the Interior regulation in respect to offshore gas (which may need some legis-
lation in respect to tract leasing" but is essentially dependent upon additional
funding), so that the Department can enforce the present statute. (4) An R&D
program administered by the Department which can be effective in evaluating
the approximate size and location of offshore gas resources. (5) The vigorous
negotiation of a concordat with Canada in respect to Arctic gas supplies. (6)
The adoption of a Congressionally approved oil imports program which will not
penalize those purchasing feedstocks for supplemental gas manufacture, and
will in effect open the world market to those seeking these feedstocks. (7) The
encouragement by distributors and pipelines to increase their gas exploration
activities. The FPC is about to come to grips with this "vertical integration
issue" and it should be given positive instruction in this direction. It is the dis-
tributors who by franchise have an obligation to make adequate gas supplies
available to the market, and the pipelines who have a direct financial incentive
to do so. In respect to those two possible sources of additional gas, regulatory
action can be effective. For a fuller discussion of this area. I am attaching as
Appendix C testimony offered in a recent proceeding {Nomccn) dealing with
this matter more fully.
In concluding, I would like to thank the Subcommittee for this opportunity
to advance these views and hope they may be of some value to it in its delibera-
tions. Time has restricted assembling the documentation wliich I would like to
have provided to support my conclusions. If your .scheduling permits, I would
like the opportunity of providing such documentation as hearing process indi-
cates may be helpful.
Statement op Qualiftcations of Charles H. FIiaziek
My educational background consists of the completion of studies leading to an
A.B. degree at Haverford College. 1924, and such studies as were required to
receive the degree of Bachelor of Science in Electrical Engineering from the
Harvard Engineering School in 1926.
The greater part of my working life was spent in the employ of the Philadelphia
Gas Works, Division of the United Gas Improvement Company (now the UGI
Corporation). I was employed by this company in 19.39. initially as Manager of
18 The need for improved data-collection procedures under existing legislation Is more
crucial than ever in this shortag-e period. At present, the FPC relies almost entirely on
industry-supplied A.G.A. proved reserves data as its basis for determininfr how much new
pas is beinjr found each year. Given the Ijnown and substantial lap: in reporting these data,
it is virtually impossible for the FPC to know whether a given price increase has or has
not resulted in any overall supply improvement. Greater use of its existing data gathering
authority could provide the FPC with a more up-to-date index of both proved and probable
gas reserve findings.
"To avoid the burden which the present auction system imposes on the gas consumer,
and improve the degree of access to this acreage.
571
Internal Auditing and retired in 1964. At the time of my retirement, as Director
of Development, I had four principal areas of responsibility : rate policy, struc-
ture and administration ; economic development, including supervision over the
preparation of cost allocation studies, market analyses, and determination of
policy with respect to new markets ; system planning ; and the procurement of
natural gas and related matters, including participation with company's counsel
in various formal and informal proceedings before the Fderal Power Commission.
The latter responsibility included presenting the natural gas requirements of the
Philadelphia Gas Works in various certificate proceedings before the Federal
Power Commission, and participating, in its behalf, in numerous pipeline rate
increase filings, assisting counsel in this respect and representing Philadelphia
Gas Works in rate settlement conferences related thereto.
When the Commission began to exercise jurisdiction over the natural gas
prices charged by independent producers, my responsibilities were expanded to
cover producer rate matters. In this latter connection. I have given rate design
testimony on behalf of the Philadelphia Gas Works and, in addition, a number
of other Eastern distribution companies in individual producer rate pro-
ceedings involving the Tidewater, Continental. Sohio (Petroleum). Gulf, and
Shell Oil companies. In the socalled CATCO proceeding, reopened on remand, I
gave testimony with respect to the proi)er rate level to be used in conditioning
the certificates sought by the applicant in those proceedings : and in proceedings
concerning Bastian Bay sales to the United Gas Pipe Line Company, similar
testimony was offered.
I also testified on behalf of the Philadelphia Gas Works, as well as several
Eastern distribution companies, on the general subject of pipeline rates, in a
case involving a 1963 rate increase filing by United Gas Pipe Line Company.
With the institution of the "area rate" methodology of producer regulation, in
Docket Xos. AR61-1, et ah, known as the Permian Basin proceeding, I was asked
to be the "Presiding Examiner's Witness," for the purpose of suggesting rate
procedures designed to effectuate the Commission's newly announced area rate
policy.
Later, since my I'etirement, I have testified on behalf of the Associated Gas
Distributors (AGD), a group of some sixty gas distribution companies, in the
Southern Louisiana Area Rate Proceedings, the Texas Gulf Coast Area Rate
Proceeding, the Other Southwest Area Rate Proceeding as to field price rate
design; and on l)ehalf of Consolidated Gas Service Company in the Pipeline
Production Area Rate Proceeding, on the same subject.
Also, on behalf of Philadelphia Gas Works, testimony was offered involving
refund flow-through by the Texas Eastern Transmission Corporation, and with
respect to rate of return in a 1969 rate proceeding of the same company : and
with re.spect to the liberalized depreciation issue in a later Texas Eastern rate
proceeding. I have recently appeared on behalf of a group of petrochemical com-
panies in Docket Nos. CP72^7 and CP72-S8. in connection with a certificate
application of the Natural Gas Pipeline Company of America ; and in Docket No.
RP72-74 in a Southern Natural Gas Company curtailment proceeding for Atlanta
Gas Light Company and Alabama Gas Corporation.
More recently. I have testified on behalf of Associated Gas Distributors (AGD)
concerning pipeline certificate applications in Docket Nos. CP72-6. et al., Ten-
nessee Gas Pipeline Company proceeding. This testimony concerned the potential
supply and requirements of gas distributors and the effect thereon of the proposed
diversion of gas from the interstate pipeline market for use as refining fuel. Also
on behalf of AGD. I have presented evidence in the matter of Belco Petroleum
Corporation. Agent, et ah. Docket Nos. CI73-293. et ah, on rate design rationale.
My presentation concerned several cost and non-cost factors which, in my opinion,
the Commission should consider in making a decision in its just and reasonable
rate findings in these proceedings at this time of "gas shortage." Also, I have
introduced evidence on behalf of Atlanta Gas Light Company, regarding the
standard rate structure proposed by Southern Natural Gas Company in their
rate increase filing. Docket. No. RP 72-91.
During the past several years I have also appeared before various state com-
missions, i.e.. the Massachusetts Department of Public Utilities on behalf of the
Lowell Gas Company : before the Virginia State Corporation Commission and
the North Carolina Utilities Commission on behalf of Virginia Electric and Power
Company, relating to gas and electric increases filed l>y that company. I have
appeared before the Pennsylvania I^tility Commission in the 1969-1970 and the
1971-1972 :\Ietropolitan Edison Company rate proceedings, and in the 1970 and
1972' Pennsylvania Electric Company rate proceedings ; before the New Jersey
Board of Public Utility Commissioners with respect to the rates of the New Jer-
572
sey subsidiaries of the General Public Utilities Corporation ; and before the New
York Public Service Commission on behalf of Long Island Lighting Company in
its electric undergrounding proceeding, and recent rate increase proceedings in-
volving the electric and gas rates of this company. I have also appeared before
the Public Service Commission of Maryland in connection with a rate increase
application filed by Columbia Gas of Maryland.
In recent years I have served as a consultant for the gas agencies of various
foreign governments ; and have, on belialf of the Philadelphia Gas Works and
others, participated extensively in economic studies and negotiations with respect
to the importation of natural gas in liquefied form into the United States. In this
connection I have offered testimony on behalf of the Atlanta Gas Light Company
in the Columbia LNG Corporation proceedings and in the related Southern
Natural Gas Company proceedings.
Finally, I have appeared before the Canadian National Energy Board, on be-
half of Gaz Metropolitan, Inc., advancing a theory of rate design for Trans-
Canada Pipe Lines Limited.
Appendix A
The Projected Supply-Demand Balance for Eastern Gas Distributors,
1973-1990
INTRODUCTION AND CONCLUSIONS
The Associated Gas Distributors, an informal grouping of some fifty eastern
gas distributing companies, has recently completed an updated projection of the
supply and demand for gas in their service area, the Bast Coast of the United
States, looking primarily to the year 1980, but with a further projection to 1990.
The original study was piiblished in September 1972. It undertook this work be-
cause the projections available to it from other public sources were deficient in
not portraying, in any realistic way, the problem which actually is likely to con-
front it and its member companies. First, most projections have been on a na-
tional basis, with little specific attention to regions. Second, the requirements, that
is the demand aspect of the equation, have been very considerably overstated, in
the light of the circumstances which are likely to prevail — an element to be later
discussed.^ Finally, little has bee done to consolidate reasonable estimates of fu-
ture supply, both from the traditiomil areas of natural gas supply and from the
various supplemental sources on which the gas industry will increasingly have to
reply.
The conclusions of this review are that a virtually constant, and then modestly
growing, projection of requirements will be juxtaposed against a diminishing East
Coast share of domestic production, itself declining, ^^^tll the result that the de-
ficiency between the East Coast requirements and this shai-e will increase year by
year. It is estimated that by 1980 this deficiency will amount to 42 percent of the
East Coast requirements of that year, and that this percentage will increase by
1990 to 62 percent.
This does not mean, however, that these requirements cannot be met. The Fed-
eral Power Commission staff has estimated that by 1980 two billion one hundred
million Mcf annually may be imported in the form of LXG, of which the East
Coast share should be at least 700 million Mcf (or 2 million Mcf a day). Further-
more, these figures may double during the suceeding decade. None of these figures
envisage such proposals as the bringing in of Siberian gas or similar projects
which have been the subject of recent feature stories.
The supplemental gas required to balance East Coast supply and demand (some
two million Mcf a day in 19S0) must presently be considered as being produced
from crude oil or its derivatives. If this is to be the supplemental source, plants
producing 700 million jNIef a year must be in being by 1980 (with a likely increase
of another 50 i>ercent or more by 1990). This represents the equivalent of eight
major plants of the size currently being contemplated, which are being designed
to produce 250.000 Mcf a day (now considered to be the optimum size plant).
This is a goal which requires prompt and effective effort on the part of the gas
distributing companies (and the pii^eline companies), hut is certainly not beyond
capability of the industry. Over half this target is on the drawing boards today,
and sevei-al projects are actually under construction.
The general conclusion of the group is that reasonable growth in gas sales and
territories can be attained. It is true that costs will be higher, but not at levels
1 Cf. page 12 for the definition of "requirements" which has been used herein.
573
that will cause the gas industry to be less than actively competitive. In order to
achieve this reasonable growth it is necessary that the industry vigorously pur-
sue its goal of developing the required supplemental sources and that all gov-
ernment agencies cooperate in the attainment of this objective. The tables and
cliart which follow illustrate the magnitude of the problem.
FORECAST BALANCE BETWEEN EASTERN STATES' ADJUSTED GAS REQUIREMENTS THROUGH 1990 AND EASTERN
STATES SHARE OF DOMESTIC PRODUCTION BASED ON CONSERVATIVE NATIONAL RESERVE ADDITIONS AND
A DECLINING SHARE OF INDIGENOUS GAS SUPPLIES TO THE EASTERN STATES
(Volumes in trillions of cubic feet at 14.73 lb/in 2a and 1,000 Btu per cubic foot]
Year
Balance to be met from
supplemental
sources
Eastern -
States share
Percent of
Adjusted
of domestic
adjusted
requirements'
productions
Volume
requirements
(l)-(2)
(3)-(l)
(1)
(2)
(3)
(4)
2.94
2.80
0.14
5
2.91
2.62
.29
10
2.92
2.46
<.46
16
2.94
2.30
.64
22
2.96
2.18
.78
26
3.06
2.06
1.00
33
3.15
1.97
1.18
38
3.26
5 1.89
M.37
42
3.83
1.80
<2.03
53
4.53
1.74
<2.79
62
1973
1974.
1975.
1976.
1977.
1978.
1979.
1980.
1985.
1990.
' New England, the eastern portions of New York and Pennsylvania, New Jersey, Delaware, Maryland, District of
Columbia, Virginia, North Carolina, South Carolina, Georgia, and Alabama.
2 Adjusted per NERA workpapers, and excluding FRC field use volumes. (See p. 5.)
3 Calculated with conservative reserve additions and with the Eastern States receiving a declining share of the national
domestic supply (from 14.22 percent in 1970 to 10.66 percent in 1980, and continuing at that level).
* For 1975, the bulk of supplemental supply would be SNG. In 1980, SNG and LNG would provide approximately equal
quantities, and we see LNG increasing more rapidly thereafter.
5 With the Eastern States maintaining a constant share of domestic production, this figure would be 2.52 T ffs. The
shortage would then be 0.74 T ft 3.
Source: Col. (1): P. 5, col. (7). Col. (2): Appendix table I, col. (5) multiplied by the Eastern States' declining share
percentages.
EASTERN STATES 1 ADJUSTED ^ GAS REQUIREMENTS
(Volumes in trillions of cubic feet at 14.73 lb/in -z and 1,000 Btu per cubic footj
Year
Firm
Electric
utilities
Interrupt-
ible
industrial
Residential
Commercial
Industrial
Others
Total
(1)
(2)
(3)
(4)
(5)
(6)
(7)
1.04
0.40
0.56
0.29
0.49
0.16
2.94
1.05
.41
.57
.26
.46
.16
2.19
1.07
.42
.59
.24
.44
.16
2.92
1.09
.43
.60
.23
.43
.16
2.94
1.11
.45
.61
.21
.42
.16
2.96
1.15
.47
.64
.21
.42
.17
3.06
1.19
.50
.66
.21
.42
.17
3.15
1.23
.53
.69
.21
.42
.18
3.26
1.45
.69
.85
.21
.42
.21
3.83
1.71
.99
1.05
.21
.42
.25
4.53
1973.
1974.
1975.
1976.
1977.
1978.
1979.
1980.
1985.
1990.
1 New England, the eastern portions of New York and Pennsylvania, New Jersey, Delaware, Maryland, District of Colum-
bia, Virginia, North Carolina, South Carolina, Georgia, and Alabama.
2 Firm requirements at H the FRC operational estimate growth rates through 1977, at full FRC growth rates thereafter;
electric utilities at twice the rate of decline of national interruptible electric through 1977, frozen thereafter; interruptible
industrial at Vz the decline of electric utilities through 1977, frozen thereafter; other at the composite growth rate of all
other classes:
Annual growth rates:
Residential 3.40
Commercial 5. 40
Industrial 4.30
Other. __ Composite
Electric — 2 times rate of decline of col. (5), table II.
Interruptible—!-^ times col. (4) decline,
s Includes company usage and unaccounted for losses, transmission mainline fuel, and any other use not otherwise
classified.
Source: By extrapolation from estimated 1972 consumption, using the method explained in footnote 2. For sources of
growth rates, refer to table II source note.
574
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575
THE OUTLOOK FOB THE SUPPLY OF DOMESTIC NATURAL GAS
To determine supply for the East Coast it is first necessary to make projections
as to the supply which may be available from the "lower 48" .states. For this
purpose we have utilized the most recent report of the Federal Power Com-
mission staff, issued in February 1972. We find that this report is consistent
with the potential supply as found by the Potential Gas Committee in its most
recent report issued in October 1971.
A word needs to be said as to "potential supply." The projections of the
Potential Gas Committee are more conservative than the data recently made
public by the Department of the Interior in Geological Survey Circular 650.*
However, a careful reading of this Circular, and the methods by which the
estimates were prepared, would indicate that the estimates of the Potential
Gas Committee represent a more suitable basis for investment decisions.
The Circular 650 estimates have a number of serious weaknesses for use in
a projection of supply to serve as a guide to the gas industry for use in planning.
They have no limitation as to technology, going well beyond proven technology
in estimating available resources, and it may be presumed that much of the
computed resource would only come in at costs far beyond any concept of gas
value. They extend, geographically, further offshore than the presently contem-
plated limit (600 feet of water depth 3) and to Alaska. Finally, they are basically
estimates of oil to be found, converted to gas potential via an historical ratio,
which may or may not apply to future discoveries. Thus, while the Circular's
message is at first blush encouraging, we conclude that the Potential Gas Com-
mittee's findings are more suitable for gas industry planning and investment
purposes.
To support the projection of production levels for the next two decades,
reserve additions of some 400 billion ;Mcf will need to be made during this period,
a figiire only modestly less than the sum of the categories of "probable" and
"possible" reserves enumerated by the Potential Gas Committee. This leaves
unutilized the category of "speculative" reserves for development subsequent to
the next decade or so. It seemed only prudent, in planning for future service
to the gas industry's customers, that the speculative potential be largely dis-
counted for intermediate-range forecasts as to gas availability.
In the above consideration the price of gas at the wellhead has not been
specified. It is assumed, first, that this price will be adequate as an incentive
to a reasonable level of exploration (considerably higher than that in the re-
cent past). On the other hand, it is not assumed that a ballooning price of gas
will cause a major change in the rate of reserve additions, since, in the light of
what we can count on to the potential supply, this would only accelerate the
rarly rimdown of domestic reserves to a potentially seriously low level.
Consequently, the projections may be said to be reasonably conservative, at-
tainable at reasonable prices, which ma.v be bettered somewhat, but not out of
scale, if conditions of exploration and development turn out to be much more
favorable. These national projections are tabulated in the attached appendix.
THE CORRESPONDING PRODUCTION LEVELS
To determine the domestic prodiwtion which a given level of reserve addi-
tions will support, we have used a declining Reserves-to-Production ratio, down
to a minimum of ten, which would be reached in 1974. At the relatively
conservative rate of reserve additions we have posited, and taking account of
field use volumes, we estimate a peak production, available to consumers na-
tionally, of 21 trillion cubic feet in 1973.* declining thereafter. Thus, the "short-
age," in terms of domestic sui>ply, is with us "for the duration" and will become
more severe time as goes on.
It should be noted that in this method of forecasting production, there has
been a netting process, by which the relatively rapid decline of the older re-
serves has been off-set by reserves airrently being found, as on the 1970 lease
sale acreage. Consequently, the validity of the projection depends importantly on
a positive leasing policy on the part of the Department of the Interior, as well
as on active onshore exploration in the deeper horizons.
^ U.S. Department of the Interior. Energy Resources of the United States, 1972.
3 The Potential Gas Committee Includes a minor increment (.3S trillion cubic feet),
larsrely speculative, as rliscoverable between 600 feet and l,.50O feet.
* Since the corresponding figure for 1972 was also calculated at 21/ trillion cubic feet. It
appears that the historical peak Is at hand.
576
For our projections into the future we would liave preferred using compre-
hensive forecasts from our supplier pipelines, but these were not available. Fail-
ing this, and starting with the figure of 14.2 percent as the recent basic share
of national production available to the East, we deemed it only prudent to as-
.s'ume that this percentage share would fall off. The past share of this national
production which has been available to the Eastern States has been deter-
mined with reasonable accuracy. In an appendix we show our derivation of
this share for the years 1968 to 1970. It reached its peak in 1969 and declined
slightly in 1970, with evidence that the figure of about 14 percent (actually 14.2
percent) held relatively constant in 1971, but declined in 1972.
As the unregulated intrastate demand mounts,"' it is in a superior position
to siphon off a larger and larger proportion of the national total. We can ex-
pect resistance to this process, but not its reversal. It seemed wise, therefore
to taper off the historic proportion by some 25 percent by the year 1980, so
that the East would by then only be receiving 10.7 percent of the national total.
We assume that this lower East Coast fraction (percentage share) could be
held constant thereafter, keeping in mind its better-than-average position with
respect to Atlantic offshore resources, the superior position of the Middle West
with respect to supplemental supplies, and the likelihood that the situation
will stabilize once there is full knowledge of the permanent nature of the gas
supply-demand imbalance.
The conclusion to be drawn from these various computations? is that the East
Coast share of indigenous production will decline steadily from this point for-
ward, from approximately 2.8 trillion cubic feet in 1973 to 1.9 trillion in 1980
and 1.7 trillion in 1990. This means that merely to stand still in the 1970s the
East would have to find supplemental sources of gas of nearly tivo and one-half
million Mcf per day, and to grow in the modest degree we project, another mil-
lion Met per dal, a total of three and one-half to four million Mcf per day for
the 1970s, a formidable task.
The chart on page 6 serves to illustrate graphically the likely supply-demand
balance.
To sum up, we conclude that by 1975, before major LNG increments may be
expected, the shortages, of nearly a million Mcf a day, will have to be met by
SNG. By 1980, we would look for the shortage to he met in approximately even
quantities from LNG and SNG, with the former increasing somewhat more
rapidly tliereafter. As above noted, we would look for a reasonable balance to be
attainable in those latter years — at a cost.
THE PROJECTION OF EAST COAST GAS REQUIREMENTS
Before describing the methodology used in deriving "requirements," a word
should be said with respect to what we consider the most useful approach to this
concept. Tlius, it is meaningless to add up all the fuel needs of tlie area, even
though this is one measure of requirements, as being impossible of achievement;
or even to project forward the trends of the 1960s. Rather, we chose to define
"requirements" as the amount of gas which is needed for sale at growth rates
whicli are reasonably attainable at prices likely to prevail : and in the category
of boiler fuel and similar indu.sitrial usage, in volumes whicli will recognize the
need to reprice the sales for such puriioses in a manner which gives recognition
to the incremental cost of the supplementary gases which would be needed to meet
this demand. If we may think of this price as lieing a dollar or more, it is obvious
that growth in these categories may be even more severely limited.
We conclude that the most reliable basic source of data on requirements was
the Future Requirements Committee; but th.nt since its most recent formal
measurements of requirements were based on full supplies of natural gas at
eiirrent price relationships, and neither of these conditions is likely to prevail.
its operational' five-year forecast was considered to be the most realistic base
^ See <t1so footnote 7, pape 1.^.
8 The Future Requirements Committee is tlie accepted industry source for requirements
forecasts, relied on as well by the Federal Power Commission. It publishes forecasts annu-
ally, but the most recent one contained two forecasts — the one assuming no jras shortage,
and the other, the "operational" forecast, a more realistic estimate of what would actually
be sold.
577
on which to make projections. However, even these modest projections do not
reflect the unfavorahle trends of the last three years : and the likelihood that at
hcftt, we won't see a "turn around" for a like period of time or even a year or two
lonjjer.
We have recognized reality in three ways. First, we held the industrial growth
rate (most imiwrtant in the Southwest) to 1 percent for firm sales for the next
five years. Second, we recognized the current policy ' trend to place sales for
electric generation in a relatively low priority position, and usetl the most recent
"official" government projection for such use,^ which shows a gradually declining
trend. We held the firm use constant, and took the decline in the interruptible use.
Third, we used the same declining rate of sales in the interruptible industrial
category which we derived for interruptible sales to electric plant?. These sales
provide the balance wheel for the industry, taking place largely in the warmer
months where capacity is idle. However, they also serve as a balancing factor
during periods of shortage, since they are, as the title implies, subordinate to
other needs.
While tills set of forecasts seemed to be a reasonable one to use for the na-
tional balance, we considered it did not. for eastern regional purposes, sufficiently
discount the pii>eline curtailments of 1972 and the next few years. To reflect this
further element of stringency, the Eastern States' growth rates were cut in
half for the next five years ; it being the view that the construction of SNG fa-
cilities will permit a reasonable, if modest, growth rate b.v 1978. Also the "elec-
tric interruptible" category was decreased by twice the national rate of decline
for such sales through 1977, and then held constant thereafter (because of the
potential need to purchase expensive supplemental supplies on a high load factor
basis).
STEPS NEEDED TO ACHIEVE A BALANCE
As noted, to reach a balance between modestly growing requirements and
overall supply, the deficiency of 1.4 billion Mcf per year in 1980, doubling by 1990
(and on a national basis 6.5 billion Mcf and 13.8 billion Mcf, respectively), must
be met from various supplemental sources, to be discussed below in greater detail.
Gas From Oil. — ^The most immediate source of supplemental gas will be from
plants which manufacture pipeline quality gas from oil and its various deriva-
tives (naphtha, natural gas liquids and LPG's). The technology is adequate, as-
suming scale problems can be met, for the manufacture of gas from the lighter
petroleum derivatives. The Administration seems at last to be adjusting the oil
imports programs to facilitate this goal, though it has a way to go.
Because of problems of national security, it would be desirable to extend the
armory of weapons for the manufacture of gas to processes deriving gas from
heavier fractions including crude oil, the importation of which does not subject
the East Coast to as many hazards. It may reasonably be expected that during
the next few years the technology for this will also be developed.
We expect the gas industry to build these plants either individually or in
concert with pipelines, thus providing the most immediate means of lifting the
restrictions on gas growth. LNG — The next source which may become available
in any quantity, chronologically, is LNG. The present impasse appears to be being
dissolved, and it is reasonable to expect that some of the gas in North Africa
and in the Caribbean will be imported to the East Coast (other gas supplies being
imported to the Gulf Coast and W>st Coast). The rather modest 1980 target only
calls for the two to three currently filed projects being successful.® This projec-
tion may turn out to be pessimistic, but in view of the world demand for fuel we
cannot reasonably expect that the United States will be able to attach a much
more substantial quantity of the presently known reserves.
The Atlantic ShcJf. — Specific mention should be made of the Atlantic Shelf
potential. It has not been included in our supply forecasts, as to speculative at
'It must be realized that the FPC priorities apply only to sales over which it has juris-
diction. A large proportion of industrial sales and sales to power plants are beyond its
reach. For these and other reasons, these priorities will have only a limited effect on
national sales in these categories.
^ U.S. Department of the Interior, United States Energy Through The Year 2000, Decem-
• her 1972.
9 Caveat : Reaction to the LNG storage tank incident in Staten Island may cause strong
legal actions aimed against any project bringing LNG into Eastern seaports.
578
this time. However, there is a potential there, and it is, of course, especially im-
portant to the eastern area. East Coast gas companies can be expected to be of
what assistance they can to further the exploratory work, once legal hurdles have
been overcome. The Potential Supply Committee assigns a "speculative" poten-
tial of 35 trillion cubic feet to this area — a ten-year supply.
Arctic Gas. — It is a virtual certainty that Arctic gas reserves on the order of
100 billion Mcf will be proven in the next several years, with geologists predicting
that the ultimate reserve figures will be considerahly higher. If the first large
pipeline is completed by 1980 to bring in, let us say, 5 to 6 million Mcf per day
(5&-inch pipe is being talked about) from the Mackenzie River Delta and the
Prudhoe Bay region, a target of some 2 billion Mcf per year could be achieved.
Reserves of 100 billion Mcf would, of course, support a much larger figure. The
following decade should more than double the 1980 target. Along with gas from
coal, this is the most promising supplemental source in terms of its ultimate
potential.
The East Coast, however, is not in a particularly favorable position, geo-
graphically, to benefit by these importations though it may do so to some extent
by displacement if there is a formal, or even a de facto, national allocations
policy. The one exception which should be mentioned is the potential of a line
from the Arctic Islands which could be built north of the Hudson Bay to reach
Montreal and from there the Northeastern United States. Because of the difiicult
pipelining problems, and the remoteness of the gas, this project would appear to
be a decade away, and not one on which the East Coast can count in its interme-
diate term planning.
While we note the "Arctic gas" supplemental source as being of great signifi-
cance, we must recognize that the arrangements with the Canadian government
are a long way from being worked out, and progress is not visible. Nevertheless,
the potential is there, the investment program well launched, and it is reasonable
to expect an accommodation with Canada will be worked out of advantage both
to that country, economically, and the U.S.
Gas From Coal. — In terms of United States' resources, pipeline gas from coal
is the most substantial of the supplemental resources on which we should count.
"We may reasonably expect that the technology will be available in three to four
years for a relatively economical conversion of coal into gas. and that commercial
plants will start being built in the latter part of this decade. It is reasonable to
project that nationally (as the FPC has done) this will be a consistently growing
source of domestic gas. However, we do not believe that the location of coal re-
serves available for this purpose is such that it should be considered, from an
East Coast standpoint, as a substantial source. Most of the potential low-cost
reserves are west of the Mississippi.
CONCLUSION ON SUPPLEMENTARY SOURCES
Both nationally and on the East Coast, the various potential supplemental
sources above described can add up to a total supply which will meet the shortage
forecast for indigenous natural gas production. The important thing to keep in
mind is that no single one of these potential sources can be overlooked — they are
not alternatives but part of the composite whole. All must be pursued by the gas
industry with vigor and expedition. The gas distributing companies have an im-
portant role in this respect.
APPENDIX TO EASTERN STATES GAS SUPPLY-DEMAND STUDY
Explanatory
The material contained in this appendix sets forth the results of the studies
performed in order to prepare the Eastern States supply-demand balance con-
tained in the text of this report as well as to illustrate the manner in which the
assumptions discussed in the text were derived.
579
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a>'o< "£ E-S 2iJ
s§iir£.ss«
,P< 3°- r.E
«-
Dij"
{vjm-3-iDtor-.ooOTOLno
_ S = g. = o""" .2 £
-00 "-ja _-■ > « no
vJ c .r^ 3 ^ ■— o
.u. = gmj=a5^;o
SS!S§t2>,g-S^
S"? "3° re<» J2 = -
00 X ^: TO O ^ -^ « £
§^" E 5 ^ H =^ S
-^--^-^.-Oo ao«£g
re ;;S-a.c
580
TABLE II.— UNITED STATES' ADJUSTED' GAS REQUIREMENTS
[Volumes in trillions of cubic feet at 14.73 Ib/in^a and 1,000 Btu per cubic feet]
Firm
Electric utilities
Inter-
ruptible
in-
Resi-
Com-
In-
Inter-
Year
dential
mercial
dustrial
Firm
ruptible
dustrial
Others
Total
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
1973—. -.
5.33
2.23
6.29
2.25
1.76
3.01
1.44
22.31
1974
5.47
2.32
6.34
2.25
1.67
2.87
1.45
22.37
1975 .,
5.62
2.40
6.40
2.25
1.59
2.73
1.45
22.44
1976
5.77
2.49
6.44
2.25
1.55
2.66
1.46
22.62
1977
5.93
2.59
6.49
2.25
1.51
2.59
1.48
22.84
1978
6.11
2.70
6.71
2.25
1.47
2.52
1.51
23.27
1979
6.30
2.82
6.95
2.25
1.43
2.45
1.54
23.74
1980
6.50
2.94
7.19
2.25
1.39
2.38
1.57
24.22
1985
7.57
3.63
8.52
2.25
1.23
2.12
1.75
27.07
1990
8.82
4.48
10.10
2.25
.93
1.60
1.95
30.13
1 Contiguous 48 States.
2 Residential and commercial at FRC operational estimate growth rates; firm industrial at 1.00 percent per annum
(Southwest producing States at H growth, rest of country at zero growth) through 1977, at FRC operational estimate
growth rate thereafter; electric utilities at the USDI rates, with all of decline allocated to interruptible use; interruptible
industrial at same rates of decline as electric interruptible; other at the composite growth rate of all other classes. 1973
through 1977 firm requirements have been reduced by amounts equivalent to reductions in Eastern States firm require-
ments. See p. 5, footnote 2:
Annual growth rates: Percent
Residential 3.10
Commercial 4.30
Industrial. __ __ 3.46
Interruptible, same as col. (5) decline.
Other Composite
Electric:
1971-75 2.07
1975-80 1.09
1980-85 .85
1985-90 1.80
3 Includes company usage and unaccounted for losses, transmission mainline fuel, and any other use not otherwise
classified.
Source: By extrapolation from estimated 1972 consumption, based on growth rates from Future Requirements Com-
mittee, "Future Gas Requirements of the United States," volume No. 4, October 1971, and U.S. Department of the Interior,
"United States Energy Through the Year 2000," December 1972.
TABLE lll.-DERIVATION OF EASTERN STATES SHARE OF NATIONAL GAS SUPPLY
[Volumes in billions of cubic feet at 14.73 lb/in 2 a and 1,000 Btu per cubic foot)
Description
(1)
1968
(2)
1969
(3)
1970
(4)
Total U.S. available supply >
Eastern States natural gas consumption 2
Percentage of total U.S. available supply consumed in the Eastern States.
18, 092
19, 305
20,515
2,554
2,778
2,917
14.1
14.4
3 14.2
' Natural gas available to consumers Including pipeline fuel for the contiguous 48 States.
2 Natural gas delivered to consumers plus pipeline fuel in New England, the eastern portions of New York and Penn-
sylvania, New Jersey, Delaware, Maryland, District of Columbia, Virginia, North Carolina, South Carolina, Georgia, and
Alabama.
3 All of the data with which to make comparable calculations for more recent years are not available. However, there
IS evic'ence that the 1971 percentage remained relatively constant; while the 1972 percentage declined due to curtail-
ments in the East (about a 0.6-percent decrease in deliveries compared to 1971) and a 2.2-percent increase in U.S. domestic
production.
Source: Line 1: AGA net production (excluding Alaska) less lower 48 field use as computed in Federal Power Com-
mission, "National Gas Supply And Demand, 1971-90." February 1972, p. 150. Line 2: Bureau of Mines, "Minerals Year-
book, delivered to consumers plus pipeline fuel, adjusted for a 2 percent sampling error, a 3.2-percent Btu cifferential,
and a 2-percent differential related to supplemental sources of supply other than pipeline imports.
ASSOCIATED GAS DISTRIBUTORS
Atlanta Gas Light Company.
The Berkshire Gas Company. Boston Gas Company, Bristol and Warren Gas
Company, Brockton Taunton Gas Company. Cape Cod Gas Company, Common-
wealth Gas Company, City of Holyoke, Massachusetts Gas and Electric De-
581
partment, City of Westfield Gas and Electric Light Department, Concord
Natural Gas Corporation, The Connecticut Gas Company, Connecticut Natural
Gas Corporation, Fall River Gas Company, Fitchburg Gas and Electric Light
Company, Gas Service, Inc., The Greenwich Gas Company, The Hartford
Electric Light Company, Haverhill Gas Company, Lawrence Gas Company,
Lowell Gas Company, Lynn Gas Company, Manchester Gas Company, Mystic
Valley Gas Company, New Bedford Gas and Edison Light Company, The
Ne^^^^ort Gas Light Company, Northampton Gas Light Company, North
Attleboro Gas Company, Northern Utilities, Inc., North Shore Gas Company,
The Pequot Gas Company, Providence Gas Company, South County Gas Com-
pany, Southern Connecticut Gas Company, Springfield Gas Light Company and
Tiverton Gas Company (jointly).
The Brooklyn Union Gas Company.
Central Hudson Gas and Electric Corporation.
Consolidated Edison Company of New York, Inc.
Elizabethtown Gas Company.
Long Island Lighting Company.
New Jersey Natural Gas Company.
North Carolina Natural Gas Corporation.
Philadelphia Electric Company.
Philadelphia Gas Works.
Piedmont Natural Gas Company, Inc.
Public Service Company of North Carolina.
Public Service Electric and Gas Company.
Rochester Gas and Electric Corporation.
UGI Corporation.
Washington Gas Light Company.
582
APPENDIX B
FUTURE U.S. GAS REQUIREMENTS BY REGION, 1970, 1975, 1985, and 1995
NEW ENGLAND-REGION 1
I 250
I 336
I 505
I 770
APPALACHIA-REGION 2
I 3908
T 5213
T 7225
]9981
SOUTHEAST-REGION 3
\ 1668
I 2228
I 3498
1 5431
GREAT LAKES-REGION 4
"1 2970
I 4453
16507
39520
1970
NORTHERN PLAINS-REGION 5
977
1179
1459
1783
MIDCONTINENT-REGION 6
1583
1 1969
"^~| 2668
I 3435
GULF COAST-REGION 7
T 6588 _/
T 8526
T 12.007
17,345
ROCKY MOUNTAIN-REGION 8
I 535
I 652
812
1 1031
PACIFIC SOUTHWEST-REGION 9
|_2615
"13360
-^ 3818
4609
PACIFIC NORTHWEST-REGION 10
298
499
680
866
PACIFIC-REGION 11
41
75 164
85 189
95 11108
~l 1 1 1 1
2.000
I I I I 1 1 1 1 1 1 1 1 r—
4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000
BILLIONS OF CUBIC FEET
*/ 23.5 percent of this amount is used by electric utilities
and 59.4 percent by industrial users.
Source: Future Requirements Committee, Future Gas Requirements
of the United States, Volume No. 4, October 1971, p. 29,
583
Appendix C
Federal Power Commission
In the Matter of
Northern Michigan Exploration Company, et al. Docket Nos. CI72-301, et al.
PREPARED TESTIMONY OF CHARLES H. FRAZIER
Q. Will you please state your name, address and qualifications?
A. My name is Charles H. Frazier and my address is Downingtown, R.D. 2.
Pennsylvania. I am an independent public utility consultant with offices in
Philadelphia, associated with National Economic Research Associates, Inc.
since 1964. A further statement of mv qualifications is appended hereto (Appendix
A).
Q. For what purpose are you presenting testimony in this proceeding?
A. I have been asked by Associated Gas Distributors (AGD) to present testi-
mony bearing on the questions raised by the Federal Power Commission in its
Order of March 20, 1973 remanding this proceeding to the Administrative
Law Judge for further findings on the "vertical Integration" issue. In the
Order which he entered on October 5, 1972, the Administrative Law Judge
issued his decision (favorable to the applicant) solely on the basis of the facts
in the case before him, finding there was not "hard"evidence before him suffi-
cient to support a conclusion that the alleged adverse longer term consequences
of distributor ventures into exploration for new natural gas supplies outweighed
the obvious advantages of the project. It is to attempt to fill that perceived
gap that AGD is offering this testimony.
Q. What are the issues to which you refer?
A. I think the simplest way of answering that question is to quote here, for
easy reference, the key paragraph in the March 20, 1973 Order (Docket No.
CI72-301, et al. ) . It is as follows :
Before turning to the merits of the Central Illinois appeal, we think it
important for us to indicate what we mean by the "vertical integration ques-
tion." That phrase should not be translatetl for the purposes of this case to
refer to antitrust issues only. Antitrust issues are clearly comprehended by it.
but so also are a considerable number of other public policy issues : e.g., (1)
the effects upon the production segment of the gas industry arising from
the entry of distributors, (2) the preemption of pipeline capacity by
distributors, (3) the applicability of pii>eline curtailment plans to dis-
tributor-acquired and distributor-transported gas, (4) the ability of pipe-
lines to serve all customers, and to function, in effect, as common carriers,
(5) consequences upon small distributors and their ability to serve their
customers. (6) the effects upon competition at each industry segment, e.g.
production, transmission, and distribution, and the overall public interest.
and (7) the reservation of gas for a distributor's own use and the sale of gas
by a distributor to a pipeline. These above-enumerated policy issues are in no
way all-inclusive, but are merely illustrative of some of the issues which
seem to us to require attention. We use the phrase "vertical integration
question" here as a convenient shorthand, but the phrase should be under-
stood to embrace all of the broad implications which we have ascribed to it.
Q. Why is there concern among the distributors by whom you are retained that
the issue characterized by the Commission as "vex*tical integration" not be the
basis for a decision here which might broadly proscribe exploration activity?
A. The basic Issue should be considered in the light of the following circum-
stances. Distributors have a franchise obligation to furnish adequate gas service
in their service areas at appropriate rates. To discharge that obligation, they
have, over the past century or more, provided service in an essentially integrated
fashion ; that is to say the distributor typically purchased the raw materials,
converted them into gas. and distributed and sold the product to its customers.
In the middle decades of this century, this general principle was departed from,
to an important extent, because most companies found it cheaper to purchase
natural gas than to make gas themselves ; and since it was cheaper, it was to
the advantage of its customers either to abandon or deactivate the gas manufac-
turing plants in favor of the less expensive fuel source (natural gas). This
change, however, never absolved the distributor of his obligation ^ to provide the
total service ; and, in many eases, if only for peaking purposes, he continued to
provide some fraction of the gas supply required.
1 Note his Is the only entity In the chain which has that obligation — unshared with either
pipeline or oil company producer.
584
Now the situation is changing to a major extent. Natural gas is becoming more
exi)ensive ; but equally important to these distributors, it apparently will not be
available in sufficient quantity to meet the requirements of their customers —
some curtailment is currently being experienced. Nor do they currently foresee the
scale of activity of the oil companies — and to a lesser extent the pipelines — as
being adequate to meet these growing requirements." Under these circumstances
distributors have moved, in a variety of directions, to fill the gap which is begin-
ning to widen between their customers' requirements and the available supply
of natural gas, to discharge their above-mentioned responsibility to their service
area. The gas distribution industry is thus in the process of returning, full circle
to its posture of full responsibility for performing all the service functions in-
herent in rendering gas service.
In sum, vertical integration has traditionally been an essential characteristic
of the gas industry, ancf the mere fact that in the 1950s and 1960s the distributors
relinquished a part of the field of service constitutes no reason, at this point in
time, to consider that their moving back into it is anything other than a natural,
responsible action, consistent with the historical structure of the industry.
Q. What steps have distributors taken to meet the gap about which you have
just testified?
A. They have taken a number of steps which, depending on the size of the com-
pany, either extend through the whole gamut of alternative sources of supply,
below listed, or may involve only one or two of them. Only the very large com-
panies, of course, can afford the whole sweep of the effort on an independent basis
while other companies may rely on cooperative efforts. These efforts include the
purchase of LNG ; the construction of synthetic gas plant (a modern version of
the old manufactured gas plant), u.sing petroleum products or coal; the upgrad-
ing of summer interruptible sales into storage by means of LNG storage and other
storage facilities ; the extensive u.se of LPG's for peak-shaving ; and, as in the in-
stant case, the actual expenditure of the company's capital for the exploration
and development of additional natural gas reserves. These conditions have also
involved (a) encouragement to supplier pipelines to make advance payments to
purchasers and to pipeline affiliates for E&D activities and (b) the paym(!nt of
higher field prices to stimulate additional producer exploration. Both of these
cannot, of course, be considered to be the equivalent of, or the replacement for,
direct distributor action.
Q. Are there other alternatives which distributors have considered to meet the
supply gap ?
A. When it became apparent that, for whatever reason, insufficient exploration
and development effort was forthcoming to "fill the pipelines" again, certain dis-
tributors on the Eastern Seaboard in addition to individual E»&D efforts deter-
mined that through cooperative distributor action, on a pipeline-by-pipeline basis,
additional effort in the exploration and development field could also be forth-
coming and be effective. This cooperative action is important for some companies
which have determined that individual exploration activity is not within their
capability. One such cooperative proposal (discussed below) which involves an
E&D rate supplement to be included in the pipeline tariff is now before the FPC.
Q. Why did these distributors conclude it was their responsibility, in contrast
to the traditional producers, the major oil companies, and the pipelines, to take
this initiative?
A. The rationale for their entering into this field of activity may be summed
up as follows: (1) gas price has serious frailties as a lever to enhance the ex-
ploration activities of the major oil companies whose primary interest is in the
discovery of oil, worldwide; (2) with the present regulatory arrangements, it is
only if distributors (or pipelines) explore onshore that the interstate market will
get its share of new onshore gas reserves; and (3) pipeline exploration efforts
are rather clearly not filling tlie gap.
Q. Will you please elaborate?
A. The problem with gas price as a lever is as follows : the major oil com-
panies' basic interest is still in finding liquids, and, by and large, the shape and
size of their exploration program will be determined by oil considerations.^ It is
no fluke that a larger and larger share of their exploration dollar is going
overseas, a 20-year trend — this is where the best oil prospects are. Moreover,
2 Cf. testimony of the witness in the "Sea Robin" proceeding. Docket No. CP72-6, et al.
3 Cf. Richard C. Gonzalez' separate comments expressed on the National Petroleum Coun-
cil report, U.S. Energy Outlook (December 1972) as set forth in The Oil and Gas Journal,
Vol. 70, No. 51, December 18, 1972 at p. 16.
585
in view of the diminishing resource base for oil in the contiguous 48 states, the
oil price level, to be effective in reversing this trend, would probably have to move
so far from the present field price as to be unacceptable.
Another way of looking at it is to consider the degree of supply price elasticity
for gas. It is generally agreed that the supply is price inelastic, that is that elas-
ticity is less than unity. While there is no definitive elasticity study, at least two
competent econometricians consider the coefficient of elasticity to be .5 or less.
With a .5 coefficient (a 20 percent increase in price prodiicing a 10 percent in-
crease in findings) the cost of the incremental supply will then be in order of
$1.50 per Mcf,* a figure higher than the cost of landing LXG. And if the pro-
ducers were successful in moving all prices upward, new and old, to the new
standard, the incremental cost would be much higher.
I conclude, therefore, that gas price alone is an extremely inefficient mech-
anism by which to enhance gas exploration activity by the major oil companies.
One further thought ; in terms of exploration in what are known as gas-prone
areas, there is no hurry, from the oil companies' standpoint, since the price, they
would reason, may well be better next year; the year after; and so on. The
general conclusion must be that while the oil companies will continue to find gas.
the pace of the finding will, in all likelihood, be inadequate to alleviate the
shortage : and T\ill be determined in important part by "nongaseous" con-
.siderations.
In this connection it needs to be kept in mind that the oil companies do not
suffer from the gas scarcity ; the sale of low-sulfur oils can be calculated to
boom, to industry, new residences and stores, at shortage-stimulated prices as
the gas scarcity deepens.
Q. With respect to onshore discoveries, what role will the intrastate market
play in tying up new discoveries?
A. A very significant role to be sure. Something like one-third of all gas pro-
duced (and probably a very much higher percentage of gas newly found on-
shore) is sold in the state of discovery, in the intrastate market. The latest FPC
Report notes sales in this market at prices exceeding area rates by substantial
amounts. Furthermore, many of the producers currently selling gas in the intra-
state market specify that were the sale to come under FPC jurisdiction, the
contract is cancellable.
The price for these sales, largely for industrial and electric power plant
purposes, however, still has a distance to go before it bumps into a value ceiling
set by low-sulfur oil. Moreover, it may be presumed that there is substantial
equipment which will be both very expensive to convert and for which current
supply contracts are expiring, creating a value of natural gas in excess of the
equivalent Btu value of low-sulfur oil. Consequently, there is little likelihood, in
the foreseeable future, of pipelines serving the East Coast being able to secure
any appreciable quantities of newly discovered gas in the onshore Texas. Loui-
siana, Oklahoma, Mississippi, Gulf Coast area, from independent exploration
and development companies. The pull of the intrastate market is too strong. (This
is likely to be the case even with deregulation.) Consequently, it is only if dis-
tributors or pipelines explore onshore that the interstate market will get its
share of new gas reserves there discovered.
Q. Could the production affiliates of interstate pipelines make up this gas
shortage?
A. While the pipelines as a group appear to be becoming more active in the
exploration field, they are rather clearly not filling the gap. Certainly pipeline
exploration should be encouraged and as above noted distributors have generally
done so.
However, this is certainly not the equivalent of direct distributor action. Not
only do the pipelines apparently not have an obligation which must thus l>e
discharged, but their financial incentive is weakened by their ability to secure
rate increases which give them an adequate return at curtailment levels of
operation.
Q. In determining what the Ea.st Coast distributors might do in this field,
what different means were considered ?
. , i. , /-, i New Volume @ New Price minus Old Volume @ Old Price
* Incremental Cost=: = r—, — ^r-; ^^
Increment in Volume
I.e., 1 Mcf, with a targeted increase in volume of 10% and using 45^ as the base price (the
producer's apparent interim target).
_ .,^. 1.1 Mcf X45(?X120%— 45^ „h>.,„, ^
Incremental Cost= — ^^ =$1.44/Mcf
586
A. Two basic procedures were discussed: one, that a joint venture (using tliis
term in its nonlegal sense) be formed to explore for gas, with capital contributed
by the distributors on a given pipeline ; or, in the alternative, that the pipeline
collect a cents-per-Mcf rate supplement which it would then turn over, by con-
tract, to a distributor joint venture to fund that venture's E&D activity. The
pipeline would then have first call on the gas discovered ; hence the results flow-
ing from this activity would, of course, redound to the benefit of all the custom-
ers on the pipeline.
The obstacles to the first course were such that the second course seemed by
far the most feasible ; and the AGD Group opted for it. They reasoned that it is
their customers who will in any event have to pay for the exploration cost
associated with any gas which goes to meet their requirements. The proposal
to have them pay for these costs in the form of a rate supplement may very
well be the most economical method of providing them with a more adequate
indigenous gas supply.
Q. What was done to give effect to this concept?
A. It was readily perceived by the AGD Group that the venture would proceed
most effectively on a pipeline-by-pipeline basis, since by so doing the kind of issues
raised by Questions 4, 5 and 7 of my quotation from the Commission's Order of
March 20 would be resolved to the benefit of all. AGD selected as the first avenue
to be pursued, a cooperative venture with Transco, which serves the major part
of the .supply to many of them. Consequently, discussions were held with officials
of this pipeline; and the end result was the filing by Transco of a suggested
tariff imposing the E&D rate supplement for this purpose. This filing was made
on December 15, 1972 in Docket No. RP73-69.
Q. Will you briefly describe the intended modus operandi of this concept?
A. The rate supplement or surcharge is to be collected as part of the total
city-gate price and paid over to an exploration entity managed by these distrib-
utors; which equity would, through an experienced company (or companies)
in the gas production field, enter into exploration programs in areas (largely
onshore) which (a) had promise of gas discoveries, and (b) were reasonably
accessible to the Transco lines. The gas so found would be offered to Transco,
at the price level found by the Commission to be appropriate. The proceeds in
respect to both gas sales and liquids sales would constitute a revolving fund
for further exploration and development effort. Thus no profits as such would
accrue to the entity, but rather, those paying the supplement would be rewarded
by receiving an enhanced gas supply.
Q. Is this the only form of E&D activity which the.se distributors support?
A. They do, of course, visualize this process being extended to other pipelines,
so that the whole Eastern Seaboard would receive the benefit of this form of
activity. In approving the principle of joint activity, however, individual com-
pany programs were not considered as being inconsistent with the group effort.
These individual company efforts would add much needed additional capital
to the search for gas. It was because of this general approval of the appropriate
distributor E&D activity, and its concern with the FPC policies developed with
respect thereto, that AGD intervened in the Transco-Elizabethtown proceeding.
Docket No. CP73^, and in the current proceeding.
Q. Would you please address yourself now to the specific questions raised by
the Commission in its Order of March 20, quoted at an earlier point in your
testimony?
A. Before answering this question. I should note at the outset that it does not
seem sensible to attempt to make policy rulings in this proceeding which either
endorse or proscribe all E&D effort by distributors. The facts relating to North-
em Michigan's exploration program and the particular supplies developed there-
from are in the record in this case. The somewhat different traditional activity
of integrated distributors such as Consolidated and Columbia is also well-known.
I have previously discussed yet another different distributor E&D effort which
is pending in the Transco case. Still other and different individual distributor
exploration programs and proposals are now pending (reference here to CP 73—4
and NI-Gas cases). One might logically assume that additional distributor
exploration projects will be before the Commission in the near-term future.
Each of these distributor activities involves different facts and circumstances,
different sources of supply and different arrangements for pipeline transporta-
tion. To fairly develop any useful policy concerning distributor exploration, the
Commission must necessarily approach the issues relating to such policy through
analysis of the particular distributor proposals before it, both now and in the
future.
587
In the specific question, this quotation referred, first, to antitrust issues. This
is, of course, principally a legal question which counsel can address. Neverthe-
less, as a layman, it seems quite clear to me that, as a general proposition, there
is, basically, no antitrust question raised by individual distributors taking the
steps necessary to provide an adequate supply of gas to their customers, con-
tinuing to fulfill the function whicli has always been theirs, of providing an
adequate supply of gas to their customers. Whether joint activity by distribu-
tors, which is not the case here, raises any antitrust issues, our counsel can
better answer; though it should be noted that distributors do not compete with
each other, but rather with the suppliers of other types of fuel. By finding addi-
tional gas by means of an increase in the exploratory effort, they are not pre-
empting any market for themselves and certainly not diminishing competition.
Turning now to the specific questions referred to as public policy issues,
Question 1 related to the effect upon the producing segment of the gas industry,
arising from the entry of distributors. It is the view of the distributors that the
entry of additional competitors in this field is both necessary and desirable and
will assist the Commission in its regulatory procedures. In its Permian Basin
decision the Commission found that there was but imperfect competition in the
production area,^ one of the reasons for regulation ; and it stands to reason that
the addition of a competitor for the end market would improve the degree of
competition and could conceivably even eliminate the need for the price regula-
tion— though this seems a long way off — given the gas shortage and the limited
nature of the exploration activity proposed. The concept of the distributors'
David-like stature, in the E&D field, overpowering the Goliath of the integrated
oil companies stretches the imagination.
The concern that the distributors would no longer be interested in "exercising
a restraining influence on an increase in field price" indicates a lack of knowledge
of the very real competitive situation faced by distributors in their market areas
(with fuel oil and electricity), with field prices leapfrogging, and their resultant
great concern to keep all of their costs down, let alone the cost of purchased
gas. This need for cost control is all the more present now since the growth
which the industry enjoyed in the 1950s and 1960s has now tapered off and this
was the only means by which they kept prices down and their competitive status
virile in the face of generally infiationary conditions. Furthermore, it might be
pointed out that it is the Commission which exercised the restraining influence
over increases in field price, on the basis of testimony in important part offered
by its own staff, though the distributors may have offered evidence they con-
sidered helpful ; and can be counted on to continue to do so where there is a con-
tribution they can make. The Commission will certainly continue to exercise
its review of contract prices proposed by gas sellers — be they producers, pipe-
line affiliates, or distributor affiliates.
One should not over-emphasize the effect which distributors may have had up
to now in restraining increases in field prices. True, their testimony may have
been helpful to commissions from time to time in reaching their conclusions.
However, the structure of the industry precludes their having a positive effect
on price. It is the pipelines who conducted whatever bargaining took place —
when the demand-supply balance permitted it — the distributors were far removed
from the bargaining table.
As to the nature of the competition in the producing areas, it is of course to
the Eastern gas companies' direct advantage to find gas a cheaply as possible,
in order that they may compete effectively for the heating market. Consequently,
it would be reasonable to expect more effective competition in the producing areas,
between two industries which are themselves directly competitive in the market-
place.
To sum up, it seems that the entry of distributors into the gas E&D activity
is a pro-competitive action which the Commission should encourage. Equally
obviously, distributors will never dominate this field because of the far greater
size and investment potential of the oil companies (whose primary interest in
the discovery of liquids will, of course, continue).
Q. Would you address yourself now to the Commission's second area of in-
terest?
A. This relates to the potential "preemption of pipeline capacity by distribu-
tors." Would that there were a problem ! Unfortunately, the Staff's forecasts, as
s In a recput proceedinj;: (CI73-293, et al.) , the Chief of FPC's Division of Economic
Studies went even further suggesting that there is currently no viable competition in the
producer segment of the natural gas Industry.
588
well as the pipelines' and distributors' forecasts, indicate that at best, the efforts
discussed herein, as well as all other efforts, will only tend to fill the present
pipelines ; they will not create a preemption problem. Indeed, it is the expressed
intention of the AGD Group that were its unfortunately pessimistic forecasts to
turn out to be ill-founded and there would be no need for continuing this particu-
lar effort, it would be abandoned. Simply stated, this question will probably not
be present in most pipeline transportation proposals. However, where a preemp-
tion problem exists, it can and should, of course, be dealt with directly by the
Commission based on the facts presented in the particular proceeding.
Q. What about the third question, having to do with curtailment plans?
A. Where these gas increments become a part of the pipeline's total supply this
question does not arise (and, therefore, subject to curtailment plans as required).
I should add however that in instances where the capital devoted to explora-
tion and development comes from the company, it seems only appropriate that
the supply discovered be just as much a part of its own supplies as would peak-
shaving gas, and therefore beyond the reach of curtailment plans. AGD recog-
nizes that in those instances, protection to the non-participating customers
would, of course, have to be afforded so that they would not be adversely affected
by the transportation element of the transaction.
Q. What about the common carrier question raised by the Commision?
A. This is primarily a legal issue. So far as I know, pipelines to the extent
they are carriers at all and are not marketing their own gas are contract carriers.
I am advised that the Natural Gas Act does not contemplate common carrier
treatment of pipelines. Absent new legislation the common carrier issue cannot
arise.
Q. What about the fifth question, relating to the consequences upon small
distributors?
A. Distributors, be they small or large, have the identical responsibility of serv-
ice to their customers. For the smaller companies, particularly, the wider their
range of alternatives, including exploration actiAities either jointly or inde-
pendently conducted, the better they may discharge this responsibility. Particular
concern for small distributors is of course met by the group exploration alterna-
tive.
Wliether individual distributor applications create a problem depends on one's
view of the natural gas resources. It is true that there is probably a finite amount
of gas yet to be discovered in the century ahead (though no one knows what it
is), but at least at this stage of development, increased exploration activity will
only enlarge the total supply and need not at all "take away any gas" from
companies not engaging in this activity. Even with the entity of distributor ac-
tivity, the production and piiieline segments of the industrv 'oill pursue those
gas supply progr'ams which they Itelieve will produce an adequate return ir-
respective of distributor efforts — tlie market is big enough for all.
Q. Would you please address yourself to the sixth area of concern of the Com-
mission, the "effect upon competition at each industry segment — production,
transmission, and distribution — and the overall public interest."
A. I have already stated that it appeared to me that the entry into E&D ac-
tivity by distributors would improve competition in that area of activity: and
have suggested that if this entry is successful, competition in the ultimate mar-
ketplace will also be improved, in that gas and oil (and electricity) will be free
competition ; the only question which remains has to do with the effecf upon
the transmission segment. If the proceeds of tlie discovery of gas as here pro-
posed become available to "fill up the transmission lines." the welfare of that par-
ticular segment of the industry will actually be improved, and to that extent, of
course, also, the public interest will be sen'ed. Demand charges will be lower for
all the customers : moreover, the need asserted by the i)ipelines for higher depreci-
ation rates diminishes as the useful life of the pipelines lengthens. Absent the
"filling up" of these lines, and with deeper and deeper curtailments, demand
charges on the transmission of gas could well become noneeonomic if the.v con-
tinue to be adjusted upwards in an effort to maintain the pipeline's overall
return.
Q. What about the last area of concern — the reservation of gas for the dis-
tributors' own use?
A. In the first place, gas distributors, unlike pipelines, have an obligation as
public utilities to ser\'e the requirements (residential, commercial and indus-
trial) for gas within their franchise areas. To deny a distributor an opportunity
to attach gas reserves which have been discovered and developed at his initiative
589
may well deprive him of the capacity to meet his public utility responsibility.
This is why in my response to a previous question I liave indicated that gas
found by the use of the funds advanced by a distributor group or a distributor
should appropriately accrue to their or his customers' benefit, without detriment
lo suppliers in other areas if as we believe, the total available supply is en-
hanced. Thus this benefit will redound to all consumers.
In sum, therefore, I find that the Commission's various questions may be an-
swered positively and that the public interest would be advanced by appropriate
proposals for distributor exploration and development. Vertical integration is not
a new development but an on-going feature of the gas distribution industry. If
the distributors are prohibited from making this effort they may be unable to
meet their responsibilities to the areas they are committed to serve.
Appendix D
Costing Note
In the cited Beleo case, the Commission majority ignored its Staff's evidence
and liy some rather tortuous mathematics found co>it support for its rate find-
ing— 45 cents per Mcf — virtually double its finding of some two years previous.
Now, key to the computation of cost are two factors — the cost per well drilled,
and the gas findings per well. All agree that the former is increasing ; but this
does not account for the wide swing. AVhat has happened is that with the decline
in exploration, the reported findings in recent years have turned down drasti-
cally— even discounting the accompanying "journal entry" nature of negative
revisions to previously reported reserves — to roughly one-half the pre-existing
level. This is all the more startling, at first blush, when exploration efforts have
concentrated, to a much greater degree in the offshore Louisiana area, where
findings per foot drilled are several times the national average. The explanation
may in all likelihood be found in two nonrecurring factors : First, the 1960s pro-
duced a relatively meager effort by Interior in making offshore acreage avail-
able ^ so that, with the usual lag between initiation of exploratory effort and
the reporting of resers-es,- we could have expected a severe dip in average findings
in recent years. Second, when a major lease sale w-as finall.v held in late 1970, the
indicated success of the drilling effort on this acreage was not reflected in either
the 1971 or the 1972 reported findings, judging from the activity in placing plat-
forms over acreage where successful exploratory wells had been drilled. In
the Belco case earlier cited, statistics derived from the latter measure, a reason-
able yardstick considering the enormous investment the 36 platforms represent,
findings of some 5 trillion cubic feet are indicated compared with reported
proven reserve additions to date of less than a tenth of this figure (the exact
flgiire is not yet available). In some year, these findings will be reported, but all
we can say at the moment is that there is a serious mismatch in the reported
more expensive drilling co.sts and the reports of the reserves. When these reports
catch up, computed costs are likely to be markedly lower, though actual costs
may well be higher. The majority's cost findings — Chairman Nassikas again dis-
senting— are seriously infectetl l)y this mismatch.
This points to another problem in applying effective regulation — the paucity
of relevant cost data. This is in three principal areas : overall lack of continuous
cost data ; a lack of differential cost data, offshore versus onshore, necessary
because of the increasing importance of the former area ; and, finally, out-of-
phase and inadequate reports on the gas actually found. The FPC has several
times marched up the hill of requiring adequate cost data to be reported on a
geological and periodic basis, only to march down again in the face of oil com-
pany resistance. It has not faced the issue of the timeliness and scope of findings
reporting, equally relevant to a cost determination.
In sum, we may presume costs are somewhat — indeed appreciably — higher than
they were when the opinion was written in the second Southern Louisiana pro-
ceeding (1970). but how much higher we do not know, nor is the data available
to make that finding.
Senator Hart. Now on the theory that after somebody lias listened
to a lot of testimony, you have developed great wisdom. There is a
tradition around here that we make closing- statements.
^ Only one major wildcat acreage sale between 1962 and 1970.
^ Figures indicate that the findings from the 1967 lease sale are not anywhere near being
fully reported yet !
590
Now the hard truth is that I have attempted to follow the testimony
in these 3 days as closely as the next fellow, but my head is reeling,
just as I suspect many others find their heads reeling.
But I do owe to those who are interested in the subject some indi-
cation of a tentative feeling and some indication of what suggestions
might result from the hearings.
First impression certainly is that those of us who were worried
that the figures on the so-called gas supply, that the American Gas
Association figures and Federal Power Commission figures showed —
the concern that we weren't on solid ground with those figures has been
confirmed.
I am almost soriy that we had to hear the testimony from the Trade
Commission. The Trade Commission, you recall, yesterday came in
with their flat statement that in all cases investigated by them the
AGA figures were an understatement of the natural gas reserved that
were carried on the company's own records, and you don't take com-
fort in that kind of news.
And when I first asked the Trade Commission in 1970 to investigate
the problem, I suggested that the FPC halt any natural gas price
increases until the validity of the figures was established, and sug-
gested that if they did go ahead and grant increases that there be an
escrow arrangement.
That wasn't done. There have been increases, and that's over the
dam. Now what can we do about that ?
Well, you can consider legislation halting further increases in price
until we get more solid figures, propose legislation that would seek to
undo price increases that have been applied, a rollback, so to speak.
And legislation could be introduced proposing explicitlv that the
Commission follow a cost-plus method for new gas, not the optional
pricing approach.
These are things that one decides after mulling over this record.
There is one legislative proposal which requires less thought, and that's
bringing interstate gas sales under the jurisdiction of Power Commis-
sion. I think that makes good sense.
And I think a solid record has been built here that, absent this type
of regulation, it's possible for interstate producers to bid up prices
in the intrastate market, and then that intrastate price is used as a
bargaining device for increases in interstate prices.
I have asked the staff to develop an early draft report on these
hearings.
I have asked for recommendations on holding early hearings on
reorganizing this industry, this entire industry, under the proposed
Industrial Reorganization Act.
T tliink "crisis" is a fair way to describe the situation the country is
in with respect to energy, and the staff, I am sure, will respond with
speed and concern, and then we'll know. I think, better what has been
proved here and what we should do about it.
Before closing this set of hearings, I do want to thank everyone
that made the arranofements and ]:)repared it. but particularly to Mr.
Nash who was primarily responsible. I think he has developed
a thorough record in an extremely difficult subject area.
591
Mr. Chumbris. As I understood from the chairman when we opened
the liearin^ back on June 8, that there would be opportunity for others
who wished to appear to submit data. Are we leaving that open now ?
Senator Hart. Indeed, yes.
Mr. Chitmbris. Because I wasn't sure.
Senator Hart. We are adjourning subject to the call of the Chair,
but I want at least from the majority staff — I welcome yours — a very
quick rw^ort to try and pull together what we've got.
Mr. Chumbris. Yes; I didn't want the record to show that this
would be the full report on the hearing.
Senator Hart. No.
Mr. Chumbris. Thank you.
Senator Hart. We are adjourned.
["Wliereupon, at 3 :11 p.m., the hearing was adjourned, to reconvene
Tuesday, October 18, 197-3, in room 2228, Dirksen Senate Office Build-
ing (see pt. 2).]
APPENDIX
Summary of Remarks of Haskell P. Wald, Chief, Office of Economics,
Federal Power Commission, at the AMR Oil and Gas Seminar in New York
City, Januaby 31, 1973
FPc natural gas regulation
The method of controlling the field price of natural gas sold in interstate com-
merce has imdergone significant changes since the U.S. Supreme Court's 1954
decision in the Phillips case. The FPC first experimented for six years \^-ith
individual producer cost-of-service regulation. It then turned to the area rate
method of regulation and a dual price system linked, in effect, to a hold-the-line
policy on new gas prices. This approach was worliable wliile gas supplies were
adequate and tliere was no national problem of inflation. The events of recent
years have made it necessary for the FPC to take action on a broad range of pol-
icy, decisions to cope with the gas shortage. Incentive increases in Avellhead
prices, along with a more flexible regulatory policy, have been the main thrust
of these decisions.
At each stage of development of gas producer regulation the controlling policy
consideration, except for recent emergency sales, has been the statutory require-
ment of "just and reasonable" rates. In everyday language this means that the
price to the consumer must not be more than necessary to give the producer an
adequate incentive to search for and find new gas reserves to replace current
production and meet the expected growth in consumption. A fundamental issue
in the current controversy over tlie need for wellhead price regulation is whether
the forces of competition, operating in a free market, would by themselves guar-
antee the equivalent of a "jast and reasonable" price for gas. This issue, on
whicli there is a sharp disagreement of views, is discussed at a later point in
these remarks.
Note. — These remarks do not necessarily reflect the position of the Federal Power Com-
mission. The opinions and conclusions are the author's personal views.
Implementation of Area Rate Program
The interim area rate ceilings establislied in 1960 included a novel feature
which acquired large significance in the subsequent area rate proceedings. Two
separate "guideline" prices were established for each producing area, one for ini-
tial prices in new contracts and the other for increased prices in existing eon-
tracts. Tlie new gas ceiling was set at the Iiighcst contract price at which sub-
stantial quantities of gas had been sold to date. The old gas ceiling approximated
the then existing average of contract prices on flowing gas. This price "vintag-
ing", as it came to be called, recognized the lower cost of older gas, most of
wliich had been discovered as a by-product of the search for oil and before the
inflation of the late 1950's had had its full impact on exjiloratory and develop-
ment costs. To aid further in holding tlie price line in this early period, the
FPC outlawed indefinite price escalations in new producer contracts and encour-
aged rate settlements. These often required refunds and rollbacks on rates which
exceeded the guideline levels.
The Permian Basin Area Rate Proceeding, concluded in 1965, was the first
evidentiary hearing to establish area rates. It was a regulatory milestone which,
as the FPC made clear, was intended to set the pattern for future area rate
decisions.
The premise of the Permian decision was a conclusion, later aflBrmed by the
Supreme Court, that the nature and extent of competition in the field market
for gas was insufficient to protect consumers against excessive prices. Undoubt-
edly the outstanding feature of the decision was the adoption of a cost-based
(593)
594
two-price system. Its purpose was to reduce the "windfalls" on old gas while per-
mitting a higher price for new gas as an incentive for finding future gas supply.
As a working liypothesis for its costing methodology, the FPC accepted the
"directionality" thesis regarding the industry's ability to search for oil or gas
with a reasonable degree of accuracy of prediction. The new gas price of 16.5
cents per Mcf in the Permian decision was closely in line wiih the then going
market price in sales to interstate pipelines and higher than the prevailing price
in the intrastate market. Most of the refunds producers were required to make
were related to price escalations for old gas.
In affirming its commitment to the area rate approach the FPC called atten-
tion to the built-in incentives for improved efficiency and technological innova-
tion. At a given area price the individual producer who succeeds in cutting costs
will reap above-average profits. In contra.st. the individual company cost-of-
service method of regulation provides no incentive for cost reduction.
The area rate program entered a new phase in 1969, when the future adequacy
of gas supply became a matter of serious concern. Its culmination was the
second Southern Louisiana Rate Opinion issued in 1971. The FPC had been
presented with a rate settlement agreed to by most of the producers, pipelines,
and distributors who were parties to the proceeding. The settlement rates, which
were substantially higher than any previously approved area rates, became
the basis not only for the Commission's Southern Louisiana decision, but also
for its decisions for the remaining major producing areas. The rates in Hug-
goton-Anadarko, however, were based on an earlier settlement proposal with
somewhat lower rates. The 1971-72 area rate decisions also included a valuable
incentive feature of the Southern Louisiana settlement agreement. Producers
were permitted to discharge their refund obligations through new dedications
of the gas interstate market.
By 1972 the national average level of area rate ceilings had been increased
to about 25 cents per Mcf, compared with the pre-1971 average of 17 cents.
Expressed in dollars of constant purchasing power, the 1972 average level was
about 10 percent higher than in 1960 when area rates were first imposed.
FPC responses to the gas shortage
Because of the critical gas supply situation, several modifications of the
area rate program have been made in the past three years. The modifications
include emergency exemptions and special relief from the rate ceilings, non-
price supplements to producer revenues, and a new optional procedure for cer-
tificating new gas sales at above-ceiling rates. The FPC's purpose has been to
allleviate the gas supply shortage by giving producers an added incentive to
find new gas reserves and by making it more attractive for anyone with gas
for sale to make the gas available to the interstate market.
One of the first new actions was in October 1969 when gas from newly dis-
covered reservoirs on previously dedicated acreage was made eligible for the
new gas prices. A few months later the FPC announced its advance payments
program which permits pipelines to make advances to producers and to inchide
the amounts as part of working capital in their rate base. This program was
recently modified and extended until December 31, 1973. The interstate pipelines
committed more than li/i billion dollars as interest-free loans to producers
during 1970-72. This sum would cover more than half the cost of drilling and
equipping all the oil and gas wells drilled in the United States in 1971.
Under the terms of a rulemaking notice issued in June 1970 the FPC has
authorized several large-volume sales at alwve-ceiling prices in the Permian
Basin, pending the completion of a "second round" Permian rate proceeding.
Another FPC order has permitted pipelines to make emergency purchases for
periods up to 60 days without advance authorization. These purchases are not
limited to ceiling prices.
In March 1971 the FPC amended its regulations to exempt small producers
from area rate ceilings, and to provide for regulatory surveillance in pipeline
rate proceedings where the prices paid to small producers will be reviewed.
This action, however, was recently set aside by the U.S. Court of Appeals on
the grounds that the FPC had exceeded its authority under the Natural Gas
Act.
Another special price relief provision widely used by the pipelines since April
1971 is the FPC order permitting purchases at above-ceiling prices under limited-
term certificates with pre-granted abandonment authority to the sellers. The prices
under these certificates have ranged up to 40 cents per Mcf and the term of the
595
sales has usually been one year or a little longer. To be eligible to make these
purchases the pipelines must demonstrate an emergency need for gas on their
system.
Probably the most significant of the recent actions to provide more flexibility in
administering wellhead price regulation is the August 1972 order establishing a
new optional procedure for the certification of new gas sales. It permits producers
who satisfy certain preconditions to apply for sales certificates at above-ceiling
prices. If the FPC concludes that the prices are required by the public interest,
the higher prices may be collected 'ndthout being subject to possible future re-
fund. The first evidentiary hearing under the new procedure is now underway.
The hearing involves three applications for sales at 45 cents per Mcf from the
Federal domain offshore Louisiana where the area ceiling is 26 cents. The parties
to this proceeding have been instructed not to rely on cost evidence alone, but
also to consider non-cost factors of supply and demand, required capital forma-
tion, and the probable industry response to any given level of rates.
Finally, in a recent decision denying petitions to set new ceiling rates in the
Appalachian and Illinois Basin Areas, the Commission expressed its intention
to move toward the elimination of the present two-price system based on contract
date vintaging. Accordingly, producers will be permitted to collect new gas prices
when their flowing gas contracts expire and a new sales contract is executed.
Causes of Gas Shortage
To understand the paradox of a gas shortage in the midst of a plentiful "po-
tential" supply, it is essential to recognize that FPC regulation of gas producers
has been beset by many obstacles in recent years. These include several significant
developments originating outside the gas industry itself. For example: (1) the
market forecasts on which the industry's planning was based during the 1960's
did not contemplate the large expansion of the mai'ket due to the imposition of air
quality standards; (2) the industry's supply curve shifted because of high in-
terest rates and other cost increases attributable to inflation; (3) well drilling
in the offshore areas, which seem to offer the best prosi)ect of prolific new finds,
was cut back because of the temi>orary halt of Federal lease .sales after 1967 ; (4)
the depre-ssed state of the domestic oil industry probably had a large negative
effect on additions to gas reserves, since it appears that from 25 to 40 i>ercent of the
gas discovered in recent years has been the result of a search for oil. The role of
FPC regulation as another contributing cause of the gas shortage should be
analyzed in the context of the market imbalance from these other sources.
Between 1961 and 1969 there was an erosion of about 15 percent in the weighted
average of the area ceilings because of inflation as measured by the overall
wholesale price index for industrial commodities. In the meantime the legality of
the area rate approach was uncertain until 1968 when the first area rate proceed-
ing iPerminn) was aflirmed by the Supreme Court. Several other rate proceedings
had been started employing the Permian methodology and hearing procedures,
the next in line being the Southern Louisiana case which was flrst decided soon
after the Supreme Court's Permian decision and later reopened for further
hearing. Being locked into a regulatory mechanism which was exceedingly
time consuming, the Commission could not complete the adjustment to a new
and higher level of ceilings to correct for the price erosion until 1971 and 1972.
This was too late to forestall a decline in drilling activity and a general re-
trenchment by the industry in bringing new supplies to the market.
Recognizing how important it was to reduce the regulatory lag to the practical
minimum, the FPC decided against initiating evidentiary proceedings in the two
remaining pricing areas, Appalachia-IUinois and Rocky Mountain. Instead, the
new ceilings in these areas were established in rulemaking proceedings com-
pleted in 1969 and 1971.
Because of the inflexibility of the principal regulatory mechanism for revising
the area rate ceilings, the FPC decided, as explained above, that it was necessary
to experiment with various policy expedients which might help immediately
to relieve the growing gas shortage in the interstate market, and also to make
available the optional certification procedure establishing new ground rules for
relief from the rate ceilings. These actions, however, had an unfortunate and
probably unavoidable side effect because they added to the regulatory uncertain-
ty that already existed as a consequence of the many appeals of the Commis-
sion's decisions in the courts. Furthermore, a new dimension of uncertainty was
introduced with the mounting campaign against the continuance of producer
regulation. As viewed by the critics, the gas shortage was positive proof that
596
regulation was unworkable and should either be abolished or else modified in
a major way.
Regulatory uncertainty has a pernicious effect on gas supply. Especially
when the uncertainty fosters expectations of higher future prices, as seems to be
the case at present, it encourages producers to defer making new capital com-
mitments even though a pay-out calculation may show a good profit at today's
ceiling prices. A profit-maximizing producer or royalty owner will ask whether the
cost of foregoing an early sale is likely to be more than offset by further appre-
ciation of the value of his asset. Due to the prevalence of regulatory uncertainty,
the recent trends in drilling activity have not provided a valid test of the ade-
quacy of economic incentives under the new ceiling levels.
Reasons for regulation of gas producers
It is obvious that gas producers are not "natural monopolies" or public utili-
ties operating under a franchise from a public authority. But it is equally obvious
that many aspects of the gas producing business are not found in unregulated
industries.
The gas industry — defined to include producers, transmission companies, and
distributors — has these distinguishing characteristics of a public utility: (1)
the sellers of gas to ultimate consumers are monopolies; (2) the three sub-
sectors of the industry are physically interconnected; (3) the service that is
provided is essential for the public welfare; and (4) the gas transmission and
distribution companies are granted the power of eminent domain. This combina-
tion of circumstances would seem to require regulatory control of prices at the
point of initial sale, since these prices become costs to subsequent sellers who are
regulated. Moreover, because of the expense and durability of gas burning equip-
ment, large segments of the end-use market are captives of the industry and
therefore have a claim to the protection provided by regulation. Similarly, the
heavy cost of transmission facilities, which require long-term purchase and
sales contracts for their financing, severely limits the opportunities for distribu-
tors to switch to other suppliers or for pipelines to divert their purchases from
their traditional supply areas to new areas where lower cost gas may be available.
Not only the technology of the gas industry but also the industry's economic
structure imposes a barrier against effective buyer-seller competition. The dom-
inant market power resides with the major producers by virtue of the vast re-
sources at their command and their joint ownership of oil and gas, and often coal
as well, which are competing products at the point of final sale. A loss of markets
from higher gas prices is likely to be more than made up by larger sales of other
fuels at higher prices. Furthermore, a "community of interest" responsibility
exists among the producers as a result of such business practices as joint bid-
ding on leases, joint ownership of operating fields, lease farm-outs and joint
negotiations at the international bargaining table.
The individual pipelines, on the other hand, do not have the necessary flexi-
bility to bargain from a position of economic strength. Tlieir future growth de-
pends upon their success in acquiring new supplies. Unlike the producers, the
pipelines cannot afford to hold back for a period as part of their bargaining
strategy. Any markets which they lose by doing so may never be recovered.
Indeed, the representation of the consumer's interest at a bargaining session on
a gas purchase contract is likely to be minimal. A higher cost for purchased gas is
unlikely to affect the profits of a pipeline whose rates are regulated on a cost of
service basis. Several pipelines even have a financial stake in higher wellhead
prices because they either own gas reserves or have producing afliliates.
The potential for the exerci.se of market power is of course greatest at a time
of shortage as at present. Without the continuing restaint of FPC regulation —
and assuming that the sellers would not be restrained by the Phase III anti-infla-
tion program — the escalation and renegotiation provisions in existing contracts
would go into effect and the prices in new contracts would rise to the immediate
"scarcity value" of the gas. The new prices would be far higher than the necessary
cost of new supplies. There would also be an upward price realignment of fuels
which are sold in unregulated markets in competition with natural gas.
This risk of "runaway" prices exLsts because of the magnitude of the unsatis-
fied demand for gas and because of the low elasticity of gas supply with respect
to price in the short run. Over the longer run the supply response may be sufii-
cient to eliminate a price premium reflecting "scarcity A'alue," but this would
597
occur only after many long-term contracts had been made at the inflated price
levels. . . .
While it is clear that the regulatory program must be accomodated to the
immediate situation of a critical gas supply shortage, this does not mean that
the statutory requirement of "just and reasonable" rates is no longer the appro-
priate pricing standard. The necessary supply elicitation can be achieved under
regulation at prices that are less than the sellers could obtain by exercising their
market power in an unregulated market. It is the FPC's responsibility to safe-
guard against possible abuses of market power in a sellers' market and against
any price escalation that does not promise an increment to supply that would
not otherwise become available.
Improvements in regulatory methods and procedures are possible and are a
constant objective of current FPC efforts. The chief opportunities are through
the clarification of pricing standards, guaranteed certainty against prospective
redu,ction of initially certificated prices, and more expeditious hearing procedures
for adjusting the rate ceilings. Other proposals may come out of the FPC's
National Gas Sur\'ey to be issued later this year. Above all, it is necessary to
eradicate the open-ended price expectations which have been fostered by the
uncertainty over regulation's future.
The outlook
The higher gas prices now being allowed should allay the previous concern
over the adequacy of profit incentives for new gas exploration and development.
While it is true that many of the gas fields now being developed appear to be
less favorable to large discoveries than was the case in earlier years, it is not
at all clear that the overall national finding rate per foot drilled is on a declining
curve. The offshore leases have been highly productive and the potential for large
new finds as more offshore tracts are made available is believed to be large.
Deeper onshore drilling, while expensive, has in the past yielded a good return
and here, too, there is a large potential according to authoritative estimates.
Several forecasts have been published showing a widening gap between supply
and demand in the years ahead, even after apparently realistic allowances for
increased imports from Canada, LNG imports from overseas, and gas from naptha
feed stock and coal. These forecasts, however, may prove to be examples of the
type of "programmed pessisims" which excludes various potential develop-
ments because they are too diflScult to quantify. On the supply side, there is no
explicit allowance in the forecasts for the probable response of domestic pro-
duction to the higher gas prices now being allowed and to the increases in oil
prices now being widely predicted. The available econometric studies suggest
that the supply re.sponse tends to build up rapidly from year to year. On the
demand side, it is not at all clear that there is adequate recognition of the
demand shifts that will eventually result from higher prices. In short, as seems
to be the case with energy projections generally, too little attention is given
in these forecasts to the operation of market forces. The forecasters seem to
ignore how previous market imbalances were corrected after a significant change
in the trend of economic incentives.
While it may be premature to interpret the drilling statistics for 1972 as
signaling the start of a recovery in domestic supplies, the increases over the
previous year are too large to be dismissed as random fluctuations. Based on
the cumulated totals for the first 3 quarters of 1972, the number of gas wells
drilled increased by 23 percent and exploratory gas well footage increased by
19 percent. Because these increases far exceeded those for oil, it is very possible
that they represent the industry's initial response to the relaxation of FPC
restraints on prices. Moreover, all of the advance in gas well activity was on
on-shore leases. There was no increase in offshore activity, which has been
curtailed because of infrequent lease sales.
In conclusion, the FPC's efforts to accelerate the transition to a more viable
method of gas producer regulation should be seen as part of the government's
overall energy program. The gas shortage is a manifestation of a tight supply
situation for all fossil fuels. Thus, the escape value of interfuel sUbstitutability
cannot operate as effectively today as in past periods. How best to meet this
overall energy problem which affects the very foundation of the Nation's welfare
is being given priority consideration by both the Executive and Legislative
branches of our government.
598
Federal Power Commission — Order Updating Nationwide Investigation
(18 CFR Part 2)
Before Commissioners : John N. Nassikas, Cliairman ; Albert B. Brooke, Jr.,
Rush Moody, Jr., and William L. Springer.
Reliability of Electric and Gas Service. Docket No. R-405.
(Issued August 1, 1973)
In our notice of investigation and proposed rulemaking with respect to develop-
ing emergency plans which was issued in this docket on November 4, 1970, we
sought with regard to the natural gas industry to elicit information so as to
enable us to assess the adequacy and reliability of the gas supply and deliver-
ability to meet consumer demand for the oncoming winter season and four
winters following. Evidence of anticipated curtailment of necessary service
has impelled the Commission to take continuing affirmative s^teps in the public
interest to obtain reliable factual information regarding the sources of avail-
able gas and the facilities existing and planned to deliver such gas to meet
consumer demands and to determine the terms and conditions of a rule or rules
necessary to avoid or minimize the consequences of any emergencies that may
develop. On September 12, 1972. the Commission issued an order updating its
investigation. Amendments of the Commission's regulations proposed in this
docket are still under Commission consideration.
Pursuant to this action and in the implementation thereof the Commission
directed all of the large gas producers whose individual jurisdictional sales of
natural gas totalled in excess of 10 million Mcf annually to respond thereto on
forms designed to elicit the information necessary for Commission considera-
tion. The responses were designed to cover separately the time frames set forth
in the notice and in the updated order.
The responses received pursuant to said orders have been particularly useful
to the Commission in enabling it to assess problems which have arisen as a result
of shortages in the gas supply and to take steps designed to meet them.
To enable the Commission to have a better understanding of the problems
prevailing in the industry, data almost identical in form to that previously
supplied should be submitted for evaluation and appropriate action. For the
purpose of this continued investigation the current data should relate also to
two time periods, one as of December 31, 1972, and the other as of June 30, 1973.
After receipt and analysis of such information, the sources thereof may be subject
to audit by the Commission's staff.
Because of steps required to be taken by the Commission pursuant to Con-
gressional subpoena duces tecum issued June 21, 1973. our treatment of informa-
tion submitted pursuant to this order cannot be accorded the confidentiality here-
tofore authorized and honored by the Commission. The Commis.sion's orders is-
sued November 4, 1970, and September 12. 1972. providing for the nationwide
investigations of reserves of natural gas directed that the reserves data sub-
mitted pursuant thereto would be held in a confidential status in accordance
with the provisions of Section 8(b) of the Natural Gas Act, 15 U.S.C. 717g(b),
and the Freedom of Information Act. 5 U.S.C. 552(b) (4) and (9).
The Chairman of the Senate Judiciary Committee's Subcommittee on Antitrust
and Monopoly requested disclosure to the Subcommittee and the Federal Trade
Commission of such data, and our efforts to comply with such requests as fully
as possible without violating the conditions of confidentiality under which the
reserves data had been obtained were unavailing. Instead, the Chairman of the
Subcommittee, acting on behalf of the Subcommittee, i.ssued a subpoena duces
tecum directing the Commission's Chairman to appear before the Subcommittee
on June 26, 1973, and to produce all data in the Commission's possession, custody
or control or of any member or employee thereof referring or relating to the
Commission's order dated September 12. 1972, including all workpapers and
composites resulting from the material received in connection with that order.
In order to avoid placing tlie Commission's Chairman in jeopardy of contempt
of Congress by refusing to disclose the data protected by our order of Septem-
ber 12, 1972, by order issued June 22, 1972, the Chairman was authorized to
deliver, under protest, the data described in the suhpoerui. The Subcommittee has
not decided whether to maintain the confidential status of the subpoenaed data,
whether to publicly disclo.se such data, or whether to disclo.se such data to the
Federal Trade Commission. Inasmuch as the protection heretofore provided
599
for proprietary data can no longer be assured, we are unable to represent to
the respondents that the data submitted will not be made public.
AVe have heretofore recognized that data such as that sought by this order
is confidential and proprietary in nature, the public disclosure of which could
result in irreparable injury to the owner and to the public. We will not, there-
fore, require filing of the data herein sought until any producer who opposes the
filing of data without an assurance of confidentiality has been afforded an
opportunity for hearing on this issue.
It is ordered that :
1. The investigation initiated by further notice issued on November 4, 1970,
in Docket No. R-405 be further updated, and the natural gas companies listed in
Appendix A are requested to file responses to the questionnaires set forth in
Appendix B ; that such responses may be submitted in hand to Mr. Leon H. Fried-
lander at Room 7312L, 825 North Capitol Street, N.E., Washington, D.C. 20426,
in a sealed envelope plainly marked "Responses to Order issued August 1, 1973,
Docket No. R-405" or or before August 22, 1973. Any questions regarding said
forms should be directed to Mr. Friedlander, who may be reached by telephone
at 202-386-5735.
2. For the purposes of this Investigation any responses submitted in com-
pliance herevdth shall be made available for inspection or copying by the public ;
individual company information received as a result of this continued investiga-
tion will not be maintained in confidential status. The Ck>mmission cannot, in
the light of Congressional demands as above set forth, assure confidential status
for the data to be submitted pursuant to this order. See "Order of Modification
to Authorize Compliance With Congressional Subpoena Duces Tecum" issued
June 22, 1973, in this docket. It should be noted that all responses will be made at
the Federal Power Commission Ofl3ces in Washington, D.C.
3. After receipt and analysis of the information requested pursuant to para-
graph 1. hereof, the data upon which the responses were predicated shall be made
available for audit by the Commission's staff in the oflSces of the producers.
4. If voluntary response to the data request herein made is not suflScient for
Commission assessment of gas supply and deliverability, appropriate proceedings
may be instituted, after notice, to consider whether the reporting and disclosure
of uncommitted reserve data by producers should be compelled.
5. The Secretary shall cause prompt publication of this order to be made in
the Federal Register.
By the Commission.
Maey B. Kidd, Acting Secretary.
Appendix A
Amerada Hess Corporation.
American Petrofina Company of Texas.
Amoco Production Company.
Anadarko Production Company.
Ashland Oil and Refining Company.
Atlantic-Richfield Company.
Austral Oil Company, Inc.
Aztec Oil and Gas Company.
Bass Enterprises Production Company.
Perry R. Bass.
Belco Petroleum Corporation.
Beta Development Company.
Cabot Corporation.
California Company, A Division of Chevron Oil Company.
Champlin Petroleum Company.
Chevron Oil Company. Western Division.
Cities Service Oil Company.
Clinton Oil Company.
Coastal States Gas Producing Company.
Colorado Oil and Gas Corporation.
Coltexo Corporation.
Columbia Gas Development Coriwratlon.
Continental Oil Company,
Edwin L. Cox.
Diamond Shamrock Corporation.
Dorchester Gas Production Company.
27-547 — 74 —39
600
Exchange Oil and Gas Company.
Exxon Corporation.
Forest Oil Corporation.
General American Oil Company of Texas.
Getty Oil Company.
Gulf Oil Corporation.
Helmerick & Payne, Inc.
J. M. Huber Corporation.
Hassle Hunt Trust.
Hunt Oil Company.
Imperial American Resources Fund, Inc.
The Jupiter Corporation.
Kerr-McGee Corporation.
King Resources Company.
Lone Star Producing Company.
Louisiana Land and Exploration Company.
LVO Corporation.
McCulloch Gas Processing Corporation.
Mapco Production Company.
Marathon Oil Company.
Mobil Oil Corporation.
Monsanto Company
Murphy Oil Corporation.
Natural Gas and Oil Corporation, A Division of River Corporation.
North East Blanco Development Corporation.
Northern Natural Gas Producing Company.
Ocean Drilling & Exploration Company.
Petroleum Inc.
Phillips Petroleum Company.
Pioneer Production Corporation.
Placid Oil Company.
Pennzoil Company.
Pennzoil Producing Company.
Pubco Petroleum Corporation.
The Rodman Corporation.
Shell Oil and Gas Company.
Signal Oil and Gas Company.
Signal Petroleum Successor of Lake Washington Inc. and U.S. Oil of Louisiana
Inc.
Skelly Oil Company.
Sohio Petroleum Company.
The South Coast Corporation.
Southern Natural Gas, Jr. Venture.
Southern Union Gathering Company.
Southern Union Production Company.
Stephens Production Company.
Suburban Propane Gas Corporation.
Sun Oil Company.
The Superior Oil Company.
Tenneco Oil Company.
Tennessee Gas Supply Company.
Terra Resources Inc.
Texaco Inc.
Texas Gas Exploration Corporation.
Texas Oil and Gas Corporation.
Texas Pacific Oil Company, Inc.
Transocean Oil, Inc.
Union Oil Company of California.
Union Texas Petroleum, A Division of Allied Chemical.
Appendix B
Warren Petroleum Company, A Division of Gulf Oil Corporation.
Question A. Will you please state your name, the name of your company and
your position with the company ?
Question B. Are you authorized by your company to furnish the information
requested in the following interrogatories?
601
Question C. If not, will you please state the name or names of the official or
officials of your company who have such information ?
Question D. Do you understand that the designated Commission employee will
combine the information obtained from you with information obtained from
others and file a composite report in the public files in Docket No. R-405?
Question E. Will you please state the net working interest volumes, including
associated royalty interest volumes, of proved recoverable reserves of non-
associated natural gas in MMcf, at 14.73 psia and 60 degrees Fahrenheit, that
your company had available for sale as of December 31, 1972, for the areas
hereinafter designated? (For the purpose of questions E-J, the term "proved re-
serves" is used as defined by the Committee on Natural Gas Reserves of the
American Gas Association and such definition is set forth on Appendix B-8 of this
letter. The volumes held "available for sale" in questions E-J are those which are
not covered by gas purchase contracts and are not reserved for direct industrial
contracts, not company use-warranty gas or not company use-fuel and feedstock. )
What are the volumes in :
1. Alaska?
2. Northern Arkansas? '^
3. Southern Arkansas?
4. California?
5. Offshore California? "
ia) Federal
(&) State
6. Colorado?
7. Illinois?
8. Indiana?
9. Kansas?
10. Kentucky?
11. North Louisiana?
12. South Louisiona?
13. Offshore Louisiana?^
ia) Federal
(,&) State
14. Michigan ?
1-5. Mississippi?
16. Montana?
17. Nebraska?
15. Northwest New Mexico?
19. Southeast New Mexico?
20. New York?
21. North Dakota?
22. Ohio?
23. Oklahoma Panhandle area? *
24. Oklahoma Anadarko area?
2.5. Eastern Oklahoma ?
26. Pennsylvania?
27. Texas Railroad District No. 5?
28. Texas Railroad District No. 10 ?
29. Texas Railroad District Nos. 8, 8A, 7B and 7C?
30. Texas Railroad District Nos. 5 and 6?
31. Texas Railroad District Nos. 1, 2, 3 and 4?
32. Offshore Texas ?''
(a) Federal
(ft) S;ate
33. Utah?
34. Virginia?
33. West Virginia ?
36. Wyoming?
37. Miscellaneous areas? *
1 For the purpose of questions 2 and 3, Arkansas is divided between North and South by
base line separating townships North and South.
= For the purpose of this question, the offshore area shall be measured from the coastline
seaward.
- For the purpose of questions 23-25. Oklahoma is divided between Eastern and Western
Hklahoma by the central Oklahoma Indian Meridian separating Ranges E and W. Western
Oklahoma is further divided between Hugoton and Anadarko by the Panhandle Meridian
separating Ranges E and W.
* For the purpose of this question, the Miscellaneous areas shall include Alabama, Ari-
zona. Florida, Iowa, Maryland, Minnesota, Missouri, South Dakota, Tennessee and
Washington.
602
38. What is the total of the volumes furnished in response to questions 1-37?
Question F. Will you please state the net working interest volumes, including
royalty interest volumes, of proved recoverable reserves of associated and dis-
solved natural gas in MMcf, at 14.73 psia, and 60 degrees Fahrenheit, that your
company had available for sale as of December 31, 1972, for the areas hereinafter
designated?
What are the volumes in :
1. Alaska?
2. Northern Arkansas ? *
3. Southern Arkansas?
4. California?
5. Offshore California ? ■
(a) Federal
{h) State
6. Colorado?
7. Illinois?
8. Indiana?
9. Kansas?
10. Kentucky?
11. North Louisiana?
12. South Louisiana?
13. Offshore Louisiana?'
(a) Federal
Cb) State
14. Michigan?
15. Mississippi?
16. Montana?
17. Nebraska?
18. Northwest New Mexico?
19. Southeast New Mexico?
SO. New York?
21. North Dakota?
22. Ohio?
23. Oklahoma Panhandle area?*
24. Oklahoma Anadarko area?
25. Eastern Oklahoma?
26. Pennsylvania?
27. Texas Railroad District No. 9?
28. Texas Railroad District No. 10?
29. Texas Railroad District Nos. 8, 8A, 7B and 7C?
30. Texas Railroad District Nos. 5 and 6?
31. Texas Railroad District Nos. 1, 2, 3 and 4?
32. Offshore Texas ?^
fa) Federal
(ft) State
33. Utah?
34. Virginia?
35. West Virginia?
36. Wyoming?
37. Miscellaneous areas?*
38. "What is the total of the volumes furnished in response to questions 1-37?
Quef'tion G. Will you please state the total net working interest volumes, in-
cluding royalty interest volimies, of proved recoverable reserves of non-asso-
ciated and of associated and dissolved natural gas in MMcf, at 14.73 psia and
60 degree Fahrenheit, that your company had available for sale as of December
31. 1972. for the areas hereinafter designated?
What are the volumes in :
I.Alaska?
1 For the purpose of questions 2 and H. Arkansas is divided between North and South by
base line separ.iting townships Nortli and South.
2 For the purpose of this question, the offshore area shall be measured from the coastline
seaward.
3 For the purpose of questions 23-25. Oklahoma is divided between Eastern and Western
Oklahoma by the central Oklahoma Indian Meridian separatiuicr Ranges E and W. Western
Oklahoma is further divided between Hugoton and Anadarko by the Panhandle Meridian
separatins Ranges E and W.
•• For the purpose of this question, the Miscellaneous areas shall include Alabama. Ari-
zona. Florida, Iowa, Maryland, Minnesota, Missouri, South Dakota, Tennessee and
Washington.
608
2. Northern Arkansas ? ^
3. Southern Arkansas?
4. California?
5. Offshore California?*
(a) Federal
(b) State
6. Colorado?
7. Illinois?
8. Indiana?
9. Kansas?
10. Kentucky?
11. North Louisiana?
12. South Louisiana?
13. Offshore Louisiana? *
( a ) Federal
I b } State
14. Michigan?
15. Mississippi?
16. Montana ?
17. Nebraska?
IS. Northwest New Mexico?
19. Southeast New Mexico?
20. New York?
21. North Dakota?
22. Ohio?
23. Oklahoma Panhandle area?*
24. Oklahoma Anadarko area?
25. Eastern Oklahoma?
26. Pennsylvania ?
27. Texas Railroad District No. 9?
28. Texas Railroad District No. 10?
29. Texas Railroad District Nos. 8, 8A. 7B and 7C?
30. Texas Railroad District Nos. 5 and 6?
31. Texas Railroad District Nos. 1, 2, 3 and 4?
32. Offshore Texas?*
(a) Federal
(ft) State
33. Utah?
34. Virginia?
35. West Virginia?
36. Wyoming?
37. Miscellaneous areas?*
38. What is the total of the volumes furnished in response to questions 1-37?
Question H. Will you please state the net working interest volumes, including
royalty interest volumes, of proved recoverable reserves of non-associated natural
gas in MMcf, at 14.73 psia and 60 degrees Fahrenheit, that your company had
available for sale as of June 30, 1973, for the areas hereinafter designated?
What are the volumes in :
1. Alaska?
2. Northern Arkansas? ^
3. Southern Arkansas?
4. California?
(a) Federal
(&) State
5. Offshore California ? "
6. Colorado?
7. Illinois §
1 For the purpose of questions 2 and 3, Arkansas Is divided between North and South by
base line separating townships North and South.
2 For the purpose of this question, the offshore area shall be measured from the coastline
seaward.
3 For the purpose of questions 23-25, Oklahoma is divided between Eastern and Western
Oklahoma by the central Oklahoma Indian Meridian separating Ranges E and W. Western
Oklahoma is further divided between Hugoton and Anadarko by the Panhandle Meridian
separating Ranges E and W.
*For the purpose of this question, the Miscellaneous areas shall Include Alabama, Ari-
zona, Florida, Iowa, Maryland, Minnesota, Missouri, South Dakota, Tennessee and
Washington.
604
8. Indiana?
9. Kansas?
10. Kentucky?
11. North Louisiana ?
12. South Louisiana?
13. Offshore Louisiana ? '
(a) Federal
(ft) State
14. Michigan?
15. Mississippi?
16. Montana?
17. Nebraska?
18. Northwest New Mexico ?
19. Southeast New Mexico?
20. New York?
21. North Dakota?
22. Ohio?
23. Oklahoma Panhandle area ? '
24. Oklahoma Anadarko area?
25. Eastern Oklahoma ?
26. Pennsylvania?
27. Texas Railroad District No. 9?
28. Texas Railroad District No. 10?
29. Texas Railroad District Ncs. 8, 8A, 7B and 70 ?
30. Texas Railroad District Nos. 5 and 6?
31. Texas Railroad District Nos. 1, 2, 3 and 4?
S2. Offshore Texas? "^
(a) Federal
(fc) State
33. Utah?
34. Virginia?
3.5. West Virginia ?
36. Wyoming?
37. Miscellaneous areas? *
38. What is the total of the volumes furnished in response to questions 1-37?
Question. I. Will you please state the net working interest volumes, including
royalty interest volumes, of proved recoverable reserves of associated and dis-
solved natural gas in MMcf, at 14.73 psia and 60 degree Fahrenheit, that your
company had available for sale as of June 30, 1973, for the areas hereinafter
designated?
What are the volumes in :
1. Alaska?
2. Northern Arkansas ? ^
3. Southern Arkansas?
4. California?
5. Offshore California?''
6. Colorado?
7. Illinois?
8. Indiana?
9. Kansas?
1 For the purpose of questions 2 and 3, Arkansas Is divided between North and South by
base line separating townships North and South.
2 For the purpose of this question, the offshore area shall be measured from the coastline
seaward.
3 For the purpose of questions 23-25. Oklahoma is divided between Eastern and Western
Oklahoma by the central Oklahoma Indian Meridian separating Ranges E and W. Western
Oklahoma is further divided between Hugoton and Anadarko by the Panhandle Meridian
separating Ranges E and W.
*Ior the purpose of this question, the Miscellaneous areas shall include Alabama, Ari-
zona, Florida, Iowa, Maryland, Minnesota, Missouri, South Dakota, Tennessee and
Washington.
605
10. Kentucky?
11. North Louisiana?
12. South Louisiana?
13. Offshore Louisiana?*
(a) Federal
(&) State
14. Michigan?
15. Mississippi?
16. Montana?
IT. Nebi-aslva?
IS. Northwest New Mexico?
19. Southeast New Mexico?
20. New York?
21. North Dakota?
22. Ohio?
23. Oklahoma Panhandle area?'
24. Oklahoma Anadarko area?
25. Eastern Oklahoma?
26. Pennsylvania?
27. Texas Railroad District No. 9?
28. Texas Railroad District No. 10?
29. Texas Railroad District Nos. 8, 8A, 7B and 7C?
30. Texas Railroad District Nos. 5 and 6?
31. Texas Railroad District Nos. 1, 2, 3 and 4?
32. Offshore Texas ?^
(a) Federal
(6) State
33. Utah?
34. Virginia?
35. West Virginia?
36. Wyoming?
37. Miscellaneous areas?*
3S. What is the total of the volumes furnished in response to questions 1-37?
Question J. Will you please state the total net working interest volumes, in-
cluding royalty interest volumes, of proved recoverable reserves of non-associ-
ated and of associated and dissolved natural gas in MMcf, at 14.73 psia and 60
degrees Fahrenheit, that your company had available for sale as of June 30, 1973,
for the areas hereinafter designated?
What are the volumes in :
1. Alaska?
2. Northern Arkansas?^
3. Southern Arkansas?
4. California
5. Offshore California?'
(a) Federal
(ft) State
6 Colorado?
7. Illinois?
8. Indiana?
I 2
1 For the purpose of questions 2 and 3, Arkansas is divided between North and South by
base line separating townships North and South.
2 For the purpose of this question, the oflfshore area shall be measured from the coastline
seaward.
3 For the purpose of questions 23-25. Oklahoma is divided between Eastern and Western
Oklahoma by the central Oklahoma Indian Meridian separatin? Ranges E and W. Western
Oklahoma is further divided between Hugoton and Anadarko by the Panhandle Meridian
separating Ranges E and W.
* For the purpose of this question, the Miscellaneous areas shall include Alabama, Ari-
zona, Florida, Iowa, Maryland, Minnesota, Missouri, South Dakota, Tennessee and
Washington.
606
9. Kansas ?
10. Kentucky?
11. North Louisiana?
12. South Louisiana ?
13. Offshore Louisiana ^
(a) Federal
(&) State
14. Michigan?
15. Mississippi?
16. Montana?
17. Nebraska ?
18. Northwest New Mexico ?
19. Southeast New Mexico?
20. New York?
21. North Dakota
22. Ohio?
23. Oklahoma Panhandle area?'
24. Oklahoma Anadarko area ?
25. Eastern Oklahoma ?
26. Pennsylvana?
27. Texas Railroad District No. 9?
28. Texas Railroad District No. 10?
29. Texas Railroad District Nos. 8, 8A, 7B and 7C?
30. Texas Railroad District Nos. 5 and 6?
31. Texas Railroad District Nos. 1, 2, 3 and 4?
32. Offshore Texas ?^
(a) Federal
(ft) State
33. Utah?
34. Virginia?
35. West Virginia?
36 Wyoming?
37. Miscellaneous areas?*
38. What is the total of the volume furnished in response to questions 1-37?
2 For the purpose of this question, the oflfshore area shall be measured from the coastline
seaward.
3 For the purpose of questions 23-25. Oklahoma is divided between Eastern and Western
Oklahoma by the central Oklahoma Indian Meridian separating Ranges E and W. Western
Oklahoma is further divided between Hugoton and Anadarko by the Panhandle Meridian
separating Ranges B and W.
* For the purpose of this question, the Miscellaneous areas shall Include Alabama, Ari-
zona, Florida, Iowa, Maryland, Minnesota, Missouri, South Dakota, Tennessee and
Washington.
607
PROVED NATURAL GAS RESERVES AVAILABLE FOR SALEi
[MM ft 'at 14.73 lb/in 2a, 60»F,1
Volumes as of Dec. 31, 1972 Volumes as of June 30, 1973
Non- Associated- Non- Associated-
State associated dissolved Total associated dissolved Total
Alaska
Arkansas:
Northern
Southern
California:
Offshore California:
(a) Federal.-
(b) State
Colorado
Illinois
Indiana
Kansas
Kentucky
Louisiana:
North
South
Offshore:
(a) Federal
(b) State
Michigan, _
Mississippi..
Montana
Nebraska
New Mexico:
Northwest
Southwest
New York
North Dakota
Ohio
Oklahoma:
Panhandle
Anadarko
Eastern _
Pennsylvania
Texas:
RR District No. 9
RR District No. 10
RR District Nos. 8, 8A, 7B, 70
RR District Nos. 5, 6..
RR District Nos. 1, 2,3, 4.
Offshore:
(a) Federal
(b) State..
Utah
Virginia
West Virginia.
Wyoming
Miscellaneous
Total
> Proved reserves are, using the definition of the Committee on Natural Gas Reserves of the American Gas Association,
as follows:
"The current estimated quantity of natural gas which analysis of geologic and engineering data demonstrate with
reasonable certainty to be recoverable in the future from known oil and gas reservoirs under existing economic and operat-
ing conditions. Reservoirs are considered proved that have demonstrated the ability to produce by either actual production
or conclusive formation test.
"The area of a reservoir considered proved is that portion delineated by drilling and defined by gas-oil, gas-water, or
oil-water contracts or limited by structural deformation or lenticularity of the reservoir. In the absence of fluid contracts,
the lowest known structural occurrence of hydrocarbons controls the proved limits of the reservoir. The proved area of a
reservoir may also include the adjoining portions not delineated by drilling but which can be evaluated as economically
productive on the basis of geological and engineering data available at the time the estimate is made. Therefore, the
reserves reported by the committee include total proved reserves which may be in either the drilled or the undrilled
portions of the field or reservoir."
608
Federal Power Commission — Order To Show Cause
(Issued July 31, 1973)
Before Commissioners : John N. Nassikas, Chairman ; Albert B. Brooke, Jr.,
Rush Moody, Jr., and William L. Springer.
Amerada Hess Corporation, et al.* RI74-15.
On December 21, 1971, this Commission intiated the study and analysis which
ultimately led to the issuance of theNational Gas Reserves Study (1973) in May
of this year by the National Gas Survey.^ In that order, we recognized the value
of having voluntary cooperation by natural gas companies in the production of
proprietary reserve information and, accordingly, provided in Paragraph (B) :
Any non-public commercial information concerning an individual natural gas
company's reserves obtained during the course of this survey and analysis shall be
treated as confidential without public disclosure by the staff of the Commission
and its agents, including any acounting firm selected by the Commission to assist
in this survey and analysis, unless otherwise directed by the Commission. The
provisions of Section 8(b) of the Natural Gas Act [15 U.S.C. 717g(b)] and 5
U.S.C. 552(b) (4) and (9) [Freedom of Information Act] shall apply."
In our amending order of March 9, 1972, we reiterated our belief in the need for
protecting the confidentiality of this reserve data, specifically noting that "the
publicizing of such information would have an inhibiting effect upon future ex-
ploration for natural gas reserves since speculators could equally benefit with
those companies willing to make geological and geophysical expenditures." *
To insure that confidentiality would be maintained in fact, we went further
in those orders and established detailed procedures for the compilation and
analysis of individual company reserve data. To begin with, industry representa-
tives who provide A.G.A. reserves were to submit those reserves by fields on a
confidential basis to an independent accounting agent. A list of all gas fields for
which A.G.A. reserve data was submited was then to be prepared by the account-
ing agent and forwarded to the Oil Information Center (OIC) of the University
of Oklahom Research Institute. After comparing the accounting agent's field list
developed from the A.G.A. records with a list from the United States Government
Interagency Oil and Gas Field Study and other government data, the OIC was to
compile a complete list of gas fields in the United States with remaining recover-
able reserves as of December 31, 1970.
A copy of the OIC gas field identification list and a supplemental list of "A.G.A.
oniitted'fields" was to be foi-warded to the accounting agent who, in turn, was to
stratify all fields in each A.G.A. subcommittee area by size and age so that a sta-
tisticaally valid sampling procedure could be prescribed. Following the determina-
tion by a" statistical validation team of the number of fields to be surveyed inde-
pendently in each A.G.A. subcommittee area, the accounting agent was to make a
random selection of the fields to be surveyed.
Upon receiving a list of the fields to be surveyed, independent reserve teams,
under supervision by the staff of the Federal Power Commission, were to visit
various natural gas companies and examine data relating to each selected field.^
The companies were requested to furnish the reserve teams with such informa-
tion as CI) field area maps showing the location and completion of all wells
drilled prior to December 31, 1970, (2) electrical well surveys, (3) core analyses,
(4) reservoir production histories, (5) specific gravities of gas, (6) formation
temperatures, (7) original reservoir pressures, (8) isopach maps, (9) records
and backup data on reservoir pressure measurements, and (10) other pertinent
data requested by tlie reserve teams. After analyzing such data, the independent
reserve teams were to transmit their estimations on a confidential basis to the
reserve team supervisor who, in turn, was to furnish the accounting agent with
a final reserve estimate for each field after comparing the reserve team data
with A.G.A. resen^e estimates or any other source.* The worksheets which were
prepared by the reserve teams were to he returned to the Commission's offices
*See Appendix A. ^ „ , „ -u- -r.
1 Order Directing Study and Analysis of Natural Gas Reserves and Prescribing Pro-
cedures for the National Gas Survey (December 21, 1971).
2 Order Amending Order Prescribing Procedures for the National Gas Survey (March 9,
197''^
3 Reserves in selected fields lying in the Outer Continental Shelf, offshore Louisiana,
were examined and estimated by the United States Geological Survey. The OflBce of Naval
Petroleum and Oil Shale Reserves were also instrumental in the estimation of certain
state l.-ind field reserves.
* A.G.A. reserves estimates for the fields surveyed were made available to Mr. Lawrence
R. Mangen, supervisor of the reserve teams.
C09
in Washington and placed in the custody of the Technical Director of the Na-
tional Gas Survey who was to have the responsibility of protecting their
confidentiality.
Once all sampling had been completed and all final estimates submitted, the
independent accounting agent was to provide a report to the National Gas Survey
on United States gas reserves as of December 31, 1970. When the report was
accepted by the National Gas Survey, the accounting agent and the reserve team
supervisor were to return all A.G.A. records to the member of tlie A.G.A. Com-
mittee of Natural Gas Reserves assigned to the particular area involved.
All of these procedures have been implemented in the compilation and analysis
of the reserves which are reported in the National Gas Reserves Study. We must
now address ourselves to the proper disposition of the confidential data now in
the possession of the Technical Director of the National Gas Survey who has
been directed to retain custody until further order. We are particularly con-
cerned with internal records and worksheets which contain detailed information
of each reservoir examined, including the reservoir's (1) principal sellers and
operators, (2) size and location, (3) number of productive areas, (4) porosity
(5) initial and current pressures, (6) depth, (7) basic li* liology, and (8) remain-
ing recoverable reserves. Furthermore, we must determine whether the National
Gas Survey should formally accept the accounting agent's report, thereby per-
mitting the accounting agent and the reserve team supervisor to release all
A.G.A records to an appropriate member of the A.G.A. Committee on Natural
Gas Reserves. As we have indicated, the accounting agent has a complete list
of A.G.A. individual field reserve estimates, while the reserve team supervisor
possesses A.G.A. reserve estimates only as to those selected fields actually
surveyed.
At the outset, it should be made clear that this Commission intends to comply
to the fullest extent possible with all assurances of confidentiality. However, our
discretion may be limited to the demands of certain Congressional committees
and subcommittees which are independently investigating the energy crisis.''
Already, the Chairman of the Commission has been compelled by subpoena duces
tecum to furnish uncommitted gas reserve data to the Senate Judiciary Commit-
tee's Subcommittee on Antitrust and Monopoly.® Under compulsion of process, we
authorized the Chairman to comply with the subcommittee's demands, but ex-
pressly noted the Constitutional and statutory infirmities inherent in such a
procedure :
"* * * [T]he procedural and substantive due process rights of citizens of the
United States are placed in jeopardy. The time constraint imposed by the Sub-
committee precludes any meaningful notice to those whose property i-ights are
being affected, and any real opportunity en their part to be heard prior to the
entry of this order and prior to the disclosure now demanded by the Subcom-
mittee." '
In order to avoid any further encroachment upon the procedural and substan-
tive rights of those whose property is involved without their opportunity to de-
fend such property, we are hereby initiating a proceeding to determine what
action, if any. shoudl be taken regarding disclosure of the reserve data upon which
the Xational Gas Reserves Study is based. Specifically, we invite not only the
natural gas companies listed in Appendix A. but indeed all interested parties, to
show cause why all or a portion of the reserve data in question should either be
(1) retained on a confidential basis, (2) disclosed to the public in general, (3)
disclosed only to Congressional committees and subcommittees, without restric-
tion. (4) disclosed only to Congressional committees or subcommittees but subject
to confidential treatment, (5) disclosed to other Federal agencies without restric-
tion, or (6) disclosed to other Federal agencies but subject to confidential
treatment.
Each party responding to this proceeding should explain in detail the reasons
in support of its position. In particular, respondents are requested to comment
on the following qviestions :
5 The staff of the Federal Trade Commission has also expressed an Interest in obtaining
a portion of the reserve data to be used in conjunction with its investigation styled In the
Matter of the American Gas Association, File No. 721 0042.
« On June 21, 1973, Senator Philip A. Hart, acting on behalf of the subcommittee, Issued
a subpoena duces tecum demanding production of virtually all documents whatsoever relat-
ing to the updated nationwide Investigation in Docket No. R-405.
^ Order of June 22, 1973, in Docket No. R-^05 ; Cf. Accardi v. Shaughnessy, 347 U.S. 260
(1954) ; Service v. Dulles, 354 U.S. 363 (1957).
610
1. Would disclosure of the detailed reserve data to the public, other Federal
agencies, or any committee or subcommittee of Congress be inimical to competi-
tion ? If so, to what extent ?
2. Would disclosure of the detailed reserve data to the public, other Federal
agencies, or any committee or subcommittee of Congress inhibit future exploration
and development for new gas reserves ?
3. Would disclosure of the detailed reserve data to the public, other Federal
agencies, or any committee or subcommittee of Congress cause economic harm
to the companies whose reserves are involved?
4. Would disclosure of the detailed reserve data to the public, other Federal
ageniees, or any committee or subcommittee of Congress place sellers of natural
gas in an unfair position to negotiate with potential buyers?
5. Is any of the reserve data underlying the National Gas Reserves Study avail-
able from any other source to the public, other Federal agencies, or any
committee or subcommittee of Congress? If, so, to what extent?
6. Has any natural gas company whose data is involved provided the same or
similar information to any other agency or any committee or subcommittee of
Congress. If so, under what circumstances?
7. Are there any other public policy reasons why such data should not be
disclosed to the public, other Federal agencies, or any committee or subcommittee
of Congress?
In the last analysis, it is the desire of this Commission to comply with all lawful
requests of Congress without violating either the terms of our orders or the
pro^-isions of the Natural Gas Act, and without breaching the trust of those
who have relied upon our assurances of confidentiality. Hopefully, through the
cooperation of all concerned, a proper balance will be reached between all
legitimate areas of public and private concern.
All responses to this order shall be in writing and shall be filed on or before
August 15 ,1973. Any definitive order hereinafter entered regarding disclosure of
the data in question shall be deemed by this Commission to be final and reviewable
by a court of competent jurisdiction.
The Commission finds:
It is in the public interest and required by due process that all interested
parties, ijarticularly those listed in Appendix A, be given an opportunity to show
cause why the gas reserve data compiled and analyzed for the National Gas
Reserves Study (1973) should be either retained on a confidential basis, publicly
disclosed, disclosed to any committee or subcommittee of Congress without restric-
tion, disclosed to any committee or subcommittee of Congress subject to con-
fidential treatment, disclosed to other Federal agencies without restriction, or
disclosed to the Federal agencies subject to confidentiality.
The Commission orders:
(1) All interested parties, particularly those listed in Api)endix A, are invited
to show cause why the gas reserve data described above should either be retained
on a confidential basis, publicly disclosed, disclosed to any committee or sub-
committee of Congress without restriction, disclosed to any committee or sub-
committee of Congress subject to confidential treatment, disclosed to other
FederaJ agencies without restriction, or disclosed to other Federal agencies
subject to confidentiality.
(2) All responses shall be in writing and shall be filed on or before August 15,
1973.
By the Commission.
Mary B. Kidd, Acting Secretary.
Appendix A
The natural gas companies who should respond to this order are as follows :
Amerada Hess Corix> ration
Arkansas Louisiana Gas Company
Atlantic Richfield Company
Austral Oil Company, Inc.
Champlin Petroleum Company
Cities Service Company
Continental Oil Company
Consolidated Gas Supply Corporation
El Paso Natural Gas Company
General Crude Oil Company
611
Getty Oil Company
Gulf Oil Corporation
Exxon Company, U.S.A.
Kentucky-AVest Virginia Gas Company
Kerr-McGee Corporation
Lone Star Gas Corporation
Marathon Oil Company
Mitchell Energy and Development Corporation
Michigan Wisconsin Pipe Line Company
Mobil Oil Corporation
Montana-Dakota Utilities Company
MuriJhy Oil Corporation
Natural Gas Pipeline Company of American
Northern Natural Gas Company
Panhandle Eastern Pipe Line Company
Pennzoil United, Inc.
Phillips Petroleum Company
Shell Oil and Gas Company
Signal Oil and Gas Company
Skelly Oil Company
Southern Natural Gas Company
Standard Oil Company of Indiana (Amoco)
Standard Oil Company of California (Chevron)
Sun Oil Company
The Superior Oil Company
Tenneco Inc.
Texaco Inc.
Texas Pacific Oil Company, Inc.
Union Oil Company of California
United States Court of Appeals for the District of Columbia Circuit
No. 71-1560
Texaco, Inc., petitioner
V.
Federal Power Commission, respondent
Mrs. James R. Dougherty, et al, intervenors
No. 71-1561
Consolidated Gas Supply Corporation, petitioner
V.
Federal Power Commission, respondent
Mrs. James R. Dougherty, et al, intervenors
No. 71-1603
James M. Forgotson, Sr.
AN independent NATURAL GAS PRODUCER, PETITIONEE
V.
Federal Power Commission, respondent
Mrs. James R. Dougherty, et al
Texaco, Inc., intervenors
612
No. 71-1612
Public Service Commission op the State of New York, petitioner
V.
Federal Power Commission, respondent
Texaco, Inc., intervenor
No. 71-1627
Independent Natural Gas Association of America, petitioner
V.
Federal Power Commission, respondent
No. 71-1647
Warren Petroleum Corporation, petitioner
V.
Federal Power Commission, respondent
No. 71-1722
Tennessee Gas Pipeline Compant, A Division of Tenneco, Inc., petitioner
V.
Federal Power Commission, respondent
No. 71-1727
Phillips Petroleum Company, petitioner
V.
Federal Power Commission, respondent
Texaco, Inc, intervenor
No. 71-1729
Texaco, Inc.. petitioner
V.
Federal Power Commission, respondent
petition for review of an order of the federal power commission
Decided December 12, 1912
Mr. Richard A. Solomon, with whom Messrs. Peter H. ScJiiff and Saul W.
Baernstein were on the brief, for petitioner in No. 71-1612.
Mr. Christopher T. Bolar.d, with whom Messrs. Robert G. Hardy and Jerome J.
McGrath were on the brief, for petitioner in No. 71-1627, also ar^ed for peti-
tioners in No. 71-1561 and 71-1722.
Mr. John T. Ketcham, with whom Messrs. Kenneth Heady, Warren M. Sparks,
Charles E. McGee and Robert J. Haggerty were on the brief, for petitioner in
No. 71-1647 and 71-1727 also argued for petitioners in Nos. 71-1560 and 71-1729.
Mr. Michael J. Manning, Attorney, Federal Power Commission for respondent.
Messrs. Gordon Gooch, General Counsel, Federal Power Commission, Leo E.
Forquer, Solicitor and George W. McHenry, Jr., First Assistant Solicitor, Federal
Power Commission were on the brief, for respondeat. Mr. J. Richard Tiano,
First Assistant Solicitor, Federal Power Commission at the time the record was
filed, also entered an appearance for respondent.
Mr. Benjami/)i F. Vaughan, III, with whom Mr. R. James George, Jr., was on
the brief, for intervenors Mrs. James R. Dougherty, et al.
613
Messrs. J. Donald Atinett and Kirk W. Weinert were on the brief for petitioners
in No. 71-1560 and No. 71-1729 and Intervenor, Texaco, Inc.
Messrs. Norman A. Flaningum, Charles R. Broioti, and Richard J. Connor,
were on the brief, for petitioners in No. 71-1561 .
Mr. Edward H. Forgotson, was on the brief, for petitioners in No. 71-1603.
Messrs. Melvin Richter, Dale A. Wright, and Harry S. Welch were on the
brief, for petitioner in No. 71-1722.
Messrs. L. Dan Jones and William I. Powell filed a brief on behalf of the
Independent Petroleum Association of America, as amicus curiae urging affirm-
ance.
Messrs. Philip R. Ehrenkranz and Clyde 0. Martz filed a brief on behalf of
Anderson Oil Company, et al and Hickerson Oil Company, et al aniiGi curiae
urging affirmance.
Before Fahey, Senior Circuit Judge, Robinson and Wilkey, Circuit Jtidges.
Opinion by Circuit Judge Wilkey.
Dissenting opinion by Senior Circuit Judge Fahy at p. 18.
Wilkey. Circuit Judge : Petitioners seek review of orders of the Federal Power
Commission^ in Docket No. R-393, a rulemaking proceeding instituted by a
Notice ^ entitled "Exemption of Small Producers From Regulation." ^ These
orders exempted all existing and future sales by "small producers" * from direct
rate regulation. Small producers could, thereunder, contract for the sale of their
gas at any obtainable rates. The Commission proposed indirectly to control such
rates by regulating, under standards set forth in the orders, the costs allowed to
be incorporated in the rates of large producers and pipelines on resale of gas
which originated with small producers. Even if resale rates were found exces-
sive because the cost of small producer gas was "unreasonably high," small pro-
ducers would be under no duty to refund the absorbed excess to the large pro-
ducers and pipelines. Since we conclude that the Commission exceeded its au-
thority under the Natural Gas Act, the orders in Docket No. R-393 must be set
aside.
/. The Ends
Our conclusion herein challenges neither the Commission's motives nor its opin-
ion that some form of deregulation of small producers might benefit the consumers
of natural gas. The orders represent an imaginative attempt to deal with prob-
lems of enormous magnitude. A critical gas shortage, which has been judicially
recognized,^ faces the nation. The Federal Power Commission is confronted
with an ever-increasing regulatory burden — and limited i-esources. These combine
to produce administrative delay and threaten the Commission's ability adequately
to control natural gas prices.
Since small gas producers have historically accounted for as much as 80%
of new exploration, but have less ready access to the necessary capital than do
large producers, after thorough study the Commission concluded that generally
beneficial exploration activity would be encouraged by assuring stable revenue
fiows to small producers. From deregulation of small producers, realization of
their full contract prices at market levels would become a certainty. Since the
small producers only account for 10.5% of the gas put into pipelines, the FPC
felt that any cost hike resulting from deregulation would have a minimal effect
on consumers. Obviously, any step towards deregulation would lessen the Commis-
sion's administrative load.
1 The Commission's original Order No. 428 was issued on 18 March 1971. It was subse-
quently modified by Order No. 428-A, issued 9 April 1971, and Order No. 428-B, issued
15 July 1971.
2 Issued 23 July 1970. It should be noted that some of the petitioners challenge the suffi-
ciency of that notice. Since all important objections were raised and considered prior to the
action of the Commission in Order No. 42S-B, we do not agree that further publication is
required by the Administrative Procedure Act. In any event, given our disposition of these
cases, that issue need not be reached.
3 Joint Appendix (hereafter "J. A.") at 1. The resulting Order 428 was entitled "Order
Establishing Blanket Certificate Procedure For Small Producer Sales and Providing Relief
From Detailed Filing Requirements." As this opinion will explain, the actual terms of this
order belie its title's suggestion that its effect is more limited than that implied by the
broad title of the Notice of Proposed Rulemaking.
* Small producers are defined as those with jurisdictional sales of less than 10.000.000
Mcf of gas per year. Such producers would be required to submit annually a document set-
ting forth pertinent information concerning their jurisdictional sales.
«See Southern Louisiana Area Rate Cases v. FPC, 428 F. 2d 407, 437 (.5th Cir. 1970),
cert, denied, 400 U.S. 950.
614
This court also recognizes that the Commission was engaged, in good faith, in
what it felt was a valid extrapolation from judicial comments as to which solu-
tions to these problems would be acceptable. In FPG v. Hunt, Justice Clark made
the following suggestion for dealing with the Commission's docket congestion :
[T]he techniques of the National Labor Relations Board might be studied
with a view to determining whether its exemption practices . . . might be
helpful in the solution of the Commission's problems.*
In more recent cases, this court has explicitly encouraged experimentation to
meet the threat of a gas shortage.^ Given traditional judicial deference to the
agency's expertise, the FPC obviously concluded that it would be allowed to em-
bark upon, and later evaluate, an experimental approach to achieving the pur-
poses of the Natural Gas Act.
//. The Means
However, Congress has prescribed limits on the Commission's authority. The
others considered here can be upheld only if they comply with the specific pro-
visions of the Natural Gas Act. The Commission may, of course, classify different
types of producers, alter some filing requirements, and "make other pragmatic
adjustments which may be called for by particular circumstances." * However,
the FPC must act "within the ambit of [its] . . . statutory authority."* The
Commission may not ignore the command of Section 4 (15 U.S.C. § 717(c) (a) :
All rates and charges made, demanded, or received by any natural-gas com-
pany for or in connection with the . . . sale of natural gas subject to the
jurisdiction of the Commission . . . shall be just and reasonable, and any
such rate or charge that is not just and reasonable is hereby declared to be
unlawful. [Emphasis added.] ^° tt c, ^
The Commission must also heed similar language in Section 5 (15 U.S.C.
§ 717(d)):
Whenever the Commission, after a hearing had upon . . . complaint of any
State, municipality. State Commission, or gas distributing company, shall
find that any rate, charge or classification demanded, observed, charged, or
collected by any natural-gas company in connection with any . . . .sale of
natural gas, subject to the jurisdiction of the commission ... is unjust, un-
reasonable, unduly discriminatory, or preferential, the Commission shall
determine the just and reasonable rate, charge, classification ... or con-
tract to be thereafter observed and in force, and shall fix the same by
order . . . [Emphasis added.]
Ever since Phillips Petroleum Co. v. Wisconsin, the Commission, even against its
own will, has had a judicially recognized duty to assume "jurisdiction over the
rates of all wholesales of natural gas in interstate commei-ce" " to insure tliat all
such rates comply with the statutory standard.
We cannot accept the Commission's argument that it may shirk this duty. To
the extent that the Commission argues that Justice Clark's dicta in Hunt imply
that exemption of a class of producers from the statutory standard would be
permissible, we note that reliance cannot be placed on the NLRB as a model.
The National Labor Relations Act si>eeifically pei-mits the Labor Board to decline
to exercise its own jurisdiction."^ In contrast, as evidenced by Phillips, the
Natural Gas Act does not give the Commission any such power. Only this year
the Supreme Court specifically contrasted the FPC and the NLRB, suggesting
6 376 U.S. 515. 527 (1964). „ „ . ^ r, t=,o., /xt ti
■J Public Service Commission v. FPC, U.S. App. D.C. , F. 2d — — (No. 71-
1161 decided 29 March 1972, slip op. at 12) (rehearing dented 19 May 1972) ; Puhhe Serv-
ice Commission v. FPC, U.S. App. D.C. , F. 2d (Nos. 71-1197, et al,
decldedl6May 1972),slipop. at9. ^ „. ,. „ „,.. .t c. .r-r^ =oe /lo^oi
8 Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 586 (1942).
0 FPC V. Natural Qas Pipeline Co., supra.
" The Supreme Court has described "the fixing of 'just and reasonable' rates as the
heart of the new regulatory system." FPC v. Hope Natural Qas Co., 320 U.S. 591, 611
(1944)
"347 U.S. 672, 682 (1954). (Emphasis added.) It should be noted that Justice Clark, in
dissent, conceded that "[o]n its face, this language brings every gas operator, from tJie
smallest producer to the largest pipeline, under federal regulatory control. ' 347 U.S. b72,
691 (emphasis added).
"29 U.S.C. 160(a).
615
that the former's jurisdiction will be broadly construed so that there are no
"gaps" in the Natural Gas Act's "comprehensive and effective regulatory
scheme." " Further, the trials and experimentations which this court has previ-
ously approved have always been trials of new procedures consistent with the
terms of the Natural Gas Act, not experimental attempts to amend, avoid or
ignore these provisions."
The Commission relies heavily on Permian Basin Area Rate Cases'^ to support
the proposition that it may exempt small producers from certain requirements.
However, the "exemptions" approved there were from detailed filing require-
ments, not from all regulation. The Court in Permian specifically noted that
"the exemptions created by the Commission" were "fully consistent with the
terms and purooses of its statutory responsibilities." ^'
Thus the Commission's power, under Section 16 of the Natural Gas Act, to
"classify i>ersons and matters within its jurisdiction" and to "prescribe dif-
ferent requirements for different classes" cannot validate this exemption of small
producers. The Commission can only classify "[f]or the purposes of its rules and
regulations." It can only prescril)e rules and regulations "to carry out the provi-
sions of this chapter." Section 16 thus does not give the Commission independent
powers. Rather, it provides for implementation of the core sections of the Act,
such as Section 4.
B.
Nor can we accept the Commission's argument that it has met its obligation
to insure the statutory standard of "just and reasonable" rates by indirectly
controlling small producers prices through regulation of large producers and
pipelines. That argument might have some merit if the Commission had provided
that small producer rates could only be passed along on resale as legitimate
costs if they met the "just and reasonable" standard." In essence, that is what
the Commission was allowed to do in Permian. There, specific and direct regula-
tion of small producer rates was held unnecessary because all such rates were
required to be below the area ceiling rate — a rate level already determined by
the Commission to be "just and reasonable." ^
Here, however, the Commission set forth a different sort of guideline for its
indirect regulation. The novel tests proposed are nowhere spelled out in the Act
or in any decision applying the Act. Small producer rates can only be passed
along to consumers if they are not unreasonably high, considering appropriate
comparisons with highest contract prices for sales by large producers or the pre-
vailing market price for intrastate sales in the same producing areas."
Whether or not these two factors would establish precise boundaries on ac-
ceptable rates, the Commission has clearly tied its determination to factors
w FPC V. Louisiana Power £ Light Co., 406 U.S. 621. 631 (1972).
1* Deregulation Is decidedly not one of the "policy decisions of the type [the FPC] . . .
was created to make." See Public Service Commission v. FPC (No. Tl-ilSl), supra.
is.'jgo U.S. 747 (1968).
M Id. at 787. (Emphasis added.)
" However, In that event, we might have greater problems with the validity of subjecting
the pipelines and large producers, who have made unrefundable payments to small pro-
ducers, to the risk of later Commission determination, under such an imprecise standard,
that the rates paid could not be passed along as legitimate costs. The Commission Itself, in
Order No. 428-B. recognized that it would be desirable for "the pipelines to know In
advance the boundaries within which they could freely contract with small producers."
J.A. at 246. Unfortunately, In the case at bar, the Commission chose a "more concrete
guide" with no relation to the mandatory statutory standard.
Judge Fahy has suggested modification of the 'Order to strike its provisions prohibiting
refunds from small producers and to leave open the Commission's authority to protect large
producers and pipelines from unreasonably high small producer prices. That approach
would only compound the uncertainty and risk for all concerned. Moreover, It would
defeat the basic purpose of the Order — encouraging exploration by assuring small pro-
ducers of a steady flow of funds under their contract rates.
« When the Commission says on pages 16 and 17 In its brief that the only dlflference In
Its new scheme from that which the Supreme Court approved In Permian in 1968 Is that
now the small producers are allowed to exceed the area rate celling determined to be just
and reasonable, then of course the Commission Is saving that the whole Issue In the law-
suit Is no different from Permian. That just Isn't so. The absence of such a "just and
reasonable" limit is the big difference. Order No. 428 not only allows small producers to
exceed the reasonable and just area rate ceilings — It allows them to do so on the basis of the
tree market, which is the antithesis of regulation.
" J.A. at 142. These standards apply to both pipelines and large producers. In addition,
large producers may reflect their Increased payments In rate Increases only If the contract
price differential between their purchase and resale prices Is "consistent with prevailing
price differentials In the area." J.A. at 140.
27-547—74 40
616
which it does not regulate or which derive solely from market forces.^ Large
producers can, of course, contract for any prices, presumably in the hope that
such payments may eventually be allowed under the regulatory scheme as legiti-
mate costs actually incurred. Intrastate sale prices are at no point subject to
regulation by the Commission.
The Commission has a duty to insure that all rates are "just and reasonable.""^
At best, the indirect controls it has proposed will insure that the small pro-
ducer rates which are passed on to consumers are below levels set by private
contracting parties (or potentially by state regulation which is not necessarily
tied to the fedei-al standard). Nothing at all insures that those levels will be
"just" or "reasona!)le." That is the essential flaw in the Commission's plan.
That is the point at which the FPC abdicates its regulatory responsibility in
derogation of the purposes and mandatory terms of the statute. Indirect "regu-
lation" by such novel "standards" is worst than an exemption simpliciter. Such
an approach retains the false illusion that a government agency is keeping watch
over rates, pursuant to the statute's mandate, when it is in fact doing no such
thing.
One variant of the "indirect regulation" argument might contend that, while
the Coniffiission would no longer be regulating rates, the market mechanism
itself would (in effect, dictate, small producer prices which were "just and
reasonable." However, though ingenious on a semantic level, that argument
ignores the essential difference between a regulated and an unregulated industry.
Put simply, the latter is governed by the market while the former, by definition,
is the subject of active governmental control.
More importantly, such a post hoc rationalization does not coincide with the
Commission's own view of its Order. The FPC flatly concedes that "[t]he Com-
mission's order does not purport to determine the just and reasonable rates
for sales by small producers." " To the contrary, the Commission's basic con-
tention all along has been that the "just and reasonable" standard was not
mandatory and that the FPC can simply choose not to regulate rates."'' It
strains credulity to assert that the Commission meant to achieve just and reason-
able rates through normal market forces while in the very same Orders it re-
fused to let pipelines and large producer plant operators pass on these "just
and reasonable" rates without further review under new non-statutory stand-
ards. Since the Commission itself has not been confident enough to conclude
that the market will necessarily yield rates that comply with the statute, this
court can hardly uphold the Orders on that ground.
Our dissenting colleague believes that "[t]he Commission has made a judgment
which I think is within the ambit of its competence and expertise not to require
small producers to be bound to the area rate .... on an experimental basis."
(P. 20) But the "area rates" are the previously Commission-determined "just
and reasonable" rates, from which, no matter how one phrases it, the small pro-
20 In the different context of individual ratemaking proceedings, this court has Insisted
that the Commission's determinations be "anchored"' to factors with some meaningful rela-
tionship to what is "just and reasonable." See City of Chicago v. FPC, U.S. App. D.C.
45S F.2d 7.31, 750 (1071), cert, denied, 405 U.S. 1074 (17 April 1972) : and Citi/ of
Detroit V. FPC, 97 U.S. App. D.C. 260, 230 F.2d 810 (1955). cert, denied, 352 U.S. 'S2!)
(1956). As the court noted in City of Detroit, a new Commission approach to regulation is
not invalid merely because it departs from the traditional rate-base or cost-of-service
methods. However, even granting the legitimacy of indirectly regulating small producer
rates, the standards set forth in Order No. 428 have not been demonstrated to have any
relationship at all to the statutory standard.
-1 To the extent that new sales are covered by the blanket small producer certificates, the
Commission has also abandoned an.v attempt to scrutinize the rates involved in such sales
against Section 7's standard of "public convenience and necessity." Were that the only
effect of Order 428, we might have a different case. If there remained a potential for future
review under the standards of Sections 4 and 5, the "public convenience and necessity"
might indeed be served by temporaril.y allowing certification of rates meeting the novel
standards proposed by the FPC. Indeed, rates are "not . . . the only factor bearing on the
public convenience and necessity." Atlantic Refining Co. v. Public Service Commission, 360
U.S. 378, 391 (1959). Unlike the situation in Atlantic Refining, small producer rates would
probably not set a pattern for the whole industry. However, the Commission here ahan-
•doned any future rate review under the "just and reasonable" standard. In its more recent
rulemaking Orders Nos. 455 and 455-A, the Commission seems to have admitted that it
has no such power. Those Orders, consolidating the Section 4 and Section 7 tests in an
optional certificate procedure for new gas sales, also sought to assure producers of certain
receipt of their certified contract rates. In that context, the Commission conceded that
"[w]e cannot bind a future Commission not to invoke the prospective operation of Sec-
tion 5, nor do we attempt to do so." Mlmeo, pp. 9-10. In marked contrast is the Commis-
sion's statement regarding Order No. 428 : "We seek to assure the small producer that when
ho enters into a new contract for the interstate sale of gas, the provisions of his contract
will not he subject to change." We conclude that Order No. 455 contains the more correct
view of the statutory limits on the Commission's power.
22 Commission's Brief at p. 35.
23 Joint Appendix at p. 136.
617
ducers will be exempt, even though on an experimental basis. It is significant
that the Notice for this rulemaking proceeding was frankly titled "Exemption
of Small Producers from Regulation." Our dissenting colleague correctly notes
that the Order which issued carried the title "Order Establishing Blanket Cer-
tificate Procedure for Small Producer Sales and Providing Relief from Detailed
Filing Requirements." This rose by another name carries the same thorns.
Judge Fahy notes that the Commission intends to review the results of its
experiment. Presumably, if that review showed unjust and unreasonable rates
developing, the Commission would consider reinstating the regulatory scheme.
However, even if it did so, the rates charged during the interim period would not
have been subject to regulation. It seems most unlikely that any "further action
to protect consumers" could legally reimburse those who made payments, valid
under the Commission's own rules during that experimental period, were we to
approve these rules here.
The Commission further defended its decision on the grounds that, given
their limited percentage of the market, a rise in small producer prices will have
no great effect on consumers.^ We doubt that the effect of potentially allowing
greater than area ceiling rates for 10.5% of the gas sold can be considered
de minimis. In any case, the long-range impact of these orders on consumers lies
more in the principle they establish than in any immediate effect on prices. We
think it undeniable that the Commission could, under its theory of this case,-
proceed to establish another class of "medium" producers, and provide the same
or different appropriate exemptions for this new class, and Commission counsel
so conceded in oral argument. Likewise, the Commission could, again by its own
fiat, change the definition of small producer to include those with greater volumes
of jurisdictional sales.
If Order No. 428 is upheld, no limit appears which could halt gi-adual erosion
of the statutory standard's applicability. Given the Commission's self -professed
distaste for regulation, a decision upholding its approach here might soon yield
further FPC decisions which made the instances where rates were determined
by the "just and reasonable" standard the exception rather than the rule.
Whatever the wisdom of the policy at this critical juncture of our national
energy source problems, we cannot hold that JiOHregulation is the statutory
equivalent of regulation. Only Congress can knowingly prescribe nonregulation
for small producers in lieu of the existing statutory scheme of regulation found
by the Supreme Court in Phillips to be mandatory under the Natural Gas Act for
all producers.
III. Means to the Desired End
All of this is not to say that a proper regulatory determination, within the
letter and spirit of the Natural Gas Act, could not set a just and reasonable rate
for small producers higher than that for large producers. Given the special prob-
lems and practices of small producers, such a result is certainly conceivable. But
the small producers cannot be exempted from the regulatory scheme, and have
their prices tied to the free market, by administrative agency fiat.
Nor is the scheme saved by the laudable purpose of the Commission, described
by our dissenting colleague : "The Commission is attempting to learn whether
under this program the small producers, relieved of much of the burden of regu-
lation required of other classifications, can improve their exploratory efforts
while charging rates which on review will nevertheless prove to be just and rea-
sonable and which will not adversely affect the consumer interests protected by
the Act." (P. 20) With all due respect to .Judge Fahy and the Commission, what
it is doing is experimenting to see if, after all, «ow-regulation of the small pro-
ducers, letting market forces shape the price structure, will not in the long run
be better both for industry and consumer. Whether this be so or not, the place for
authorizing such experiments outside the present language of the Act is in Con-
gress.^ And, as noted immediately above in Part II, the means adopted by the
=■» A de minimis effect on consumer prices seemed to weigh with the Court in Permian
with regard to one of the approved "exceptions." 390 U.S. 747, 786-87, n. 56, and accom-
panying text (1968).
~> Thf Congress could itself classify small producers, exempt theiii from regulation for a
designated period of time, and meanwhile order the Commission to gather empirical data to
see if this is beneficial to the industry and to consumers of natural gas. While we do not
reach the details of the Commission's plan here, we should note that the different parties
pointed out various inequities, each from its own point of view. The Commission might be
well advised to make certain refinements in its overall plan before recommending it to
Congress. In particular, the standards to be applied to resale by non-exempt producers and
pipelines would benefit from greater precision — so that these businesses could know in
advance what their position would ultimately be and would not have to rely on the good
will of the Commission for their economic salvation.
618
Commission here are capable of being employed to the complete subversion of the
regulatory scheme.
The Power Commission has made a conscientious and intelligent effort to cope
with an enormous national problem. Where the Commission has failed is not in
its diligence and its expertise. It has simply failed because the methods adopted
do not square with its duties under the Natural Gas Act. This court's role, in
regard to the actions of regulatoiy commissions, is to insure that such bodies
comply with applicable legislation. The Commission's imagination and ingenuity
here simply out ran the statute. The place to bring these resources to bear is in
Congress. If exemption is advisable, and the Commission appears to have made
a powerful case that it is. Congress should have a receptive ear. In the interim,
this court cannot ignore the statute or excuse the Commission from its duty.
Accordingly, the orders of the Commission in Docket No. R-393 are set aside.
So Ordered.
Fahy, Senior Circuit Judge, di.'^scntinfj: I agree with the court that all rates
and charges of any natural-gas company subject to the jurisdiction of the
Natural Gas Act, which includes the small producers here involved, shall he
just and reasonable and, if not, that they are unlawful. But we have no particular
rate or charge before us for scrutiny as to its justness or reasonableness. Order
No. 428 of the Commission, before us for review, was made in a rule-making
proceeding duly conducted. It passed upon no particular rate or charge of any
or all small producers. It laid down certain guides within which small producers
may contract for sales of their gas. It is properly entitled by the Commission as
an "Order Establishing Blanket Certificate Procedure for Small Producer Sales
and Providing Relief from Detailed Filing Requirements." The Commission
explicitly relies upon the Supreme Court decision in Permian Basin Area Rate
Cases, 390 U.S. 747 (1968), to the effect that under section 16 of the Act,^ for
purposes of its rules and regulations, the Commission may "classify persons and
matters within its jurisdiction and prescribe different requirements for different
classes of persons or matters." It cannot be questioned that it is within the power
of the Commission separately to classify small producers.^ The question really is
wliether the rules or regulations applied to this classified group are within the
Act. More precisely, as it seems to me, tlie question is whether we can hold, on
the record before us, that the type of regulation of prices adopted by the Com-
mission has led or will lead inevitably to unjust or unreasonable rates charged
by small producers to purchasers of gas from them, notwithstanding
[a] presumption of validity . . . attaches to each exercise of the Commis-
sion's expertise, and those who would overturn the Commission's judgment
undertake "the heavy burden of making a convincing showing that it is
invalid because it is unjust and unreasonable in its consequences" ....
. . . [I]t must be free, within the limitations imposed by pertinent consti-
tutional and statutory commands, to devise methods of regulation capable
of equitably reconciling diverse and conflicting interests.
Permian, supra, 390 U.S. at 767.
The Commission has made a judgment which I think is within the ambit of its
competence and expertise^ not to require small producers to be bound to the
area rate and certain filing requirements, on an experimental basis.* A higher
rate than that previously fixed for the industry in the area may be just and
reasonable for the small producer as a separate classification within the area.
The Commission is attempting to learn whether under this program the small
115U.S.C. S 717(0) (1970).
2 Permian, supra, 390 U.S. at 787, where the Supreme Court stated :
"The problems and public functions of the small producers differ sufficiently to permit
their separate classification, and the exemptions created by the Commission for them are
fully consistent with the terms and purposes of Its statutory responsibilities. It Is not
without relevance that this Court has previously expressed the belief that similar arrange-
ments would ameliorate the Commission's administrative difficulties."
3 Recently, in FPC v. Louisiana Power and Light Co., 406 U.S. 621, 642 (1972) the Court
referred to the Commission's authority under section 16 of the Act as follows :
"[T]he Commission must possess broad powers to devise effective means to meet these
responsibilities. FPC and other agencies created to protect the public interest must be
free, 'within the ambit of their statutory authority, to make pragmatic adjustments which
may be called for by particular circumstances.' . . . Section 16 of the Act assures the
FPC the necessary degree of flexibility. ... In applying this section, we have held that
'the width of administrative authority must be measured In part by the purposes for which
it was conferred. . . . Surel.v the Commission's broad responsibilities therefore demand a
generous construction of its statutory authority.' "
* The Court is not bound by Commission counsel's response during argument that the
Commission could establish a class of "medium" producers for regulation similar to that
which Order No. 428 applies to small producers.
619
producers, relieved of much of the burden of regulation required of other classi-
Hcatious, can improve their exploratory efforts while charging rates which on
review will nevertheless prove to be just and reasonable, and which will not
adversely affect the consumer interests protected by the Act. The Order provides :
We intend to review the prices established in new contracts or contract amend-
ments relating to sales by small producers to assure the reasonableness of the rates
charged by such producers pursuant to the action we are taking herein. In the
event we determine that this approach is inimical to the interests of consumers,
we shall take further action to protect consumers.
The Commission is attempting "to reach an accommodation of conflicting
interests, through experimentation, that will result in the proper alleviation of
the gas shortage." Public Service Commission of the State of New York v. FPC,
U.S. App. D.C. , F. 2d (1972) .
I do not think the Commission has abdicated its responsibility to insure that
rates of small producers will be just and reasonable. It does not appear from
the record before us that any such price that might be charged is necessarily
unjust or unreasonable. It is the Commission's assumption, given the small
percentage of gas sales the small producers account for, and given their situa-
tion within the industry, that the rates to be collected from their sales of gas
under this new plan will in fact be just and reasonable. The record before us does
not rebut this assumption. Moreover, consumer protection is promised, and I
cannot now hold that the promise will not be fulfilled. The Commission states :
The action taken here in oi;r view does not constitute deregulation of
sales by small producers. We will continue to regulate such sales but will
do so at the pipeline level by reviewing the purchased gas costs of each
pipeline with respect to small producer sales. We shall also provide certain
other safeguards against unreasonably high small producer prices, as
hereinafter discussed, to assure adequate protection of the consumer.
I have considered the contention that Order No. 428 discriminates against
large producers vis-a-vis pipelines, but I find in this, as in other contentions
made, no reason to depart from my basic position that as the matter now comes
before the court the Order should not be set aside.
I would, however, modify Order No. 428 in one respect. I would strike its
provisions prohibiting refunds to pipelines and large producers, leaving open
to the Commission to exercise such authority as it has to protect lai'ge producers
and pipelines in the event the Commission finds they have been charged un-
reasonably high prices by small producers. As thus modified I would affirm
Order No. 428 and its alphabetical series. Should such a modification temper to a
degree the charges of small producers, I think that result must be accepted as
required by the public interest represented by the Act. I do not think such
possible tempering would go so far as to defeat the purposes of Order No. 428.
I respectfully dissent.
[Press release dated Sept. 3, 1970]
Septembee 3, 1970.
From the Office of Senate Antitrust and Monopoly Subcommittee.
Senator Philip A. Hart (D-Mich) has asked the Federal Power Commission to
delay a proposed natural gas price hike until it is determined by the Federal
Trade Commission if there truly is a gas shortage.
Hart noted that the industry argues the increase is needed to encourage ex-
ploration for gas in order to alleviate a serious shortage.
Normally reliable sources. Hart said, have alleged that gas producers are not
rei>orting discoveries and that there is a "strike" of producers — who are collec-
tively withholding gas from the market pending an increase.
The proposed rate increase reportedly would raise gas costs by 50 to 100 per-
cent for consumers, utilities and industrial users.
Hart called upon the Federal Trade Commission to use its "unique authority
and expert manpower" to check out the allegations and determine the exact gas
reserves.
He told the FPO that since its information on gas reserves is limited to data
the industry supplies voluntarily, "with all the unknowns, it seems a Commis-
sion decision on a rate increase woiild be less than 'informed'."
"If a rate increase is unavoidable," Hart asked the FPC to put the added rev-
enue in escrow until a geological survey of reserves is completed. Also, he said,
care should be taken to see that only "true" new discoveries enjoy the new rate
and that unreported "new" discoveries and discoveries made prior to the in-
crease are not "grandfathered in."
620
Hart also expressed concern over the growing dominance of the entire energy
field by the oil companies.
He asked the FPC to recommend legislation giving it the authority to "evalu-
ate the interrelationship of basic heating fuels", including regulating "artifi-
cially induced shortages of coal and heating oil which may cause gas shortages."
( Complete text of both letters attached. )
Attachment 1
September 1, 1970.
Hon. A. EvERETTE MacIntyre,
Acting Chairman, Federal Trade Commission,
Washington, D.C.
Dear Mr. MacIntyre : The Senate Antitrust and Monopoly Subcommittee has
been conducting a study of the energy industry. Information which recently has
come to our attention with respect to the basic fuels, i.e., coal, oil and natural gas
is extremely disturbing.
gas
The Federal Power Commission currently is holding hearings on proposed rate
increases in natural gas. One of the reasons given in favor of the increase is that
we presently are faced with a shortage of known reserves, and an incentive is
needed for the exploration, development and production of new natural gas.
The basic statistics on known reserves have been furnished to the Federal Power
Commission on a voluntary basis by the industry. It is my understanding that
FPC does not have the authoiity or the mechanics needed for an independent de-
termination of reserves. Natural gas producers and pipeline concerns have recom-
mended price boosts of 10 to 15 cents for each 1,000 cubic feet in new interstate
gas sales contracts according to the "Wall Street Journal." This apparently would
mean a rise of from 50 to 100 percent of the cost of new gas supplies to consumers,
utilities and industrial users.
The industry information on gas reserves would indicate that there is indeed
a shortage of reserves. Yet, there have been numerous allegations that the pro-
ducers are collectively withholding information on new discoveries and are
awaiting the proposed price increase in order to obtain the higher rate before
reporting or developing these new finds. For example, Joseph Swidler, Chaii-man
of the New York Public Service Commission, has been quoted as saying that
natural gas producers are holding back gas supplies waiting for a better price
and are sitting on gas leases and not attempting to explore for gas. Louisiana
Governor John J. McKeithen has stated that the Conservation Department has
found 1,100 gas wells shut in, mostly waiting for higher wellhead prices.
In recent testimony before the Feedral Power Commission, Docket Nos. AR 69-1,
Albert F. Bass, a petroleum engineer associated with National Economic Re-
search Associates, Inc., concluded that based upon his investigation and study
of the gas reserves of the Southern Louisiana area, the available public informa-
tion was not suflacient to determine the actual magnitude of the available gas
supply. Mr. Bass also raises the possibility that producers are delaying reports
or not reporting new gas discoveries. A copy of this testimony is enclosed for
your information.
COAL
The country is also faced with an apparent serious shortage of coal. The Office
of Emergency Preparedness estimates total 1970 use of coal at 583 million tons
and production at 571 million. TVA is reported to have a coal supply of only 10 to
12 days and only 4 days' supply in some plants. Furthermore, it is paying as much
as 100 percent more for coal than it was paying at the beginning of this year.
Statements received during Subcommittee hearings raised a serious question
as to whether the acquistion of coal companies and coal-producing properties by
oil companies has contributed to the shortage and price increases and whether
there has been a deliberate withholding of coal from the marketplace.
on.
A similar situation exists with regard to oil products used for heating and
power generation. The last few months have seen dramatic increases in fuel
oil with prices being raised simultaneously by major fuel suppliers. There have
been numerous complaints to the Subcommittee with respect to the inability of
utilities and distrbutors to obtan these products.
621
The dominance of major oil companies in gas, oil and coal energy resources,
coupled v.ith the simultaneous price increases and shortages in all of these
energy resources, raises serious antitrust questions ; and, in my view, warrant a
thorough and si>eedy investigation by the Commission. If this trend is left unat-
tended, the public faces at best spiraling eosts for heating, lighting and trans-
portation, and at worst a cold and dark winter. In addition, a number of manu-
facturers foresee plant curtailment or closures as a resul of power shortages and
greatly increased cost of operation, thereby giving a new impetus to the continued
growth of unemployment and inflation.
It seems to me that this situation calls for immediate action, and the Commis-
sion is uniquely equipped in expert manpower and statutory authority to examine
the allegations of an artificially induced shortage of natural gas and to provide
the facts to settle the question of reserves finally.
Therefore, I suggest that the Commission should use its broad investigating
authority under Section 6 of the Federal Trade Commission Act to :
1. Accurately and objectively determine the proven, probable, possible and
speculative gas reserves of the leading producers.
2. If there is a withholding of gas reserves and delay in reporting new proven
or probable gas reserves, determine whether this is attributable to a combination
or other conduct violative of Section 5 of the Federal Trade Commission Act or
the antitrust laws.
.3. Determine if the alleged shortage of natural gas is related to oil company
dominance of competing energy resources.
In view of the pending gas rate increase under consideration by the Federal
Power Commission and their apparent lack of information in this area, I would
respectfully request that you furnish the Antitrust Subcommittee with this
material at the earliest time. Please feel free to contact the Subcommittee staflf
for any assistance they may be able to render in your investigation.
Sincerely,
Philip A. Haet, Chairman.
Attachment 2
Hon. John N. Nassikas,
Chdirman,
Federal Power Commission,
Washington, B.C.
Dear Chairman Nassikas : Members of the Federal Power Commission have
been making public statements that a rate increase for natural gas is essential
in order to avoid winter shortages and encourage new discoveries. The increase
proposed is reported to mean a doubling of consumer costs for residential use and
substantial increases for industrial users.
The Commission apparentily finds itself in a dilemma : grant the increase or
encourage "freeze outs".
Neither choice is a comfortable one — and I sympathize with the Commission
if it must make that choice.
However — as you will see from the enclosed copy of my letter to the Federal
Trade Commission — my greatest discmofort with this portrayal is not the pre-
sumed dilemma but that it may not be a true picture of the situation.
It is my understanding that the Commission's evaluation of how much natural
gas is readily available now is based on information supplied voluntarily by the
industry. The Commission, as I understand, is unable to determine objectivity
the proven, probable, possible and speculative reserves. Neither, I am told, does
it know — nor can it find out — whether there is a "strike" by producers or a sup-
pression of existing but unreported discoveries of natural gas.
All of the these unkowns, it seems to me, make a decision on a rate increase
by the Commission less than "informed". Of course, anything less than a "best
effort" would not be in keeping with the responsibility to the public interest the
Commission has.
As you see from my letter, I have called on the FTC to get information the Com-
mission lacks and which seems essential to a rational decision on the rate increase.
The FTC is uniquely equipped in expert manpower and statutory authority to
examine the allegations of an artificially induced shortage and to provide the
facts to settle the question of reserves finally.
This study, I realize, may not solve the threat of short-term shortage this
winter. Neither can it eliminate the long-range problem the FPC has in rationally
establshing equitable rates without objectively obtained supply information.
Therefore, I would appreciate the Commission considering these steps:
622
I. GAS SHOETAGE
A. Suspend considering a rate increase until the FTC has reported ; or
B. If a rate increase is unavoidable, develop definitions and safeguards to
assure only "true" nev? discoveries of provable and probable reserves enjoy the
new rate and prohibit "grandfathering" in discoveries which were in fact made
prior to the rate increase ; and
C. Require revenue from the new rate be placed in escrow, subject to rebates,
until an objective survey of proven, probable, possible and speculative gas re-
serves is completed.
II. POWER COMMISSION AUTHOEITT
Present Congress with recommendations for legislation to authorize the FPC
to require geological information from producers and authority for its own surveys
of gas reserves so the Commission may make informed rate decisions.
III. INTERFUEL COMPETITION AND SUPPLIES
Recommend legislation authorizing the FPC to evaluate the interrelationship of
basic heating fuels ; to control interlocking or conglomerate ownership of fuel re-
sources ; and, to investigate and regulate artificially induced shortages of coal and
heating oil which may cause gas shortages or an uneconomic allocation of energy
resources.
In view of the emergency which we are supposedly facing, hopefully you will
agree that an early decision on these suggestions would be beneficial.
Sincerely,
Philip A. Haet, Chairman.
Enclosure. [Retained in committee files.]
Federal Trade Commission,
Washington, D.C., October 13, 1970.
Hon. Philip A. Hart,
Chairman, Senate Stibcommittee on Antitrust and Monopoly,
The U.S. Senate, Washington, D.C.
Dear Senator Hart : This letter is in response to your letter of September 1,
1970, concerning natural gas and related energy matters. The Commission has
engaged in an intensive initial review of the important questions raised by your
letter. In this process, the vpilling assistance of the staff of the Antitrust and
Monopoly Subcommittee, as well as the Federal Power Commission, has been
greatly appreciated.
The Commission is initiating a vigorous investigation of practices and trans-
actions in and affecting the energy field which present significant competitive and
consumer problems. In the energy field, as well as any other to which our juris-
diction and responsibility extends, we welcome your suggestions as well as the
transmission of any helpful information held by the Antitrust and Monopoly
Subcommittee.
As you know, the energy sector of our economy is one of several concentrated
industries which the Commission has planned to study. Because of our concern
about energy issues such as those which you raise, the Commission has directed
today that the initial planning phase of the energy portion of the concentrated
industries study be given high priority. AVe expect that this exiiedited planning
phase of the energy portion of the concentrated industry study will provide a
great deal of information which vrill assist the Commission in developing the
further scope of our intended investigation in this field.
Dealing more specifically with the immediate concern expressed in your letter
of September 1, 1970, our staff has reviewed the cuiTent criticism relating to the
reporting, estimation, and deployment of reserves by the natural gas industry.
In order that the possibility of collusion or other unlawful conduct in this field
may be more fully explored, we have today directed that our staff commence an
investigation which will focus principally on the reporting, estimation and de-
ployment of reserves by the natural gas industry in one selected area of the
country, including related trade association activity. We believe that this investi-
gation is also pi-operly part of the larger energy problem and will enable the
Commission to properly appraise the antitrust as well as consumer protection
significance of gas reporting methods and procedures presently employed.
623
Also in the energy field more generally, we have today directed that the staff
give expedited, priority treatment to current merger activity in the energy field,
including a number of pending matters.
By the Commission.
Joseph W. Shea,
Secretary.
Fedeeal Trade Commission,
Washinr/ton, D.C, May I4, 1971.
Hon. Philip A. Hart,
Chairman, Senate Subcommittee on Antitrust and Monopoly, U.S. Senate, Wash-
ington, D.C.
Deab Mr. Hart : As you will recall, in my letter to you of October 13, 1970, I
indicated that the stafi; of our Bureau of Competition had been directed to imder-
take a limited antitrust investigation of the estimating and reporting procedures
of natural gas reserves in Southern Ix)uisiana in order to explore suggestions as
to the possibility of collusion or other unlawful conduct in tliis field. This investi-
gation is currently under way. The staff is also now analyzing certain energy
merger transactions, including situations involving oil company acquisitions or
otlier extensions into competing fuel areas. In this area, our analysis includes
consideration of the competitive elfects of the Continental Oil-Consolidation Coal
merger transaction.
In addition, my letter reported on the status of our concentrated industries
project — an important component of which is a structural and performance in-
quiry into the energy sector, explaining that "the Commission lias directetl today
that the initial planning phase of the energy portion of tlie concentrated indus-
tries study be given high priority." I indicated that, upon the completion of this
initial planning phase, the Commission would be in a better position to deter-
mine the further scope of our activity within the energy field.
Pursuant to Commission direction, the staff has now completed, and submitted
to tlie Commission, memoranda discussing and outlining the possible dimensions
of study areas within the energy area, accompanietl by estimates of tlie resource
demands which \\'ould be associated with them. The staff reports recommend that
the Commission direct its attention to four specific problems in the energy field,
each of which relates to the degree of present concentration. These are as follows :
1. A careful investigation and definition of competitive market boundaries
within the energy sector, focusing largely on inter-fuel substitutability within
the various demand markets. Staff estimates that this study element, most
important in terms of antitrust merger enforcement policy, can be completed
in about 3 months ;
2. An empirical analysis of concentration and concentration trends within the
energy sector, utilizing production and sales data, and examining the extent to
which the use of regional geographic market dimensions are appropriate. It is
estimated by the staff that this structural element can be completed in about a
year;
3. A careful examination of the relationships between concentration levels
within the energy sector and industry profitability, as a prime empirical indicator
of the existence and application of market power. The staff estimates that this
performance element can be completed in 3-4 months, assuming the availability
of the relevant data ;
4. An inquiry into effects of structural change on new investment and research
and development within the energy sector. It is estimated that this portion of
the concentration project will take l^A to 2 years for completion and will involve
substantial economist and attorney time.
Having considered the material which has been prepared by the staff, the Com-
mis.sion this week directed the Bureau of Economics (supported by the Bureau
of Competition) to commence work on the study of those four areas. The Com-
mission is of the opinion that these areas can be managed with our existing
manpower, although it will involve a considerable portion of our resources.
The Commission concurs with the staff's belief that this study plan for the
energy jwrtion of the concentration project is significant from a policy and
economics standpoint. The areas referred to above are discussed in greater detail
in the enclosed staff memoranda.
The Commission also has discussed and considered some of the other basic
areas which must be explored if intelligent answers to our current energy problems
are to be developed. They are questions which exist within the energy field, but
624
which are outside of the scope of our concentrated industries study. Two of the
most important of such areas of inquiry, also discussed in tlie enclosed staff
memoranda, appear to be as follows :
1. An analysis of the structure of the energy sector in order to ascertain the
ownership and control of energy reserves in addition to focusing on production
and sales data. Staff indicates that this type of study effort— by whomever
conducted— would require a large technically-qualified staff and sizable annual
appropriations for a period of 2 to 3 years ;
2. A general exploration of long-run energy supply problems, dealing not only
with industry structural and performance information (including reserves data)
but also analyzing the effects of external factors such as the interplay of the
numerous governmental policy forces which affect the total energy picture. This
type of project, it is estimated would also require a large staff with diversified
expertise and substantial annual appropriations.
The Commission is of the view that these two study possibilities are quite
distinct from the earlier four in terms of scope of the undertaking. Unfortunately,
the study of these areas would involve a commitment of resources far beyond
those presently available to us. The Commission feels, however, that it is
essential that these areas be fully explored — either by the Congress or by an
agency or institution designated and funded by the Congress.
We are aware that the Senate has passed a resolution authorizing an energy
study which encompasses some aspects of the broader study possibilities dis-
cussed in the enclosed staff memoranda, and of the general Congressional
concern that an energy study be commenced. The Commission has great interest
in seeing that the energy sector receives the careful economic study it demands,
and that relevant competitive issues are given appropriate attention in the
process. While as noted above, such a study is not within the present resource
capabilities of the Commission, we would urge that the Congress give this matter
continued priority attention and that the appropriate study or studies be under-
taken by the Congress or by some appropriate agency or institution authorized
by the Congress.
I am hopeful that our planned activity within the energy area will contribute
to a fuller understanding of the energy sector and be of policy significance to us
and to others. Your comments about our plans and activities in this area would
be most welcome.
By direction of the Commission.
Sincerely,
Miles W. Kirkpatrick, Chairman.
U.S. Senate,
Subcommittee on Antitrust and Monopoly,
_ June 23. 1911.
Hon. Miles W. Kirkpatrick,
Chairman, Federal Trade Commission,
Washington, B.C.
Dear Mr. Chairman: As you may know several days ago at my direction
the Senate Antitrust and Monopoly Subcommittee staff turned over to the Federal
Trade Commission staff the documents which were the basis of the recent Jack
Anderson columns on natural gas. These documents show that high FPC officials
have substantial doubts about the reliability of American Gas Association
estimates of natural gas reserves. Copies of these documents had been supplied
me by Mr. Anderson.
It is my understanding that these documents had not been made available to
your staff by the Federal Power Commission during discussions on this matter.
Considering the direct bearing these documents seem to have on the credibility
of the industry-supplied data on natural gas reserves — the subject of the inves-
tigation you took on at my request — I am very much concerned that the FPC
has not made this vital data available to you.
Because consumers are facing a $4 billion natural gas rate increase on the
assumption that there is a shortage, the views of the FPC experts have significant
importance. May I respectfully suggest that FTC immediately review all FPC
staff memorandum and studies bearing on this subject as part of your effort to
determine the real facts.
Sincerely,
Philip A. Hart, Chairman
625
[Press release dated Oct. 18, 1972]
From the office of Senate Antitrust and Monopoly Subcommittee.
Labeling basic antitrust work and economic studies by the Federal Trade Com-
mission its most important consumer work, Senator Philip A. Hart (D-Mich)
has prodded the FTC chairman for action in six areas.
Hart asked for a status report on four investigations — gasoline, auto parts
distribution, natural gas and pro-strip mining ads — and two studies — concen-
trated industries and conglomerates.
In a letter to Chairman Miles W. Kirkpatrick, Hart praised the "turn around
in the public image" of the Commission under Kirkpatriek's chairmanship.
"However, I am concerned that while a great deal of work has been done in the
surface consumerism areas — such as advertising practices — full revitalization
has not seeped through to the more pure antitrust areas or to fulfilling the duties
of the Commission to do economic studies for Congress," Hart said.
He asked Kirkpatrick what appropriation the FTC needs to move its anti-
trust and economic study work along and volunteered help in getting the money.
[Full text attached.]
October 11, 1972.
Hon. Miles W. Kirkpatrick,
Chairman. Federal Trade Commission,
Washington, D.C.
Dear Mr. Chairman : More than two years ago, following Antitrust Subcom-
mittee hearings on the gasoline industry, I asked the Federal Trade Commission
to investigate possible antitrust violations in the industry. Two particularly
troublesome practices which the Federal Trade Commission agreed to look into
were arbitrary termination and zone price supports.
As you may have noted, two court decisions in recent weeks — one in the
Seventh Circuit and one in the Superior Court of New Jersey — held these prac-
tices illegal. Also, the judges indicated they viewed zone price supports as vio-
lations of the Robinson-Patman Act.
So — subject to appeal and after the expenditure of a great deal of money —
at least two gasoline i-etailers may be out from under these practices.
However, I am deeply concerned about those of the other 385,000 gasoline
retailers who could be trying to survive with severe competitive disadvantages.
My concern is especially strong because the turnover in this industry is about
the most depressing of any of which I have knowledge. Aceoi'ding to figures
developed by the American Petroleum Institute, at least one in five gasoline
retailers goes out of business annually. This figure makes allowance for such
"normal" occurrences as retirement, illness or death. In really troubled areas —
especially those where price wars are almost a way of life — the turnover is
much higher. For example, during our hearings we learned that the rate in
Detroit was in the range of 35 to 40 percent.
So the cold, hard fact is that each month's delay in action means that literally
hundreds of retailers will be out of business and beyond help. When you consider
that termination can cost a retailer his life's savings and, we have been told,
even his home, speed becomes more essential.
Would you please tell me the status of this investigation? Especially. I would
like an opinion on when the Commission may be ready to decide if it will be
acting in this area.
Not to presume upon you — but to clear up a lot of loose ends — may I extend
my request for updating to several other Federal Trade Commission investiga-
tions in which I have a special interest.
For example, in 1968, the staff of the Antitrust Subcommittee began discussions
with your staff about distribution methods for sheet metal auto parts. Our con-
cern was born of an arrangement with General Motors and other leading domestic
automobile manufacturers, apparently in lieu of filing a proposed Federal Trade
Commission complaint against General Motors.
Over the years, independent members of the repair industry have made clear
to me their fear that the arrangement worked out was in effect restructuring
the industry. Further, the insurance industry and others pointed out that the
result also was a significant increase in consumer prices for auto sheet metal
parts.
During the 1970-72 period, prices for auto parts, tires, etc. increased .36.8
percent. Crash repairs rose 111 percent from 1960 to 1971. In other words, in
1971 motorists paid about .'?7 billion for parts they could have bought in 1960
for a little more than $3 billion.
626
In March of 1970, when appearing before the subcommittee, then Federal
Trade Commission Chairman Weinburger told me the Federal Trade Commission
was doing a study of auto repair parts with special attention to Robinson-Patman
aspects of the industry, and promised it would be concluded by November 1970.
In September of that year, you wrote me the study was moving along. In Janu-
ary of this year, you advised me the task force study had been transmitted to
the Commission and action could be expected shortly.
As of this date, I have seen neither the study nor Commission action based
on it.
If, in fact, as members of the industry claim, restructuring is going on and if
it does indeed tend toward concentration, we once again could face the situation
of trying to help businessmen who won't be there to help.
Now, if I have not worn out my welcome, I do have several other areas to get
into.
For example, I am deeply concerned whether the Federal Trade Commission
is pursuing its investigation of possible collusion in withholding natural gas sup-
plies with as much enthusiasm as the situation demands.
The Federal Trade Commission, again in response to a request from me, took on
this study in September 1970. Since — through the press and remarks of mem-
bers of industry and regulatory agencies — we have been plagued with proposetl
solutions to a problem we are not sure exists — the shortage of natural gas. Final-
ly, in a move which I still feel was beyond its authority, the Federal Power Com-
mission a few weeks ago de-regulated natural gas prices. It's a step that will cost
consumers an estimated $750 billion over the next 20 years.
Apparently — and I mean no criticism — the gas industry has been using all legal
tools at its disposal to impede the Federal Trade Commission investigation. How-
ever, I am interested in knowing what ammunition the Commission is using in
return. For example, how much staff is assigned? At what stage is the investiga-
tion? How vigorously does the Commission plan to pursue it?
On another front, I am most interested in knowing when the second part of
the conglomerate study will be ready. As you may recall, this was begun in mid-
1968 and the first report delivered to the subcommittee in late-1969. At that time,
we were told the second part of the study — concerning the impact of conglomerate
mergers on industrial behavior and performance — would be along later. Could you
update me on the status of that?
In the same field, I would like to know the current status of the concentrated
industries study. As I recall, the Federal Trade Commission first announced that
six industries would be studied. However, more recently I have read that the
number is down to two — or possibly three.
Finally, there is one other request — related to the energy area which you are
working in but falling more on the advertising side. This was my request in July
of last year that the Federal Trade Commission take a hard look at the veracity
of some of the ads being placed by industry and trade associations favoring strip
mining. A report on the progress in that area also would be appreciated.
There is no question that under your chairmanship, the Commission has turned
around its public image. Nor is there any question but that the more favorable
image is deserved. However, I am concerned, that while a great deal of work has
been done in the surface consumerism areas — such as advertising practices — full
revitalization has not seeped through to the more pure antitrust areas or to ful-
filling the duties of the Commission to do economic studies for Congress.
Now, I know that you can't do everything at once and I know that you must
allocate funds in the manner you see as best. However, I am convinced that the
basic antitrust work and the economic studies the Commission can do can have
the greatest impact on the consumer and the nation in the long run.
Therefore, anticipating that you may explain the delay in some of these areas
as due to lack of funds. I would like to ask one more thing :
Would you be so kind as to tell me what appropriations you see as necessary to
move these studies and others you deem necessary along speedily. I will be most
happy to do my best to help the Commission get that sum in its next appropriation.
With best wishes.
Sincerely,
Philip A. Hart, Oh airman.
627
Federal Trade Commission,
Washington, D.C., November 15, 1972.
Hon. Philip A. Hart,
Chairman, Subcommittee on Antitrust and Monopoly,
U.S. Senate, Washington, D.C.
Deak Mr. Chairman : This is in response to your letter of October 11, 1972,
requesting an update on the various programs and investigations tlie Commis-
sion is pursuing. In order to expedite a response to your request, I will, below,
simimarize briefly the events and status of those cases inquired of. A more
detailed explanation of those cases will be sent to you by the Bureau Directors
involved.
In the gasoline industry, as you know, the Commission has issued proposed
complaints and orders against both Phillips Petroleum and Standard Oil of
Ohio, based upon alleged abuses by the oil companies of their dealers. There are
also a number of investigations progressing on the "zone pricing" issue, wherein
the Commission has authorized the use of compulsory process.
In the "crash parts" area, the investigation you referred to in your letter
has been concluded. It was found, however, that there was not sufficient infor-
mation then available to make a valid determination regarding competition
among the industry members. The Commission, therefore, has authorized the
use of compulsory process to expedite the finalization of this study. The Com-
mission has likewise authorized compulsory process in the investigation of
natural gas resources. Vigorous opposition by the oil companies makes it diffi-
cult to predict a date for completion of this investigation, but I am informed that
substantial advances have been made.
There are presently four concentrated industries studies, including the fields
of energy, electrical equipment, drugs and automobiles. The energy investiga-
tion is further broken down so that there are. in the aggregate, a number of
studies covering various segments of the industry. The conglomerate merger
study, I am told, is complete save for minor details, and should shortly be before
the Commission.
With regard to the advertising by some companies and its veracity vis a vis
the environment, an investigation into advertising claims relating to reclama-
tion including strip mining and its effects is continuing. This study is being
conducted by the Bureau of Consumer Protection. As Mr. Pitofsky recounted in
his letter to you of August 13, 1971, there are certain problems to be overcome
in proc-eeding with this investigation. I am advised that for the most part the
difficulties have been resolved and the investigation continues.
I hoi^e this brief synopsis serves adequately to apprise you of the status of
those investigations you asked about. As I said, the Bureau Directors involved
will be in touch with your oflSce with more detailed accounts. If I can be of
further assistance, please let me know.
By direction of the Commission.
Miles W. Kirkpatrick, Chairman.
Federal Trade Commission,
Washington, D.C, May U, 197.3.
lion. Philip A. Hart,
Chairman, Subcommittee on Antitrust and Monopoly,
U.S. Senate, Washington, D.C.
Dear Mr. Chairman : I am writing to provide you with details concerning
three of this Bureau's investigations about which you inquired in your letter of
October 11. 1972: (1) natural gas; (2) gasoline zone pricing and dealer tennina-
tiou ; and (3) automotive "crash parts" .^
NATURAL GAS INVESTIGATION
For many years, as you know, proved natural gas reserve data reported by the
American Gas Association (AGA) has been widely used in connection with devel-
1 1 have disqualified myself from participation in the "crash parts" investigation. The
information contained herein regarding that Investigation was provided by the Bureau's
staff.
628
opment and implementation of government policy in the natural gas industry,
particularly by the Federal Power Commission in setting natural gas prices. The
persons responsible for the AGA's reserve reporting are employees of the major
producers, and through them, in essence, each producer reports reserves for his
own fields.
A few years ago, questions were raised regarding the AGA procedures. The
FPC Office of Economics, for example, noted that in 1968, in several fields,
dedicated reserves appreciably exceeded AGA reported proved reserves. Proved
reserves, of course, normally should exceed dedicated reserves, because dedicated
reserves (which ai-e compiled by the FPC from submissions by pipeline com-
panies) exclude reserves held for intrastate shipment. The Ofiice of Economics
also has expressed concern over sizable negative revisions in AGA gas reserves
for 1968 associated with the discovery and development of oil, \^ithout similar
negative revisions in oil reserves. Most significantly, the Power Commission's
Chief of the Bureau of Natural Gas noted that dedicated reserves reported by
FPC staff as existing in Offshore South Louisiana in 1968 exceeded the AGA
estimate for the area by 7.9 Tcf. This difference equals about one-fifth of all
Ijroved reserves reported by the AGA for that subarea.
Such substantial discrepancies, when considered in light of the procedural
framework for data compilation, certainly raise the possibility of antitrust viola-
tions. Brought to mind are the numerous antitrust problems which arise when
sensitive data is compiled and exchanged by members of an industry (see e.g.,
United, States v. Container Corp. of America, 393 U.S. 333 (1969) and cases cited
therein).
In 1970, the Commission began its investigation to determine the possibility of
collusion or other unlawful conduct in the reporting of gas reserves. InitialUy,
the Bureau requested the cooperation of the AGA and, after months of negotia-
tion, we were given access to field-by-field estimates for Offshore South Louisiana,
the first time, we were told, that a government agency has seen such figures.
Depositions of certain AGA oflicials were taken.
In November 1971, eleven companies were subpoenaed to gain access to the vital
raw data including company reserve estimates, which only the major producers
had. After months of negotiations, motions to quash and further motions to recon-
sider, only three companies have in any way i-esponded to the Commission's sub-
poenas. Court enforcement proceedings against all of the other firms are antic-
ipated. The Commission's requests for enforcement proceedings have been trans-
mitted to the U.S. Department of Justice.
In the face of the producers' opposition to this inquiry. It is now impossible to
make any firm judgments about the integrity and accuracy of the AGA reporting
system. The limited amount of evidence my staff has been able to get through
non-producer sources, however, confirms the need for thorough review of AGA's
procedures. But until we have obtained the requested material from the pro-
ducers, it is impossible to apprai.«re the significance of this evidence.
Three attorneys in the Bureau of Competition have been working on this
investigation. Two attorneys in the General Counsel's Ofiice have been preparing
Court enforcement proceedings. Additional attorneys will be assigned as the need
arises. It seems likely that the investigation will not be finished during this fiscal
year.
GASOLINE MARKETING INVESTIGATIONS
Your letter expressed concern over the precarious competitive existence of
many gasoline retailers. Since receipt of your letter the Commission has issued
complaints against the marketing practices of two major oil companies. In
Standard Oil Company of Ohio (Sohio), Docket 8910 (complaint issued Janu-
ary 18, 1973, the Commission has charged Sohio with price fixing and coercion
of dealers. The complaint alleges that Sohio controls its dealers by use of short
term leases, and in the Notice of Contemplated Relief, the Commission indicated
that a guaranteed five-year lease for Sohio's dealers may be part of an appropriate
remedy in the case.
On Novemlier 0, 1972. the Commission announced its intention to issue a com-
plaint against Phillips Petroleum Corporation. The proposed complaint charges
that Phillips has a standard form lease which provides for short term leasehold
interest, and whif'n allows Phillii)s to arbitrarily cancel on 10 days written notice.
Additionally, Phillips is charged with causing dealers to accept concellation
without an explanation or cause, requiring dealers to iiurchase Phillips' tires,
batteries and accessories (TBA), requiring dealers to maintain minimum levels
of Phillips products to secure loans from Phillips, and requiring a stated minimum
629
gasoline purchase, which constitutes a dealer's total requirement or a major per-
centage of a dealer's gasoline sales.
The Notice of Contemplated Relief in this case also includes a ban on lease
agreements with terms of less than five years, a ban on lease cancellations or
thi-eats to cancel except for good cause and a ban on requirements that dealers
deal exclusively in TBA products manufactured, distributed or sponsored by
rhillips. Settlement negotiations with Phillips, so far, have not been successful.
The Commission's zone pricing inquiry, still in the investigatory stage, is
primarily centered in the Detroit area and involves Shell, Mobil, American and
Texaco. Subpoenas and a request for a special report have been served, partial
subpoena returns have been made, and investigational hearings have been held.
We expect to make our recommendations to the Commission in this matter in
early summer.
To a large extent, the problems we see manifested at the marketing level of the
petroleum industry may be symptoms of serious competitive problems in the
production, refining and transportation segments of the industry. Recognizing this,
the Commission in December 1971 directed us, working with the Bureau of
Economics, to determine the effects of vertical integration and joint ownership
and operating arrangements on the structure, conduct and performance of the
petroleum industry. In connection with this directive, numerous interviews and
file searches are now being conducted at all levels of the petroleum industry. At
this stage of the investigation, we have not reached and firm conclusions about
the existence of antitrust violations.
"CRASH parts" investigation
The heart of the problem in the automobile crash parts industry is the control
maintained by GM, Ford and Chrysler over manufacture and distribution of
replacement crash parts. Production of these parts is either handled by the auto
maker.s or contracted out according to rigid specifications. In the latter case, the
auto makers exercise exclusive ownership or rights over the blueprints and
resultant tools and dies necessary to produce crash parts for each of their
resi>ective car models. The contractors produce only the quantity requested by
the auto makers, and, it would seem, are effectively precluded from selling to
anyone but them. Here, too, gathering evidence has been time consuming and
difficult. The staff foresees, however, that by year's end a decision can be made
as to the appropriate disposition of this matter.
I am hopeful that this letter has provided you with the information you desire.
If you need further assistance, please do not hesitate to call upon me.
Very truly yours,
Alan S. Ward,
Director,
Bureau of Competition.
In the United States District Court for the District of Columbia
Civil Action No.
Federal Trade Commission, 6th and Pennsylvania Avenue NW.,
Washington, D.C, petitioner
V.
0. N. Miller. Chairman, and. Standard Oil Company of California, a
Corporation, 225 Bush Street, San Francisco, Calif., respondents
petition for an order requiring respondents to appear, testify and produce
documentary evidence in an investigation being conducted by the federal
trade commission
Petitioner, the Federal Trade Commission, with authorization of the Attorney
General of the United States, and pursuant to Section 9 of the Federal Trade
Commission Act, 15 U.S.C. §49, hereby respectfully petitions the Court in this
summary proceeding for an order requiring the respondent. Standard Oil Com-
pany of California, by respondent O. N. Miller, Chairman, to appear before a
designated representative of the Federal Trade Commission and to testify
and produce books, records and documents in accordance with a subpoena
dtice-^ tecum issued by petitioner in November 24, 1971. A copy of said subpoena is
attached hereto and incorporated as Exhibit 1.
In support of this petition, petitioner further alleges the following:
630
1. Petitioner, the Federal Trade Commission, is an administrative agency
of the United States Government and is empowered and directed by Section 5
of the Federal Trade Commission Act, 15 U.S.C. § 45, to prohibit unfair methods
of competition in commerce and unfair or deceptive acts or practices in com-
merce. It is empowered by Section 3 of the Federal Trade Commission Act, 15
U.S.C. § 43, to prosecute any inquiry necessary to its duties in any part of the
United States and, by Section 6 of said Act, 15 U.S.C. § 46, to gather and com-
pile information concerning, and to investigate from time to time, the organiza-
tion, business, conduct, practices and management of coiporations engaged in
commerce and their relation to other corporations and to individuals, associa-
tions and partnerships.
Section 9 of the Federal Trade Commission Act, 15 U.S.C. § 49, empowers the
Commission to require by subpoena the attendance of witnesses and the produc-
tion of documentary evidence relating to any matter under investigation. Such
attendance of witnesses and production of documentary evidence may be required
from any place in the United States at any designated place of hearing.
2. Respondent Standard Oil Company of California ("Standard-California")
is a corporation organized under the laws of the State of Delaware, and it
maintains an office and its principal place of business at 225 Bush Street, San
Francisco, California 94120.
3. Jurisdiction of this cause and over respondents and the power to issue
the order prayed for herein are conferred upon this Court by the aforesaid
Section 9 of the Federal Trade Commission Act which provides that "[a]ny
of the district courts of the United States within the jurisdiction of which such
inquiry is carried on may, in case of contumacy or refusal to obey a subpoena
issued to any corporation or other person, issue an order requiring such coriJora-
tion or other person to appear before the commission, or to produce documentary
evidence if so ordered, or to give evidence touching the matter in question * * *."
The investigatory proceeding, in the course of which petitioner's subpoena was
issued and served, is being conducted by petitioner within the jurisdiction of
this Court.
4. Acting pursuant to its authority and duties referred to in numbered
paragraph 1 above, petitioner is now and at all relevant times has been carrying
on a nonpublic investigation (Federal Trade Commission File No. 711 0042)
to determine whether Continental Oil Company, Gulf Oil Corporation, Mobil Oil
Corporation, Shell Oil Company, Standard Oil Company (California). Humble
Oil & Refining Company. The Superior Oil Company, Inc., Texaco, Inc., and
Union Oil Company of California, and other persons and corporations, indi-
vidually or in concert, are engaged in conduct in the reporting of natural gas
reserves for Southern Louisiana which violates Section 5 of the Federal Trade
Commission Act, or are engaged in conduct or activities relating to the
exploration and development, production, or marketing of natural gas. petroleum
products, and other fossil fuels in violation of Section 5 of the Federal Trade
Commission Act.
A copy of the resolution issued by petitioner on June 3, 1971, directing the
use of compulsory process in said investigation is attached hereto and in-
corporated as Exhibit 2.
5. In comiection with said investigation and pursuant to the authority duly
delegated by petitioner's published rvale (16 C.F.R. § 2.7), Owen M. Johnson, Jr.,
an Assistant Director of the Commission's Bureau of Competition, on November
24, 1971, issued and caused to be served on respondents the aforesaid subpoena
(a copy of w^hich, as heretofore noted, is attached hereto and incorporated as
Exhibit 1), requiring respondents to appear before a named attorney examiner
of the Commission at Room 368, Federal Trade Commission Building, 6th Street
and Pennsylvania Avenue, N.W., Washington, D.C., on December 27, 1971, to
testify and produce siJecified books, papers and documents. Similar subpoenas
were issued and served on the following named corporations and principal offi-
cers thereof: Continental Oil Company, Gulf Oil Company, Mobil Oil Company,
Pennzoil Company, Shell Oil Company, Standard Oil Company (New Jersey)
(name subsequently changed to Exxon Corporation), Standard Oil Company
(Indiana), The Superior Oil Company, Texaco, Inc., and Union Oil Company of
California.
6. On December 23, 1971. respondent Standard-California filed a motion to
quash the subpoena contending, inter alia, that (a) the Commission failed to
comply with the Federal Reiwrts Act of 1942 (44 U.S.C. §§ 3501-3511), (b) the
Commission lacks jurisdiction to conduct the investigation in that exclusive and
631
primary jurisdiction in the area rests with the Federal Power Commission which
agency is allegedy exercising such jurisdiction, (c) the subpoena is directed to
confidential information, the disclosure of which would impair the competitive
position of Standard-California, (d) the resolution under which the subpoena
was issued failed to advise as to the nature and scope of the investigation, and
(e) compliance with the subpoena would be unduly broad and oppressive as to
time and scope.
7. On June 27, 1972, the Commission is.sued its order denying Standard-
California's motion to quash, together with an accompanying opinion giving the
reasons for its action. A copy of said order and opinion are attached hereto
and incorporated as Exhibit 3.
8. Wirh respect to Standard-California's claim that the subpoena required the
approval of the Office of ^lanagement and Budget, the Commission concluded in
the aforesaid opinion that such approval is not required with respect to investi-
gational subpoenas issued for law enforcement purposes. This conclusion ac-
cords with the views of the Clearance Officer of the Office of Management and
Budget as expressed in a letter to the Commission Liaison Oflicer dated Octolier
29. 1971. A copy of this letter is attached hereto and incorporated as Exhibit 4.
9. Following tlie Commission's denial of motion to quash. Owen Johnson, Jr.,
of the Commission, sent a letter to O. N. Miller, Chairman of the Board of
Standard-California, on July 7, 1972, asking for a statement indicating whether
or not Standard-California Intended to comply fully with the subpoena. A copy
of this letter is attached hereto as Exhibit 5.
10. On July 31. 1972. Lee Loevinger, Esq., counsel for Standard-California,
wrote a letter to Charles A. Tobin, Secretary of the Commission, and stated,
inter alia, that Standard-California did not intend to comply witii the FTC
subpoena dated November 24, 1971. A copy of this letter is attached hereto and
incorporated herein as Exhibit 6.
11. In further support of this petition, there is attached hereto and Incorporated
as Exhibit 7 the affidavit of Donald K. Tenney. a senior attorney in the Federal
Trade Commission's Bureau of Competition and one of the attorneys assigned to
conduct the Commission's investigation pursuant to which the subpoena here
sought to be enforced was issued.
12. No previous application has been made to this or any other Court for relief
herein prayed.
Wherefore petitioner respectfully invokes the aid of this Honorable Court and
prays :
(1) That it issue an order directing respondent Standard Oil Company of
California, by respondent O. N. Miller, to appear before such duly appointed
examiner of petitioner as may be designated by petitioner at a date, time and
place to be determined by petitionei", and to testify and produce specified books,
papers and documents in response to the subpoena issued by the Commission on
Novemlier 24, 1971 :
(2) That petitioner be awarded the costs of this action ; and
(3) That petitioner be given such other and further relief as this Court may
determine to be just and proper.
attorneys for petitioner
James T. Halverson,
Acting General Counsel.
Harold D. Rhtnedance, Jr.,
As.<^istant General Counsel.
Miles J. Brown,
Attomeif.
Montgomery K. Hyun,
Attorney.
Harold H. Tittjs, Jr..
U.S. Attorney.
Arnold T. Aikens.
Assistant U.S. Attorney.
Assistant U.S. Attorney.
Gregory B. Hovendon,
Attorney.
547 — 74 41
632
Verification
Charles A. Tobin, being duly sworn, deposes and says that he is Secretary
of the Federal Trade Commission ; that he has read the contents of the fore-
going petition and the attachments thereto ; that the facts stated in said peti-
tion are true and the Exhibits, except for Exhibit 7 and the attacliments thereto,
are copies of papers contained in the official files of the Federal Trade Commis-
sion ; and that he has been authorized by the Federal Trade Commission to
execute this verification.
Charle a. Tobin, Secretary.
Subscribed and sworn to before me, a notary public in and for the District
of Columbia, on this Sth day March, 1973.
JuANiTA A. Wells,
Notary PuMic.
My Commission Expires March 15, 1977.
Exhibit 1
Subpena Duces Tecum
UNITED STATES OF AMERICA
Federal Trade Commission
Mr. O. N. Miller, Chairman,
To: Standard Oil Company of California, Standard Oil Building, 225 Bush
Street, San Francisco, California 94120
You are hereby required to appear before Donald K. Tenney. an Attorney and
Examiner of the Federal Trade Coinmiftsion, at Room 368, Federal Trade Com-
mission Building, 6th and Pennsylvania Avenue. N.W., in- the City of Washing-
ton, D.C. 20580 on the 27th day of December, 1971, at 10:00 a.m.. to testify in
connection with the Commission's investigation of various corporations and
persons. File No. 711 0042. pursuant to Commission Resolution dated June 3,
1971, a copy of which is attached and made a part hereof, for the purposes stated
therein.
And you are hereby required to hrinfi icith you and produce at said time and
place the following hooks, papers, and documents: See attached "Definitions"
and "Specifications."
Fail not at your peril.
[seal]
In testimony whereof, the undersigned, an authorised official of the
Federal Trade Commission, has hereunto set his hand and caused the
seal of said Federal Trade Commission to he affixed at Washington,
D.C, this 2-'fth day of November, 1971.
Owen M. Johnson, Jr..
Assistant Director Bureau of Competition.
Notice to Witness.- — If claim is made for witness fee or mileage, this subpoena should
accompany voucher.
Definitions
As used herein, the term "documents" means all writings of every kind includ-
ing books, records, folios, minutes, reports, memoranda, correspondence, agree-
ments, discounted casli flow studies, cover sheets, calculation sheets, print outs,
telegrams, dairy entries, pamphlets, notes, charts, and tabulations in the posses-
sion, custody or control of the Company. The term "documents" also includes
voice recordings and reproductions or film impressions of any of the aforemen-
tioned writings as well as copies of documents which are not identical duplicates
of the originals and copies of documents of which the originals are not in the
possession, custody or control of the Company. The term "documents" further
includes all punch cards or other cards, tapes or recordings used in data proces-
sing, together with the programing instructions and other written material nec-
essary to understand or use such punch cards, tapes or other recordings.
In response to specifications in which the term "documents" is followed by an
asterisk (*), a verified written statement by an officer of the company containing
the requested information may be submitted in lieu of the documents called for
633
provided that the underlying documents or source materials are listed or other-
wise specifleally identified in, or as part of, such verified statement.
Each document submitted must be identified as to the specification or specifca-
tions to which it is responsive.
The term "the Company" means the corporation upon which this Subpoena
was served as well as its directors, officers, employees, and agents ; its subsidi-
aries and affiliates ; and the directors, officers, employees and agents of its sub-
sidiaries and affiliates. The tei-m "the corporation" means the corporation upon
which this Subpoena was served.
Unless otherwise stated, the following definitions apply to the specifications
that ensue :
1. Smith Louisiana. That geographical area delineated by Map III, page 84, of
the May, 1971 edition of Reserves of Crude Oil, Natural Gas Liquids, and Nat-
ural Gas in the United States and Canada and United States Produetive Capacity
as of December SI, 1910 including the offshore area. The term "Off.shore South
Louisiana" is defined as that geographic area which lies seaward from the Lou-
isiana coastline. The South Louisiana Offshore Area is sometimes referred to
, as Federal Areas 1 through 4 and includes the West Cameron Area. East Cameron
Area, Vermilion Area, South Marsh Island Area, Eugene Island Area, Ship Shoal
Area, South Pelto Area, Bay Marchand Area, South Timbalier Area, Grand Isle
Area, West Delta Area, South Pass Area, Main Pass Area, Breton Sound Area,
Chandeleur Area and Chandeleur Sound Ax'ea and any additions thereto, as indi-
cated on the United States Geological Survey "Oil and Gas Development Map of
the Gulf Coast State of Louisiana Outer Continental Shelf", as revised on Jan-
uary 5, 1971.
2. Net Production. The definition appearing in Technical Peport No. 1, Stand-
ard Definitions for Petroleum Statistics (First Ediiton, July 1, 1969), at page 11,
is adopted.
3. Natural Gas Present or Recoverable or Ultimately Recoverable.
a. Present. Natural Gas in place, i.e., existing either in the gaseous phase or in
solution with crude oil in a natural underground reservoir or reservoirs.
b. Recoverable. Natural gas in place that is producible.
e. Ultimately recoverable. Natural gas in place that is producible, together
with its cumulative production.
4. Field. A field is an area consisting of a single reservoir or multiple reser-
voirs all grouped on, or related to, the same individual geological features and/or
stratigraphical condition. A reservoir is a porous and permeable underground
formation containing an individual and separate natural accumulation of hydro-
carbons (oil and/or gas) which is confined by impermeable rock or water barrier.s
and is characterized by a single natural pressure system.
5. Completion Date. The first date on which any permanent equipment for
the production of oil or gas is installed in a well. Completion reports may relate
to the abandonment of a well or to the installation of permanent productive
eqtiipment.
6 & 7. Associated Gas; Dissolved Gas. The definitions of these two terms that
appear in Technical Report No. 1, Standard Definitions for Petroleum Statistics
(First Edition, .July 1, 1969), page 6. are adopted.
8. Nonassociated Gas. Natural gas which is in a reservoir or reservoirs not
containing significant quantities of crude oil.
9-13. Proved Reserves; Revisions; Extensions ; New Field Discoveries; and
New Reservoir Discoveries in Old Fields. The definitions of these five terms that
appear in Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the
United States and Canada and United States Productive Capacity as of Decem-
ber 31, 1970, at pages 102-104. are adopted.
14. Dedicated Reserves. The volume of natural gas committed to a pipeline
company and for which both the seller and the pipeline company have received
certificate authorization from the Federal Power Commission.
Specifications
A. Documents* which will indicate the correct legal name and business address
of the corporation, its date and state of incorporation, and the name, position
and home address of each officer and director of said corporation.
B. Documents* which will indicate the correct legal name and business address
of the parent of the corporation, the date and state of incorporation of the parent
and the percentage ownership the parent has in the corporation, and the name,
position and home address of each officer and director of the parent.
634
C. The corporation's Annual Reports for each of tlie rears 1066, 1967, 1968, 1969
and 1970.
D. Documents* which will indicate the name and address of each subsidiary,
affiliate, and division of the corporation and of the divisions of each such sub-
sidiary and affiliate engaged in the exploration, development, production, or
distribution of natural gas; the function (s) as heretofore set forth of each;
and the dates and states of incorporation and the names, positions, and addresses
of officers, directors, managers of each subsidiary, affiliate, and division.
E. Documents* which will indicate (1) each type of customer purchasing
natural gas, produced in South Louisiana, from the corporation, its subsidiaries
and affiliates and (2) the manner and methods of distribution of such natural gas
to each such type of customer.
r. Documents* which will indicate the following for each of the years 1986
through 1970:
1. Total net production of natural gas, in units, in (a) the United States and
(b) South Louisiana, by the corporation, its subsidiaries and affiliate.'s-
2. Total unit and dollar volume of sales of the total net production of natural
gas produced in (a) the United States and (b) South Louisiana, by the corpora-
tion, its subsidiaries and affiliates.
3. Total dollar volume of sales of the total net production of natural gas pro-
duced in South Louisiana by the corporation, its subsidiaries and affiliates to
each type of customer identified in Specification E(l) — for 1969 and 1970 only.
G. Documents either received (from whatever source) or written by the Com-
pany, in whole or in part, at any time bctvreen January 1, 1962 to December 31,
1970, which contain estimates or evaluations of the volume of natural gas present
or recoverable or ultimately recoverable (1) throughout all of South Louisiana
(2) throughout all of Offshore South Louisiana and/or (3) in specific fields,
portions of fields, leaseholds and/or portions of leaseholds located in Offshore
South Louisiana.
Excluded from this specification are any documents previously made available
to the Commission by the American Gas Association and presently in the custody
of Price, Waterhouse & Company, 1801 K Street, Washington, D.C. Included
in this specification by way of illustration but not limitation are documents
containing estimates or evaluations including re-estimates or reevaluations made
in connection with or in preparation for or as the residt of the following: (1)
l>idding on or nominating leases (2) deciding whether to erect permanent plat-
forms (3) compiling or inventorying total company reserves oi* supply (4) negoti-
ating or contracting for the sale of natural gas, or for the joint or common
exploration, development, production, purchase, or sale of acreage, or for obtain-
ing blank loans (5) filing depreciation expense schedules with Internal Revenue
Service or (6) submitting field-by-fieid estimates to subcommittees or committees
of the American Gas Association or the American Petroleum Institute.
H. Documents* indicating any or all of the following with regard to each field
and leasehold in Offshore South Louisiana for which estimates or evaluations of
the volume of natural gas, pretaining to the whole or a portion thereof, are pro-
duced pursuant to Specification G :
1. For each such field and portion thereof, its name and the number (s) of
•each l)lock number comprising said field or portion thereof — if the field or field
portion is situated at least in part in a portion of a block, the portion of the
block as well, e.g., "XW14":
2. For each such leasehold and portion thereof, the OCS number and the
name(s) and location (s) of the field (s) and portion (s) thereof comprising
such leasehold or portion thereof.
3. The pipe line company (ies) serving each such field, leasehold, or portion
thereof ;
4. The producer (s) and the operator (s) of each such field, leasehold, or por-
tion thereof, indicating the precise interest eacli such producer and operator lias
in the acreage.
5. For each such field, leasehold and portion thereof, the location (on a map)
and designation of each well drilled including (for each such well) :
a. The current status as classified by the Company, eg., "dry and abandoned'',
"temporarily abandoned", "suspended", "shut-in", "service", "producer", etc. :
b. Whether classified by the Company as an oil or gas well at the time of ( 1 )
application for drilling (2) the filing of each completion report (3) currentb^:
c. The number of reservoirs containing natural gas that have been penetrated
by tlie well ;
635
(1. The date drilling commeuced ; the date total depth was reached ; first date
of testing; first date of testing otficially reported; completion date; date com-
menced prodneiug.
I. Documents either received (from whatever source) or written hy the Com-
pany, in whole or in part, at any time subsequent to January 1, 1962, which refer,
analyze, compare, conmient on, set forth, and/or relate to any or all of the
following :
1. Any natural gas estimates or evaluations called for by Specificatinn G : tlie
prejiaration or completion of such estimates or evaluations ; the procedures,
criteria or inteiin-etations used in such preparation or completion; the identity
of organizalioual units and personnel of the Company involvetl in such prepara-
tion or completion ;
2. Any natural gas estimates or evaluations made available to the Commission
by the American (Jas Association and presently at Price, Waterhouse & Co., or
appearing in any American Gas Association Report on Natural Reserves, pub-
lislied subsecpient to January 1. 19G7, including the constituent categories of these
estimates such as "proved reserves", "re\isions", "extensions", "new field dis-
coveries", "new reservoir discoveries in old fields" ; the preparation or completion
of such estimates or evaluations ; the procedures, criteria or inteipretations used
in such preparation or completion; the organizational units and personnel of the
Company involved in such preparation or completion ;
3. Any lease nominations and bids, any agreements for joint or common leasing,
exp' oration, development, production, purchase or sale, or any cash flow or eco-
nomic feasibility studies preparatory to leasing, exploring, developing, purchasing
or selling, which involve Offshore Soutli Louisiana acreage ;
4. Any compilation. 'report or study of "dedicated reserves".
•"). Whether any well designated in response to Specification II-.5 contains natu-
ral gas in sufficient quantities as to be capable of producing in paying quantities.
J. Documents either received (from whatever source) or written I>y the Com-
pany, in wliole or in part, at any time subseipient to January 1, 1060. which refer,
analyze, compare, comment on, set forth, and/or relate to any or all of the
following :
1. Any failures or delays, for whatever reason, in reporting proved reserves
of natural gas to the American Gas Association, inchiding any failures or delays
by personnel of the Association to identify to subcommittee members all fields
containing proved reserves ;
2. The classification or exclusion or inclusion of volumes of natural gas as
proved reserves ;
8. The relationship between increases or decreases of crude oil proved reserves
with increases or decreases of associated, dissolved or associated-dissolved natu-
ral gas proved reserves ;
4. Negative revisions to American Gas Association proved reserve estimates
l)ecause of clerical f)r mathematical error.
K. Documents either received (from whatever source) or written by the
Company, in whole or in part, at any time subsequent to January 1, 1962. which
refer, analyze, compare, comment on, set forth, and/or relate to any or all of
the following :
1. The relation between the amount of "proved reserves" and the rate al-
lowed, to be allowed, or that may be allowed for natural gas by the Federal
Power Commission ;
2. The reporting of lower "proved reserve" figures.
Ij. Documents — naming all employees of the corporation, its subsidiaries and
affiliates who have, any time since January 1, 1986 with regard to Oftshore-
South Louisiana, estimated, evaluated or enumerated natural gas proved re-
serves, dissolved gas proved reserves, potential gas supply or well drilling activity
either for the American Gas Association, American Petroleum Institute, Poten-
tial Gas Committee, American Association of Petroleum Geologists or the Inter-
national Oil Scouts, including local scout checks, indicating for each person
named (1) the association for which he estimated or enumerated (2) whether
a member of the association (3) what was estimated or enumerated and (4)
the dates for which he estimated or enumerated for the particular association.
Exhibit 2
United States of America Before Federal Trade Commissiox
Commissioners : Miles W. Kirkpatrick. Chairman ; Paul Rand Dixon ; Everette
Maclntyre ; Mary Gardiner Jones ; David S. Dennison, Jr.
636
RESOLUTION DIRECTING USE OF COMPULSORY PROCESS IN NONPUBLIC INVESTIGATION
File No. 711 0(H2. . ^ . ^. ^.
Nature and Scope of Investigation : The purpose of the authorized investigation
is to develop facts relating to the acts or practices of the following corporations,
Continental Oil Company, Gulf Oil Corporation, Mobil Oil Corporation, Shell
Oil Companv, Standard Oil Company, California. Humble Oil & Refining Com-
pany. The Superior Oil Company, Inc., Texaco, Inc., and Union Oil Company of
California, to determine whether said corporations, and other persons and cor-
porations, individually or in concert, are engaged in conduct in the reporting
of natural gas reserves for Southern Louisiana which violates Section 5 of the
Federal Trade Commission Act, or are engaged in conduct or activities relating
to the exploration and development, production, or marketing of natural gas,
petroleum and petroleum products, and other fossil fuels in violation of Section
5 of the Federal Trade Commission Act.
The Federal Trade Commission hereby resolves and directs that any and all
compulsory processes available to it be used in connection with this investigation.
Authority to Conduct Investigation :
Sections 6, 9, and 10 of Federal Trade Commission Act, 15 U.S.C. 46. 49, 50 ;
FTC Procedures and Rules of Practice 16 C.F.R. 1.1, et seq. and supplements
thereto.
By direction of the Commission.
[seal] '
Secretary.
Dated : June 3, 1971.
Exhibit 3
United States of America, Before Federal Trade Commission
File No. 711 0042
Commissioners : Miles W. Kirkpatrick, Chairman; Paul Rand Dixon ; Everette
Maclntyre ; Mary Gardiner Jones ; David S. Dennison, Jr.
In the Matter of The American Gas Association, Inc., et al.
OPINION OF THE COMMISSION
This matter is before the Commission on motions of the eleven companies
subpoenaed, filed with the Secretary, to quash subpoenas duces tecum. The sub-
poenas were issued pursuant to Commission resolution dated June .3, 1971, which
directed the use of compulsory process in a nonpublic investigation to determine
whether petitioners and other persons and corporations, individually or in concert,
are engaged in conduct in the reporting of natural gas reserves for Southern
Louisiana which violates Section 5 of the Federal Trade Commission Act, or
are engaged in conduct or activities relating to the exploration and development,
production, or marketing of natural gas, petroleum and jjetroleum products and
other fossil fuels in violation of Section 5 of the Federal Trade Commission
Act. The subpoenas were signed by Owen M. Johnson, Jr., Assistant Director,
Bureau of Competition.
Tlie combined arguments of the subpoenaed coi-porations alleges in support
of the motions that :
(1) exclusive and primary jurisdiction in the area of the investigation rests
with the Federal Power Commission, which is currently exercising that power;
the petitioners' actions, even if collective, are protected from antitrust attack
by the Nocrr-Pe>i7iinf/tO)i doctrine ; the Commission should tenninate, or alterna-
tively, stay its nonpul)lic investigation of the reporting of natural gas reserves
for Southern Louisiana ;
(2) the demands of the subpoena are unduly broad, vague, burdensome and
irrelevant :
(3) the Commission has failed to comply with the requirements of the Federal
Reports Act of 1W2 :
(4) the documents are confidential, and not adequately protected from dis-
closure bv the Commission's procedures ;
(5) the resolution fails to advise petitioners of the scope and purpose of the
investigation ;
(6) delegation to an A.sslstant Bureau Director of authority to issue subpoenas
is unlawful ;
637
(7) the Commission's Rules of Practice deny witnesses the riglit to adequate
representation by counsel, as guaranteed by tlie Constitution and the Adminis-
trative Procedure Act ;
(S) the subpoena requires production of documents under the control and
possession of petitioners' subsidiaries and affiliates, which petitioners have no
right to produce.
A number of petitioners also request permission to obtain copies of and to
reply to any memoranda, comments or recommendations of the Commission's
staff in support of the subpoena, and opportunity to present oral argument.
Many also request an extension of time to comply with the subpoena, and reserve
the right to seek protective orders. One petitioner requests substitution of parties
responding to the subpoena.
Exclusive and primary jurisdiction in the area of the investigation 7-ests with
the Federal Power Commission, ivhich is currently exercising that power
Petitioners contend that this Commission is prec-luded from conducting the
present investigation because the investigation represents duplication of Federal
Power Commission efforts. The Commission's investigation, however, is targeted
on possible violations of the antitrust laws and Section .5 of the Federal Trade
Commission Act — activities over which the Federal Power Commission lacks
jurisdiction. California v. Federal Poiver Commission, 369 U.S. 482 (1962).
The Natural Gas Act I'j U.S.C. §§ 717 et seq. (1963), grants the Federal Power
Commission jurisdiction to establish just and reasonable rates for natural gas
companies and to certify mergers between such companies. 15 U.S.C. § 717c,
d and f. The Act does not expressly immunize gas producers subject to Federal
Power Commission jurisdiction from the antitrust laws. It also does not
authorize the Federal Power Commission to enjoin unfair methods of com-
petition or vuifair or deceptive acts or practices. The Act clearly does not confer
authority upon the Federal Power Commission to proceed against conspiracies
or practices which may constitute unfair or deceptive acts or practices. When
the Federal Power Commission encounters an antitrust violation, it "may trans-
mit such evidence as may be available concerning such acts or practices or
concerning apparent violations of the Federal antitrust laws to the Attorney
General, who, in his discretion, may institute the necessary criminal proceed-
ings." 15 U.S.C. § 717s (a). Thus, while the Federal Power Commission may
enjoin or modify rates it has approved, it may not approve of the acts of con-
spirators and it may not enjoin a conspiracy. The ratemaking authority of the
Federal Power Commission is insufficient to cure violations of the antitrust
laws.
This Commission, on the other hand, is specifically charged with enforcement
of antitrust laws, both through the Clayton Act and through the broad jurisdic-
tional grant of Section 5 of the Federal Trade Commission Act.
It is well settled that exceptions from the antitrust laws must be specific, and
that repeals of authorifv bv implication are not favored. Silver v. New York
Stock Exchange, .373 U.S. 341 (1963). George v. Pennsylvania R. Co., 324 U.S.
4.39 (1945). Where, as here, there is neither exemption nor immunity granted
to the natural gas companies, none should be read into the statutes. Clearly, a
reasonable rate approved by the Federal Power Commission is legal even though
it may be demonstrable that the rate was fixed through concerted action by the
producers. Despite the legality of the rate, however, any alleged underlying
conspiracy is not beyond the reach of a specific grant of authority to enforce
the antitrust laws. See California v. Federal Power Commission, supra; United
States V. R.C.A., 3'>8 U.S. .334 (19.^9) ; Georgia v. Pennsylvania F. Co., supra;
United States v. Borden Company, 308 U.S. 188 (1939) ; Keogh v. Chicago d
N.W. Ry. Co.. 260 U.S. 1.56 (1922).
It is clear, therefore, that in the absence of an express exemption or immunity
either in statutes or in court decisions, the Federal Trade Commission, as an
agency charged specifically with the duty to enforce the antitrust laws, may pro-
ceed against alleged antitrust violations although another body may, even must,
consider the same underlying facts for difference purposes. In the well-known
Federal Trade Commission case of American Cyanamid Company v. Federal
Trade Commission. .363 F.2d 757 (6th Cir. 1966). the court held that the re-
quirement of the Patent Office to consider the truthfulness of renresentations
before it. in granting or denying applications, did not preclude the Federal Trade
Commission from investigating alleged fraudulent misrepresentations to the Pa-
tent Office if such misrepresentations would violate the Federal Trade Commis-
sion Act. Thus, the fact that the Fedei-al Power Commission considers reserve
638
estimates and procedures in its ratemaldng function does not preclude tliis Com-
mission from investigating tlie same estimates and procedures in an investigation
of possible violations of Section 5 of the Federal Trade Commission Act, unless
it constitutes part of a "regulatory scheme."
The mere duty of the Federal Power Commission to consider antitrust policies
in the setting of rates has been held not to constitute part of a regulatory scheme,
and not sufficient to displace the antitrust laws. California v. Federal Power Com-
mission, supra. Those agencies and courts with specific authority to enforce anti-
trust laws have primary jurisdiction in proceeding against antitrust violations.
United States v. R.C.A., supra; Georgia v. Pennsylvania R. Co., supra; Silver
V. Neiv York Stock Exchange, supra. As the Supreme Court said in United States
V. R.C.A., supra:
"At the same time, this Court carefully noted that the doctrine [of primary
jurisdiction] did not apply when the action was only for the purpose of dissolv-
ing the conspiracy through which the allegedly invalid rates were set, for in such
a case there would be no interference with rate structures or a regulatorv
scheme." (Id, at .347 : emphasis added.)
Clearly, on the basis of the foregoing authorities, this Comm.ission has juris-
diction to conduct an investigation of alleged antitrust violations by gas pro-
ducers. There is no express exemption or immunity from conspiratorial conduct
granted to the industry either liy the Natural Gas Act or the Federal Trade Com-
mission Act. The general requirement of the Federal Power Commission to weigh
antitrust considerations in its rate determinations is not sufficient to displace the
specific grant of authority in the Federal Trade Commission to determine anti-
trust violations and does not evidence a regulatory scheme inconsistent with the
objectives of this investigation. The assertions to the contrary provide no basis
for quashing the subpoenas.
Another jurisdictional argument is that the Commission has no jurisdiction
to investigate or proceed against conduct which is per se economically impracti-
cal. The basis for this contention is the assertion that no oil company interested
in continuing the sale of natural gas would delil)erately underreport natural sras
reserves because of its deleterious effect on the ability to compete, and on the
ability to finance, not to mention the liability under the'securities laws. The mere
statement of the proposition demonstrates its absurdity.
One petitioner contends that on the basis of the koerr-Penniugton doctrine,
collective efforts on the part of natural gas industvv members to secure favorable
decisioiis from the Federal Power Commission are immune from prosecution
under the antitrust laws. Even assuming the correctness of the interpretation,
immunity from prosecution under the antitrust laws cannot by virtue of
Xoerr be held to extend to collusive filing of false infonnation with the
Federal Power Commission. Woods E.rpJoratioit and Producing Company v
Aluminum Company of America, 438 F.2d 1286 (.jth Cir. 1971), cert, denied,
— U.S. — (1972). See also. Trucking Unlimited v. California Motor Transport Co.,
432 F.2d 755 (9th Cir. 1970). f/Ff?, — U.S. — (1972) ; Easicrn Railroad Presidents
Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961). The Federal Power
Commission itself lacks the authority to proceed under the antitrust laws against
alleged collusive deception. California v. Federal Power Commission, supra.
Therefore. Noerr cannot be interpreted to preclude the Commission from con-
ducting the instant investigation to determine whether or not movant or other
natural gas companies may be violating the antitrust laws and Section 5 of the
Federal Trade Commission Act.
Several petitioners make the argument that the Commission should terminate,
or alternatively, stay its nonpulilic investigation of the reporting of natural gas
reserves for Southern Louisiana. The grounds cited by movants relate to various
audits of reserves purportedly performed by the Federal Power Commission.
Questions regarding the collection of similar data by two agencies for different
purposes relate to comity rather than to jurisdiction. They provide no basis for
termination of the present investigation. Tliis leaves only the ruestion as to
whether the Federal Power Commission has investigated and obtained evidence
which the Federal Trade Commission staff can profitably use in its present
investigation and can reasonably obtain. Movants cite three such instances:
systematic investigations and periodic audits of gas reserve data by the Federal
Power Commission ; the Uncommitted Reserves' Study : and the National Gas
Sun-ey.
The only systematic investigations and periodic audits undertaken by the
Federal Power Commission that this Commis.sion has been able to ascertain
639
relate to applications filed with the Federal Fovcev Commission for certification
to construct pipelines. If certification is obtained, reserves dedicated to those
pipelines must be reported annually on Federal Power Commisison Form 15.
This data, liowever, is not of much use in the present investigation. First, the
figures relate only to reserves which have been slated for shipment through the
particular p/ipelines, (this does not include, for instance, the gas vviiich will not
be shipped in interstate commerce). Such figures are in no way equivalent to the
proved reserves estimates of the producers themselves. Producers have been
adamant in showing that the dedicated reserves differ from proved reserves an<l
cannot be used to check the accuracy of the latter. Not only are they based upon
shipment figures, state the producers, but they also may be based upon a different
geological measurement system. As to producer data supplied to the Federal
Power Commission, the only available figures are the final proved reserves
estimates, which are channeled through the American Gas Association, and which
v\e have also. The producers do not provide any underlying data upon which the
estimates are made, so that the Federal Power Commission has no underlying
data available with which we could check the accuracy of the reporting.
It is also contended that the information gathered in preparing the Soiith
Louisiana rate proceedings, AR69-1. and in the subsequent Uncommitted Re-
serves Study, track the data that we seek and that the Federal Power Commission
determined at that time that the reserve estimates were "reasonably reliable for
the purposes used." It is urged that we defer to the Federal Power Commission
expertise in this area. But first, the Federal Power Commission reserves study
was by no means complete, having been reduced from the originall.v planned audit
of all reserves to an audit only of uncommitted reserves. Secondl.v, the under-
lying data which were to be available to the Federal Power Commission were
kept at the offices of the producers, and are tmavaiiable to us. Third, the question-
naires were never made public and were returned to the producers. No data was
removed from the oflSces of producers and the Vv-orkjiapars of the auditing were
destroyed. There would appear, therefore, to be no material upon which comity
might work.
in addition, the Federal Power Commission had no procedure nor did it perform
any kind of audit to determine whether the producers reporting reserves had
reported all of their uncommitted reserves, nor was an investigation mad" to
determine if all companies holding reserves in off-shore South Louisiana had
filed questionnaires.
The Federal Power Commission Uncommitted Reserves Study did not set out
to check the accuracy of American Gas Association proved reserve figures. Imt
only the accuracy of certain producer figures compiled for one occasion. It is,
clear that the Federal Trade Commission cannot rely upon the accuracy of the
final determination involved here, and it is equally clear that the underlying
data are not available for Federal Trade Commission examination from the Fed-
eral Power Commission.
Finally, the argument is made that the Federal Power Commission is presently
conducting a Natural Gas survey for the specific purpose of auditing gas reserve'^,
and that this Commission should stay its investigation pending completion of that
study, in order to use the results gained from that study. But first, this Commis-
sion's investigation was begun substantially before that of the Federal Power
Commission. Second, the Federal Power Commission study will not he adequate
for our purposes. The study will be done on a random sampling basis : data will
be evaluated only in company ofl!ices ; thf independent reserve team-generated
worksheets will be preserved in the companies' offices until July 1, 1074. And there
will be no cross-referencing of data from one compan.v to another, as all reserve
estimates on individual fields will be available only to the independent accountant
working with the data on an individual firm. Tlie study will cover on'y one year,
1970. and will miss the crucial years in our investigation, 196S and 1969. Finally,
selection of the fields for study has not been done or even scheduled to be done, so
it will be impossible to determine the extent of overlnp for some time. Under the
circumstances, we think it unneccessary to postpone our investigation in anticipa-
tion of the Federal Power Commission's study.
The demands of the suhpoena are uvditly broad, var/ue. iunlennojne avd irrelevant
a. Petitioners contend in variou-^ wa"s that the scope of the specifications is
too broad. Some sneciflcally exempt certain specifications from the charge fnar-
ticularly A-D). but most condemn all the demands with such sweeping obiections
as that the subpoena "would call for every piece of paper conceivably related to
the production and exploration of natural gas." that it is "nearly as broad as the
640
Federal Trade Commission's vast potential Section 5 jurisdiction," and that it
is "intended to cover every conceivable kind of document or record on paper, card,
film or magnetic tape," or "sweeps across the entire range of [movant's] natural
gas operations."
The petitioners, however, read the subpoena too broadly, for it displays no
undue breadth of demand. The subpoena seeks specific information relating to the
reporting practices of a portion of petitioners' total operations in a specifically
defined geographic area through the use of terms clearly defined throughout
the industry and clearly relevant to the investigation at hand.
One petitioner argues that a time period of, in some instances, a decade over
which documents are demanded is too broad and burdensome.
It is clear that in an antitrust investigation such as the present one a time
span of ten vears is not at all unusual. Such a period of time is needed for the
proper development and analysis of the pattern of behavior and of any change
during that period. ^ . t-, i tj
It is also contended that no time frame is given for Specifications h, and H.
How-ever, Specification E is worded in the present tense and demands informa-
tion as to present customers and distribution methods, and H is clearly based
upon Specification G and the time periods therein.
b. Several movants claim that certain of the specifications are overly vague.
Arguments are made, for instance, that Specifications G, I, J and K are so
vague and indefinite as to render the subpoena unenforceable because documents
are demanded which "relate" to named items. Thus, these specifications call
for a judgment decision bv the movants "as to what is too remote." While
subpoena demands must, of course, be reasonably clear, the specificity of the
demands must be balanced against the agency's knowledge of w-hat documents
exist and in what form. It is clear that at the investigational stage the Com-
mission lacks specific knowledge of the existence of particular documents.
In any case, the documents called for relate to specific categories of informa-
tion. Each category pertains to a clearly defined factual situation relevant to the
Commission's inquiry. That is all an investigatory subpoena need provide.
Other movants challenge Specification K(2)'s demand for production of docu-
ments relating to "lower proved reserves," because it provides no comparative
basis. It is clear from the entire specification that documents are sought which
reflect differences between the figures submitted to the American Gas Associa-
tion and the possibly higher ones in these movants' own files which are used
for other purposes.
Questions are also raised as to what "unit" means. That term refers to the
standard measurement of reserves as reported to the American Gas Association,
Federal Power Commission and others. The most usual industry measurements
are MCF. BCF and TCF (millions, billion, and trillions of cubic feet), as meas-
ured at sixty degrees fahrenheit and 14.73 psi (pounds per square inch). Any^
of these measurements, consistently used, is satisfactory.
c. Movants urge burden of compliance in several respects. Most movants argue
that the large volume of documents, as well as their geographic dispersal, con-
stitute the unreasonable burdensomeness of the demand. However, it is well
settled that a subpoena will be enforced if on its face it is reasonably relevant
to the investigation. Federal Trade Commissi07i v. Menzics, 145 F. Supp. 164.
170 (D.C. Md. 1956). atf'd, 242 F.2d 81 (4th Cir.). cert, denied, 353 U.S. 957
(1957) ; Fleming v. Fidelit!/-Pliiladelp?iia TruMt Company, 248 F. Supp. 487. 493
(E.D. Pa. 1965). The general relevance of the demands is evident, and relevance
of the technical data demand will be established infra. The search that may
be necessitated by the subpoena does not result, therefore, from any impro-
priety in the demands made, but rather from the application of reasonable
demands to a large and widespread corporation. The breadth of the search is
found in movants' operations, not in the demands of the subpoena. The incon-
venience that movants may suffer from having the subpoenaed data widely
disper.sed throughout its corporate division must yield to the public interest.
Wirfz V Local 875, Internntionnl Brotherhood of Teamstem. Chavfferfi. Ware-
hou.<<ci)ien. and Helper.^ of America, 2l6 F. Supp. 798, 800 (E.D.N.Y. 1963). As
Judge Weinfeld succinctly stated in Application of Radio Corporation of
America:
"But the great number of documents called for are an inevitable concomitant
of RCA's gigantic size, the broad scope of its far-flung operations and the nature
of its corporation structure. The magnitude of RCA's activities and the fact
that some of its activities have been decentralized, with the consequent dispersal
641
of records in various places, hardly serves as an excuse for denying the Grand
Jury the right to inspect documents required by it in the furtherance of its duty.
'•I)icmn-cnicnce is relative to size. Any witness who is subpoenaed suffers
inconvenience. An individual operating a small business, for example, or a cor-
poration operated by a sole shareholder, may suffer, in like circumstances more
inconvenience than the movant with its thousands of employees. But this in-
convenience, whether suffered by a witness, grand jurors, or jurors is part of
the price we pay to secure the effective administration of justice and the en-
forcement of our laws." (Emphasis added.) Application of Radio Corporation
of America, 13 F.R.D. 167, 171-172 ( S.D.N. Y. 1952) ; see also, Oklahoma Press
Puhlishinrj Company v. WaUiuff, 321 U.S. 186 (1946).
A number of petitioners contend that the thirty-day time period given for
response to the subpoena is unreasonable. The reasonableness of the time allowed
for compliance with the subpoena is best left for resolution between petitioners
and Commission staff pursuant to Section 2.7 of the Commission's Rules of
Practice.
d. Several petitioners contend that the subpoena is unreasonable in that it
requires production of technical and nonproduction data related to the com-
panies' estimates of natural gas reserves which are beyond the comi^etence of
the Commission to interpret, and are irrelevant to any investigatiton of possible
violations of the antitrust laws. Technical data underlying the companies'
reported estimates of natural gas reserves are cleai-ly relevant. As discussed
infra p. 21. the purpose of the investigation is to determine whether the com-
panies, individually or collectively, are engaged in activities which violate Sec-
tion 5 of the Federal Trade Commission Act in the context of the activities
defined by the resolution. Underlying data are essential to enable the Com-
mission to determine the accuracy of such estimates and the soundness of the
companies' reporting procedures and to assist the Commission in evaluating the
companies' conduct in connection with the exploration, development, production
and marketing of natural gas. Even assuming that the data is "highly technical,"
as is claimed, this does not preclude the Commission from conducting its in-
vestigation. It represents a curious situation at best for an investigated party
to as.sert. as barring investigation, the complexity of the matters investigated.
The ability of an agency to evaluate information sought has been and continues
to be necessarily a factor totally irrelevant to the legitimacy of investigational
demands.
One petitioner objects to the relevance of the subpoena specifications calling
for information relating to the sale and net production of natural gas. and to
the reporting and estimating activities that precede exploration, development,
purchase or sale of explorable acreage. The former category of information is
relevant to the investigation at hand because of the necessity and desire to
determine whether public interest exists from the magnitude of the sale of
natural gas. The latter category of information regarding other, less-direct
methods of estimating gas reserves is relevant from a comparative standpoint
because of the potential correlation in this type of gas reserve estimation
and ultimate gas reserve reporting.
The Commission failed to comply icith the requirements of the Federal Reports
Act of 1942
Movants contend thot identical suhqoenas were issued to more than ten com-
panies asking for identical information, and that the demand must, therefore,
be submitted to the Office of Management and Budget according to the provisions
of the Federal Reports Act (44 U.S.C. §§3501, et scq.). Section 5 of the Act
(44 U.S.C. § 3509) provides :
"A Federal agency may not conduct or sponsor the collection of information
upon identical items, from ten or more persons, other than Federal employees,
un'ess. in advance of adoption or revision of any plans or forms used in the
collection —
"(1) the agency has submitted to the Director the plan or forms, together with
copies of pertinent regulations and of other related materials as the Director of
the Bureau of the Biidget has specified, and
"(2) the Director has stated that he does not disapprove the proposed collection
of information."
The Commission believes that this section of the United States Code is not
applicable to the issuance of administrative subpoenas for law enforcement pur-
poses, and that clearance from the Director of the Bureau of the Budget (now
Office of Management and Budget) need not be sought.
642
A tlirt'shokl determination in ascertaining the applicability of the Federal
Reports Act involves a determination whether issuance of this administrative
subpoena constitutes a "collection of information" within the meaning of Section
5 of the Act. The term "information"' has been given a word-of-art definition for
purposes of the Act. Section 3502 of Title 44 defines the term as follows :
"As used in this chaptei' —
»•♦***»
" '[IJnformation' means facts obtained or solicited by the ».s-e of wrilten report
forint, application forms, schedules, questionnaires, or other similar methods
calling either for answers to identical questions from ten or more persons other
than agencies, instrumentalities, or employees of the United States or for answers
to questions from agencies, instrumentalities, or employees of the United States
which are to be used for statistical compilations of general public interest."
(Emphasis supplied.)
Obviously, the mere existence of the above-quoted definition substantiates con-
gressional intent to limit the definition of the common word "information." The
construction of the definition most applicable and favorable to petitioner's argu-
ment that subpoenas are covered reads as follows :
"'[IJnformation' means facts obtained or solicited by . . . [various forms and
questionnaires] . . . calling . . . for ansivers to identical questions . . . ."
( Emphasis supplied. )
The subpoena, like all Commission subpoenas, does not ask questions. It is
not a written report form, questionnaire, application foi-m. schedule or other
document calling for the formulation or an answer. Compliance with a sulipoena
and a return thereunder does not require the formulation or expostulation of an
answer.
All that an administrative subpoena requests are documents. It is well-settled
law that a subpoena may not compel a party to prepare any documents or other
information for the purpose of the subpoena. In shoi-t. the documents sought by
a subpoena must exist prior to the date of return under the subpoena, and need
not be prepared in response thereto. Thus, a return of documents under a sub-
poena is not the obtaining of "facts obtained or solicited by use of written rej)ort
forms * * * for answers to identical questions from ten or more persons other
than agencies, instrumentalities, or employees of the United States . . . ."
There is another reason why the Commission is not required to sefk Bureau
of the Budget (now Oflice of Management and Budget) clearance for the issu-
ance of the subpoena in question. The Federal Reports Act is limited by its literal
terms to the collection by federal agencies of information in the nature of the
reports intended "to be used for statistical compilations of general public inter-
est." (44 U.S.C. §3509.) Hence, it does not govern the investigatory activities
of the Federal Trade Commission seeking by conumlsory process to determine
whether nuy of the l.-nvs it administers have been violated.
The validity of this contention is demonstrated by the definitional concern
toward limiting the term "information." The final clause of that definition mod-
ifies the term "facts" as applied to the meaning of "information." Thus, the
appropriate phraseology of the definition of "information" (with omission for
clarity ) :•< :
" 'fllnformation' means facts . . . (obtained by various methods) . . . trhich
arc to he used for statistical compilations of (jencral public interest." (Emphasis
su])plipd.>
Although the precise meaning of this definitional phrase is not reflected in
the lecislntive history of the Act, other sections of the Federal Reports Act verify
ihnt the Act was not intended to encompass the use of compulsory process by
independent regulatory agencies. Section 3506 (44 U.S.C. § 3506) provides that
any party having a substantial interest may request that tlie Director of the
BTireau of the Budget Cnow Direc<^or. Office of Manasrement .-'ud Budget) deter-
mine ". . . whether or not <^he collection of information by a Federal agency is nec-
e.ssnry for the pro'^er pei'formance of the functions of the nffency or for any other
proper iturnose." The apin-oprinteness of this section in instances not involving
alleged violations of law is manifest. It enables a business to obtain relief from
an ofiierwise burdensome information cn]l<=cti'>n pror-pss. However, the rights
afforded under this section, when applied to alleged violations of law, produce
an nbsnrd nnd inconsi'^^tent result.
Application of Section .3."0G to law enforcement efforts of independent regula-
tory agencies world provide a corporation or business entity thf> o'^no'-tunii-v for
frustration of the statutory puri'.ose found, for example, in the Federal Trade
643
Comniissiou Act. That section vests in the Director of the Bureau of the Budget
(now Office of Management and Budget) the authority to determine the nec-
essity for the collection of information. If found unnecessary, the Act bars the
agency so found from further collection of this information.
Thus, if we accept petitioner'.s construction of the Federal Reports Act, it
would mean that the very person who is being investigated for possible law
violations may appeal to, and obtain a hearing by, the Bureau of the Budget (now
Uthce of Management and Budget) on the nature of the compulsory process used,
before the federal agency concerned may obtain by its compulsorj- process in-
vestigatory facts needed to determine whether the laws it enforces have been
violated. Congress surely never intended to subject to executive leview the use
of compulsory process in investigations to determine law violations. However,
if we accept petitioner's argument, in effect the now Office of Management and
Budget has plenary, unappealable power to determine whether compulsory
process "is necessary" for proper effectuation of the Commission law enforcement,
investigatory functions.
We believe the point made above goes to the very heart of the determination
of the applicability of the Federal Reports Act, and requires reemphasis: If
Congress had sought such anomalous results by passage of the Federal Reports
Act, the intention would have been clearly manifest somewhere in the legislative
process.
Xo such intent appears either in the statutes or in its> legislative history. 82
Stat. 1302, Ti r.S.C. §3501; .»fe Conference Report on this bill, reproduced at SS
Cong. Rec. 0434-943.J (December 10. 1942) ; see also Senate Report Xo. 1651,
77th Cong.. 2d Sef-)s. (1942). Virtually every relevant legislative interpretation
either expressly or implicitly indicates that the information sought for proscrip-
tion under this Act does not include that which is a necessary adjunct to the
discharge of law enforcement responsibilities and which bears directly on an
a.'«?ertainment of alleged law violations. Accordingly, we do not accept petitioner's
argument that the Federal Reports Act applies to com])ulsory process issued
by the Federal Trade Commission for law enforcement purposes.
Tiie documents are confidential, and the suhpoena and the Commission's proce-
dures do not adequately protect them from disclosure ■
^Movants contend that much of the information demanded consist.?* of highly
confidential trade secrets such as bidding procedures and estimates of natural
gas in the fields.
The alleged confidential nature of documents, however, does not preclude their
inspection and examination by the Commis>sion and provides no basis for limiting
or quasliing a subpoena. Federal Trade Commission v. Tuttle, 244 F.2d 605 (2d
Cir. 1057), cert, denied, 354 U.S. 925 (1957) ; Federal Trade Commission v. Green,
2.52 F. Supp. 153 (S.D.X.Y. 1966). Documents received during a nonpublic inves-
tigation such as this are not a matter of public record, but instead constitute
part of the confidential records of the Commission, pursuant to Section 4.10 of the
Commission's Rules. Under Section 10 of the Federal Trade Commission Act, any
officer or employee of the Commission who makes public any information with-
out authority of the Commission or by direction of court is guilty of a misde-
meanor and subject to criminal sanctions.
The confidential nature of the documents thus provides no basis for quashing
the subpoena.
One movant goes to extremes and contends that disclosure of information to
the Commission is tantamount to disclosure to competitors, and that this would
reduce competition in violation of the antitrust laws. The argument is patently
ridiculous. Such an unfounded assumption of disclosure of information received
would, if taken seriously, bring into question all Commission proceedings.
The resolution fails to advise the scope and purpose of the investigation
It is next contended that the resolution of June 3, 1971, is vague and ambiguous,
encompassing almost any violation of the very broad sweep of Section 5 of the
Federal Trade Commission Act. In support of the argument, movants refer to the
several cases in which courts have felt compelled to quash compulsory process
issued pursuant to an unlawfully vague resolution. The principal ones cited are
Montship Lines. Ltd. v. Federal Maritime Board, 295 F.2d 147 (D.C. Cir. 1961) :
ITellenic Lines. Ltd. v. Federal Maritime Board, 295 F.2d 138 (D.C. Cir. 1961). In
those cases, however, there was either no statement of purpose or merely a state-
ment that the investigation was being carried on pursuant to certain statutory
authority.
644
The scope of the present investigation is clearly marked out by the terms of
the resolution which specify the identity of the companies under investigation, the
specific products involved, and the particular acts and practices of the companies
to be investigated. The purpose of the investigation, as indicated in the reso-
lution, is to determine whether the companies, individually or collectively, are
engaged in activities violative of Section 5 of the Federal Trade Commission Act
in the context of the activities defined by the resolution. The argument is also
made that the resolution does not authorize investigation into areas outside
South Loui-siana because it specifically mentions reserve reporting for that area.
However, the resolution expressly covers conduct or activities relating to the
exploration or* development of natural gas without any limitation as to geo-
graphical area. The very object of gas exploration is to uncover gas reserves,
which then become company assets to be used in various ways, including being
reported to the American Gas Association. The reporting of gas reserves is thus
directly related to exploration and development and, as such, is authorized by
the resolution. Moreover, the terms of the subpoena make it al)undantly clear
as to precisely what acts and practices of the petitioner are under investigation.
See also, Federal Trade Commission v. Green, supra.
Delcf/atioii to an assistant bureau director of autJiority to issue subpoenas is
unlaicful
Movants contend that the Commission is without power to delegate the au-
thority to is-sue subpoenas. It i.'? clear that Reorganization Plan No. 4 of 1961, 26
Fed. Reg. 6101 (1961), 72 Stat. 837, 5 U.S.C.A. §1, provides the Commission
with authority to delegate its functions to employees. Pursuant to such authority
the Commission, on April 8, 1970, 35 Fed. Reg. 5753, amended 35 Fed. Reg. 10627,
by general delegation, and by Section 2.7(a) of the Rules of Practice and Proce-
dure, 35 Fed. Reg. 5681, expressly delegated the authority to issue.
The validity of such a delegation has recently been upheld by the 5th Circuit
Court of Appeals. Federal Trade Commission v. Gibson, 1972 Trade Cas. Par.
73,985 (5th Cir. May 19, 1972). In its decision, the court squarely faced and
flatly rejected contentions identical in all material respects to those raised
by Movants in this investigation. It determined with regard to a parallel delega-
tion to field office officials that "[T]he authority to issue investigative subpoenas
duces tecum was properly and unequivocally delegated. . . ." In reaching this
conclusion, the court specifically found that the Commission's power to make
such a delegation is derived from Reorganization Plan No. 4 of 1961. It is clear
the Commission may properly delegate the authority to issiie subpoenas, and
Movants' arguments to the contrary are patently without merit.
One Movant asserts that the Commission's efforts to delegate its subpoena
powers have thus permitted and resulted in an oppressive and unreasonable
attempt by the staff to oppress business. This argument likewise is without merit.
The retention by the Commission of the ability to review motions to quash
evidences the fact that Movant's arguments as to uncontrolled abuse are
groundless.
The Commission's rules of practice deny witnesses the right to adequate repre-
sentation by counsel, as guaranteed by the Constitution and the Administrative
Procedure Act
Petitioners contend that Rule 2.9 purports to limit the right of representation
by counsel in substantive ways and that this contravenes both the Administrative
Procedure Act and the Constitution. It is unquestionable that the Administra-
tive Procedure Act, 5 U.S.C. § 555, applies and a witness responding to a Com-
mission subpoena is entitled to be accompanied, represented, and advised by
counsel. The Commission's rule so provides, and the cases cited by counsel to the
contrary are irrelevant because they deal with investigational hearing pro-
cedures employed prior to the adoption of present Rule 2.9.*
*Wnn(lerer v. Kaplan, 1962 Tr. Cas. Par. 70.535 (D.D.C. 1962) ; Hall v. Lemke, 1962
Tr. Cas. Par. 70,338 (N.D. 111. 1962).
645
Petitioners contend that Rule 2.9 denies counsel "any right to ciiallenge the
Commission's authority to conduct the investigation or to ciiallenge the legality
or sufficiency of the subpoena" before the presiding official and is thei'efore in
direct conflict with Anheuser-Busch Inc. v. Federal Trade Commission, 359 F.2d
487 (1966). Rule 2.9(b)(4), however, does not deprive counsel of the right to
make such a challenge before the presiding official ; it merely establishes the
prftcedure in accordance with which objections must be made. Motions challenging
either the Commission's authority to conduct an investigation or tlie legality or
sufficiency of the subpoena must be directed first to the Commission in accordance
with Rule 2.7. In the event the motion is denied and counsel wishes to continue
the challenge, he may file a copy of the motion witli the presiding official as part
of the record of the investigation, and he may refuse to produce the documents
demanded on the grounds stated in the motion.
Clearly then, a challenge to tlie subpoena may be made before the presiding
official without reargument of any ground relied upon in the motion addressed
tn tlie Commission. In Anheuser-Busch the court rotated :
'■ft] he hearing officer has no statutory power to enforce compliance or to im-
pose sanctions. Instead, to enforce the summons, the Commission must seek the
assistance of a court.
"It is tliis resort to the federal court which, ... is the 'adversary proceeding
affording a judicial determination to the challenges to the summons and giving
complete protection to the witness." "
It is clear that Rule 2.9(b) (4) is not in conflict with this decision, and movants'
reasoning to the contrary is not supportable.
Moreover, the present rule constitutes full representation in accordance with
Administrative Procedure Act standards. It provides that movant may be "ac-
companied, represented, and advised" hy counsel at the investigational hearing
when return is made under the subpoena. At the hearing, counsel may consult
with his client either on his own initiative or at the request of his client. If the
witness refuses to answer any questions on advice of counsel or on his own
initiative, counsel may briefly state the legal grounds for the refusal. Further, if
it is claimed that any testimony is outside the scope of the investigation or the
witness is privileged to refuse to answer, counsel may state briefly the grounds of
such claims. Following completion of the questioning of any witness, counsel may
request the presiding official at the investigational hearing to permit the clari-
fication of any answer given in order that it "may not be left equivocal or incom-
plete on the i-ecord." This procedure permits counsel to state on the record
reasons why the witness' testimony is equivocal or incomplete and why clari-
fication may be necessary to understand the meaning of an answer given in
response to a particular question. The fact that a presiding official may deny the
request does not in any way deprive the witness of his riglit to effective repre-
sentation by counsel.
Finally, as to one petitioner's argument that refusal to answer questions may
result in the imposition of criminal sanctions, such action may be taken only
through a court proceeding wherein the respondent may raise his objections
anew.
Although Rule 2.9 does not permit counsel to testify on behalf of his client, it
does provide for full representation by counsel in compliance with the require-
ments of the Administrative Procedure Act. Accordingly, the arguments raised as
alleged deficiencies in the rule provide no basis on which to quash these
subpoenas. »
The siih poena requires production of documents from the files of movants' sub-
sidiaries and affiliates
Some petitioners further object to the subpoena on the ground that it requires
them to produce documents within the custody and possession of independently
operated subsidiary corporations which they own or control. They argue that
such dociiments are not within their control and are, therefore, beyond the reach
of the subpoena.
In In re Investigation of World Arrangements, 13 F.R.D. 280 (1952), the court
considered and rejected an argument substantially similar to that which movant
urges upon the Commission. The court stated :
646
"Tlie position of the mOA-ants is that they cannot reach the files of their own
subsidiaries unless they are available 'free of the necessity of securing the con-
sent of others." It is inescapable that the 'others" can only meiln the corporations'
own subsidiaries. A corporation, be it the parent corporation or the subsidiary
coi-poration, functions under the guidance of its directors. Therefore, if a cor-
po]-ation has the power, either directly or indirectly tli rough another corporation
or a series of corporations to elect a majority of the directors of another cor-
poration, such corporation may be deemed a parent corporation and in control
of the corporation whose directors it has tlie power to elect to office. If any cor-
poration herein under the subpoena duces tecum has tliat power it has the control
necessary to secure the documents demanded by the government."
When a parent company is served with a sulipoena, it is no defense to claim
that the information is within the possession of a wliolly owned subsidiary,
because such a corporation is owned and controlled by the parent. See generaV.ij.
Westirif/Jwuse Credit Corp. v. Mountain States Mining and Milling Co., 37 F.R.D.
348,340 (1965).
Xo petitioner making these assertions contends that it lacks the power, either
directly or indirectly, to choose a majority of the directors of its subsidiary
corporations, sec (/cncraUy, Flank Oil Co. v. Continental Oil Co., 277 F. Supp. 3.17
(1967) : and if such power exists, the petitioners have the control necessary
to secure the documents demanded by the Commission's subpoena.
Requests to be provided with copy of staff memoranda supporting suhpocna to
reply thereto and to present oral arguments; requests for extension of time
and substitution of parties
Many petitioners request permission to obtain a copy of and to reply to any
memoranda, comments or recommendations of the Commission's staff in support
of the subpoena, and an opportunity to present oral argument. However, since
this matter is not at an adjudicatory stage, it 'does not involve the same due
process considerations that othervrise apply. In the case of Federal Trade
Commission v. Hallmark, Ine., 265 F.2d 433 (7th Cir. 1959), the court discussed
the point well :
" 'Adjudication' is defined by 5 U.S.C.A. § 1001(d) as meaning 'agency process
for tb.e formulation of an order.' The same section defined 'order' as meaning
"the wJiole or any part of the final disposition ... of any agency in any matter
other tlirai rule making but including licensing.' The present investigation
does not qualify as an adjudicative adversary process. . . . The investigation
may eventually le-nd to an adjudicatory proceeding, but the investigation itself
will result in no final disposition of the rights and duties of Hallmark."' (Id. at
-137.) See also, Federal Trade Commission v. Waltham Wateh Company, 169 F.
Supp. 614 (D. S.D.X.Y. 1959) : Federal Trade Commission v. Seientifie Living,
150 F. ,Hupp. 495 ( D. M.D. Pa. 1957) .
The Commission is under no obligation to grant movants access to the "staff
memoranda" in support of the subpoenas, nor does the Commission generally grant
access to such documents. Staff communications to the Commission regarding
a motion to quasli an investigational subpoena constitirte intra-agency memoranda
and are thus exempt from disclosure under the Freedom of Information Act
(5 U.S.C. § 5.52(b) ). As the Fifth Circuit has held :
". . . intra-agency correspondence discussing the course of conduct to be
followed by the parties and expressing opinions as to the merits of various
claims presented to the agency enjoys at least a qualified privilege which, in
tlie absence of special circumstances, shields it from examination by the public."
Daris v. Brasicell Motor Freight Lines, Ine., 363 F.2d COO, 604-605 (5th Cir.
11X')6).
There are no special circumstances in this case. Staff communications regarding
the recommended course of actions w'ith respect to movants' motions do not
in any way diminish movants' right to present their case. Movants' requests that
tliey be permitted to respond to staff communications would result in needless
delny, and accordingly, are denied.
Finally, several movants request leave to present oral argument on their
motions!. In view of the fact that the issues as set out in the motions and
supporting memoranda appear comprehensive, oral argument would result in
needless expense and delay. The requests, therefore, are denied. Federal Trade
Conunis.<(ion v. Hallmark. Inc., supra.
The motions to quash the su))poenas are without merit, and. accordingly, are
denied. Appropriate orders accompany this opinion. Any extension of time
for response to the subpoena duces tecum may be negotiated with the staff
647
attorneys, pursuant to Section 2.7 of the Commission's Rules. Tlie same pro-
cedure will apply to requests for substitution of persons required to appear and
testify in this investigation.
June 27, 1972.
Exhibit 4
Executive Office of the Presidext,
Office of Management and Budget.
Waslnncjton, D.V., October 2i), 1971.
Mr. Henry Lipsky,
Liaison Officer. Federal Trade Commission,
Wa.'shiDgton, D.C.
Dear Mr. Lipsky : Your letter of October 28, 1971 asked if investigational sub-
poenas or subpoenas issued during litigation are subject to clearance by the
Office of Management and Budget under the provisions of the Federal Reports
Act of 1942.
The answer to your question is no, they are not.
If I may be of further help to you on this matter, please let me know.
Sincerely,
ROYE LOWRY.
Clearance Officer.
Exhibit 5
July 7, 1972.
Mr. 0. N. Miller,
Chairman, Standard Oil Co. of California,
San Francisco. Calif.
Dear Mr. Miller : As you know, on June 27, 1072 the Commission denied
Standard's motion to quash the Subpoena Duces Tecum, issued to you on Novem-
ber 24, 1971, in the above matter.
Because of the substantial delay that has already occurred in this matter, we
do not feel that a new deadline should be set for submission of your response to
the subpoena until we are assured tliat you intend to comply fully with the sub-
poena's demands. Accordingly, you are directed to submit within twenty (20)
days from the date of this letter, a statement indicating whether or not you in-
tend to comply fully with said subpoena without resort to further legal proceed-
ings.
Any questions concerning compliance with the subpoena should be addressed
to Attorney Donald K. Tenney (202-962-7566).
Very truly yours,
Owen M. Johnson. Jr.,
Assistant Director.
Bureau of Competition.
Exhibit 6
HoGAN & Hartson.
Washington, D.C. July 31, 1972.
Hon. Charles A. Tobin,
Secretary, Federal Trade Commission,
Viashington, D.C.
Dear Sir : This is in response to the Commission's Order and Opinion denying
the Motion of Standard Oil Company of California to Quash Su'opoena Duces
Tecum dated November 24, 1971 in the above captioned matter and to the letters
from the Commission staff relating to that matter dated July 18, 1972 and July 20,
1972.
The subpoena seeks certain material which is relatively routine relating to
the corporate organization of Standard but the principal thrust of the subpoena
is to .seek extremely extensive, technical and contideutial documents relating to
natural gas reserves. As we have indicated in our motion and in conversations with
the Commission staff. Standard is, of course, quite willing to supply the routine
material sought but it is obvious that the Commission is interested only in secur-
ing the extensive, technical, confidential material relating to natural gas reseiwes.
Tlwe Federal Power Commission has been established by Congress as the gov-
ernment agency to regulate natural gas companies and has regulated virtually
all aspects of tlie operations of companies engaged in production and interstate
distribution of natural gas. Over the years Standard has cooperated fully with
the FPC, has disclosed all data to the FPC that were sought and has made every
effort to cooiJerate entirely in the public interest and to maintain as adequate a
27-547 — 74 42
648
supply of this dwindling natural resource to the public as resources permit. As
you have been advised, the FPC has recently undertaken a survey of natural
gas reserves. This is itself a very extensive inquiry which will involve many
highly trained and technically qualified individuals and which will impose a
substantial burden upon the companies responding. Standard is responding and
will respond fully to this FPC inquiry, will cooperate with the FPC, and will
furnisJi all data required by the FPC.
On the other hand, it is evident to us that the Federal Trade Commission is
not authorized by Congress to duplicate the work of the FPC, that it is not
technically qualified to handle the material sought by the subpoena that has been
directed to Standai'd. and that there is every likelihood that it would be unable
to maintain the confidentiality of the extremely important and valuable data
relating to exploration and discovery of undeveloped natural gas reserves. It is
our view that it is beyond the proper scope and jiirisdiction of the FTC to seek
this material, that it would be conti-ary to the public interest and inconsistent
with the competitive purpose of the antitrust laws for such material to be
delivered to the FTC, as sought by the subpoena, and that the subpoena is in-
valid for all of the reasons stated in detail with supporting argument and au-
thority in the Motion to Quash and supporting material previously filed. It is
our view that the Order and Opinion of the Commission i-elating to this matter
are inadequate and unpersuasive and fail to meet the arguments and authorities
cited in the Motion and supporting material.
Accordingly, you are hereby notified that Standard Oil Company of California
does not intend to comply with the FTC subpoena dated Noveml)er 24, 1971, and
if enforcement is sought intends to contest the jurisdiction of the FTC and the
validity of the subpoena by all available legal means.
Sincerely yours,
Lee Loevinger.
Exhibit 7
In the United States District Court for the District of Columbia
Civil Action No.
Federal Trade Commission, petitionee
V.
O. N. Miller, chairman, and Standard Oil Company of California, a corpora-
tion, Respondents
Affidavit of Donald K. Tenney
District of Columbia,
City of Washington, ss :
Donald K. Tenney, being duly sworn, deposes and says that :
1. I am a senior attorney in the Federal Trade Commission's Bureau of Com-
petition and am one of the attorneys assigned to the Commission's investigation
identified as File No. 711 0042.
2. In the course of performing my duties in tlie conduct of this investigation.
I have made certain inquiries and have examined various portions of the files
of the Federal Power Commission and the attachments hereto are true and ac-
curate copies of the documents or portions of documents as described as follows :
Attachment A — cover page and pages 8, 13-19 66-68, 76-79, and 98 of dep-
osition of B. B. Gibbs, Chairman of the South Louisiana Subcommittee of the
American Gas Association, taken on August 5, 1971.
Attachment B — pages 1411-13, 1417 and 1422 of "prepared testimony" of
John C. Jacobs, Jr.. Chairman of the American Gas Association Committee on
Natural Gas Reserves, given in Federal Power Commission Area Rate Pro-
ceeidnr/s, ct al. (Southern Louisiana Area), Docket No. AR69-1.
Attachment C — pages 90-93 and 120 of joint report of American Gas As-
sociation. American Petroleum Instittite, and the Canadian Petroleum Institute
entitled Reseri^rs of Crude Oil, Natural Gas Liquids, and Natural Gas in the
United States and Canada as of December 31. 1969, "Vol. 24 (May 1970).
Attachment D — pages 1 and 8 of Federal Trade Commission December 28,
1970, questionnaire, letter to .lohn C. Jacobs, Jr., Chairman of the American Gas
Association Committee on Natural Gas Reserves and answers of Mr. Jacobs to
questions 30(a) and 30(b) of that questionnaire.
649
Attachment E — Federal Power Commission Order Requiring Reporting of
Specified Reserves Data and Prescribing Procedures, is-sued March 17, 1970 (43
FPC444).
Attachment F— transcript pages 5190-92, 5196, 5200, 5430 and 5446 from
hearings in Federal Power Commission Area Rate Proceedings, ct al. {SoKthern
Louisiana Area), Docket No. AR69-1, constituting excerpts of the testimony
given by Lawence R. Mangeu, Assistant Section Head of the Gas Supply Section,
Federal Power Commission.
Attachment G — Federal Power Commission Order Authorizing the Establish-
ment of National Gas Survey Advisory Committees and Prescribing Procedures,
issued February 23, 1971.
Attachment H — Federal Power Commission Order Establishing Technical
Advisory and Coordinating Committee Task Forces and Designating Membership,
issued December 21, 1971. together with Appendix A thereto.
Attachment I — page 126 of joint report of American Gas Association. Ameri-
can Petroleum Institute, and the Canadian Petroleum Institute entitled Reserves
of Crude Oil, Natural Gas Liquids, and Xatural Gas in the United States and
Canada as of December 31, 1968. Vol. 23 (May 1969) .
3. Gulf Oil Company has submitted over 12,000 documents constituting what
it claims to be a complete submission of the subpoena duces tecum. Union Oil
Co. of California has likewise submitted voluminous documents purporting to
be a complete response to the subpoena duces tecum. Further. Continental Oil Co.
has purportedly submitted all the documents called for by the subpoena except
for certain files called for by Specifications G and I which have been termed "bid
files." These "bid files" will be the subject of a subpoena enforcement action.
The completeness of the respective submissions of these companies cannot be
vouchsafed until they have been completely reviewed and knowledgeable officials
of the companies are questioned at future hearings ; and
4. The American Gas Association has made available for examination by the
Commission's staff certain field by field estimates for Offshore Southern Louisi-
ana. This data reveals that some 200 such fields were reported on.
DOIVALD K. Tenney.
Subscribed and sworn to before me this 7th day of March, 1973.
JuANiTA A. Wells,
Notary PuMic.
My commission expires March 15, 1977.
Exhibit 7. Attachment A
Before the Federal Trade Commission
Title No. 7110042
In the Ma-ttee of American Gas Association, Inc.
Washington, D.C, August 5, 1971.
Deposition of R. B. GIBBS, taken pursuant to notice, at 10:00 a.m.
Before : Donald K. Tenney, Bureau of Competition.
Appearances: Anthony J. De Phillips, James R. Hermsen, Counsel for the
Federal Trade Commission. D. Lamar Smith, Esq., Counsel for B. B. GIBBS.
Frederick M. Rowe, Esq., Counsel for American Gas Association, Inc.
A. Now?
Q. Yes.
A. I am Chairman of the South Louisiana Subcommittee of the American Gas
Association.
Q. How^ long have you been Chairman ?
A. Approximately twelve years.
Q. And what are your duties as Chairman of that Subcommittee?
A. Well, I am responsible to Mr. Jacobs, who is the present Chairman of the
Committee, for timely and accurate reserve determinations on an annual basis
from South Louisiana.
In order to do that I have the responsibility of putting together an organiza-
tion which can get that job done.
Q. You appoint various Subcommittee members?
A. Yes. I generally discuss it with Mr. Jacobs.
Q. As to the appointment?
A. Yes. But I am the one who appoints members of the Subcommittee.
650
Q. Now, can you tell ns a little bit about the background of how vou were (se-
lected for the Subcommittee? That is your first entry into the Subcommittee and
Committee that we are discussing?
A. When I was transferred back to Shreveport : I did my field work in South
Louisiana, and I was transferred back to Shreveport in the early part of 194S.
Q. Who were you employed by at that time?
Are Subcommittee assignments made on the basis of fields?
A. Yes.
Q. Now, what criteria do you use in assigning a particular field to a particular
Subcommittee member?
A. The criteria was whether or not — whether the man to whom we assign a
field has the necessary information from which to make an estimate.
Obviously, if a new discovery is made by Texaco or Humble, the Texaco man
or the Humble man would naturally know more about that, that particular field,
than anyone else.
Q. All right, Now could I have Gibbs Exhibit I for a moment here?
Appropos to what you state, here we have Mr. Foss (indicating), who is witli
Chevron Oil Company. From that last statement may we surmise that the next two
pages here relate to fields in which Chevron Oil has some interest?
A. Not absolutely. I mean, you could not take this list and add up the reserves
that Chevron brought in and say that these are reserves owned by Chevron Oil
Company.
Q. Well, as to "some interests" might it be a joint interest of some kind?
A. No. There might be occasions where they would have the off-site lease.
Q. They would be adjacent?
A. Yes. They might be adjacent to it without actually owning anything there.
I don't think you can make the asumption that they have a proprietary interest
in every one of those.
Q. Would it be a safe assumption that they have a proprietary interest in most
of these?
A. Yes, I think so.
Q. And they are proximate to by location or adjacent to those fields listed here
in which they have no intrest.
A. I didn't quite get your question.
Q. You have stated that most of the fields here listed on the first tv,-o pages of
Exhibit I would represent fields in which Chevron Oil has a proprietary interest.
A. To some degree, yes.
Let me clarify that. They may not necessarily have the whole interest ; I mean,
they might only have two wells.
Q. I understand.
A. There might be twenty wells.
Q. But Chevron would have some interest?
A. Chevron would know more about it than anybody else on the Committee,
in which case they would have had it.
Q. Because they have some proprietary interest in the field ?
A. No, no. Not because they have some proprietary interest, but because they
have the knov?ledge of the geology and the reservoir mechanics.
Q. Because of their proprietary interest?
Well, whatever the reason for assigning them, you have — you will indicate by
yes or no, does Chevron Oil Company have some proprietary interest in most of
the fields listed as being the responsibility of Mr. W. R. Voss?
A. I would say yes.
Q. And with respect to those in which it does not have a proprietary interest,
would it be true that these fields are adjacent to fields in which Chevron Oil
does have a proprietary interest?
A. I don't think that necessarily is true. It could be true.
Q. Adjacent or nearby. Would you accept that as a correction?
A. No, I wouldn't.
Q. There will be occasions •
A. There will be occasions. I wouldn't want you to draw the conclusion that
this is true in all cases. There could be a case where that is not true.
Q. Now. what you stated about Chevron, would this also be titie with respect
to the fields assigned to ^Ir. , of Humble oil ? Would most of those fields be
fields in which Humble Oil and Refining Company has some proprietary interests?
A. I think that would be right to say.
Q. Can we say the same thing about Harold Meaker and Texaco?
A. Yes.
651
Q. And Cullen LaBlanc and Gulf Oil?
A. Yes.
Q. J. D. Clark and Union Oil?
A. Yes.
0. .Tohn Kerr of Continental Oil Company?
Would most of these on the two pages following his name — would most of
these fields be fields in which the Continental Oil Company has some proprietary
interest?
A. I am less certain of that statement in regard to Mr. Kerr than the rest, be-
cause I am not as familiar with the offshore areas as I am perhaps with the
others.
And I don't know — the offshore area is very complex and there are many com- .
bines operating, and it is a little bit more complex and complicated than onshore,
luit the reason why these fields were assigned to Mr. Kerr is that he has more
information on those fields than anybody else on the Subcommittee would have.
And that is true of all the rest of them, of course.
Q. Yes?
A. But I can't be too sure about Mr. Kerr, because I am not so sure about the
ownership of the various fields.
Q. I see. So most of — is it your belief that many of these are owned by Conti-
nental Oil — not completely. I am sorry — •! shouldn't say "owned," but that
Continental Oil Company has a proprietary interest?
A. They have some just in that area.
Q. Now let's for the moment skip you and just finish off this list. I don't know
how many more there are here.
Mr. Swingle and Shell Oil Company.
A. I would say yes.
Q. That Shell has a proprietary interest in most of these fields listed after
his name?
A. To some degree.
Q. Some degree of interest?
A. Yes.
Q. Allen Guiberteau and Pan American Petroleum Corporation, would the
same thing be true of him as you have stated, for instance, of Mr. Voss?
A. Yea
Q. Okay. Let's get back to these.
About how many fields are you responsible for?
A. Approximately 300.
Q. That's fine.
A. It could be plus or minus 100.
Q. Now, your company, I understand, has contracts in your own language, what
the notation "AGA" in the right-hand corner of some of the.se sheets indicates?
A. The notation AGA means that this estimate is by us for AGA.
Q. By "us"?
A. The United Gas Pipeline.
Q. So you are stating that there is no distinction whether "AGA" is noted in
the right-hand corner or whether "Co." is noted?
A. No. The distinction "AGA"' in the right-hand corner means that it was
made bv us solely for the reason, of putting it in because of our responsibility
to aga!
The company estimate means that we derived the data on here from our
company estimate.
The "AGA" means we would not have estimated the reserves in that field, if
we were not responsible for it to AGA.
Q. Would it indicate then that you or Mr. MacKenzie had gone out and looked
at the raw data, whatever it was that was available, and you had worked up
your own estimates on those?
A. That is rijrht.
Q. Let's hop along — or hob1)le along, to another area here.
What is the Form 15 and with whom is it filed?
A. A Form 15 is an annual report of gas supplies filed with the Federal Power
Commission ffir the year that is indicated on the form. They are filed annually
with the Federal Power Commission.
Q. Now, you have brought with you some Form 15s, I notice, apparently for
a five-year period ; is that correct?
A. That is right.
652
Q. Why don't we begin with the most remote year, and work forward, number
these as Physical Exhibits 35 et seq — 34, et seq?
We have them for 1966, do we not?
A. That is right.
Mr. Tennet. Right. So let's call that Gibbs Physical Exhibit 34, and by my
calculations, that would take us up, by 1970, so that we would be to Gibbs
Physical Exhibit 3S.
(The documents referred to were marked for identification as Gibbs Physical
Exhibits 34 through 38, inclusive. )
By Mr. Tenney :
Q. As these are each being numbered, Mr. Gibbs, are there certain fields
which you are resix»nsible for the AGA, whose reserves are dedicated in their
entirety to your company ?
A. Yes.
Q. In these instances, would there be any difference then between proved
reserves and dedicated reserves? ■
A. You are speaking of the dedicated reserves in the Form 15?
Q. Yes.
A. As compared to the proved reserves in AGA?
Q. That is correct. Were all those reserves in that field not dedicated to you?
A. There could be a dilference. The reserves in the Form 15 are prepared for
us by an independent consulting firm of Ryder-Scott Company, who are a
consulting firm of geologists and engineers.
Our company policy is that any reserves which will be submitted to a regulatory
body, we have an independent consultant to do this work for us.
Q. All right. A different party would be working that up with respect to those
fields, but would the criteria for dedicated reserves in these instances be any
different from the criteria for proved reserves?
A. In our situation, no.
Q. Let me just quickly ask you — we now have these numbered, and I think
we are ."^-tarting with 34— Gibbs Physical Exhibit 34 is the 1966 Form 15 filed
by your company.
Gibbs Physical Exhibit 35 for 1967, 36 for '68. 37 for 1969, and 38 for 1970.
Would you agree to that? Do you want to take a look?
Mr. Rowe. Can we say "producing companies"? Because that is the terminology
which we have been living with.
Mr. Tenney. Well, it might confiise a producer company which is principally a
gas company and pipeline company with one which is principally an oil-gas
company.
Mr. Rowe. Well, I think you can liring that in in your interrogation of the
witness, but what the nature of the business is which employes members of tlie
Southern Louisiana Association
Mr. Tenney. Actually, all I want to know is the source of the estimates by
other Subcommittee members.
The Wit.'vess. Well, as I said, I don't know the source.
By Mr. Tenney.
Q. All right. What happens at these meetings in late February? You say that
you come to the meetings with your worksheets already filled out, and they do
the same?
A. Yes.
Q. When they come do they bring, or do vou bring, any supporting data?
A. No.
Q. You mean the only thing that anyone has to look at at these meetings
are the worksheets themselves ?
A. That is coiTCct.
Q. All right. Now, when the meetings take place, as you have already indi-
cated, each member is given a copy of each member's worksheets. Is this done
precisely at that time?
A. These things are discussed ; if there are any changes to be made, they are
made at that time and then we — I mean ^SlacKenzie and myself, take these
sheets from everybody, back to Shreveport, and we reproduce them for every-
body, so that each member has a copy.
Q. Mr. Gil)bs. would you just go over that again, exactly the timing sequence
here, as to when meml)ers obtain worksheet copies from other Subcommittee
meml )ers ?
A. This is after the Subcommittee meeting.
653
Q. All right. But during the Subcommittee meeting, does each Subcommittee
member have access to tlie worksheets brought by other members?
A. Yes.
Q. But there is no access to the underlying data at this time, because they
dou"t bring it with them. Is that correct?
A. That is right.
Q. All right. Now. what check, if any, is there of a given Subcommittee
member's work by other Subcommittee members?
A. Well, as I said, this is no — I can't go to another company office and
look over somebody's shoulder while he is making his estimate. But those people
on the Subcommittee, the Subcommittee members, are pretty knowledgeable
people.
They are mature, competent engineers and geologists, experienced men, who
have been estimating reserves for some time, and because of the fact that in
some companies there is diverse ownership in some of these fields, one of our —
well, there might be three Subcommittee member who will have data on a
particular field, but one Subcommittee member brings it, so the other two
certainly know what the estimate is. or have made some kind of a study.
Likewise, we look at many fields in South Louisiana for which we do not
bring in estimates.
Q. How is this done? Oh. you are talking about because of the company
A. Yes. We don't police these fellows, and try to look over their shoulder, but
we feel that if anybody was way out of line, he would be checked.
Q. Has this happened?
A. It has happened, but very infrequently.
Q. Very infrequently that a Subcommittee member's estimate are off?
A. Yes.
Q. How would you know that it is out of line if you don't have the back-
ground data with you?
A. Well, you might have a difference of opinion, at which time you go into
discussion on it.
Q. Well, we are talking about hundreds and hundreds of fields, and someone
comes in with a list of fifty or sixty fields, and with his estimates on these —
that is what these worksheets indicate— how would you know whether these
estimates are out of line?
A. Well, you wouldn't know if every one of them was out of line, but you
might see one or two there that you would have some knowleilge of, in which
case you would.
I am not saying that I know, whether I am able to tell whether any field
that you might "pick out is out of line, but there are some I would know.
Q. What happens if there is disagreement among Subcommittee members as
to what the estimate for a given field should be?
A. We would discuss the situation and resolve it right there.
Q. Can you tell me whether there were any such discussions or resolutions
during the years involving estimates for '68 and '69?
A. I don't recall any.
Q. You don't recall any?
A. No, sir.
Q. As far as you know, the worksheets that were presented in the Subcom-
mittee meetings in late February for the calendar years '68 and '69 were adopted
without debate?
Q. Now, I get the impression, reading this, that the Subcommittee Chairman
get access to all the underlying data. I have the impression here today, from
hearing you, Mr. Gibbs, state that you do not have access to the data underlying
the worksheets of other subcommitteemen —
Mr. RowE. Well. I object to that form of question, Mr, Tenney. I have no
objection to your asking Mr. Gibbs the question, but I resent •
By Mr. Tenney :
Q. The question is : do you have access to the underlying documents going
into these worksheets of other Subcommittee members ?
A. I have never exercised the prerogative to have access. Let me say that I have
worked with most of these people for many years.
They are as competent professional men as you can find anywhere in the
country. I believe in what they do. I am convinced they write the best numbers
they know how to write ; if I were not so convinced, I would ask them to no longer
be members of the Subcommittee.
654
In my judgment they have been discharging their responsiljilities to the
Subcommittee to the best of their abilities, and I have no reason to quarrel
with their estimates.
Q. I wonder if you would comment on SC Exhibit 88.
Exhibit 7, Attachment B
Federal Power Commission Docket No. AR 69-1. Area Rate Proceedings
(Southern Louisiana) Prepared Testimony of John C. Jacobs, Jr.
Q. Please state your name and address.
A. My name is John C. Jacobs, Jr. My business address is Texas Eastern
Transmission Corporation. P.O. Box, Houston, Texas.
Q. Mr. Jacobs, by whom are you employed and what is your present position?
A. I am employed by Texas Eastern Transmission Corporation and I am
Senior Vice President.
Q. Are you also Chairman of the American Gas Association Committee on
Natural Gas Reserves?
A. Yes.
Q. Have you been asked to testify in this proceeding by the UDC Group and
to answer certain questions propounded by Mr. R. G. Groch, General Counsel
to the Federal Power Commission, in a letter dated March 16, 1970, and served
on all the parties?
A. Yes. sir. In view of the apparent widespread desire that the methods of
operating of the ACA Committee on Natural Gas Reserves be fully developed
in the AR69-1 proceeding, I am happy to appear as a witness for the UDC
Group.
Q. Pipase describe your educational background and experience?
A. Educationally. I received a Bachelor of Science in Chemical Engineering
degree from Georgia Institute of Technology in 1939 and a Bachelor of Laws
degree from I'ale University in 1948.
Professionally and on the legal side, I am a member of the American Bar
Association, and am licensed to practice in the courts of Texas and Federal
District Courts, Circuit Courts and the U.S. Supreme Court.
On the engineering .side. I am a registered profes.sional engineer in Texas,
a member of Colegic ie Ingenieros de Venezuela, a member of the Institute
of Petroleum and the Institution of Gas Engineers in England, and hold
memberships in the following U.S. societies: Society of Petroleum Engineers
of the American Institute of ]Mining and IMetallurgy Engineers, American
Institute of Chemical Engineers, and the American Petroleiun Institute.
As to the gas industry. I was a founder of the Wilcox Trend Gathering System
in Texas and served as Executive Vice President from 19."i2 through 1955. From
1955 through 1966, I .served as Vice President of Texas Eastern Transmission
Corporation where my principal duties were concerned Vvith gas supply. Since
1966 I have served as Senior Vice President of that organization as head of its
Petroleum Division. I have been a member of the American Gas Association
since 1965.
I have been associated with the estimation of reserves in one way or another
since my initiation into this fraternity as a reservoir engineer of Creole Petroleum
Corporation in Caracas. Venezuela, in 1944.
Q. Plea.se briefl.v describe the American Gas Association.
A. The American Gas Association is one of the oldest industrial associations
in the United States. It has among its members some 345 distribution companies
located in every State of the Union, and supplying gas service in every major
town and city of the country, except certain cities in Northern New England.
The distribution companies which are members of the American Gas Associ-
ation comprise some of the oldest utility onerations in the LTnited States. The
earliest company has operated since 1916. Gas has been served by quite a few
mem.ber companies from the middle 1900's.
Also included in the membership of the Association are most of the long-
distance interstate transmission companies which carry gas from the pro-
diT^'ing fields to the distribution eomimnies.
The American Gas Association was organized to assist the member companies
in research, coordination of industry activities, and in the collection, coordination
and dissemination of ideas and information. TTie AGA is recognized as one of
the prinr-ipal s(»urces of authoritative statistical data on tlie gas industry in the
United States.
655
Q. Please state the number of members in the AG A and, in answer to Question
No. 1 in ^Ir. Cooch's letter, give the breakdown between distributors, pipelines,
producers and others.
A. Information supplied to me by the headquarters staff of the American
Gas Association on April 15, 1970, indicates that the AGA has 389 voting
members made up of 345 domestic distribution companies, 13 foreign distri-
bution companies and 31 domestic pipeline companies. The AGA also has
5.400 individual members. In addition, there are 683 non-voting associate
members. The associates are made up of 606 manufacturing companies, 55
c('nsulting organizations, 17 producing companies and 5 financial organizations.
Q. When and why was the AGA Committee on Natural Gas Reserves
established?
A. It v.as established in 1945 to provide the industry, the Government and the
general public an annual estimate of the proved natural gas and natural gas
liquids reserves of the United States.
H; ***** *
Q. "WTiat are your duties as Chairman of the Reserves Committee?
A. ]My duties are to select, from the men, excellent candidates available, the
best for Committee membership, to appoint the members of the Committee, to
coordijiate the activities of the Committee and to supervise the preparation of
the Report.
Q. Will you please describe the organizational structure of the Committee.
A. The nation is divided into 10 geographical districts, each of which is under
the jurisdiction of a member of the Committee. The reserves for each of these
districts are determined by a Subcommittee comprised of the Committee member
and a Subcommittee which he, in turn, appoints and supervises. The reserves so
detei-mined for the several districts are then added together to get the reserves
for the nation as a whole.
*******
Q. ]Mr. Gooch's Question No. 4 is as follows : "Are there any other persons, such
as obsei-vers. who participate either officially or unofficially in the work of the
Committee or any Subcommittee?"
A. Meetings of the Committee and Subcommittees are attended only by the
Committee and Subcommittee members, it being the position of the Committee
that only these actual members can make a contribution to the work being done.
Q. How and when are Subcommittee meetings scheduled?
A. Subcommittee meetings are scheduled by the Subcommittee Chairman as
and when he deems best to provide coordination of the work and timely reporting
of the reserves and productive capacity determination.
Q. Do you have knowledge of the figures for individual fields as determined by
the Subcommittee?
A. No. The Subcommittee Chairmen report to me only the total figure for their
respective areas.
Exhibit 7, Attachment C
Okganizatiox, Procedures, and Definitions
introduction
The American Gas Association is recognized as one of the principal sources of
authoritative statistical data on the gas industry of the United States. As part of
the Association's overall program, the Committee on Natural Gas Reserves were
established to provide the industry, the government and the general public an
annual estimate of the gas and natural gas liquids reserves of the United States
within established regions and to supply other pertinent statistics in the field of
gas and natural gas liquids reserves, production and prodvictive capacity as
required. The Committee on Natural Gas Reserves derives its authority from, and
is responsible to. the Board of Directors of the Association.
It is the established policy of the Committee to restrict its coverage of industry
■ statistics to current and historical data and not to participate in the determination
and publication of forecasts of supply and demand or of estmiates of natural gas
and natural gas liqiiids reserves that are speculative in nature.
The Committee adheres firmly to the policy of maintaining in the strictest
confidence the basic data and reserve estimates for individual fields and reser-
voirs on which published totals by states and subdivisions of states are based.
As the continued existence of the Committee and the value of its esimates depend
upon the availability of confidential interpretations of data obtained from many
individual and company sources it is obligatory that every member of the Com-
656
niittee and each Subcommittee respect the confidential nature of the individual
reservoir or field reserve data and report any violation of this policy. It is recog-
nized that the majority of the basic data used in reserve determinations is avail-
able from records of regulatory bodies, industry reports and commercial sources
for the cost of obtaining and compiling the data in a usable form. The compiled
information as well as the individual interpretations of these data is regarded
as confidential. It should be noted that certain terms and definitions contained in
the report have been formvilated by the Committee solely for the purpose of
making the report clear and understandable and they should not be construed as
necessarily being in conflict with or having a different meaning than any other
accepted technical statement of terms and definitions relating to the same subject.
OKGANIZATION
The Chairman of the Reserves Committee is appointed by the President on
behalf of the Board of Directors of the Association. The Secretary of the Commit-
tee is from the Dept. of Statistics of the Association and is a member of the
Reserves Committee. A representative from the United States Bureau of Mines
in an ex officio member of the Committee. Other Committee members are ap-
pointed by the Chairman and assigned geographic areas of responsibility. In
carrying out this responsibility each Committee member maintains a organiza-
tion of an Area Subcommittee composed of qualified technical personnel from
industry who under his supervision and in accordance with the procedures and
guidelines formulated the Committee compile and report the necessary I'eserves,
production and productive capacity data to the Committee member responsible for
the Area for inclusion in the Annual Report of the Committee.
Membership on tlie Committee and each Sul>committee is retained by each
individual so long as the assignments are properly discharged and the policies
of the Committee are observed. Each individual is expected to serve only as long
as he retains an affiliation with the oil and gas industry in an active capacity
which enables him to make a contribution to the work of the Committee or Sub-
committee.
The geographic districts of the United States assigned to Reserve Committee
members and their Subcommittee organizations are as follows :
1. Appalachian Area: Kentucky, Maryland, New York, Ohio, Pennsylvania,
Tennessee, Virginia, and West Virginia.
2. .?owf7!cosi 4rea; Alabama, Florida, and Mississippi.
3. South Central Area: Arkansas and North Louisiana.
4. South Louisiana Area: South Louisiana including the Offshore Area.
5. Texas Gulf Coast Area: Texas Railroad Commission Districts 1, 2, 3, and 4
including the Offshore Area.
6. Northeast Texas Area: Texas Railroad Commission Districts 5, 6, 7B, and 9.
7. West Texas-Southeast New Mexico Area: Texas Railroad Commission Dis-
tricts 7C, 8. SA, and Southeast New Mexico.
8. Mid-Continent Area: Illinois, Indiana, Iowa, Kansas, Oklahoma, Michigan,
Missouri, and Texas Railroad Commission District #10.
9. Rocky Mountain Area: Colorado, Montana, Utah, Wyoming, Northwest New
Mexico, Nebraska, and Nortli Dakota.
10. Pacific Coast Area: Alaska, Arizona, Oregon, Washington, and California,
subdivided into San Joaquin Valley Region including the Sacramento Valley
Area, the Coastal Region, and tlie Los Angeles Basin Region.
Suhcoiuniittces
Each Committee member is the Subcommittee Chairman for the respective
areas of his responsibility. The Subcommittees, Avhich are responsible for the
determination of reserves, are composed of geologists and engineers from all
segments of the oil and gas industry. They are experienced in reserve determina-
tion and/or producing capacity estimation and have intimate knowledge of the
areas assigned to them. They also have availal^le to them in company records de-
tailed information of industry operations and developments.
Conrdinatinn ivith A.P.I. Conmiittec on Reserves and Prndiicfire Capacity
The A.G.A. and A.P.I. Reserves Committee have joint responsibilities in the
determination of certain reserves and production. Original recoveralile dissolved
gas reserves, dissolved gas production and remaining reserves are directly re-
lated to the original crude oil in-place in the reservoirs and oil well produc-
tion as determined by the A.P.I. Subcommittees. The A.G.A. Committee on
Natural Gas Reserves must for necessity report all gas and natural gas liquids
statistics. Therefore, cooperation between the A.G.A. Subcommittee and the
respective A.P.I. Area Subcommittee is required.
657
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Exhibit 7, Attachment D
Dec. 28, 1970.
Re : American Gas Associatiou, File No. 711 0042.
Mr. JoHX C. Jacobs, Jr.,
CItuinnmi, Committee on Xatural Gas Reserves,
American Gas Association, Inc.
Arlington, Va.
Dear IMr. Jacobs : This Bureau is presently conducting an investigation into
the reporting of natural gas reserves by the American Gas Association. In that
regard, we have prepared an informal questionnaire, incorporated herein, re-
(inesting certain documents of the American Gas Association's Committee on
Natui'al Gas Reserves and its Southern Louisiana Area Subcommittee which
relate to gas reserves in that Subcommittee's area. As Chairman Kirkpatrick of
the Commission indicated to you in his letter of October 23, 1970, we appreciate
your offer to assist us in this investigation.
For purposes of this questionnaire, the following definitions shall be applicable :
1. "Proved reserves," "discoveries," "extensions." "revisions." "net production,"
and other terms used herein, as defined by the American Gas Association in
Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the United States
and Canada and United States Productive Capacity as of December 31, 1969,
Volume 24, May 1970: specifically pages 85-118 therein, and Standard Defini-
tions for Petroleum Statistics, American Petroleum Institute, Technical Report
Xo. 1. July 1, 1009.
(a) Obtain the total number of all such tests and holes
{b) Obtain information showing the presence or absence of gas accumulations
in such tests and holes
(c) Obtain data, where gas accumulations were present in said tests and holes,
for determinarion as to whether the gas accumulations found should be included
or excluded in estimates of proved reserves.
*******
27. The methods and sources which are utilized by the AGA Committee, the
Area Subcommittee and its members to :
(n) Determine the validity or invalidity of proved reserve estimates prepared
by producers and operators, and
(6) Prepare reserve estimates v\-here producers and operators refuse to provide
relevant information and data or where the AGA Committee, the Area Subcom-
mittee or its members consider information and data submitted by producers
and operators to be inadequate, incomplete, or inaccurate.
28. Identify the producers, owners, or lessees of each field containing natural
gas reserves in the Southern Louisiana area as of December 31, 1969.
29. Please submit copies of the minutes of the meetings, formal and informal,
of the Committee on Natural Gas Reserves and the Southern Louisiana Area
Subcommittee from January 1. 1965 through December 31, 1970.
30. List each individual member of the Committee on Natural Gas Reserves of
the AGA (a) as of December 31, 1969, and (b) from January 1, 1960 to December
31, 1969. indicating for both (a) and (b) :
( a ) Name ;
( & ) Address ;
(c) Occupation and employer;
(d) Length of time served, and
(e) Specific duties and responsibilities on Committee.
Natural Gas Reserves Committee Member as of December 31, 1969
Ed Parkes (Chairman, 1960-69), chairman of Executive Committee, Pennzoil
United, Inc.. Box 1407, Shreveport, La.
J. C. Jacobs (Vice Chairman. 1969). senior vice president, Texas Eastern Trans-
mission Corp., P.O. Box 2521, Houston, Tex.
D. S. Colby (Alternate, 1951-57; 1958-69), Division of Economic Analysis, Bu-
reau of Mines, Washington, D.C.
P. A. Cole ( Subcommittee, 1948 ; Chairman — District No. 2 and Texas RR Com-
mission District 10. 1982-69), chief geologist, Cities Service Gas Co., P.O. Box
25128. Oklahoma City, Okla.
R. O. Garrett (Chairman — Arkansas & North Louisiana. 1960-69), president,
Texas Gas Exploration Corp., P.O. Box 52310. Houston, Tex.
660
B. B. Gibbs (Subcommittee, 1948-52; Chairman — South Louisiana, 1953-69),
Manager, Gas Availability Department, United Gas Pipe Line Co.. Box 1407,
Slireveport, La.
J. V. Goodman (Chairman — Appalachian States, 1960-69), vice president and
chief geologist. Equitable Gas Co., 420 Boulevard of the Allies, Pittsburgh,
Pa.
J. R. Jordan (Chairman — Texas RR Commission Districts 5, 6, 7-B, 9. 1966-69),
manager, gas reservoir engineering section, Gas Supply Department, Lone
Star Gas Co., 301 South Harwood St., Dallas, Tex.
J. N. Newmyer (Chairman — New Mexico. Texas RR Commission Districts 7-C,
8, 8A, 1965-69), district reservoir engineer. Gulf Oil Coi-p., P.O. Box 1150,
Midland, Tex.
E. D. Pressler (Chairman— Texas RR Commission Districts 1. 2, 3, 4, 1960-69),
reserve coordinator — production department headquarters, Humble Oil & Re-
fining Co., Box 2180, Houston, Tex.
D. R. Scherer (Chairman — Mississippi, Alabama, Florida, 1960-69), exploitation
geologist, Southern Natural Gas Co., P.O. Box 1513, Houston, Tex.
A. H. Wieder (Chairman — Rocky Mt. Region. 1960-69), staff exploitation en-
gineer, Shell Oil Co., 1700 Broadway, Denver, Colo.
M. T. Whitaker (Chaix'mau — Pacific Coast and Alaska, Arizona, Nevada. 1960-
69), regional planning analyst, Mobil Oil Corp., P.O. Box 2122, Terminal Annex,
Los Angeles, Calif.
T. I. Gradin (Secretary, 1960-69), manager, department of statistics. American
Gas Association, Inc., 605 Third Ave., New York, N.Y. (Present address for
A.G.A. : 1515 Wilson Blvd.
Ed Parkes (Chairman. 1960-69). chairman of executive committee, Pennzoil
United, Inc., Box 1407, Slireveport, La.
W. F. Burke (Chairman— Texas RR Commission Districts 5, 6, 7-B. 9, 1960-66),
Lone Star Gas Co., 301 South Harwood St., Dallas, Tex.
D. S. Colby (Alternate, 1951-57; Member, 1958-69), division of economic anal-
ysis. Bureau of Mines, Washington, D.C.
P. A. Cole ( Subcommittee, 1948-61 ; District No. 2 and Texas RR Commission
District 10, 1965-69; District No. 2, 1962-64), chief geologist, Cities Service
Gas Co., P.O. Box 2512S, Oklahoma City, Okla.
R. O. Garrett (Chairman — Arkansas & North Louisiana. 1960-69), president,
Texas Gas Exploration Corp., P.O. Box 52310, Houston, Tex.
B. B. Gibbs (Subcommittee, 1948-52; Chairman— South Louisiana, 1953-69),
manager, gas availability department. United Gas Pipe Line Co., Box 1407,
Slireveport, La.
J. V. Goodman (Chairman — -Appalachian States. 1960-69), vice president & chief
geologist, Equitable Gas Co., 420 Boulevard of the Allies, Pittsburgh, Pa.
J. C. Jacobs (Vice Chairman, 1969), senior vice president, Texas Eastern Trans-
mission Corp., P.O. Box 2521, Houston Tex.
J. R. Jordan (Chairman — Texas RR Comimssion Districts, 196(>-69), manager gas
reservoir engineer section, gas supply department. Lone Star Gas Co., 301
South Harwood St., Dallas. Tex.
J. N. Newmyer (Subcommittee, 1961-64. Chairman — New Mexico, Texas RR
Commission Districts 7-C, 8, 8A, 1965-69), district reservoir engineer. Gulf
Oil Corp., P.O. Box 1150, Midland, Tex.
E. D. Pressler (Chairman — Texas RR Commission Districts 1. 2. 3. 4. 1960-69),
reserve coordinator production department headquarters, Humble Oil & Re-
fining Co., Box 2180, Houston, Tex.
D. R. Scherer (Chairman — Mississippi, Alabama, Florida, 1957-69), exploitation
geologist. Southern Natural Gas Co., P.O. Box 1513. Houston, Tex.
C. E. Turner (Chairman — New Mexico. Texas RR Commission Districts 7-C,
8, 10, 1960-64), Phillips Petroleum Co., Bartlesville, Okla.
A. H. Wieder (Subcommittee, 1951-58, Chairman — Rockey Mt. Region, 1959-
1969), staff exploitation engineer, Shell Oil Co., 1700 Broadway, Denver, Colo.
661
M. T. Whitaker (Subcommittee, 1947-57, Chairman — Pacific Coast and Alaska,
Arizona, Nevada, 1958-69), regional planning analyst, Mobil Oil Corp., P.O.
Box 2122, Terminal Annex, Los Angeles, Calif.
T. I. Gradin (Secretary, 1960-69). manager, department of statistics, American
Gas Association, Inc., 605 Third Avenue, New York, N.Y,
Exhibit 7. Attachment E
Federal Power Commission — Order Requiring Reporting of Specified Reserves
Data and Prescribing Procedure
Before Commissioners : John N. Nassikas, Chairman ; Lawrence J. O'Connor, Jr.,
Carl E. Bagge, John A. Carver, Jr., and Albert B. Brooke, Jr.
Area Rate Proceeding ( Southern Louisiana Area )
Docket No. AR69-1
(Issued March 17, 1970)
On January 28, 1970, Pan American Petroleum Coii^oration and a number
of other producers filed herein a motion requesting the Commission to enter
its order requiring the reporting of certain gas reserves information by producer
respondents for use in this proceeding. No answers thereto have been filed by
any party or intervener. The reserves data in question relate to the volumes of
uncommitted proved reserves controlled by the producer respondents in the
Southern Louisiana area as of year end 1968 and year end 1969, separately
stating the Federal Domain and the remaining Southern Louisiana area. We
noted in our order enlarging this proceeding, issued December 15, 1969, that
information of this type would be required, and we will accordingly order the
reporting of such information, subject to the terms and conditions hereinafter
set forth.
THE COMMISSION" FINDS
The public interest requires that the volumes of proved natural gas reserves
held by producers in the Southern Louisiana area and not conti-acted to inter-
state pipelines be reported and made available in this proceeding in the foiTU and
manner hereinafter prescribed.
THE COMMISSION ORDERS
(a) The questionnaire attached hereto as Appendix A shall be completed by
all large producer respondents. The questionnaire attached hereto as Appendix
B shall be completed by all original AR69-1 producer respondents. The com-
pleted questionnaires shall be mailed to Arthur Young & Co., P.O. Box 1529, Tulsa,
Oklahoma 74101 no later than May 1, 1970.
(&) Arthur Young & Co., shall furnish to the staff and to all parties to this
proceeding a composite of the individual questionnaire responses as soon as
may be possible and will return the individual responses to the respective
companies.
(c) The individual producer respondents who make reports pursuant to this
order shall make such reports (including any workpapers or other data under-
lying such reports) available in their offices to the Commission's Staff upon
request of Staff counsel.
{(I) Compliance with this order shall not constitute nor be construed as a
waiver of any claim of privilege in any future case, by any producer respondent.
(e) The individual company responses to the attached questionnaires and
any other information revealed by a Staff audit of the responses are to be treated
as confidential information without public disclosure by Arthur Young & Co.
662
or Staff. The provisions of § S(b) of the Natural Gas Act [15 U.S.C. 717g(b)]
and 5 U.S.C. 552(b) (4) (Freedom of Information Act) shall control.
By the Commission.
Gordon M. Gr.vnt. Secretary.
Exhibit 7, Attachment F
Federal Power Commission, Bureau of Natural Gas
Docket No. AR69-1, et al.
(Akea Rate Pkoceeuings, et al, South Louisiana Aeea)
• Testijiony of Lawkence E. Mangen
Question. Please st;ite your name, by whom you are employed, and your
position?
Answer. My name is Lawrence R. Mangen. I am employed l>y the Federal
Power Commission in the Bureau of Natural Gas as a supervising natural gas
engineer.
Question. Briefly outline your educational and professional background?
Answer. I received a B.S. degree in Engineering at the University of ^Minnesota
in 1955 and a M.S. degree in Geology in 1957 at the University of ^Minnesota.
Upon graduation I was employed by Shell Oil Company as a junior engineer,
field engineer, workover engineer and production geologist. Since 19G2 I have
been employed with the FPC. I am currently Assistant Section Head, Gas Supply
Section and I am also team leader of the National Supply Team of the
Gas Supply Section of the Analysis and Procedures Division of the Bureau
of Natural Gas.
Question. Are you a member of any professional societies?
Answer. I am a member of the society of Petroleum Engineers of AIME, a
fellow of the American Association for the Advancement of Science, and a
registered professional engineer.
Question. Have you previously testified in any hearings?
Answer. Yes, I have testified before the Texas Railroad Commission, primarily
on productive acreage hearings, and before the Federal Power Commission in
two prior area rate proceedings, Docket Nos. AR61-2, (South Louisiana Area)
and AR67-1 (Other Southwest Area).
Question. What is the purpose of your testimony ?
Answer. The puniose of my testimony is to describe and explain the procedures
used by the Commission staff in auditing the uncommitted reserve figures re-
ported by the producers in this proceeding.
The Commission by its order of March 17, 1970 required producers to report
certain reserve data by separate questionnaires for the Onshore and Offshore
Areas in Southern Louisiana. The data were to be reported as of year-end 19G8
and year-end 1969. Volumes of reserevs available for sale and resei-ves held for
fulfillment of warranty gas sales contract were to be reported for the Onshore
Area, In addition to the reporting of volumes of warranty gas and
gas available for sale in the Offshore Area, the Commission required the report-
ing of volumes of gas resei-ves committed to direct industrial contracts and
tiie reserves held for company use and fuel or feedstock but not subject to
specific contract arrangements. The completed questionnaires were forwarded
by each responding producer to the Tulsa, Oklahoma office of Arthur Young &
Co. Donald W. Auten, a certified public accountant wirli that finn, composited
the data and presented it in this pi-oceeding as Exhibit No. 27. That exhibit has
been a public record since May 26, 1970.
Question. Were the volumes reported by each individual respondent made
public?
Answer. No. Under the Commission order, the individual company responses
were to be treated as confidential information without public disclosure. How-
663
cever. that order also provided that the indi\^dual reports and data underlying
such reiKirts should be made available to the Commission staff upon request.
Question. Was a reqiiest for such an audit made?
Answer. Yes, it was made and an audit was performed.
Question. How was the audit performed?
Answer. The first step in the audit was to review all the individual company
filings in order to verify the totals of the volumes composited by Mr. Auten in
Exhibit No. 27. In order to maintain confidentiality I was selected as the only
person who would see these filings.
* * * * * * - *
Question. After verifying the individual components of the Auten composite,
did you proceed to audit the data underlying the uncommitted reserves volumes
as submitted by each producer?
Answer. Yes. I arranged to have members of the staff visit each company
that reported having any uncommitted reserves in Southern Louisiana.
Question. Did the staff review the undei-lying data for every reservoir com-
prising the reported uncommitted reserves in Southern Louisiana?
Answer. Xo. In addition to the time limitations placed upon the staff by the
necessity to complete the audit and submit the results in this proceeding, I
concluded that a representative sample of the reservoirs involved would serve
as an adeipiate ba.sis for auditing the reported data.
* * 4: 4: 4: « *
Question. In terms of Mcfs what volume of reported reserves were examined
by the staff?
Answer. I can"t answer that question on the ba.sis it is confidential informa-
tion.
Question. Well, would it be incorrect to add the figures on page six, the avail-
able-for-sale figures as of December 31, 1969. for the offshore and onshore regions,
and to multiply that by thirty-three percent?
Answer. That would give you an approximation.
Question. And would you accept, subject to check, that that approximation is
858 million cubic feet?
Answer. I will accept that subject to check. It doesn't sound to be the right
magnitude, however, from my recollection of the total number.
Question. I wonder why is that information confidential, since we have the
available-for-sale figures and we know the percentage of reserves examined
and reviewed by the staff team. Why is the Mcf figure
Answer. I destroyed all my work papers because they contained confidential
information, and this number was on these work papers which were destroyed.
Question. As I understand it, the questionnaires, the purpose of the question-
naires was for the companies to report uncommitted proved gas reserves. Is that
correct ?
Answer. That's correct.
Question. Now. did you have any procedure, did the staff have any procedure
whereby it could check to determine whether or not companies had not reported
uncommitted proved gas reserves?
Mr. Rebman. Mr. Examiner, just still by way of clarification, whether counsel
is asking anything different than the question that was posed by the witness'
own counsel on page twelve, transcript 5202. It sounds pretty much like the same
thing to me.
Mr. Miller. No, this is different for this reason : As I understand the question
on page twelve, that is directed only to companies who reported no uncommitted
gas reserves. I am speaking of companies
Presiding Examiner. Is there any way that you could check whether a com-
pany had reported all its uncommitted proved reserves?
The Witness. The only way that we could have done it was to perform the
same kind of audit that we performed for the companies that reported none.
Presiding Examiner. Well, did you do that ?
The Witness. No.
Presiding Examiner. Go ahead.
27-547—74— — 43
664
Exhibit 7, Attachment G
Federal Power Commission — Order Authorizing the Establishment of Na-
tional Gas Survey Advisory Committees and Prescribing Procedures
Before Commissioners : John N. Nassikas, chairman ; Lawrence J. O'Connor,
Jr., John A. Carver, Jr., and Albert B. Brooke, Jr.
(Issued February 23, 1971)
The Federal Power Commission has determined that a National Gas Survey is
necessary and appropriate to the purposes of the Natural Gas Act, 15 U.S.C.
717(a) et seq. As carried out, the Survey will serve the interests of all who are,
and may be, dependent upon or affected by the use and further development of
the Nation's natural gas resources. Within the areas to be studied, the Commis-
sion contemplates detailed analyses inter alia of factors of demand, supply and
alternate fuel sources, facility expansion, economic and environmental considera-
tions, inflation, inter-fuel competition, import-export relationships and policies,
and regulatory considerations — Federal, state and local. Other matters will be
studied as appropriate.
To accomplish the objectives of the Natural Gas Act, in providing for the
ultimate consumer an adequate and reliable supply of natural gas at a reaosnable
price and the Nation a vital energy resource base, the Commission will direct the
conduct of the Survey through the members of the Commission and its staff.
To assist the actions of the Commissioners and Commission staff, the Commis-
sion will use various advisory committees which shall be conducted under the
general direction of the Commission and in accordance with the provisions of
Executive Order No. 11007, February 26, 1962 (27 F.R. 1875). Currently, the Com-
mission contemplates these advisory committees will include a National Gas Sur-
vey Executive Advisory Committee, a General Technical Advisory Committee and
a number of Regional Advisory Committees. Others may be established. All will
be conducted pursuant to the general requirements as set forth in this order.
The Commission contemplates the issuance of specific order or orders from time-
to-time establishing each committee and denominating its membership and chair-
manship.
The advice of nil committees shall be limited to matters relating solely to the
planning and carrying out of the National Gas Survey. The Commission will
have complete responsibilty for the National Gas Survey with respect to its
conduct, scope, the ultimate recommendations and the acceptance of the final
report. In discharging these responsibilities, the Commission will approve the
Survey's objectives, scope of work, organization and schedule of performance,
make any required policy determinations and give its advice directed toward the
coordination and cooperation between the Survey and any inter-governmental,
state, industry, agency or representative, including any other expertise as
required.
1. Purnose. The committers shall advise and make recommendntions to the
Commission in planning and carrying out the Commission's proposed National
Gas Surve.v.
2. Selection of Committee IMembers. All committee members, alternates and
persons designated to act as committee chairman shall be selected and designated
by the Chairman of the Commission with the approval of the Commission.
3. Conduct of Meetings. The Chairman of the Commission, or in his absence,
the Vice Chairman of the Commission, or any full-time salaried officer or em-
ployee of the Commission designated by the Chairman of the Commission, who
shall act as chairman of a committee, shall be responsible for opening, conduct-
ing and adjourning committee meetings when, in his judgment, adjournment is
in the public interest. When a committee is chaired by a person, designated by
the rivnirman of tlie Commission as chairman of that committee, who is not
a fn1i-time sa^nried officer or employee of the Commission, no meeting of such
coinnittpe shall be held except at the call of. of with the advance approval of,
a full-time salaried officer or employee of the Commission designated by the
rhairinnn of the CommiS'Sion, and with an agenda formulated or approved by
such officer or employee; and all such meetings shall be conducted in the pres-
ence of such fuH-time salaried officer or employee of the Commission, who shall
be responsible for opening the meeting, assisting in the conduct thereof, and
for adjourning any meeting whenever he considers adjournment to be in the
public interest.
665
4. Minutes. The Chairman of the Commission having made a finding that
maintenance of a verbatnm transcript would be impracticable and not in the
public interest, there shall be kept by the secretary of each committee, in lieu
thereof, a record of persons present, a description of matters discussed and con-
clusions reached, and copies of all reports received, issued, or approved by each
committee.
5. Secretary of tlie Committee. The Chairman of the Commission shall appoint
a secretary of each committee from among the members of the Commission staff
who shall be responsible for preparing summary minutes of all committee meet-
ings, preparing agenda, notifying members of the meetings, and maintaining all
records related to organization, membership and operations of the committee.
The secretary shall be present during all meetings and shall certify the ac-
curacy of all minutes.
6- Location and Time of Meetings. Unless otherwise directed, committee meet-
ings will convene at the call of the Chairman of the Commission at the OflSce of
the Federal Power Commission, located at 441 G Street, N.W.. Washington, D.C.
20426, or at such place and time as may be designated by the chairman of the
committee with the approval of the Chairman of the Commission. Ordinarily,
these meetings will be held during the regular working hours of the Federal Pow-
er Commission.
7. Advice and Recommendations Offered by the Committee. The advice and
recommendations of the members of the committees may be presented to the
Commission at committee meetings either orally or in written form. The advice
of all committees shall be limited to matters relating solely to the planning and
carrying out of the National Gas Survey and ultimate decisions based on the
Committees' advice or recommendations are reserved to the Federal Power
Commission.
8. Duration of the Committee. All committees shall terminate not later than
two years subsequent to their date of establishment, unless the Commission
determines in writing, not more than 60 days prior to the expiration of such
two-year period, that continued existence of a committee is in the public interest.
A like determination by the Commission shall be required not more than 60 days
prior to the end of each subsequent two-year period to continue the existence of
each committee thereafter.
The Secretary of the Commission shall cause prompt publication of this order
to be made in the Federal Register in accordance with the provisions of the Ofl3ce
of Management and Budget Circular No. A-63.
By the Commission.
Kenneth F. Plumb, Acting Secretarp.
Exhibit 7, Attachment H
Federal Power Commission — Order Est.vblishing Technical Advisory and
Coordinating Committee Task Forces and Designating Membership
( Issued December 21, 1971 )
Before Commissioners : John N. Nassikas, Chairman ; John A. Carver, Jr.,
Albert B. Brook, Jr., Pinkney Walter, and Rush Moody, Jr.
The Federal Power Commission determines that the establishment of respec'
five Task Forces to the Technical Advisory Committee — Supply, Technical Ad'
visory Committee — Transmission, Technical Advisory Committee — Distribution
and the Coordinating Committee, is in the public interest and establishes such
Task Forces, as identified in the attached Appendix, all in accordance with the
provisions of the Commission's orders issued February 23, 1971, 36 F.R. 3851,
April 6, 1971, 36 F.R. 6922 and May 10, 1971, 36 F.R. 8910.
1. Purpose. — The purposes of the Technical Advisory Committee Task Forces
are as set forth in the Comnii.ssion"s April 6, 1971, Order Establishing National
Gas Survey Technical Advisory Committees and Designating Initial Member-
ship, and the purposes of the National Gas Survey Coordinating Task Force are.
to further the discharge of the purposes as set forth in the Commission's May 10,'
1971, Order Establishing National Gas Survey Coordinating Committee' and
Designating its Membership and Chairmanship. The Technical Advisory Com-
mittee Task Forces are organizationally subordinate to their respective Technical
Advisory Committees, and the Coordinating Task Force is organizationally .sul>
ordinate to the National Gas Survey Coordinating Committee.
666
The Oommission's order issued February 23, 19TI, states in part as follows :
"To assist the actions of the Commissioners and Commission staff, the
Commission will use various advisory committees which shall be conducted
under the general direction of the Commission and iu accordance with the
provisions of Executive Order No. 11007, February 26, 1962 (27 F.R. 1875).
* * * All will be conducted pursuant to the general requirements as set forth
in this order. The Commission contemplates the issuance of specific order or
orders from time-to-time establishing each committee and denominating its
membership and chairmanship.
"Tile advice of all committees shall be limited to matters relating solely to the
planning and carrying out of the National Gas Survey. The Commission will
bave complete responsibility for the National Gas Survey with respect to its
conduct, scope, the ultimate recommendations and the acceptance of the final
report. In discharging these responsibilities, the Commission will approve the
Survey's objectives, scope of work, organization and schedule of performance,
make any required policy determinations and give its advice directed toward
the coordination and cooperation between the Survey and any inter-governmental,
state, industry, agency or representative, including any other expertise as
required."
2. Membership. — With respect to each Task Force, the Task Force Chairman
(wh.0 shall be designated Director), the Deputy Director, the FPC Survey
Coordinating Representative and Secretary, the Alternate FPC Survey
Coordinating Representative and Secretary, the FPC Representative and the
other Ta.sk Force members, shall be selected by the Chairman of the Commission,
with the approval of the Commission, and are designated in the Appendix hereto,
and any additional persons that may be designated to serve on the Task Forces
shall be selected by the Chairman of the Commission, with the approval of the
Commission, provided, however, the Chairman of the Commission may select
and designate additional persons to serve in the capacity of Alternate FPC
Survey Coordinating Representative and Secretary. The person or persons
who are designated as the FPC Survey Coordinating Representative and Sec-
retary shall be full-time salaried officers or employees of the Commission.
The FPC Survey Coordinating Representatives and Secretary, or alternates,
shall be designated by the Chairman and serve as Secretary of the Task Force
Committee for which selected. The Directors, Deputy Directors, FPC Survey
Coordinating Representatives and Secretaries and alternates, the FPC Represent-
atives and the other Task Force members, as selected and approved in accordance
with this order, are designated in the Appendix hereto.
3. The following paragraphs of the aforementioned Commission order, issued
February 23, 1971, are hereby incorporated by reference :
"3. Conduct of Meetings.
"4. Minutes.
"5. Secretary of the Committee.
"6. Location and Time of Meetings.
"7. Advice and Recommendations Offered by the Committee.
"8. Duration of the Committee."
4. In accordance -^ath the provisions of Section 6(e) of Executive Order No.
11007. 27 F.R. 1875, none of the Task Forces herein established .shall be per-
mitted to receive, compile or discuss data or reports showing the past, current
or pro.iected non-public commercial operations of identified business enter-
prises. Data or reports of a non-public nature that are requested by the Federal
Power Commission, its staff. National Gas Survey Advisory Committees and Task
Forces from identified business enterprises shall be submitted directly to the
Director of the National Gas Survey, or to such person on his staff as designated
by the Director, or any other designated agents of the Federal Power Commission,
and such data or reports will be composited vdth that submitted by other ident-
ified business enterprises and reported on a composite basis and the provisions
of Section 8(b) of the Natural Gas Act [15 U.S.C. 717g(b)] and 5 U.S.O. 552
(b) (4) and (9) [the Freedom of Information Act] shall apply.
■ The Secretary of the Commission shall cause prompt publication of this
order to be made in the Federal Register in accordance with the provisions of the
Office of Management and Budget Circular No. A-63.
By the Commission.
Kenneth F. Plumb, Secretary.
667
Appendix
National Gas Survey, Supply-Technical Advisory Committee
supply-technical advisory task force-natural gas supply
Task Force Members '
Ralph W. Garrett, director, exploration analysis manager. Humble Oil &
Refining Co.
Worthy Warnack, deputy director, Geologist, Humble Oil & Refining Co.
Paul J. Root, FPC survey coordinating representative and secretary, Technical
Director, National Gas Survey, Federal Power Commission.
Donald L. Martin, Alternate FPC survey coordinating representative and
secretary. Regional Engineer (Fort Worth) Federal Power Commission.
Edward A. Alba res. FPC Representative, head. Gas Supply Section, Federal
Power Commission.
Charles M. Allen. General Gas Geologist, Phillips Petroleum Co.
John F. Bricker, Chairman of the Board, Exchange Oil Corp.
G. O. Carlson, Gas Manager, Union Oil Co. of California.
F. L. Carpenter, Petroleum Engineering Advisor, Gulf Oil Corp.
William B. Cleary, Sr., President, Cleary Petroleum Corp.
John K. Drisdale, Manager of Petroleum Engineering, Texaco, Inc.
E. S. Garner, Staff Engineer, Reserves Standard Oil Co. of California.
R. E. Geiger, evaluation and analysis manager, exploration and production de-
partment, Mobil Oil Corp.
B. B. Gibbs, manager, gas availability department. United Gas Pipe Line Co.
P. N. Glover, manager of exploration economics. Shell Oil Co.
H. J. Gruy, president, H. J. Gruy & Associates, Inc.
J. M. Hanley, vice president. Northern Natural Gas Co.
Wayne H. Hardin, manager engineering and evaluation, George Mitchell &
Associates.
Kenneth E. Hill, manager of corporate finance, Eastman Dillon Union Securities
& Co.
Frank Jordan, economic analyst, Independent Petroleum Association of America.
Frank T. Lloyd, director of special projects, Reservoir Engineering Department,
Atlantic Richfield Co.
William C. Lonquist, Jr.. manager, contracts and lands, Texas Eastern Trans-
mission Corp.
H. Alan Nelson, president, Calvert Exploration Co.
E. A. Rassinier, director of resource planning, Trunkliue Gas Co.
Ralph P. Roe, staff engineer, Amoco Production Co.
Edward Symonds, senior economist. First National City Bank of New York.
SUPPLY-TECHNICAL ADVISOR TASK FORCE — REFORMER GAS
L. A. Goldstein, director, manager, crude oil supply planning. Shell Oil Co.
Dr. R. J. Howe, deputy director, coordinator, energy policy development, Humble
Oil & Refining Co.
Paul J. Root, FPC coordinating representative and secretary, technical director,
National Gas Survey, Federal Power Commission.
Charles A. Gallagher, alternate FPG survey coordinating representative & sec-
retary, engineer, Federal Power Commission.
Donald E. Anderson, gas compressor superintendent, Consumers Power Co.
Murray E. Brooks, vice president of engineering, development, and resource, the
Lumus Co.
John E. Cohoon, asistant vice president, the Brooklyn Union Gas Co.
C. Vernon Foster, manager, process engineering department. Continental Oil
Co.
Richard Goode, vice president. Power Corp. of America.
A. Grossberg, manager, process design division. Chevron Research Corp.
John W. McCutcheon, assistant manager, economics and resources division, plan-
ning and economics department. United Gas Pipeline Co.
668
A'ppendix A
National Gas Reserves Study .
The Federal Power Commission (FPC), acting throiigii tlie National Gas
Survey, will direct an independent estimation of proved recoverable reserves of
natural gas of the United States. This estimation will deal with naturally oc-
curring gas which analysis of geologic and engineering data demonstrates with
reasonable certainty to be recoverable in the future from known oil and gas
reservoirs under existing economic and operating conditions. The study will not
include gas in storage.
Natural gas is defined to be a mixture of hydrocarbon compounds and small
quantities of various non-hydrocarbons existing in gaseous phase or in solution
with oil in natural underground reservoirs at reservoir conditions.
Re.'-iervoirs are considered proved that have demonstrated the ability to produce
by either actual production or conclusive formation test.
Estimated gas reserves will be reported in cubic feet at 14.73 pounds per
square inch absolute pressure and 60° F. temperature as of December 31, 1970.
All definitions and terminology will conform to that used by the American Gas
Association (A.G.A.) Committee on Natural Gas Reserves as set forth in the re-
port. •Reserves of Crude Oil. Natural Gas Liquids, and Natural Gas in the United
States and Canada and United States Troductive Capncity as of December 31,
1970."' and the American Petroleum Institute (API) Technical Reports Nos. 1
and 2.
I. formation of organization
To conduct the survey, independent experts will be employed or commissioned
by the FPC and organized in four work disciplines.
(«) Gas field identification will be provided by a ccmiprehensive list of all gas
fields in the United States. The list will assure that all fields with gas reserves
are identified for survey. The Oil Information Center (OIC) at the University of
Oklahoma Research Institute will be commissioned by the FPC and charged with
this responsibility. Mr. Jack L. Morrison is the director of the Oil Information
Center.
(&) Independent reserve teams will be supervised by Mr. Lawrence R. Mangen,
FPC Assistant Section Head of the Gas Supply Section. The teams are to be
made up of geologists, engineers and other professional staff members of the
Federal Power Commission to review data ordinarily needed to determine gas
reserves, with assistance, as available, from the United States Geo-
logical Survey, United States Bureau of Mines, and from colleges and universities.
(g) The independent accounting agent will be selected by the Federal Power
Commission. This agent will be commissioned by the Federal Power Commission
to:
"1. Provide security for individual field reserve estimates ;
"2. Classify gas fields by reserve size and age ; perform random selection of
fields for reserve estimations as prescribed by the statistical validation team ;
••3. Consolidate the findings of the reserve teams ; and
••4. Report United States gas reserves estimates to the National Gas Survey."
ul) A statistical validation team will be supervised by Dr. Marie D. Wann,
Chief Mathem.atical Statistician, Statistical Policy Division, United States OflBce
of Management and Budget. The team will consist of other experts from the
OflBce of IVIanagement and Budget and others commissioned by the FPC. This
team will have the responsibility of prescribing sampling procedures for
A^alid reserve estimation.
(e) Task Force Advisory Sections, which shall perform as work teams and
not Industry Advisory Committees, will be selected from the membership of the
Supply-Technical Advisory Task Force-Natural Gas Supply. These sections
will perform the tasks assigned by the Supply-Technical Advisory Task Force-
Natural Gas Supply as indicated in Attachment A (Items B, F, N, P, and W) and
other tasks as assigned.
SECURITY considerations
Individual companies must, for competitive reasons, protect highly confidential
information in competitive areas such as offshore Louisiana. The security prob-
lem will be accommodated by :
(a) Requiring that all company-furnished data be evaluated at the companies'
offices with no data or worksheets leaving the premises. All independent reserve
669
team generated worksheets will be preserved in the companies' offices until
July 1, 1974.
(b) Having the complete list of A.G.A. individual field reserve estimates
available only to the independent accounting agent. All these records are to
be returned to the member of the A.G.A. Committee on Natural Gas Reserves
assigned to the particular area involved as soon as the study is completed.
(c) Having the A.G.A. reserve estimates for the randomly selected sample
fields for independent reserve estimation available to Mr. Lawrence R. Mangen,
supervisor of reserve teams.
Detailed procedures are diagramed on the information flow chart, Attachment
A. Information boxes on the chart bear the same letter designation as the cor-
responding descriptive paragraphs which follow.
(a) The National Gas Survey requests that the industry representatives
who provide A.G.A. reserves also submit those reserves by fields on a confidential
basis directly to the selected accounting agent.
(b) A natural Gas Supply Task Force Advisory Section (Item B, Attachment
A) will I'ecommeud a data for recording U.S. gas fields and reserves. The format
will be readily convertible to computer cards and will i-ecord the following in-
formation for each gas field :
1. A.G.A. District
2. State
3. Railroad Commission District or State Subdivision
4. Field Name or Names
•5. Discovery Date
6. Gas Reserves as of December 3l, 1970
(c) A Task Force Advisory Section (Item B, Attachment A) will meet with
the industry representatives and will explain the data format. A request will
be made that each A.G.A. subcommittee chairman provides the indicated data
on all gas fields in his area.
d) A computer card will be punched for each gas field. A computer program
Avill be written for error checking and sorting as is needed.
(e) A listing of all gas fields for which reserve data has been submitted
will be prepared by the accounting agent and forw;irded to the Oil Information
Center (QIC) at the University of Oklahoma Research Institute. This list
will provide the state, field name, and discovery date — but no reserve information.
if) The field list developed from the A.G.A. records will be compared by the
OIC with a list from the United States Government Interagency Oil and Gas
Field Study. The "government" data is presently stored by computer in a data
bank at the OIC.
(ff) Screening and verification of the field lists will be done by the OIC. This
operation will reconcile field names and identify duplications and omissions.
Other information sources such as U.S. government publications, state geological
survey publications, and oil and gas regulatory agency publications will be used,
if necessary. A task Foi-ce Advisory Section (Item F, Attachment A) of the
Supply-Technical Advisory Task Force-Natural Gas Supply, will assist in clarify-
ing field nomenclature.
(/!.) The OIC will compile the complete list of gas fields in the United
States. It will include all gas fields with remaining i-ecoverable gas reserves
as of December 31, 1970. The fields will be grouped by state and substate areas.
The listing will be alphabetical and will convey field name and date of discovery.
(/) A copy of the gns field identification list and a supplemental list of
^'A.G.A. omitted fields" will be forwarded by OIC to the accounting agent. Na-
tional Gas Survey teams will later estimate reserves for any omitted field.
(i) A copy of the gas field identification list will be forwarded to the
National Gas Survey together with a statement of accuracy. Both documents
will appear in the final reserves publication.
(k) The independent accounting agent will stratify all fields in each A.G.A.
subcommittee area by size and age so that a statistically valid sampling procedure
can be prescribed.
(I) The statistical validation team will prescribe the number of fields to be
surveyed independently in each A.G.A. subcommittee area by size and age cate-
gory in order to project a statistically valid reserve estimation with a reasonable
degree of accuracy and certainty.
Sampling will be started on a minimum basis to test the magnitude of deviation.
If, in the initial field reserve estimations, the standard deviation of the per-
centage differences from their mean is too large to assure the desired certainty
670
and accuracy, additional sampling will be carried out as required or the specifi-
cations will be modified. The National Gas Survey will balance the time required
against the desired accuracy so as to obtain the best results in a reasonble time.
(m) The accounting agent will select the fields to be surveyed in each category
as prescribed by the statistical validation team and will furnish a list of field
names to the independent reserve team supervisor with a copy to the Task
Force Advisory Section (Item N, Attachment A). The list of "A.G.A, omitted
fields" will also be submitted for independent reserve estimations.
(n) The Task Force Advisory Section (Item N, Attachment A) will assign
each sample field to a company, and will schedule reserve team visits to the var-
ious companies. Valid results will require a company to furnish data for each
randomly selected field.
(o) Companies will prepare to furnish, if available :
1. A working area with telephone connections. Materials should include a calcu-
lator, adding machine, planimeter, and normal ofllce work desks, tables, and
equipment.
2. The type of information which may be requested of the companies for use
during reserve team visits is listed for reference :
(a) For each field : It will probably be necessary to supply the following items,
if available :
(1) A map of the field area showing the location and completion of all
wells drilled prior to December 31, 1970.
(2) Electrical well surveys to illustrate the depth and configuration of
all gas-bearing reservoirs.
(3) Core analysis needed for basic rock properties.
(4) Reservoir production histories may be needed which tabulate oil, gas,
condensate and water production for each gas reservoir on a yearly basis
to December 31, 1970.
(5) Si)ecific gravity of gas.
(6) Formation temperature.
( 7 ) Original reservoir pressure.
(6) For fields in which porosity-area reserve estimates have been made, the
following additional information may he requested :
(1) Effective porosity-electric well surveys and core analysis, (a) Porosity,
(b) Salt water saturation.
(2) Productive reservoir volume — copies of isopach maps should be avail-
able for examination. Planimetered volumes should be available.
(c) For fields in which pressure-volume reserve estimations have been made,
the following additional information may be requested :
(1) A tabulated record of reservoir pressure measurement versus gas
VFithdrawals.
(2) Backup data for each pressure measurement.
(d) Questions on interpretive data, such as estimated recovery efficiency, may
be furnished by companies, if requested by the reserve teams.
(p) The National Gas Survey will provide an appropriate seminar for the
independent reserve teams prior to beginning the field surveys. The seminar will
be conducted by a team of qualified geologists ; engineers and other qualified
personnel selected from government agencies and/or colleges and universities.
The seminar will be held at an early date for the purpose of assuring quality
reserve estimations, the use of standard techniques, and definitions.
(q) Independent reserve estimations will be made in the offices of the various
companies. Each company will furnish a qualified representative who is familiar
with all the reserve data pertaining to the subject field. He will furnish these data
to the reserve teams as needed and will insure that no data other than the
independently derived field reserve are taken from the working area. He will
be available to answer inquiries of the reserve teams but will not be a member
of the team. v
671
(r) Independent reserve estimations are transmitted on a confidential basis
to the reserve team supervisor. Tlie reserve team supervisor will compare the
independent field reserve estimates with reserve estimates from the A.G.A. He
may compare them with any other source including (but not limited to) the
following :
(1) OIC Data Bank at the Oldahoma University Research Institute.
(2) Natural Gas Companies' Annual Report of Gas Supply — FPC Form 15.
( 3 ) Industry professional publications.
(4) United States Geological Survey data.
At his discretion, he may call for a recheck of the work of the first reserve
team or he may call for a re-examination of the data by a "senior reserve team"
of liis choice. A final reserve estimate for eacli field will be transmitted to the
accounting agent.
(s) When the accounting agent has received all final reserve estimates, he
determines the deviation from the mean of the sample .He forwards the deviation
information to the statistical validation team.
(t) Tlie statistical validation team determines the adequacy of the sample.
Additional sampling will be prescribeed if it is required to obtain the desired
accuracy and certainty.
(u) The accounting agent will randomly select the additional fields. Addi-
tional reserve estimations will be made by the reserve terms in accordance with
the original procedure, and the results will be compiled and examined as before.
(v) When sampling is sufiicient to assure the desired accuracy, the statistical
validation team reports to the National Gas Survey. Tlie report will include a
description of the sampling procedure and a statement of the reliability of the
survey.
(w) One independent reserve team will have the responsibility of compiling
and reporting United States disolved gas reserve statistics as needed. The Task
Force Advisory Section for dissolved gas (Item W, Attachment A) will furnish
historical data.
(x) The accounting agent submits a report to the National Gas Survey on
United States gas reserves as of December 31. 1970. When tlie report is accepted
by the National Gas Survey, the accounting agent will dispose of all records
which reflect gas reserves by field in the manner prescribed in paragraph Il-B.
iy) The reserve team supervisor will submit a detailed summary of the meth-
ods and procedures used to make the independent reserve estimations. He will
receive assistance from the personnel conducting the Reserves Seminar and will
be advised by the Task Force Section on reserve determinations methods (Item
P. Attachment A). The reserve team supervisor will return all A.G.A. records
which reflect gas reserves by fleld to the member of the A.G.A. Committee on
Natural Gas Reseiwes assigned to the particular area involved when the account-
ing agent's report is accepted.
(~) The National Gas Survey will publish its initial reserves report in the
following form :
1. Complete list of gas fields in the United States by states and substate areas
with year of discovery. A statement of accuracy by the Director of the Oil In-
formation Center, University of Oklahoma Research Institute.
2. Detailed description of sampling procedures. A statement of statistical ac-
curacy by the leader of the statistical validation team.
3. Detailed description of methods and procedures of reserve determination by
the reserve team supervisor.
4. Report of reserves from the accounting agent. Report will include: (a) Gas
field size distribution; (ft) Gas reserves by states.
5. Recommendations relating to future estimations of national gas reserves.
672
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673
In the United States District Court for the District of Columbia
Civil Action No.
Federal Trade Commission, 6th Street and Pennsylvania Avenue, NW.,
Washington, D.C. 20580, petitioner
V.
O. X. Miller, Chairman, and Standard Oil Company of California, a Cor-
poration, 225 Bush Street, San Francisco, California 94120, RESP0NDE^■TS
Memorayidum in Support of Petition for an Order Requiring Respondents to Com-
pjij with a Subpoena Duces Tecum Issued in the Course of an Investigation
Being Conducted by the Federal Trade Commission
NATURE OF PROCEEDING
This is a summary proceeding ^ upon a petition filed pursuant to Section 9 of
the Federal Trade Commission Act, 15 U.S.C. § 49, to obtain judicial enforcement
of a subpoena duces tecum issued by petitioner Federal Trade Commission
("Commission") in the course of an investigation being conducted by the Com-
mission under Commission File No. 711 0042.
FACTS
On June 3, 1971, the Commission issued its resolution dii'ecting the use of com-
pulsory process in a nonpublic investigation to ascertain whether various named
corporations "and other persons and corporations, individually or in concert, are
engaged in conduct in the reporting of natural gas reserves for Southern Louisi-
ana which violates Section 5 of the Federal Trade Commission Act, 5 U.S.C. § 4.5,
or are engaged in conduct or activities relating to the exploration and develop-
ment, production, or marketing of natural gas, petroleum and petroleum products
and other fossil fuels in violation of Section 5 of the Federal Trade Commission
Act" (Petition, Exhibit 2).
On November 24, 1971, Owen M, Johnson, Jr., Assistant Director of the Com-
mission's Bureau of Competition, acting pursuant to said resolution and in ac-
cordance with the authority delegated to him by Section 2.7(a) of the Com-
mission's published rules (16 C.F.R. § 2.7(a) ), issued and served on O. N. Miller
and Standard Oil Company of California a subpoena duces tecum.- The subpoena
dii'ected respondents to appear, testify and produce certain specified books, rec-
ords and documents at an investigational hearing before an attorney examiner
on December 27, 1971, at a designated place in Washington, D.C. (Petition. Ex-
hibit 1). The information sought related primarily to natural gas and natural
gas reserves. Similar subpoenas were served on ten other producers of natural
gas and principal officers thereof.'
On December 23, 1971, Standard-California filed a motion to quash the sub-
poena. See, infra, pp. 9-48 for a discussion of the grounds of the motion. On June
27, 1972, the Commission issued its order denying the motion to quash together
1 Proceedings to enforce administrative subpoenas are special statutory matters, sum-
mary in nature, and usually are commenced bv a show cause order on the named respond-
ent by the district court. See FTC v. Sherry, Trade Reg. Rep. [1969 Trade Cases], ^ 72,906
(D.D.C. 1969) ; United States v. Associated Merchandising Corp., 256 F. Supp. 318, 321
( S.D.N. Y. 1966) ; Kennedy v. Lynd, 306 F. 2d 222, 225-26 (5th Cir. 1962), cert, denied,
371 U.S. 952 (1963) ; FTC v. Standard Am., Inc., 195 S. Supp. 801, 802 (B.D. Pa. 1961),
atT'd, 306 F. 2d 231 (3d Cir. 1962) ; Long Beach Fed. Sav. & Loan Ass'n v. Federal Home
Loan Bank Bd., 169 F. Supp. 589, 596 (S.D. Cal. 1960), rev'd on other grounds, 295 F. 2d
403 (9th Cir. 1961) ; NLRB v. Cudahay Packing Co., 34 F. Supp. 53, 69 (D. Kan. 1940),
aff'd, 117 F. 2d 692 (10th Cir. 1941) ; FTC v. Scientific Living, Inc., 150 F. Supp. 495,
498 (M.D. Pa. 1957), appeal dismissed (3d Cir. order dated Aug. 12, 1957), cert, denied,
355 U.S. 940 (1958) ; Goodyear Tire <i Rubber Co. v. NLRB, 122 F. 2d 450, 451 (6th
- The Subpoena was directed to "O. N. Miller, Chairman, Standard Oil Company of
Calif omla" (Petition, Exhibit 1). Thus, it was a command to the corporation to produce
the requested documents by Mr. Miller. See FTC v. Sherry, Trade Reg. Rep. [1969 Trade
Cases], K 72,906 at p. 87,454 (D.D.C. 1969) ; WiUon v. United States, 221 U.S. 361, 376-77
(1911) ; Bowles v. Bay of New York Goal & Supply Corp., 152 F. 2d 330, 331 (2d Cir. 1945).
^ The ten other producers on which the subpoenas were served are : Continental Oil
Company, Gulf OU Company, Mobil Oil Company, Pennzoll Company, Shell Oil Company,
Standard Oil Company (New Jersey) (name subsequently changed to Exxon Corpora-
tion), Standard Oil Company (Indiana), The Superior Oil Company. Texaco. Inc.. and
Union Oil Company of California.
674
with an accompanying opinion giving tlie reason for its action (Petition, Exhi-
bit 3).
Following the Commission's denial of Standard-California's motion to quash,
counsel for Standard-California advised the Commission, on July 31, 1972, that
the company did not intend to comply with the Commission's subpoena dated
November 24, 1971 ( Petition, Exhibit 6) .
The situation, therefore, is that respondents have unequivocally refused to
obey the subpoena, returnable in Washington. D.C., thus bringing into effect the
jurisdiction and authority of this Court to enforce the subpoena pursuant to
Section 9 of the Federal Trade Commission Act.
AEGtJMENT
7. The Commission is authorized to issue the subpoena duces tecum and this
Court has jurisdiction to enforce compliance with the subpoena
The authority of the Commission to issue the subpoena duces tecum to res-
pondents and the jurisdiction of this Court to enter an order enforcing the sub-
poena is conferi-ed by Section 9 of the Federal Trade Commission Act, 15 U.S.C.
§ 49. which provides as follows :
That for the purposes of this Act the commissiou, or its duly authorized
agent or agents, shall at all reasonable times have access to. for the purpose
of examination, and the right to copy any documentary evidence of any
corporation being investigated or proceeded against ; and the commission
shall have power to require by subpoena the attendance and testimony of
witnesses and the production of all such documentary evidence relating to
any matter under investigation. Any member of the commission may sign
subpoenas, and members and examiners of the commission may administer
oaths and affirmations, examine witnesses, and receive evidence.
Such attendance of witnesses, and the production of such documentary
evidence, may be required from any place in the United States, at any desig-
nated place of hearing. And in case of disobedience to a subpoena the com-
mission may invoke the aid of any court of the United States in requiring
the attendance and testimony of witnesses and the production of docu-
mentary evidence.
Any of the district courts of the United States within the jurisdiction of
which such inquiry is carried on may, in case of contumacy or refusal to
obey a subpoena issued to any corporation or other person, issue an order
requiring such corporation or other person to appear before the commission,
or to produce documentary evidence if so ordered, or to give evidence touch-
ing the matter in question ; and any failure to obey such order of the court
may be punished by such court as a contempt thereof.
The Commission's power to conduct the inquiry herein concerned is further
conferred by Section 3 of the Federal Trade Commission Act, 15 U.S.C. § 43,
which provides, in part:
The commission may. by one or more of its members, or by such examiners
as it may designate, prosecute any inquiry necessary to its duties in any
part of the United States.
And by Section 6(a) of the Federal Trade Commission Act, 15 U.S.C. § 46(a),
which provides that the Commission shall also have power :
To gather and compile information concerning, and to investigate from
time to time the organization, business, conduct, practices, and manage-
ment of any corporation engaged in commerce, excepting banks and common
carriers subject to the Act to regulate commerce, and its relation to other
corporations and to individuals, associations, and partnerships.
The investigation being conducted by the Commission, in the course of which
the subpoena was issued, is not a formal adversary proceeding, but is for the
purpose of securing facts bearing upon whether Section 5 of tlie Federal Trade
Commission Act. which the Commission enforces, has been or may be violated.
Tt is well established that the Commission may require the appearance and
testimony of witnesses and the production of documentary evidence in the
course of conducting an investigation nnd that sucli authority is not limited to
a situation where a complaint charging a violation of law has been issued.*
*Aiitomat!n Canteen do. of America v. FTC. S4R U.S. fil, 79 (19.5.^: FTC v. Tuttle,
244 F 2rt fiO,"!, ei5 (Id C\r. IS.'iT'). cert, denicf. .'?54 F.R. 925 : FTC v. Walfham Wafeh Co.,
1fi9 F. Simp. 614. 619-20 (S.D.N.Y. 19.')91 : FTC r. Rarrell. Z-i^ F. 2d S.54. S56 (■7th Plr.
1963) : FTO V. Fttnndard Am.. Inc., 306 F. 24 2."?1. 2.S4-.S5 f3d Cir. 1962) : attd see Okla-
homa Press Publishing Co. v. 'Walling, 827 U.S. \^C<. 201 (1946).
675
As stated in United States v. Morton Salt Co., 338 U.S. 632, 652 (1950) :
Even if one were to regard the request for information in this case as
caused by nothing but ofEcial curiosity, nevertheless law-enforcing agencies
have a legitimate right to satisfy themselves that corporate behavior is
consistent with the law and the public interest.
The Commission may "investigate merely on suspicion that the law is being
violated, or even just because it wants assurance that it is not." Id, at 642-43.
In the instant case the inquiry as to possible violations of law relates to a
situation of great public interest. The importance of natural gas to our economy
and to the public welfare is beyond dispute. In setting wellhead rates for natural
gas, the Federal Power Commission takes into account proved gas reserves. See,
e.g., Permian Basin Area Rate Cases, 390 U.S. 747, 816-18 (1968) : Federal Power
Commi-ssion Opinion No. 598: Area Rate Proceeding, et al. {Southern Louisiana
Area). Docket Xos. AR61-2. et al., AR69-1, at pp. 6, 19-31, 60, 62, 63. As a general
proiKisition, the lower the proved reserves that are considered, the higher the
rate that has been allowed. Gas reserve estimates which have been considered by
the Federal Power Commission in rate-making have been in the first instance
compiled by employees of the major gas producers and furnished to regional
subcommittees of the Committee On Natural Gas Reserves of the American Gas
Association, thence through the Conmiittee to the Federal Power Commission.
It is obvious, therefore, that individual or concerted conduct of gas producers
in underreporting or underestimating gas reserves could have the indirect result
of the Federal Power Commission allowing higher wellhead gas rates. See. ivfra,
pp. 17-18.
It is well established that any collusion or combination among common carriers
underlying a rate-making proceeding before a regulatory agency is a violation
of the Sherman Act which the government may challenge independently of
determinations by the regiilatory body with respect to the reasonableness of the
rates.^ It is equally well established that any violation of the antitrust laws or
any act repugnant to the public policy embodied therein is an unfair method of
competition in violation of Section 5 of the Federal Trade Commission Act." The
investigation to determine whether Standard-California and other corporations
and persons, individually or in concert, are engaged in conduct in the reporting
of natural gas reserves, or are engaged in other conduct or activities, in violation
of Section 5 of the Federal Trade Commission Act is undeniably within the Com-
mission's broad authority under the Act to prohibit unfair methods of competition
and unfair or deceptive acts or practices.'
Commission investigations as to possible violations are analogous to those of a
grand jury, and may be broad and comprehensive in the nature of grand jury
investigations.* It is sufBcient that the inquiry is within the Commission's au-
thority, the demand is not too indefinite and the information sought is reasonably
relevant* The standards of relevance are far less rigid in an investigation than
are required in an adversary proceeding in view of the purpose to discover evi-
dence— not to prove a pending charge.^" The subpoena here clearly satisfies the
criteria of general relevance applicable to the investigations concerned. Further,
the subpoena is presumptively correct and the burden is on any party who
challenges the Commission's right to proceed."
With these principles in mind we now turn to the objections to the subpoena
as raised in the Motion to Quash filed with the Commis<sion by Standard-Cali-
^ Swift d Co. V. United States, 196 U.S. 375, 396 (1905) ; United States v. Pacific &
Arctic R. d N. Co., 228 U.S. 87, 104-05 (1913) ; Georgia v. Penn. R. Co., 324 U.S. 439,
456-59 (1945).
« Fa.shion Oriqinators' Guild of America, Inc., v. FTC, 312 U.S. 457. 463 466 (1941) •
FTC V. Motion Picture Advertisinq Serv. Co., 344 U.S. 392, 394-95 (1953) : FTC v. Brown
Shoe Co.. 384 U.S. 316, .320-31 (1966).
■^ Cf., FTC V. Spernj d Hutchinson Co., 405 U.S. 233 (1972) ; The Atlantic Ret. Co. v.
FTC, 381 U.S. 357, 367-68 (1965).
'•Hannah v. Larchc. 36.T U.S. 420, 449 (1960) : United Stntrs) v. Morton Salt Co., 338
U.S. at 642-43 : Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186, 216 (1946) ;
Bowles V. Baer. 148 F. 2rt 787, 789 (7th Cir. 1944).
^ Adams v. FTC. 296 F. 2d 861, 866 (8th Cir. 1961), cert, denied, 369 U.S. 864 (1962) :
FTC V. Green, 252 F. Siipp. 153, 156 (S.D.N.T. 1966). See also. United States v. Morton
Salt Co., 338 U.S. at 652 ; Oklahoma Press Pnl)lishing Co. v. Walling, 327 U.S. at 208-09 :
SEC V. Vacuum Cart Co.. 157 F. 2rt 530. 532 (7th Cir. 1946). cert, denied, 330 U.S. 820
(1947) : FTC v. Waltham Watch Co., 169 F. Supp. 614, 621 (S.D.N.Y. 1959).
i«.S'/?C V. Vacuum Can Co., 157 F. 2d at 532; Westside Ford v. United States, 206 F. 2d
627, 629-32 (9th Cir. 1953).
^^Kilgore Nat'l Bank v. Federal Petroleum Bd., 209 F. 2d 557, 560 (5th Cir. 1954).
See also, CAB v. Hermann, 353 U.S. 322, 328 (1957).
676
foi-uiu and demonstrate that the objections are without fflerif. In essence, Stand-
ard-California argues (1) that the subpoena is unreasonable and oppressive as
to time and scope; (2) that the resolution, pursuant to which the subpoena was
issued fails to advise or disclose sufficiently the purpose and scope of the investi-
gation; (3) that the subpoena constitutes an unlawful attempt to interfere with
the primary jurisdiction of the Federal Power Commission with respect to a
matter which is under investigation by the Power Commission; (4) that the
subpoena is directed to confidential information, the disclosiare of which would
impair the competitive position of Standard-California; and (5) that the sub-
poena was issued in violation of the Federal Reports Act. These objections are
without merit for the reasons detailed below.
//. Standard-Calif ornia' s asserted grounds before the Commission for refusing
to comply with the subpoena are invalid
A. The claim that the Commission's resolution stating the nature and
scope of the investigation is unduly broad and is unclear
Standard-California contends that the Commission's resolution, pursuant to
which the instant subpoena was issued, is unduly broad and is unclear. See
Petition, Exhibit 3, pp. 20-21 for the portion of the Commission's opinion rejecting
this assertion. In assessing this contention, it must be remembered that the Com-
mission's resolution of investigation does not constitute a complaint and that the
resoluton is not to be evaluated on the basis of the requisites of a complaint.
The Federal Trade Commission is empowered and directed by Section 5(a) (6)
of the Federal Trade Commission Act, 15 U.S.C. § 45(a) (6), to prevent persons,
partnerships, or corporations * * * from using unfair methods of competition
* * * and unfair or deceptive acts or practices * * *." The courts have re-
peatedly held that the Commission may exercise its "broad power of investigation
and subpoena, prior to the filing of a complaint," ^ and that the Commission, as
the administrative agency charged with the enforcement of the Federal Trade
Commission Act, "has a power of inquisition" which is "analogous to the Grand
Jury, which does not depend on a case or controversy for power to get evidence
but can investigate merely on suspicion that the law is being violated, or even
just because it wants assurance that it is not." ^
The Commission's resolution (Petition. Exhibit 2) authorized an investigation
to develop facts to determine whether certain corporations, in concert with
other persons and corporations, are engaged in specified conduct or activities
as follows :
[CJonduct in the reporting of natural gas reserves for Southern Louisiana
which violates Section 5 of the Federal Trade Commission Act, or * * *
conduct or activities relating to the exploration and development, production,
or marketing or natural gas, petroleum and petroleum products, and other
fossil fuels in violation of Section 5 of the Federal Trade Commission Act.
Respondent may not argue successfully that this resolution is either too broad
or ambiguous, and hence that the relevancy of the material sought by the sub-
poena cannot be determined. We submit that the Commission's authority and the
nature and scope of its present investigation are adequately reflected in the reso-
lution. Indeed, resolutions no more specific have been held sufficient for the
purpose of issuing investigational subpoenas.
In FTC v. Green, 252 F. Supp. 153 ( S.D.N. Y. 1966) the respondent argued
that the citation of Section 5 of the Federal Trade Commission Act and Section 2
of the Cayton Act in the resoution " authorizing that investigation was too
broad to "offer a clue as to the subject matter of the investigation," and thac
since the scope and purpose of the investigation were not particularized, the
relevance of the information sought by the Commission was indeterminable. Id.
at 155-56. The court concluded, however, that citation by the Commission in its
resolution of Section 5 of the Federal Trade Commission Act and Section 2
of the Clayton Act as the Statutory provisions suspected l)y the Commission to
havp been violated was sufficient as a basis for enforcement of the subpoena.
^Automatic Canteen Co. of America v. FTC. 346 U.S. 61, 79 (1953) ; Oklahoma Press
Puhllshing Co. v. Wallino, 327 U.S. 1S6, 201 (1946).
'^^Vnitefl Fttates v. Morton Salt Co., 338 U.S. 632, 642-43 (1950). Accord, Hannah v.
Larch. 363 U.S. 420, 449 (1960) ; Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186,
201 (1946).
" Tlip resolution authorized an investigation of the yeast Industry to determine whether
the producers or distributors of compressed yeast, active dry yeast and related products
were "engaged in practices in violation of Section 5 of the Federal Trade Commission Act
(15 U.S.C. § 45(a)(1)) or Section 2 of the Clayton Act, as amended by the Robinson-
Patman Act (15 U.S.C. § 13)." FTC v. Green. 252 F. Supp. at 154-55.
677
In Far East Conference v. Federal Maritime Commission, 337 F.2d 146 (D.C.
Cir. 1964), cert, denied, 379 U.S. 991 (1965), the court held it sufficient that the
purpose of the compulsory process there was set forth with reference to particular
statutory provisions, as the Federal Trade Commission did here in its resolution.
Likewise, in Pacific Westhound Conference v. United States, 332 F.2d 49 (9th
Cir. 1964), the court dismissed as insubstantial and frivolous the petitioner's ap-
peal from a Federal Maritime Commission order requiring the filing with the
Commission of specified documents relative to rates. The court rejected the
argument that the order did not state the purijose for which it was issued, in
language most appropriate here, as follows (332 F.2d at 52-53) :
That statement of purpose appears to us to be about as complete and specific
as it could possibly be, considering the fact that, as the Commission has a
right to do, it had not yet determined that any agreements, rates or fares
were unlawful but was seeking information to ascertain the measure of
compliance with the named regulatory statutes and the need of future Com-
mission action in fulfillment of its statutory duties.
In Westside Ford, Inc. v. United States, 206 F.2d 627 (9th Cir. 1958), the court
held that the stated scope and purpose of an investigation by the Office of Price
Stabilization into any and all transactions of the business relating to new auto-
mobiles were sufficiently definite to determine the relevancy of material sub-
poenaed pursuant to that investigation. The court concluded that "the expressed
purpose was to determine all conceivable questions of violation of ceiling price
regulations, and the stated scope comprehended investigation of any and all
transactions of appellant relating to new automobiles." 206 F.2d at 630-31. See
also, Detiveiler Bros. v. Walling, 157 F.2d 841, 842-43 (9th Cir. 1946) .
It is manifest that the s-cope and purpose of the Commission's investigation are
at least as specific as those in &reen. Far East Conference, Pacific Westbound
Conference, Westside Ford, and Detireiler Bros. Iiideed. the Commission's reso-
lution specifies most snccinctly the product involved, and the acts and practices
of the companies to be investigated. The purposes of the investigation, as stated
in the resolution, are to determine whether the investigated companies, individ-
ually or collectively, are engaged in activities in the reporting or natural gas
reserves in Southern Louisiana which violate Section 5 of the Federal Trade
Commission Act and whether those companies are engaged in conduct or ac-
tivities relating to the exploration and development, production, or marketing,
with geographic limitation, of natural gas, petroleum and petroleum products,
and other fossil fuels which also violate Section 5.
Thus, the resolution authorizing the investigation is sufficiently specific to man-
ifest the scope and purpose of the investigation. Indeed, since the Commission
has not yet determined that Section 5 of the Federal Trade Commission Act has
been violated, the resolution is as specific as is reasonably possible.^^ Certainly a
wide range of investigation is necessary where, as here, complex multifaceted ac-
tivities are concerned and the possibilities of violation of the Commission-
enforced statute are so numerous that the precise manner of possible violations
cannot be known in advance. However, [iln such a case, there is no impossible
requirement of meticulous pinpointing of narrow objectives and subjects of
investigations." We-'<tside Ford. Inc. v. United States, supra, 206 F.2d at 631.
B. The claim that tlie Commission's subpoena is unreasonable and op-
pressive as to time and scope
It is well established that a subpoena is not unreasonable or oppressive if the
documents are material and relevant to the proper purpose underlying the
subpoena. Pacific Westhound Conference v. United States, 332 F.2d 49. 54 (9th
Cir. 1964). The scope of the subpoena must be judged in i-elation to the scope
of the investigation: for that reason "[b]roadness alone is not sufficient justi-
fication to refuse enforcement of a subpoena so long as the material sought is
relevant." Adams v. FTC. 296 F.2d 861, 867 (8th Cir. 1961). Cert, denied. 369
U.S. 864 (1962). In McPhatil v. United States, .364 U.S. 372, ,382 (1960), a sub-
)ioeua calling for "all records, correspondence, and memoranda" relating to
three subjects was held to be no more sweeping than those sustained in Endicott
IS Of course, respondent cannot arirne successfully that Section ." of tbe Federal Trade
Commission Act is vague or overly broad so that reference to Section 5 in the resolution
does not constitute notification of the purpose of the investigation. FTC v. Green, supra,
252 F. Supp. at 156. In the face of numerous challenges, section 5 has withstood close
judicial scrutiny in a long series of decisions unnecessary for citation here. The scope and
limits of Section 5 have been sufficiently defined, and the broad authority vested by
Congress in the Commission to administer and enforce Section 5 has been repeatedly
affirmed. See, e.g., FTC v. Sperry d Hutchinson Co., 405 U.S. 2.3.^ (1972).
678
Johnson Corp. v. Perkins, 317 U.S. 501 (1943), and Oklahoma Press PuUishinff
Co. V. Walling, 327 U.S. 186 (1946).
It is submitted that the specifications of the subpoena are not vague. They
adequately describe the documents required to be produced so as to enable re-
si)ondents to identify them. This is all that is required. McPhaul v. United States,
364 U.S. 372, 382 (1960) ; Brmcn v. United States, 276 U.S. 134, 143 (1928). As
stated in Adams v. FTC, 296 F.2d 861, 866 (8th Cir. 1961), cert, denied, 369 U.S.
864 (1942) :
There is a general unanimity among the courts that a subpoena meets
the requirements for enforcement if the inquiry is (1) within the authority
of the agency: (2) the demand is not too indefinite, and (3) the infor-
mation sought is reasonably relevant.
It is for the agency to "exercise its discretion in determining what informa-
tion it will require in making the investgaton." In a subpoena enforcement
proceedng "it must be judicially determined whether the agency abused its
discretion." And, in making this determination of relevancy the court should
lay the specifications of the subpoena alongside the complaint (or resolution
of investigation) . Adams v. FTC, 296 F.2d at 866-67.
There is a clear presumption of relevancy of an administrative subpoena,
FTV V. Standard Atn., Inc., 306 F. 2d 231, 235 (3d Cir. 1962), and the burden
is on the suljpoenaed party to show othei"wise. Goldberg v. Truck Drivers Local
Union No. 299, 293 F.2d 807, 812 (6th Cir. 1961), cert, denied, 368 U.S. 938;
United States v. Michigan Bell Tell Co., 415 F.2d 1284, 1286 (6th Cir. 1969) :
Kilgorc Natl Bank v. Federal Petroleum Bd., 209 F.2d 557, 560 (5th Cir.
19.")4). Clearly Standard-Californiii did not sustain its burden before the Com-
mission of demonstrating that the subpoenaed materials w^ere not relevant ta
the matter under investigation. Local 57, Int'l Union of Operating Eng'rs {AFL-
CIO V. Wirts, 346 F.2d 552, 556 (1st Cir. 196-")) .
Standard-California has contested the breadth of the subpoena insofar as it
covers time periods varying from five to ten years. These time requirements
are not, in the circmnstances of this investigation, too broad.
In September 1968. the Power Commission set rates for South Louisiana, an
area which accounts for about one-third of this country's gas production. These
rates were set at levels considerably lower than those sought by industry." In
May 1969. the AGA reported an unprecedented event, a decline in national gas
reserves occurring in 1968. In ^lay 1970, the AGA reported for the year 1969
declining reserves liotli nationally and for the South Louisiana area." Thus 1967,
196S and 1969 are critical years to the Federal Trade Commission's investigation —
1967 as the last year for which no decline was reported and 1968 and 1969 as the
first years for which declines were reported. It is known with respect to offshore
South Ltniisiana. for example, that leases are for a five-year period of
time. The required drilling and exploration during the entire period prior to
the year in question would furnish underlying data upon wliich gas reserve
estimates for that year could be established and appraised. Hence an examina-
tion by the Federal Trade Commission of data going back to 1962 is not only rea-
sonable, but absolutely essential.
As in the case of the claim of a lack of relevance, the subpoenaed party
must ber the burden of supporting any changes of burdensomeness, FTC v.
Standard Am., Inc., 306 F.2d 231, 235 (3d Cir. 1962). "The burden of proving
that a subpoena duces tecum is oppressive is on the party moving for relief on
the ground. 5 ]\Ioore H 45.05 [2]." We.stiiighnuse Electric Corp. v. City of Bur-
lington. Vermont. 351 F.2d 762, 766 (D.C. Cir. 1965) ; accord. Freeman v. Scliqson,
405 F.2d 1326. 1337 (D.C. Cir. 1968). Both Wcstinghouse and Freeman in-
volved great quantities of government documents. Freeman involved a half-mil-
lion docximents from six agencies of the Department of Agriculture — one
agency having estimated it would take the time equivalent to one-man year
to comply witli the subpoena. Yet, in both instances, the court found that the
K'Fwipral Power Commission Area Rate Proceeding, et al. {Southern Louisiana Area),
Docket No. AK61-2, 40 FPC 530 (1968).
"Joint Report of American Gas Association, American Petroleum Institute and the
Canadian Petroleum Institute entitled Reserves of Crude Oil, Natur-al Gas Liquids, and
Natural Gas in the United States and Canada as of December 31, 1968 {May 1969), Vol. 23,
p. 12(5 (see Petition. Exhibit 7, Attachment I).
.Tolnt Report of American Gas Association, American Petroleum Institute and the
Canadian Petroleum Institute entitled Reserves of Crude Oil, Natural Gas Liquids, and
Natural Gas in the United States and Canada as of December 31, 1969 {May 1970), Vol. 24,
p. 120 (see Petition, Exhibit 7, Attachment C).
679
subpoenaed party had not sustained its burden of sliowing burdensomeness.
Liliewise, in Genuine Parts Co. v. FTC, 445 F.2d 1382, 1391 (5th Cir. 1971),
the court did not tind tlie subpoena to be burdensome even thougli tlie sub-
poenaed party estimated an expenditure of 1500 man-hours to respond to only
a portion of tlae subpoena.
Standard-California's assertion that the subpoena is unduly burdensome
stems from the extent of its operations rather than from any undue demands
of tiie subpoena. Burdensomeness is a relative term which must be considered
in light of the size of the subi)oenaed party and the size and complexity of the
investigation. ApijJication of RaOlo Corp. of America, 13 F.R.D. 167, 171-72
(.S.D.N.Y. 1952). The possibility of significant inconvenience to the subpoenaed
pai'ty is the price which must be paid for the administration of justice and
the enforcement of our laws. Application of Consumers Union of United States,
Inc., 27 F.R.D. 251 (S.D.N.Y. 1961) ; Application of Kelly. 19 F.R.D. 269 (S.D.N.Y.
1956)
Significantly, on November 22, 1972, Gulf Oil Co. submitted over 12,000 docu-
ments to the Federal Trade Commission, constituting what it claims to be a
complete response to the siibpoena issued to it, which subpoena is identical to
the one here in question. Subseciuently, Union Oil Co. of California has submitted
numerous documents pursuant to the identical subpoena issued to it and has in-
dicated that its response is now complete. Further, Continental Oil Co. has pur-
portedly submitted all the documments called for by an identical subpoena served
upon it,^' except for certain files called for by Specifications G and I which are
termed "bid files" (see Petition, Exhibit 7). These bid files are the subject of
the subpoena enforcement action currently filed in this Court against Continental
Oil Co.
SPECIFICATIONS
We submit that the foregoing fully demonstrates that there is no support to
Standard-California's contentions that the specifications of the subpoena are
vague, unreasonable or oppressive. The following additional and general analy-
sis of the specifications is provided for the convenience of the Court.
Specifications A-E are basically for background purposes and have not been
questioned by Standard-California. Specifijcation F requires general information
which goes to the question of public interest. It also calls for documentation as
to interstate and intrastate .sales which will indicate the volume of gas sales
subject to Power Commission regulation. This should permit the Trade Com-
mission to compute the approximate increase in revenue respondent stood to
gain through the new and higher rates.
Specification G demands documents covering specific estimates. It should be
noted that, although information is required as to total gas reserve estimates for
all of South Louisiana and all of Offshore South Louisiana, the response relating
to specific fields or leaseholds is limited to the Offshore South Louisiana Area.
There are only approximately 200 reported fields in that offshore area (see Peti-
tion, Exhibit 7). As 1967 was the last "normal" year before AGA statistics started
plummeting and the terms for offshore leases is five years, the time period covered
in the subpoena, i.e.. back to 1962. will include the documents containing in-
formation about most estimates for fields in existence in the critical years of
1967, 1968 and 1969. Specification G details as carefully as possible the type of
documents which may contain estimates for whatever purpose compiltd, all or
any of which may indicate the accuracy of the estimates supplied to the AGA.
Such information as has already been submitted to the Trade Commission is
excluded.
Specification H, which is limited to the fields and leaseholds, or parts thereof,
for which estimates are to be reported in Specification G, demands the technical
underlying data concerning the particular operations of respondent in this area.
This information should provide the Commission w'ith information necessary to
help in ascertaining the accuracy and completeness of all of the estimates sup-
plied in response to Specification G. It would also provide the Commission with
the names of additional parties who might be privy to or have their own esti-
mates as to the acreages involved.
Specification I requires the production of documents containing data underly-
ing the estimates provided in response to Specification G as well as any other
commentaries or information concerning the reporting of estimates and the
w Until these submisi5ionf5 have been completely reviewed and until knowledgeable com-
pany officials are questioned at a hearing, the completeness of these responses cannot be
v^ouchsafed at this time.
27-547 — 74 44
680
procedures used therein. This specification is limited, for the most part, to
total reserves reported for AGA geographical areas, the nation as a whole or
to other estimates relating to individual fields in the Offshore South Louisiana
Area. Specifications J and K require the production of other documents con-
taining specific information as to specified circumstances that may have occurred
in connection with the reporting of gas reserves or other problems associated
with such reporting. Finally, Specification L calls for the identification of
respondent's employees or other persons who, with regard to South Louisiana,
may have been involved in the activities under investigation.
In sum, any difllculty of compliance that Standard-California may experience
is aue to the size ot its operations. The subpoena demands are I'elevuut, and the
time period for w'hich the documents are demanded is clearly not unreasonable
for the type of antitrust investigation being conducted. The specifications are
not overly vague, as the documents demanded are described as specifically as
possible under the circumstances of such an investigation and the terms used
are defined according to industry standards.
We need not dwell on Standard-California's contention that the time period for
compliance set forth in the subpoena is patently unreasonable. The time specified
in the subpoena was, as is ordinarily the case in similar situations, for the
purpose of the initial compliance. It is understood that therefore the Commission
will grant reasonable extensions of time upon a showing of need by Standard-
California. It is clear that the Commission lacks specific knowledge of what docu-
ments exist and in what form, and how much time is required for a good faith
compliance. Therefore, the claimed unreasonableness of the time period is clearly
not such a fatal defect as to render the subpoena invalid. Rather, it is a matter
for negotiation once bona fide attempts at compliance have commenced. The
proposed order submitted to the Court leaves the data of return of the subpoena
open, and the Commission will entertain requests for extensions of time, as the
circumstances may warrant once compliance has begun. Indeed, the Commission
has pointed out that "the reasonableness of the time allowed for compliance with
the subpoena is best left tor resolution between (the company) and Commission
staff pursuant to Section 2.7 of the Commission's Rules of Practice" (Petition,
Exhibits, p. 13).
C. The claim that the subpoena is invalid by reason of seeking documents in
an area where allegedly exclusive and primary jurisdiction rests with,
and is being exercised by the Federal Power Commission.
Standard-California contends that the subpoena is invalid inasmuch as the
Federal Power Commission has exclusive jurisdiction to regulate natural gas
rates and allegedly has exclusive and primary jurisdiction over all matters re-
lating thereto, including the manner in which gas producers report their reserves.
See Petition, Exhibit 3 pp. 3-10, for the portion of the Commission's opinion re-
jecting this allegation. The very statement of the assertion, however, demon-
strates its invalidity. For the Federal Power Commission's jurisdiction is over
the reasoiiabletiefis of gas rates and the Federal Trade Commission's investigation
involves primarily an entirely different subject — the possible collusion in under-
reporting gas reserves in violation of Section 5 of the Federal Trade Commis-
sion Act.
Section 5(a) (6) of the Federal Trade Commission Act, 15 U.S.C. § 45(a) (6),
which directs the Federal Trade Commission to prevent persons, partnerships
and corporations from using unfair methods of competition and unfair or de-
ceptive acts or practices, exempts only "banks, common carriers STibject to the
Acts to regulate commerce, air carriers, and foreign air carriers subject to the
Federal Aviation Act of 1958, * * * (and those) subject to the Packers and Stock-
yards Act, 1921, as amended," with certain exceptions. Section 6(a) of that
Act, 15 U.S.C. § 40 (a), wJiifh emjiowers the Federal Trade Commission to investi-
gate the organization, business, conduct, practices and management of any cor-
poration engaged in commerce, exempts only "banks and common carriers subject
to tlie Act to regulate commerce."
Thus, natural gas companies are not included in the enumerated exceptions to
Sections 5 and 6 of the Federal Trade Commission Act and so belong to the class
as to which the Federal Trade Commission is directed to prevent the use of unfair
methods of competition and unfair or deceptive acts or practices and are included
in the general category of corporations subject to the Federal Trade Commis-
sion's investigatory power.
As noted, supra, pp. 7-8, any collusion or combination among common carriers
underlying a rate-making proceeding before a regulatory agency violates the
Sherman Act and may be challenged independently of the rate-making determina-
681
tion of the regulatory body, and any violation of the antitrust laws or any act
contra to the public policy thereof is an unfair method of competition violative of
Section 5 of the Federal Trade Commission Act. In sum, collusion in under-report-
ing natural gas reserves and other collusive acts of natural gas companies in
restraint of trade would violate Section 5 of the Federal Trade Commission Act ;
the Commission is authorized to inquire about such conduct ; and the subpoena
which seeks information relevant to such matter should be enforced.
The Federal Trade Commission's jurisdiction, by virtue of uie Federal Trade
Commission Act. over natural gas producers, including Stand;ird-Califoi-nia, and
its authority to conduct the investigation in question is clear. And this jurisdic-
tion and authority has not been di.'^placed or modified by the Natural Gas Act. The
Natural Gas Act has not empowered the Federal Power Commission to determine
antitrust law issues as such or as to grant antitrust immunity to any natural gas
company. The exclusive jurisdiction and power of the Power Commission to
determine just and reasonable rates for natural gas does not preclude the Trade
Commission from investigating a possible unlawful collusion underlying natural
gas rate proceedings even though the documentary material sought by the Trade
Commission may also be relevant to a rate-making determination by the Power
Commission.
Under the Natural Gas Act, 15 U.S.C. § 717, et seq., natural gas companies are
subject to the jurisdiction of the Federal Power Commission with respect to cer-
tain aspects of their business operations including construction of pipe lines and
wholesaling of natural gas in interstate commerce. While the Power Commission
has been judicially directed to take into account antitrust considerations in its
certification proceedings as a factor relevant to the issue of public interest, con-
venience and necessity, e.g., Northern Natural Gas Co. v. FPC, 399 F.2d 9.53, 961
(D.C. Cir. 196S), it has been settled that the Natural Gas Act does not evince such
a "pervasive regulatory scheme" as to evidence a congressional intent to displace
the antitrust laws. California v. FPC, 369 U.S. 482 (1962). There the Court
stated (369 U.S. at 485) (citations omitted) :
Immunity from the antitrust laws is not lightly implied. * * *
Here. * * *. while antitrust considerations are relevant to the issue of "public
interest, convenience, and necessity," there is no "pervasive regulatory
scheme' including the antitrust laws that has been entrusted to the [Power]
Commission.
In the California case, the Supreme Court held that the certification of a na-
tural gas merger by rhe Power Commission under Section 7 of the Natural Gas
Act. 15 U.S.C. § 717(c), did not immunize that merger from a Government chal-
lenge under Section 7 of the Clayton Act, 15 U.S.C. § IS, and that the Power Com-
mission should await the outcome of a pending suit brought by the Government
under Section 7 of the Clayton Act. Significantly, Section 7 of the Clayton Act
is enforced by the Federal Trade Commission as well as by the Department of
Justice. There would be no basis for arguing that the Natural Gas Act somehow
displaces the Trade Commission's authority to enforce its organic act, the Fed-
eral Trade Commission Act, despite the fact that it has no such effect upon its
authority under the Clayton Act.
The California case controls the instant situation. The principle expressed in
California has most recently been reaffirmed and applied by the Supreme Court in
Otter Tail Power Company v. United States 41 U.S. L. Week 4292. 4294-95 (Feb.
22, 1973)." Unlike certain other agencies such as the Interstate Commerce Com-
mission, the Power Commissioner has neither the power to enforce the Clayton
Act nor the authority to confer antitrust immunity upon any natural gas com-
pany. Above all, it has no power to enjoin natural gas companies from en.L'aging
in unfair methods of competition or unfair or deceptive acts or practices as pro-
scribed in Section 5 of the Federal Trade Commission Act. A fortiori, the Natural
^« Also see United States v. Pacific & Arctic Co., 228 U.S. 87 (1913) (Interstate Com-
mrrce Act is no bar to an antitrust suit charging a carrier with unlawful coercion) ;
United States v, Borden Co., .308 U.S. 188 (1939) (Neither the Agricultural Adjustment
Act nor the Capper-Volstead Act displaced the Sherman Act) ; Georgia v. Pennsylvania R.
Co., 324 U.S. 439 (1945) (Interstate Commerce Act Is no bar to an antitrust suit charging
a carrier with unlawful combination) ; United States v. Radio Corp. of America, 358 tJ.S.
334 (1959) (Federal Communications Act Is no bar to an antitrust suit against TV and
radio licensees) ; Pan Am. World Airways v. United States, 371 U.S. 296 (l963) (Federal
Aviation Act does not completely displace antitrust laws) ; Silver v. Neic York Stock
Exch.. 373 U.S. 341 (1963) (Securities Act does not completely displace antitrust laws) ;
United States v. Philadelphia Nat'l Bank, 374 U.S. 321 (1963) (Bank Merger Act of 1960
does not confer Immunity from Section 7 of the Clayton Act) : Carnation v. Pacific West-
hound Conference, 383 U.S. 213 (1966> (Shipping Act of 1916 does not completely dis-
place antitrust laws with respect to the shipping Industry).
682
Gas Act did not displace any antitrust law or render Section 5 of the Federal
Trade Commission Act inapplicable to natural gas companies.'"
The Power Commission's power under Sections 4 and 5 of the Natural Gas Act,
15 U.S.C. §§ 717c, 717d, is limited to the removal of natural gas rates and prac-
tices which are unjust, unreasonable, discriminatory or preferential. It has no
power to pi-oceed against or dissolve unlawful combinations or collusions. Indeed,
the Natural Gas Act does not purport to confer antitrust immunity upon any
natural gas company with respect to its rates or practices.
Even with respect to common carriers subject to the regulatory jurisdiction
of the Interstate Commerce Commission (an agency which, unlike the Power
Commission, Is empowered to enforce the Clayton Act, to enjoin unfair methods
of competition, or to grant antitrust immunity in certain respects), the Govern-
ment is not barred from an antitrust suit if the challenged acts or transactions
lie without the antitrust issues the agency had the power to decide or beyond the
immunity it had the power to grant.
The power of the Government to attack, under the Sherman Act, collusion,
combination or coercion of common carriers related to rate-making is not open
to question where the purpose of the challenge is not to set aside the rate deter-
mination of the regulatory body, but is to dissolve the underlying collusion or
combination claimed to exist. United States v. Pacific & Arctic Co., supra, 228
U.S. at 104; Georgia v. Pennsylvania R. Co., supra, 324 U.S. at 456-63.
In the Georgia case, the Supreme Court rejected a contention that Georgia's
suit alleging conspiracy to fix joint through rates by common carriers and seek-
ing injunctive relief under Section 16 of the Clayton Act was an impermissible
attempt to trench upon the primary jurisdiction of the Interstate Commerce
Commission.^ The Court concluded (324 U.S. at 455-56) :
The relief which Georgia seeks is not a matter subject to the jurisdiction of
the [Commerce] Commission. Georgia * * * is not seeking an injunction
against the continuance of any tariff. * * * She merely asks that the alleged
rate-fixing combination and conspiracy among the defendant-carriers be en-
joined. * * * [T]hat is a matter over which the [Commerce] Commission
has no jurisdiction.
*******
* * * But Congress has not given the [Commerce] Commission comparable
authority to remove ratemaking combinations from the prohibitions con-
tained in the antitrust laws. * * * x^^j. i^^^ j^- empowered the Commission to
proceed against such combinations and through cease and desist orders or
otherwise to put an end to their activities. Regulated industries are not
per se exempt from the Sherman Act.
The Court also rejected as irrelevant the Commerce Commission's authority to
remove discriminatory ratf'; alleged to exist and the fact that the Commission
had already taken some action in that regard, stating (324 U.S. at 459-60) :
The present [suit] does not seek to have the court act in the place of the
Commission. It seeks to remove from the field o/ rate-making the infiuences
of a combination which exceed the limits of the collaboration authorized for
the fixing of joint through rates. ♦ * * . That is not to under cut or impair
the primary jurisdiction of the Commission over rates. [Emphasis added.]
The Georgia case is dispositive of Standard-California's argument that the
Trade Commission's investigation directed to possible collusion in the reporting
of natural gas reserves unlawfully interferes with tlie Power Commission's ex-
clusive jurisdiction over nntural gas rates. And see United S:tates v. Radio Corp.
of America. 35S U.S. 334. 347 (1959). Also see American Cyvamid Co. v. FTC,
363 F.2d 757 (6th Cir. 1966), 401 F.2d .574 (6th Cir. 1968), cert, denied, 394 U.S.
920 (1969), where the requirement of the Patent OflSce to consider the truthful-
ness of representations l>efore it in a patent proceeding was held not to preclude
the Trade Commission from investigating alleged fraudulent misrepresentations
=0 That the Power Commission has not been given the responsibility of enforcing the
antitrust laws in the natural gas industry is further evidenced by Section 20(a) of the
Natural Gas Act. 15 U.S.C. § 717s(a), which directs that Commiss'ion to "transmit * * *
eyidence concerning apparent violations of the Federal antitrust laws to the Attorney
General, who in his discretion, may institute the necessary criminal proceedings." See
Calif ornia y. FPG, supra, 369 U.S. at 486. This provision is consistent with the Trade
Commission's exercise of its Section 5 jurisdiction and power to institute civil proceedings
against natural gas companies, and does not evidence a congressional intent to vest an
exclusiye antitrust jurisdiction in the Department of Justice.
21 Eyen the four dissenting Justices did not question the Government's right to bring an
antitrust suit to dissolve a conspiracy underlying the fixing of joint rates by carriers. 324
U.S. at 482.
683
to the Patent Office if such misrepresentations would violate Section 5 of the
Federal Trade Commission Act, and the Trade Commission's power to require
as a remedy compulsory licensing of the drug on a reasonable royalty basis was
sustained.
While we have demonstrated that the subject matter of the Trade Commis-
sion's investigation is within its jurisdiction and authority, it is axiomatic that
the Commission is authorized to secure by compulsory processes information
whicli may be necessary to determine its jurisdiction. The Supreme Court has
been emphatic in holding that district courts should enforce administrative sub-
poenas upon a preliminary showing that the subject matter of the inquiry is
generally within agency jurisdiction without first passing on the sufficiency of the
showing of coverage with respect to the particular transactions or acts involved
in the inquiry. FTC v. Crafts, 355 U.S. 885 (1957): reversing per curiam. Crafts
v. FTC, 244 F.2d 882 (9th Cir. 1957) ; Endicott Johnson Corp. v. Perkins, 317 U.S.
501-09 (1943) : Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186, 199-201
(1946).
In Oklahoma Press PubUshing Co., the Wage and Hour Administrator had is-
sued an investigational subpoena under Sections 9 and 11 of the Fair Labor
Standards Act. The subpoena power was conferred through adoption of Sections
9 and 10 of the Federal Trade Commission Act. Section 11 of the Fair Labor
Standards Act authorized general and specific investigations by the Adminis-
trator. Rejecting the argument that the district court had to pass on the ques-
tion of coverage before it enforced the subpoena, the Court concluded (327 U.S.
at 214) :
We think * * * that the courts of appeals were correct in the view that
Congress has authorized the Administrator, rather than the district courts in
the first instance, to determine the question of coverage in the preliminary in-
vestigation of possibly existing violations : in doing so to exercise his sub-
poena power for securing evidence upon that question, by seeking the pro-
duction of petitioners' relevant books, records and papers ; and, in case of
refusal to obey his subpoena, issued according to the statute's authorization,
to have the aid of the district court in enforcing it.
This language applies to the instant proceeding with equal force. Also see Myers
V. Bethlehem Corp., 303 U.S. 41, 47-52 (1938) and the Court's discussion of 3Iyers
In Oklahoma Press Publishing Co., supra 327 U.S. at 211-13.
In sum, the subject matter of the Commission's preliminary investigation is
within its jurisdiction under the Federal Trade Commission Act, Standard-
California is in the class subject to the Commission's inquiry, and the admin-
istrative subpoena seeks to secure information which the Commission is by law
authorized to obtain. Therefore, under the controlling decisions of the Supreme
Court, the Commission is entitled to enforcement of its subpoena without first
litigating the question of coverage.
A related question is whether, although the Trade Commission is not by law
precluded from prosecuting the instant investigation, comity dictates that the
Commission's subpoena not be enforced in the light of data already secured and
to be secured by the Power Commission in the course of the discharge by it of
Its functions. See Petition, Exhibit 3, pp. 7-10, for the Federal Trade Commis-
sion's evaluation that the data considered by tlie Power Commission was either
not sufficient for the Federal Trade Commission's purposes or was not available
to it.
The Trade Commission is entitled to make its own determination as to what it
needs to conduct its investigation and may not he limited to the data the Power
Commission deemed sufficient for its purpose. In Penfield Co. v. SEC, 330 U.S.
585, 592 (1957), the Supreme Court upheld the propriety of a subpoena even
though many books and records had been examained in the course of a prior
criminal trial, stating :
The thought apparently is that the Commission had probed enough into
Penfield's affairs. But the District Court did not hold that the Commission's
request had become moot, that the documents [previously] produced satis-
fied its legitimate needs, or that the additional ones sought were irrelevant to
its statutory functions. We agree with the Circuit Court of Appeals that at
least in absence of such a finding, the refusal of the District Court to grant
the full remedial relief which the Act places behind the orders of the Com-
mission was an abuse of discretion.
And in FTC v. Dilger, 276 F.2d 739, 745 (7th Cir. 1960), the Court said:
684
We further hold with the Commission that the district court did not err in
refusing to hear evidence offered by appellant for the purpose of showing that
the Commission had in its record evidence sufficient to enable it to decide
the issue before it without the documents called for by the subpoena. The dis-
trict court properly observed that the state of the record before the Commis-
sion was not in issue before it.
The Trade Commisision's investigation focuses primarily on South Louisiana
and in-depth data is required only with regard to the offshore area of i>i<iuth
Louisiana. As shown more fully below, while producers, in connection with an
Uncommittetl Reserve Study conducted by the Power Commission, made certain
data available to that Commission relative to certain fields in offshore South
Louisiana, the Power Commission (1) has never had access to producer data
pertaining to most fields in that area, (2) has never compared any estimates
it has made with American Gas Association ("AGA") estimates, because it has
never had access to any field by field AGA estimates and (3) had destroyed,
such estimates based on producer data as it has made. Nor will a complete inves-
tigation of offshore South Louisiana be forthcoming in connection with the Power
Commission's pending National Gas Reserve Study, which was instituted some
six months after commencement of the instant investigation.
When the Power Commission grants a certificate for the construction of inter-
state pipelines, reserves actually dedicated to tlwse pipelines are reported annu-
ally to the Power Commission by the pipeline company. These figures, however,,
do not reflect the proved reserve estimates of the producers themselves. They
relate only to those reserves which have been slated for shipment through the
particular pipelines, and do not include the gas which will not be shipped in
interstate commerce. Also, the reported figures may be based upon diverse geo-
loigcal measurement systems.^
The only producer data in the possession of the Power Commission are the final
reserves estimated for varioiis areas, which channelled through the American Gas
Association. There are more than 300 voting members in the American Gas Asso-
ciation. These voting members are either gas wholesalers (e.g., Washington Gas
Light Company) or gas pipeline companies. In addition, there are over 600 non-
voting associate members, comprised of natural gas producers, manufacturing
companies, and consultants. The Board of Directors of the AGA authorized the
formation of the Committee on Natural Gas Reserves in 1945.^
This Committee reports an annual estimate of the reserves of proven natural
gas in the United States. "* This report is compiled from regional totals supplied
by ten sulicommittees, each of which is responsible for one geographic region
and each of which is headed by a member of the Committee on Natural Gas
Reserves. ^ The chairman of each of the 10 subcommittees has generally been
an employee of a major natural gas producer. ^ The subcommittee responsible
for South Louisiana is the South Louisiana Subcommittee on Natural Gas Re-
serves. Nine of the members of the Subcommittee including its chairman, are
employes of the producers subpoenaed under the surrent Commission investiga-
tion. Each subcommittee member is assigned to report on those fields in which his
employer has a proprietary interest. Each such member brings in his final esti-
mates for his assigned fields to a meeting of the subcommittee. No underlying
data is brought to this meeting. " The estimates of each member are totaled by
the subcomnnttee chairman, who brings only this total to the meeting of the main
Committee. -'' The AGA then issues its annual report. Because of these procedures,
the accuracy of these reports cannot be checked.
^ See pp. 66-68 of deposition of B. B. Gibbs, Chairman of the South Louisiana Subcom-
mittee of the American Gas Association (Petition. Exhibit 7, Attachment A).
23 See "prepared testimony" of .Tohn C. Jacobs. Jr.. Chairman of the American Gas Asso-
ciation Committee on Natural Gas Reserves, in Federal Power Commission Area Rate PrO'
ceedina, et al. (Southern Louisiana Area), Docket No. AR69-1, pp. 1412-13 (Petition,
Exhibit 7. Attachment B).
"■• This report Is entitled Reserve/^ of Crude Oil, Natural Gas Liquids, and Natural Oas in
the United States and Canada. It is publlslied jointly by the American Gas Association,
Inc., American Petroleum Institute, and the Canadian Petroleum Association in May of
every year covering the previous yenr.
"^ See. e.p.. Reserves of Crude Oil. Xatur'^l Gas I/iquids. and Nofural Gns in fl:e United
States and Canada as of December 31, 1969. Vol. 24 (May 1970), pp. 92-93 (Petition,
Exhibit 7, Attachment C).
'^ See answers 30a and 30b of John C. Jacobs. Jr., to Federal Trade Commission ques-
tioTinnire dated December 24, 1970 (Petition. Exhibit 7. Attachment D).
^ Sep pp. 8, 15-19, 77-79. 98 of deposition of B. B. Gibbs (Petition, Exhibit 7, Attach-
ment A).
"^See "prepared testimony" of John C. Jacobs, Jr., in Federal Power Commission Area
Rate Proceedinq, et ah (Southern Louisiana Area). Docket No. AR69-1, p. 1422 (Petition,
Exhibit 7. Attachment B).
685
As for the Power Commission's rate-making proceeding involving the South
Louisiana Area (Docket Nos. AR61-2, et al., and AR69-1), neither it nor the
»See the Power Commission order dated March 17. 1970 (43 F.P.C. 444) (Petition,
Exhibit 7, Attachment E).
Uncommitted Reserves Study, which was instituted as a part thereof, ^ has pro-
duced or is likely to produce the kind and quality of information now sought by
the Trade Commission. First, the Power Commission's audit was principally
with regard to uncommitted reserves. Second, the underlying data was kept at
the offices of the producers, and in not now available to either the Power Com-
mission or the Trade Commission. Third, the questionnaires were never made
public and were returned to the producers. Fourth, no data was removed from
the offices of the producers and the audit workpapers were destroyed. Fifth, the
Power Commission did not verify the completeness of the reports either in terms
of reporting producers or questionnaires. ^°
Also, in the Uncommitted Reserves Study, the Power Commission did not con-
duct a check to determine the accuracy of American Gas Association proved
reserve figures but only to determine the accuracy of certain producer figures
submitted to the Power Commission.^^
After the Trade Commission instituted the instant investigation in June 1971,
the Power Commission, on December 21, 1971, launched a National Gas Survey
which had been announced in February 1971, and directed a survey of natural
gas reserves a.v of Decemher 31, 1970, to proceed immediately. ^^ However, the
gas reserve data to be secured by the Power Commission will not enable the
Trade Commission to make the determination of the issues involved in the Trade
Commission investigation. Most important, the Power Commission study will
te conducted on a random satnpling basis, there will be no cross-referencing
of reserve estimate data from one company to another, and the study covers
only 1970 and does not include 1968 and 1969, two crucial years in the Trade
CG'.nmission investigation. '" Apart from the adequacy of such procedures for the
purpose of rate-maldng, they are clearly inadequate for the purpose of the
Trade Commision investigation.
In short, neither the doctrine of primary jurisdiction nor the principle of
comity precludes the enforcement of the Trade Commission subpoena by this
Court.
D. The claim that the subpoena should not be enforced with respect to
documents containing allegedly confidential commercial information
Standard-California asserts that the subpoena should not be enforced with
respect to documents which allegedly contain confidential information, contending
that such information will not be adequately protected from unwarranted
disclosure which will impair the competitive position of Standard-California.
See Petition, Exhibit 3, pp. 19-20, for the portion of the Commission's opinion
rejecting this contention.
In acting upon the Commission's petition for enforcement of the subpoena,
the Court need not determine whether any of the documents subpoenaed contain
confidential information for (a) it is well settled that the Commission is em-
powered to secure confidential information or trade secrets, and (b) the
information sought by the instant subpoena will be adequately protected from
unwarranted disclosure.
Courts have uniformly upheld the Commission's authority to subpoena allegedly
confidential documents.** Even in private antitrust suits, the alleged confi-
dpntiality of demanded material has been held not to preclude enforcement
of the demand. "
30 See the testimony of Mr. Lawrence R. Manpen, Assistant Section Head of the Gas
Supply Section, Federal Power Commission in Federal Power Commission Area Rate Pro-
ceeding, et al. (Southern Louisiana Area), AR69-1 at Tr. 5191-92, 5196, 5200, 5430. 5446
(Petition, Exhibit 7, Attachment F).
31 Ibid, at p. 5191.
32 See Federal Power Commission Orders of February 23, 1971, and December 21, 1971
(Petition. Exhibit 7. Attachments G and H).
33 See Appendix A of the Federal Power Commission Order of December 21, 1971 (Peti-
tion, Exhibit 7. Attachment H>.
3* See, e.g., FTC v. Tuttle. 244 F. 2d 605, 616 (2d Cir. 1957) ; FTC v. Oreen. 252 F. Supp.
153, 159 (S.D.N.Y. 1966) : FTC v. Waltham Watch Co., 169 F. Supp. 614 (S.D.N.Y. 1959) ;
FTC V. Botcman, 149 F. Supp. 624 (N.D. 111. 1957), aff'd, 248 F. 2d 456 (7th Cir. 1957) ;
FTC V. Menziea, 145 F. Supp. 164 (D. Md. 1956), aff'd, 242 F. 2d 81 (4th Cir. 1957),
cert, denied, 353 U.S. 957.
35 E.g., Gordon, Wolf, Cowen Co., Inc. v. Independent Halvah & Candier, Inc., 9 F.R.D.
700 (S.D.N.Y. 1049) ; l^eff v. General Outdoor Advertising Co., 11 F.R.D. 598, 599 fN.D.
Ohio 1951) ; Caldwell Clements, Inc. v. McGraw-Hill Put. Co., Inc., 12 F.R.D. 531 (S.D.N.Y.
1952) ; Radio Corporation of America v. Rouland Corp., IS F.R.D. 440 (N.D. III. 19.55) ;
Service Liquor Distributors, Inc. v. Calvert Distillers Corp., 16 F.R.D. 507, 509 (S.D.N.Y.
1955) .
686
Significantly, the information requested from respondents is being sought
as part of a nonpublic investigation. Information so received by the Commission
is not, as a matter of routine, released to the public.
Section 6(f) of the Federal Trade Commission Act, 15 U.S.C. § 46(f), specific-
ally exempts trade secrets and names of customers from the information which
the Commission may disclose. And Section 10 of the Act, 15 U.S.C. § 50, provides
severe criminal sanctions for unauthorized disclosure by Commission personnel
of any information obtained by the Commission. Section 4.10 of the Commission's
Rules of Practice, in accordance with the Freedom of Information Act, 5 U.S.C.
§ 552, protects not only commercial or financial information obtained from a
person and privileged or confidential (§ 4.10(a) (2) ), but aslo "geological and
geophysical information and data, including maps, concerning walls" (§ 410(a)
(7)). Disclosure of such information contained in Commission files can result
only from a determination by the full Commission pursuant to Section 4.11(b)
of the Commission's Rules.
Although Commission Rules permit the use of confidential information in
the course of adjudication, ^° it is obvious that it cannot now be determined
whether a Commission complaint charging a violation of law will ultimately
issue. If such a complaint should issue, respondent would have ample opportunity
under Section 3.45 of the Commission Rules of Practic, 16 CFR 3.45, to seek
in camera treatment of any confidential information furnished to the Commission
pursuant to the instant subpoena. Such protection is suflBcient according to
FTC V. Menzies, 145 F. Supp. 164 (D. Md. 1956), aff'd. 242 F.2d 81, cert, denied,
353 U.S. 959 (1957), in which the Court said of the Commission's authority to
acquire information (145 F. Supp. at 171) :
No part of the documentary evidence should be made public and available to
the competitors of the several respondent corporations unless it is necessary
to do so in the proper enforcement of the Jaw. If requested by the respondents,
the Commission .should follow its practice of placing the documents offered
in evidence in a confidential file, in order to keep business secrets away from
the sight and knowledge of the respondents' competitors so far as it is prac-
ticable to do so in the discharge of the Commission's responsibilities under
the law. [Emphasis supplied. ^'J
The Commission need not give prior assurances of confidential treatment
to respondent. See FCC v. Schreiber, 381 U.S. 279 (1965) (where the Court so
held with respect to confidential information required to be furnished to the
Federal Communications Commission pursuant to subpoena in a public investi-
gational hearing), tichreiber constitutes clear authority for enforcement of
the Federal Trade Commission's subpoena, where, as here, it is returnable in
a nonpublic investigation, without regard to the alleged confidential nature of the
documents called for. ^*
E. The claim that the subpoena is defective by reason of not having been
cleared ]>y the Director of the OflSee of Management and Budget in
accordance with the Federal Reports Act of 1942.
Standard-California asserts that inas'mucli as the Commission has issued iden-
tical subi>()enas to eleven companies, the subpoenas are invalid by reason of the
Commission's failure to have secured clearance pursuant to the requirements of
the Federal Reports Act of 1942. 44 U.S.C. §§ 3501-3511. See Petition, Exhibit 3,
pp. 14-18. for the portion of the Commission's opinion rejecting this assertion.
Standard-California relies upon Section 5 of the Federal Reports Act of 1942,
44 U.S.C. § 3509, which provides as follows :
A Federal agency may not conduct or sponsor the collection of information
upon identical items, from ten or more pers'ons. other than Federal employees,
unless, in advance of adoption or revision of any plans or forms used in the
collection —
(1) the agency has submitted to tlie Director the plan or forms,
38 Federal Trade Commission Rules of Practice and Procedure, Section 3.43(c), 16 CFR
3.43(c) and Section 4.10(a) (5), 3S Fed. ReR. 1732 (1973).
S7 See FTC v. Hallmark, Inc., 265 F. 2d 433, 439 (7th Clr. 1959) : As the investigation
Is not a public one and the documents will routinely go into the Commission's files, we do
not reach the issue of whether or not the documents contain trade secrets.
^ See also. Grove Laboratories, Inc. v. Dixon, Civil Action No. 339.5-61 (D.D.C.) (Order,
January 29. 1964), where this Court directed that the plaintiff, a party then being investi-
gated by the Federal Trade Commission, comply with a Commission order to file a special
report with the agency pursuant to Section 6(b) of the Federal Trade Commission Act,
15 U.S.C. § 46(b), uithout being afforded assurances (other than as provided by statute
and refjidation) of confidential treatment by the Commission of the information so
furnished. 5^
687
together with copies of pertinent regulations and of other related ma-
terials as the Director of the Bureau of the Budget has specifieti, and
(2) the Director has stated that he does not disapprove the proposed
collection of information.
Thus, clearance must be obtained from the Director of the Bureau of the Budget
(Now OflBce of Management and Budget) when Federal agency seeks to collect
information upon identical items from ten or more persons.
The Commission's subpoenas to the eleven gas producers are not subject to the
clearance requirement of the Fedeml Reports Act because they do not constitute a
"collection of information" within the meaning of the Act. The term "informa-
tion," as used in the Federal Reports Act, has been given a precise and limited
definition as follows (44 U.S.C. § 3502) :
"[I]nformation" means facts obtained or solicited by the use of written
report forms, application forms, schedules, questionnaires, or other similar
methods calling either for ansioers to identical questions from ten or more
persons other than agencies, instrumentalities, or employees of the United
States or for answers to questions from agencies, instrumentalities, or em-
ployees of the United States irhich arc to be used for statistical compilations
of general public interest. [Emphasis supplied.]
It is apparent that the subpoena does not fit within the statutory definition
or "information." First, under the definition, the facts must be obtained "by the
use of written report forms, application forms, schedules, questionnaires, or other
similar methods" calling "for answers to identical questions." Clearly, the sub-
poena is not a form, schedule, questionnaire, or similar device calling for answers
to questions. It does not ask questions : it does not call for the development of
answers to questions. Rather, it calls for the production of documents which
must exist prior to its return date. A party may not be compelled by a subpoena
to prepare any dociunents or other information.
Further, the statutory definition of information is limited in terms of the use
to which it is to be put. Specifically, information means "facts * * * to be used
for statistical compilations of general public interest." As stated in the Commis-
sion's resolution (Petition, Exhibit 2), the purpo.se of the subpoena is to develop
information necessary to determine whether certain practices of respondent
violate Section 5 of the Federal Trade Commission Act. In short, the subpoena
was issued for law enforcement purposes and not for statistical gathering pur-
poses as is required to make the Federal Reports Act applicable.
In addition to the express statutory definition of information, the Federal
Reports Act, considered as an integral whole, also supports the conclusion that
the clearance requirement does not apply to information collected for law en-
forcement purposes by independent regulatory agencies such as the Federal Trade
Commission.
The Act gives various powers to the Director of the OflSce of Management and
Budget with respect to controlling the collection of information. The Director
is authorized to approve or disapprove the request for information, 44 U.S.C.
§ 3509, to designate one agency as an information collecting agency to satisfy the
needs of two or more agencies, 44 U.S.C. § 3504, and to determine, upon either
the request of a party having a substantial interest or upon his own motion,
whether the collection of the information is necessary for the proper performance
of the functions of the agency, 44 U.S.C. § 3506. This Section permits the Director
to hold a hearing at which the agencies and "any other interested persons" may
present their views; and it further provides that "[t]o the extent, if any. that
the Director determines the collection of information by the agency is unneces-
sary, for any reason, the agency may not engage in the collection of the informa-
tion."
In light of these provisions it is readily apparent that if the Federal Reports
Act were construed to apply to the Commission's compulsory process issued for
law enforcement purposes, the Commission's independence and effectiveness as
a law enforcement investigative agency would be significantly diminished. It
would not only provide members of an industry under investigation for possible
violations of the Federal Trade Commission Act with a means to delay respond-
ing to the Commission's compulsory process by appealing to the Ofl^ce of Manage-
ment and Budget, but it would also provide that OflSce with a veto power not
simply as to the form in which the Commission may collect information but in-
deed as to whether the Commission could collect the information at all.
Such intrusions on the Commission's investigatory and law enforcement jwwers
would clash directly with congressional intent as expressed in the Federal Trade
688
Commission Act wliich vests the Commission with extensive compulsory process
.powers. Sections 6(a) and 8(b) of the Federal Trade Commission Act, 15 U.S.C.
§ 46(a), (b), give the Commission authority to conduct investigations by means
of special reports, and Section 9 of the Act, 15 U.S.C. § 49, gives the Commission
authority to issue subpoenas requiring the appearance of witnesses aud/or the
production of documentary evidence.
The importance of such compulsory process powers of investigation' to the
Federal Trade Commission's exercise of its law enforcement function was em-
phasized by the Supreme Court in United States v. Morton Salt Co., 338 U.S.
632, 642-43 (1943). However, if the Federal Reports Act were construed to apply
to the Commission's compulsory process issued for law enforcement purposes,
the Office of Management and IJudget would have, as the Commissiooi stated in
its Opinion on Jersey Standard's motion to (juash (Petition, Exhibit 3, p. 19),
"plenary, unappealable power to determine whether ciimpulsory process 'is nec-
essary' for proper effectuation of the Commission law enforcement, investigatory
functions."
If Congress had intended by passage of the Federal Reports Act to abrogate
these powers previously granted to the Federal Trade Commission, it would
have clearly manifested its intention to do so. Xo such intention is found in the
Act itself or in its legislative history. Indeed, the legislative history supports the
plain and express provision of the statute to the eifeet that the Act applies only
to information to be used "for statistical compilations of general public interest."
The report of the Senate Committee on Education and Uabnr ^^ on the bill which
ultimately was enacted as the Federal Reports Act^" makes it clear that Con-
gress" essential concern was to reduce tlie large number and duplication of statis-
tical reports then being required from business and industry by the various Fed-
eral agencies.*^ The Committee pointed out the conclusions contained in a I'e-
port of the Central Statistical Board *" which was a response to a request from the
President " asking the Board to report '"on the statistical work of the Federal
agencies, with recommendations looking forward to consolidations and changes
which are consistent with efficiency and economy, both to the Government and
to private industry." ^ The conclusions of the Board, cited by the Committee, were
as follows : '"^
(1) the officials of practically all administrative agencies of the Federal
Government recognize tJic tremendous increase and. duplication of statistical
reports required from husiness and industry;
(2) that they are opposed to a central statistical agency for the collection
of all information and reports; but that (3) thej/ are sympathetic to. and
many recommend,, a coordinating agency such as the Division of Statistical
Standards in the Bureau of the Budget, with sufficient authority placed In the
Director of the Bureau of the Budget to require the releasing of information
by one Federal agency to another and to reduce the demands for inform-ation
made by the Government upon business enterprises. [Emphasis supplied.]
The Senate Committee report also refers to a report of the Senate Special
Committee to Study Problems of American Small Business.** This latter report
resulted from an extensive investigation and numerous conferences with ^he
heads of Federal agencies, including the Director of the Bureau of the Budg-
et, concerning the problem of reports required by the Government. The Small
Business Committee's report, after noting that the proposed Federal Reports Act
had originated with a letter from the President to the heads of agencies most
concerned with reports to the Government, made the following observations."
These replies Irei^eived from the heads of the Federal agencies most con-
cerned] by Mr. Mclntlre [Pecret-^ry to th^ President] >ihnof<t iinanifnoiislii
rejected the idea of a consolidation of Federal statistical work into mie
agency. On the other hand, they just as unanimously advocated the estab-
lishing by law or otherwise of an agency to coordinate Federal Reporting
services and eliminate duplications and costs.
The I roposrd bill to hrinr this ^oordiv'tion ahout hns been developed out
of a number of conferences between representatives of the Senate Committee
38 S. Rpp. No. 16.51, 77th Cons., 2d Sess. (1942).
■•" R. 1fifi6, 77th Cons:.. 2d Sess. (1942).
« S. Rep. No. 16.51, 77th Conp., 2cl Sess. 3 (1942).
^2This Report Is summarized in S. Rep. No. 479, Part 1, 77th Cong.. 1st Sess. (1941),
Report of the Special Committee to Study Problems of American Small Business entitled
"Sm.ill Business Problems."
« Letter from President Roosevelt to the Chairman, Central Statistical Board, May 16,
1938. in S. Rep. No. 479, Part 1, 77th Cong., 1st Sess. (1941).
** Id. nt 21-22.
« S. Rep. No. 1651, 77th Cong., 2d Sess. 3 (1942).
« S. Rep. No. 479, 77th Cong., 1st Sess. (1941).
" Id. at 1-2.
689
to study Problems of American Small Business and the Bureau of the Bud-
get.
♦ * * [T] here is made a part of this report * * * data as evidence /Mf fTie
President and the heads of the various Federal agencies almost unanimously
advocate a means of coordinating Federal statistical reporting services and
the vesting of potver in a central agency to bring about this coordination to
the fullest extent short of th-e central coordinating agency unsurping the
authority to collect statistical data itself. [Emphasis supplied.]
In addition to the reports discussed above, the Congressional debate also
demonstrate that the Act was meant to apply only to information collected for
statistical compilations. Nowhere in the debates is compulsory process issued for
law enforcement purposes noted as subject to the clearance requirement of the
Federal Reports Act. In sharp contrast the debates frequently refer to, and demon-
strate Congressional concern with, the numerous statistical reports required by
the War Production Board and the Office of Price Administration in connection
with the war effort.'^
The Commission's position that its investigational subpoenas and subpoenas
issued during the course of litigation are not subject to clearance by the Office of
Management and Budget under the provisions of the Federal Reports Act accords
with the position of the Office of Management and Budget. See letter dated Oc-
tober 29, 1971. from the Clearance Officer of the Office of Management and Budget
to the Federal Trade Commission to that effect (Petition, Exhibit 4).
CONCLUSION
"\Mierefore, it is respectfully submitted that the requirements of the Com-
mission's subpoena are valid and proper, that enforcement of the subpoena is
necessary and proper to enable the Commission to discharge its duties under the
laws which it administers, that Standard-California's objections are without
merit and therefoi-e that the Court should issue the order prayed for in the
Petition.
James T. Halverson.
Acting General Counsel,
Harold D. Rhtnedaxce, Jr.,
Assistant General Counsel,
Miles J. Brown,
Attorney,
Montgomery K. Htun,
Attorney,
Federal Trade Commission,
Harold H. Titus, Jr..
United States Attorney,
Arnold T. Aikens,
Assistant United States Attorney,
Gregory B. Hovendon,
Attorney,
U.S. Department of Justice.
In the United States District Court
for the District of Columbia
Civil Action No.
Federal Trade Commission, 6th and Pennsylvania Avenue, NW.,
Washington, D.C. 20580, petitioner
V.
O. N. Miller, Chairman, and Standard Oil Company of California, a corpora-
tion, 22.5 Bush Street, San Francisco, California 94120, respondents
ORDER to show CAUSE
Pursuant to the authority conferred by Section 9 of the Federal Trade Commis-
sion Act. 15 U.S.O. § 49, petitioner, the Federal Trade Commission, having invoked
«See, e.g., 88 Cong. Rec. 9078, 9158, 9435-36 (1942) (remarks of Senator Vandenberg
and Representatives Whittlngton, Smith and Hoffman). See also, 88 Cong. Rec. 9161,
9164, 9165, 9343, 9437-38.
690
the aid of this Court for an order requiring respondent Standard Oil Company of"
California, a corporation, by respondent O. N. Miller, Chairman of the Board of
said corporation, to appear, testify and produce documentary evidence as re-
quired by a subpoena duces tecum issued by the Federal Trade Commission on
November 24, 1971, in an investigation being conducted by the Commission under
File No. 711 0042, and the Court having considered the Petition and the papers
filed in support thereof, it is hereby
Ordered that respondents Standard Oil Company of California and O. N. Miller,
Chairman of the Board of said corporation, appear on the day of
1973, at 10 a.m. before the Honorable , Judge of this Court, Room
Number , United States Courthouse, Third and Constitution Avenue, N.W.,
Washington, D.C., provided service is made on or before the day of
1973, and show cause, if any there be, why this Court should not grant said Peti-
tion and enter an order directing the appearance, the giving of testimony and the
production of books, records and documents as required bv said subpoena ; and it
is
Further ordered that a certified copy of this order, and copies of said Petition
and the memorandum in support thereof, filed herein, be served forthwith upon
respondents by the United States Marshal in the manner provided in the Federal
Rules of Civil Proceflure for the service of summons : and it is
Further ordered that if respondents intend to file papers in opposition to said
Petition or the entry of the order requested therein, such papers must be filed
and served no later than ten days prior to the date on which respondents are to
appear in this Court in compliance with this Order.
In the United States District Court for the District of Columbia
Civil Action No.
Federal Trade Commission, 6th Street and Pennsylvania Avenue, NW.,
Washington, D.C. 20580, pettioner
V.
O. N. Miller. Chairman, and Standard Oil Company of California, a Cor-
poration, 225 Bush Street, San Francisco, California 94120, respondents
order
Petitioner, the Federal Trade Commission, having invoked the aid of this
Court, pursuant to 15 U.S.C. § 49, in requiring Standard Oil Company of Cali-
fornia, by respondent O. N. Miller, to comply Mith an administrative subpoena
duces tecurn issued by petitioner in an investigation being conducted by peti-
tioner (FTC File No. 711 0042) and the Court having considered the verified
Petition and other papers of record, and the Court being of the opinion that the
relief sought by petitioner should be granted, it is hereby
Ordered that respondent Standard Oil Company of California, by respondent
O. N. Miller be, and hereby is, commanded to appear before a duly designated
representative of petitioner at a time and place in Washington," D.C, to be
designated by petitioner upon not less than five (5) days notice, and then and
there to testify and produce the books, papers and documents requested in the
subpoena duces tecum issued by the Commission on November 24, 1971. a copy
of which is attached to the aforesaid Petition as Exhibit 1,
It is further ordered that a certified copy of this Order be served forthwith
upon respondents O. N. Miller and Standard Oil Company of California by the
United States Marshal.
Federal Power Commission,
Wafihinffton. D.C. July 21. 1971.
Memorandum to : General Counsel.
From : Assistant to the General Counsel.
Subject : Analysis of Jack Anderson Articles of June 14, 15, 20, 23 and 26, 1971.
Articles making reference to the Commission appeared under the by-line of
Jack Anderson on June 14, 15, 20, 23 and 26, 1971 in his syndicated column en-
titled "The Washington Merry-Go-Round," which is published by the Washington
Post and other newspapers throughout the country. These articles purport to be
691
based upon internal staff memoranda which apparently came into the possession
of this columnist through the acticms of employees acting in violation of the
ethical conduct standards of the Federal Power Commission (18 CFR § 3.5735-6).
The Commission, by order of July 2. 1971. found that these articles may be ex
parte, olf-the-recoi-d commissions by an interceder and an attempt to preju-
dice the public interest and persons involved in the Southern Louisiana Area
Rate Proceedings, Docket Nos. AROl-2, et al., AR69-1. Since such communica-
tions would be within the prohibitions of Section 1.4(d) oT the Commission's
Rules of Practice and Procedure (18 CFR 1.4(d) ), the Commission ordered them
placed in the public files associated with these proceedings, but separate from
the record material upon which the Commission can rely in reaching decisions.
By the same order, the Commission found that the public interest required that
it waive its right, imder the Freedom of Information Act, 5 U.S.C. 552(d) (5), to
maintain the confidentiality of the intra-agency memoranda referred to in these
Jack Anderson articles and authorized the Secretary to designate such intra-
agency meroranda which he can identify from the Anderson articles, including
those related thereto, and to place them in the public files associated with the
Southern Louisiana Area Rate Proceedings. Pursuant to this delegated authority,
on July 2. 1971 the Secretary designated by a Release of Intra-agency Documents
(hereinafter '"Release") thirty-three intra-agency memoranda to be placed in
the public file in the Southern Louisiana Area Rate Proceedings.
The articles appearing in Jack Anderson's columns of June 14, 15 and 20.
1971 primarily attack the reliability of the estimates of proved U.S. natural gas
reserves which have been made annually since 1945 by the Committee on Natural
Gas Reserves of the American Gas Association. These natural gas reserves esti-
mates, together with those of Canada and estimates of oil and natural gas liq-
uids reserves of the United States and Canada, are published jointly by the
American Petroleum Institute, the Canadian Petroleum Association and the
AGA in an annual report entitled Reserves of Crude Oil, Natural Oas Liquids,
and Natural Gas in the United States and Canada. In his articles, Jack An-
derson refers to these estimates as "producers' figures" and states that the
American Gas Association "speaks for the producers." According to testimony
at transcript page 1413 of the Southern Louisiana Area Rate Proceeding by
John C. Jacobs, Jr., the Chairman of the AGA Committee on Natural Gas Re-
serves, the AGA had 389 voting members as of April 15. 1970, made up of 345
domestic distribution companies, 31 domestic pipeline companies and 13 foreign
distribution companies. In addition, he testified that there are 683 non-voting
associate members made up of 606 manufacturing companies, 55 consulting
organizations. 17 prodiicing companies, and 5 financial organizations. Mr. Jacobs
further testified at transcript page 1419 that of the 14 members of the AGA
Committee on Natural Gas Reserves as of December 31, 1969, six work for
pipeline companies, four work for producing companies, two work for distri-
bution companies, one works for an agency of the Llnited States Government,
and one is Seci-etary of the AGA. Mr. Jacobs also outlined the general procedure
by which the reserve estimate for each geographical district is prepared (tr.
pp. 1421-22 ) . His testimony indicated that the subcommittee member uses all
available date which he deems reliable, from both public and private sources, in
preparing reserves estimates for the fields assigned to him. These individual
estimates are then subject to review and discussion by the full subcommittee be-
fore it adopts a reserve figure for each field within its geographical district.
This testimony indicates that Jack Anderson erroneously asserted that the AGA
"speaks for the producers" and that its reserves estimates are "producers'
figures," although basic data comes from producers.
The June 15 article by Jack Anderson maintains that "the FPC's chief econ-
omist. Haskell Wald, found the industry's figures to be dubious." To support his
proposition. Anderson cites and quotes fragments of or paraphrases memoranda
from Haskell WaM dated February 12. February 19, November 13, and Decem-
ber 1. 1970. These memoranda are included intact as Exhibits A. C. R. and U.
respectively, of the Secretary's Release.
The February 12 memo from Wald makes "a quick check of the consistency of
the reserves data reported to FPC on Form 15 and the reserves data published
by AGA." His re.sults are summarized as follows :
The trends of the two series over the 1963-68 period are broadly similar, in
that they both advance year-by-year until 1968 when they both declined. The an-
nual changes, however, can hardly be said to match each other * * *
By quoting the past portion of the second sentence out of its proper context,
Anderson distorts the comparison to give the appearance Wald is warning that
692
the two series are contradictory. Reviewing tlie entire statement, it becomes
evident that while Wald found divergence in the annual changes of the two
series, he recognized that the trends are broadly similar. This is consistent with
prior statements by Chairman Nassikas and the Commission's finding at pa^ie
23 of Opinion No. 598, issued July 16, 1971 in the Southern Louisiana Area Rate
Proceedings, that "AGA and Form 15 data show similar trends of reserves and
reserve-to-production (R/P) ratios."
Wald continued his comparison on page two :
There is of course no reason why the two annual series should always move
together or maint.iin a constant relationship to each other, since the interstate
pipelines may succeed in contracting for a very high proportion of new reserve
additions (or uncommitted reserves) in one year and a low proportion in another
year.
By juxtaposing fragmented quotes from Wald's February 12 memo with his
owni conclu-^ion, i.e.. "The industry's estimates which should be consistent."
Anderson created the illusion that Wald wrote that the two series should be
consistent, Actually, Wald stated exactly the opposite at the bottom of the first
page of his February 12 memo :
The differences noted above may be entirely consistent with 100 percent accu-
racy in the two series*, since the series measure different quantities.
The Wald memo of February 19 was a submission to the General Counsel of a
list of questions for discussion with the AGA Committee on Natural Gas Reserves.
Anderson states that in this memo Wald "called attention to an industry error
of 1.3 trillion cubic feet." V.'ald's reference was to a memo from Dr. Kh'azzoom
which "calls attention to a large reporting error in the reserves data for 1967."
Khazzoom's memo of February 16, 1970 (Exhibit D of Release) referred to a
computational error in the 1967 reserves for Texas R.R. Commission District 10
which he wrote "resulted in an overstatement of res-erves in that district by .65
billion Mef. When it was discovered in 1968 it was subtracted from the 1968
revisions." Khazzoom contended that "as a result, a comparison of '68 with '67
shows an erroneous drop in reserves of 1.3 billion Mcf (double the .65 billion
:\rcf error)." This subject was raised in a letter of June 20. 1969 from Lee C.
White, then Chairman of the FPC, to Ed Parkes, then Chairman of the AGA
Committee on Natural Gas Reserves (attachment 1) inquiring into the principal
factors necessitating the downward revision of the reserves in this district
(question 3b). Mr. Parkers responded in a letter of July 11, 1969 (attachment 2)
as follows :
This seems to be one time that a computer or its input erred. In computing the
reserve in one field for the 1967 report, the 1967 production for that field was not
subtracted. This made the 1967 reserve some 650 billion too high. This error was
not discovered until 1968, when it was corrected. The correction resulted in the
downward revision in 1968.
Evidence of this revision was included in the Southern Louisiana Area Rate
ProceedinsT in Exhibit No. -16 by Dr. J. Dnniel Klmzzoom in Seotembor 1970.
Since the subtraction of production figures for this field were delayed by one
year, the 1967 reserves figures were overestimated by .65 trillion cubic feet. How-
ever, the downward revision by that amount in 1968 should have resulted in that
year's figures being neither overestimated nor underestimated. This would indi-
cate to me a total error of only .65 trillion, which Khazzoom and Wald interpreted
as 1.3 trillion. In any event, the deferral in reporting the production figures was
corrected in 1968 and the FPC was aware of all of the facts by July 1969. Further-
more, since reserves were overstated by .65 trillion (or even 1.3 trillion) cubic
feet in 1967, the producers w^ould not have been the beneficiaries of this type of
error.
Anderson's June 15 column states that on November 13, 1970 "Wald jolted Nas-
sikas with another memo disclosing that the FPC's studies and the industry's
figures were out of kilter by a startling 42 per cent." This apparently is the
same memo which led Anderson, in his June 14 article, to compare AGA esti-
mates of 24 trillion cubic feet in proved reserves in offshore Southern Louisiana
with a 34 trillion figure which he stated "the FPC's own experts, after carefol
calculation, came up with."
In his .Tune 20 article. Anderson asserts that "we have reported how the
Federal Power Commission, under the prod of Chairman John Nassikas, has sup-
pressed its own figures." Wald's November 13 memo m.alces absolutelv cle.ir tbnt
these figures were not withheld from the public by stating, "The figures cited
above are in the public record." The 34 trillion cubic foot figure was taken from
693
an estimate by a Commission staff witness placed in evidence as Exliibit No. 31A
in ttie Southern Louisiana Area Rate Proceeding. As is explained in a memo to
the Chairman from the Chief, Bureau of Natural Gas dated November li), 1970
(Exhibit S of Release), differences in methods of allocation account for 2.1
trillion of the 10 trillion cubic feet difference in the two estimates and "the
remaining difference can most probably be accounted for by the use, by AGA and
pipeline companies, of different methods of estimating reserves in relatively
wildcat or undeveloped areas such as the Offshore Federal Domain." Exhibit
V of the Release is a .ioint memo dated December 16, 1970 to the Chairman
signed by the General Counsel ; Chief, Bureau of Natural Gas ; and Haskell
Wald as Chief of the Office of Economics comparing these two reserve estimates.
Anderson in his June 15 article refers to a "strong memo" from Wald to
Gooch's Office of December 1, 1970 "reiterating that the evidence indicated errors
up to 40 per cent in some of the industry data." This memo (Exhibit U of Release)
was a note to me requesting that two separate comments be added to the joint
memo, then in draft stage, after Wald's signature. The first comment was to read
as follows :
1. A 40 percent allowance for judgmental factors may be appropriate for new
fields without production experience, but not for fields which have been in
production for a few years. Much of the offshore reserves is in the latter category.
Although this in no way relates to the disingenuous conclusion Anderson drew
that "evidence indicated errors up to 40 per cent in some of the industry data."
even this proposed comment did not appear in the final joint memo of December
16. signed by Wald, which stated :
Staff geologists believe that a difference of 20 percent, plus or minus;. aT)]iofiring
in the estimates of two geologists would not establish either estimate as being
unreasonable. Thus a total range of 40 percent could be allowed and might even
be conservative in a relatively undeveloped area such as the Federal Domain.
Referring to Wald's December 1 memo again in his June 20 article, Anderson
stated :
The figures provided by the American Gas Association, representing the
producers, might be helpful on broad trends, Wald suggested tactfully. But the
industry figures were highly questionable, lie cautioned, for assessing the need
for a rate increase.
Wald's actual language in his proposed comment on December 1 to the draft
of the joint memo was :
2. I agree with the statement about corroboration of broad trends. However,
the reliability of the AGA data for estimating unit costs or assessing the
adpor.ricy '^f current supply is a separate issue — and a critical issue for the Com-
mission's area rate decisions.
Mr. Wald comments on Anderson's June 20 column in a memo to Chairman
Nassikas dated June 21, 1971 (attachment 3) wherein he states:
The purpose of my comment to Mr. Wakefield was to make clear my position
that the reliability of the AGA data is unproven except as an indicator of brund
trends. I did not go so far as to suggest that my reservations about the accuracy
of the data provided a basis for questioning the need for a rate increase.
As you know from my previous comments on the Anderson columns this Office
has been on record favoring a rate increase since the spring of 1969. The latter
fact belies most of Anderson's talk about consumers being "bilked" because the
Staff Brief ignores my warnings about inconsistencies between the Form 15 and
AGA reserves data.
The draft was revised to meet Wald's invitation of December 1 to make "the
appropriate changes in the memorandum to accommodate my comments, so
that I might sign without reservations." The final, joint memo of December 16,
reached the following conclusion on page 2 :
"The Commission has made u.se of AGA jniblished estimates for additions to
reserves and production volumes in determining certain unit cost components
when setting area rates. The determination of the figures to be used for additions
to reserves is based on trends ran.ging tvom five to fifteen years. The estimate of
additions for any particular year, therefore, is significant only insofar as it may
affect the long-term trend of reserves added. Since the cost components involved
are calculated from annual additions to reserves, the estimate of total proved
reserves at a point in time would not be a factor in the cost computations which
have been used in setting area rates. The figures introduf-ed in AR69-1 in Staff
Exhibit No. 31-A do not In any way influence our opinion that the Commission
may reasonably rely upon the AGA reserve figures."
694
Since it is the averaged additions to reserves rather than the total proved
reserves at year-end which are used in cost computations, even were it true that
the producers "have greatly understated the amount of natural gas availahle
under the Louisiana bed," it would not follow, as Anderson declared in his June
14 article, that "their figures make the risk and expense of sinking new wells ap-
pear to be far higher than is true."
For further reply to Jack Anderson's allegations of deception regarding AGA
reserves data, Haskell Wald's memorandum of June 17, 1971 (attachment 4) to
the Chairman explains how Anderson misused information in Wald's memoranda
and ignored material statements therein :
4. The Anderson column also refers to our memorandum of November 13, 1970,
concerning the difference of 42 percent between BNG and AGA estimates of re-
serves in the Federal domain offshore Louisiana. Tlie basic data are taken from
exhibits in the AR69-1 proceeding. Mr. Joyce's memorandum of November 19,
1970, explains that the discrepancy of 10 billion Mcf, or 42 percent, can be attri-
buted in part to diferent methods of allocating the reserves in fields which strad-
dle the area boundary and in part to diferent estimating procedures for reserves
in relatively undeveloped fields. Our memorandum concludes that "our Form 15
reports are useful for verifying the broad trends reported by AGA but not the
reserves reported in particular producing areas." This conclusion is ignored by
Mr. Anderson.
5. Finally, the Anderson column mentions "a strong memo to Gooch's office on
December 1 reiterating that the evidence indicated errors up to 40 percent in
some of the industry data." This is another example of Mr. Anderson's misuse of
information. The actual language of my memorandum, reproduced below, Is not
critical of industry data ;
"1. A 40 percent allowance for judgmental factors may be appropriate for new
fields without production experience, but not for fields which have been in pro-
duction for a few years. Much of the offshore reserves is in the latter category.''
Furthermore, the memorandum continues as follows :
2. I agree with the statement about corroboration of broad trends.
"The latter statement is also ignored by Mr. Anderson."
In his June 15 article, Anderson wrote that on February 13. 1070. Chairman
Nassikas received another personal memo from Edward McManus, chief of the
Producer Division of the Commission's Bureau of Natural Gas, "who warned
that ''the reliability of gas reserve estimates (by the industry) for any specific
reservoir of field initially is suspect.' " A perusal of the actual memo from Mc-
Manus, which is Exhibit B of the Secretary's Release, reveals that the parenthet-
ical phrase was deceptively placed in the middle of the sentence by Anderson
and has no relation to the moaning McManus was conveying. A memo from Mc-
Manus to the Chairman dated June 16, 1971 (attachment 5) points out how
Anderson's articles "consist of twisted paraphrasing and lifting out of context of
my memorandum dated February 13, 1970." McManus concludes his June 16
memo as follows :
"True or factual reporting would have required the column to explain the
basis of the statement 'the reliability of gas reserve estimates for any specific
reservior or field initially is suspect,' as my memorandum does explain such
basis. Further fair reporting would have required reference to the summary or
conclusion of the memoranda that tlie AGA reserve studies as a yearly service
is reliable as a statistical series indicating a signal as to status of the gas supply."
Anderson contends in his June 15 article that after receiving the February 1970
memoranda, "Nassikas and Gooch should have ordered an immediate, massive
FPC staff inve!*tigation." The Commission's Order Enlarging Investigation and
Proposed Rulemaking was issued December 15, 1969 in the Southern Louisiana
Area Rate Proceeding (attachment 6). In that order, the Commission had ex-
panded Docket No. AR69-1 and indicated that the first phase of the proceeding
"should include evidence with respect to the adequacy of gas supply and ade-
quacy of service to consumers, the demand for gas, the cause of a shortage, if
any" and had called for evidence, in addition to the supply and demand evidence,
which would include "prodiicer data as to volumes of reserves in the offshore
area not contracted to interstate pipelines and data on status of shut-in gas
wells." Thereafter, on March 17, 1970 in the same proceedings, the Commission
issued its Order Requiring Reporting of Specified Reserves Data and Prescribing
Procedure (attachment 7). Under this order the Commission found that "the
public interest require.^* that the volumes of proved natural gas reserves held
by producers in the Southern Louisiana area and not contracted to interstate
pipelines be reported and made available in this proceeding in the form and
695
manner hereinafter prescribed." The order also provided that the individual
producers making such reports shall make any workpapers or other underlying
data available to the Commission's staff for purijoses of a confidential audit.
In his June 15 article, Anderson again quotes a fragment of a sentence in an
attempt to distort its true meaning. He attacks a letter of September 15, 1970
from Chairman Nassikas to Senator Philip Hart by stating that the Chairman
"said the two crucial sets of data 'closely parallel' each other." The Chairman's
actual sentence in that letter (attachment 8) reads, "The FPC has been collecting
this data on Form 15 annually since 1963 and finds that they closely parallel
trends and projections based on national statistics." ^\Tien read in its entirety, it
is clearly consistent with Wald's February 12 memo which stated that "the trends
of the two series over the 1963-1968 period are broadly similar." After quoting the
Chairman's statement that "The staff has also made specialized reports and
conducted investigations," Anderson concludes that "This made it appear that
the staff backed up the gas industry's figures when, in fact, the staff memos
said exactly the opposite." The Chairman's letter at this point was using as an
example the 'FPC Staff Report on National Gas Supply and Demand" and was in
no way making reference to investigations of gas Industry figures. Thus Ander-
son's statement is doubly misleading in that neither was the Chairman attempting
to make "it appear that the staff backetl up the gas industry's figures" nor did
"the staff memos" say "exactly the opposite."
Ander.son'9 June 15 article also states that on December 9, 1970 at a Senate
hearing chaired by Senator Lee Metcalf "Gooch testified that the industry's
figures were 'reasonably relial)le.' " A review of the transcript at pp. 3.")6-.")7 of
those hearings (Senate Committee on Government Operations, Subcommittee on
Intergovernmental Relations) shows that Gooch's testimony was actually a quo-
tation taken from the response of the FPC staff in Docket R-389A vphich included
the statement that "Staff concludes that AGA data are reasonably reliable."
The articles by Jack Anderson contain a number of statements which imply that
Chairman Nassikas, having received memoranda from two staff members on a
particiilar point, should have accepted their statements (or Anderson's interpre-
tations of them) unquestioningly. Even though a reading of the memoranda
themselves, along with contemporaneous memoranda, clearly shows that their
contents have been misinterpreted or misrepresented to the public by Anderson,
the implication that the Chairman was not at liberty to follow the dictates of his
own judgment in accepting or rejecting any or all such memoranda is astonishing.
The United States Court of Appeals for the Second Circuit, in the recent case of
International Paper Company v. Federal Poxcer Commission, 438 F.2d 1349 (1971) ,
.spoke to this very point in upholding the District Court's refusal to order the Com-
mis.sion to disclose all internal staff memoranda transmitted to it. At pages
1358-59, that Court stated the following :
We agree with this finding, because the views of individual members of the
Commission's staff are not legally germane, either individually or collectively to
the actual making of final orders. They could be grossly misleading, when applied
to the ultimate findings and conclusions reached by the FPC as a whole, because
at best they are only advisory in character. To allow disclosiire of these docu-
ments would interfere with two important policy considerations on which
§ 552(b) (5) is ba.sed : encouraging full and candid intra-agency discussion and
shielding from disclosure the mental processes of executive and administrative
officers. ^
The article of June 23 by Jack Anderson states that "the case for raising
rates was made by Nassikas's general counsel, Gordon Gooch. who drafted a
lengthy legal brief justifying the gigantic horns woggle." The staff's initial
brief, signed by Richard V. Mattingly. Jr., and Roy A. Nierenberg. Commission
staff counsel, was filed on April 15, 1971 (attachment 9). The staff reply brief,
signed by the same staff counsel, was dated May 6. 1971 (attachment 10). Ander-
son contends in his June 23 article that "The Office of Economics took vigorous
exception to Gooch's figures, facts and arguments. Not only were ringing
dissents made, but the economists demanded that their disagreement be written
into the brief." Ander.son asserts that this "demand" was made in a May 14,
1971 memo (Exhibit GG of the Secretary's Release). This memo from David
Schwartz, Assistant Chief, Office of Economics, who was supervising that office's
participation in the Southern Louisiana Area Rate Proceeding, transmits Alterna-
tives A, B and C as proposed errata to the staff brief. Alternatives A and B pro-
posed errata to the reply brief, whereas Alternative C proposed a lengthy errata
to the initial staff brief. David Schwartz had. six weeks previously, submitted
27-547 O — 74— — 45
696
6 pages of comments on the initial staff brief to the Commission staff counsel
(Exhibit Z of Release). By his May 14 submittal, one month after the filing of
that initial brief, Schwartz raised entirely new and heretofore unmentioned
objections and exceptions to that brief. To have permitted a wide variety of
changes in the staff,'s initial brief after all parties had submitted their reply
briefs would have raised the possibility of cogent objection by other partes that
their right to file reply briefs had been made ineffective.
Anderson contends that after these alternatives were submitted, "Gooeh buried
the memo deep in his files and submitted his brief to the commissioners with
no hint that the FPC's best economist had raised a howl." Contrary to this
accusations, on May 14, 1971 an Errata to Staff Reply Brief (attachment 11) was
filed and served on all parties, encompassing Alternative B of the Schwartz pro-
posal and noting the dissent of the Office of Economics. Although this errata dis-
associated the Office of Economics from the views expressed in tlie brief dealing
with the reliability of cost estimates and new gas well gas cost issues, the Office
of Economics raised no exception to the following statement at page 3 of the
Staff Reply Brief :
The AGA reserves statistics are unquestionably reliable, and provide an ac-
curate measure of the proved reserves inventories of the individual supply areas
and of the nation.
For additional clarification, Haskell Wald wrote a memo to the Chairman
dated June 23, 1971, commenting upon Jack Anderson's column of June 23. 1971
(attachment 12) in which he points out, again, that Anderson has misrepresented
and grossly distorted the Office of Economics position. A portion of that memo
reads as follows :
Turning to the specific issues covered in the Anderson column, I believe that my
own position, which largely contradicts what Anderson reports, is fully explained
in my previous memoranda to you on the first three Anderson columns. I have not
dissented from the Staff position that the FPC 'field audit served to verify the
accuracy of the uncommitted reserves volumes as initially reported' (see page
10 of Staff Initial Brief). Anderson grossly distorts this statement when he sub-
stitutes 'industry figures on natural gas reserves' for 'uncommitted reserves
volumes as initially reported.' I have no objection to the statement, in Anderson's
column, that the rate increase would 'make drilling for gas . . . more attractive.'
nor to the statements that uncommitted reserves are 'extremely small' and that
rate increases 'are necessary.'
The background to the issuance of the errata notice is .set forth in a memo of
June 23, 1971 from the General Counsel to the Chairman (attachment 13). This
memo points out that the dispute as to the briefs aro.se lietween the Office of
Economics and the Bureau of Natural Gas over whether the econometric model
presented by OEC was the only reliable evidence in the proceeding. Rather than
rejecting the OEC model when reaching its decision in Opinion 598, the Commis-
sion accepted it in large measure in paragraph 89 at page 38.
The Anderson article of June 26 claims that "FPC officials set up an illegal,
secret meeting with an industry spokesman only weeks before his case was to
be heard." As Exhibit E of the Release shows, Thomas .Joyce had scheduled a
meeting with John Jacobs, Chairman of the AGA Committee on Natural Gas
Reserves, to be held on April 2. 1970. Neither Jacobs nor the AGA were parties
to the Southern Louisiana proceeding, although Jacobs was to appear as a witness
for the United Distribution Companies. The memo of :March 11, 1970 (Exhibit F of
Release) from Haskell Wald indicates that although he would be "ont of the
city on the meeting date," he did intend to have two members of the Office of
Economics pre.sent. By memo of March 12. 1970 (Exhibit G of Release) the
General Counsel suggested that Commissioners and their personal staff refrain
from attending since Jacobs was to be a witness in AR69-1. On March 16, 1970
18, 1970. Mr. Gooch and Mr. Wald exchangetl memos on the approach being taken
in asking the mtness prior questions (Exhibits K and L of Release). On March
18, 1970. Mr. Gooch and Mr. Wald exchanged memos in the approach being taken
in asking the witness prior questions (Exhibit K and L of Release). On March
19. 1970. Mr. Wald wrote a memo to the General Counsel entitled "Miscellaneous
Observations on Arrangements for AGA Witness on Reserves Estimates" (Ex-
hibit M of Release) in which he stated :
6. I am concerned that we may be exaggerating the imiwrtance of the AGA
reserves estimates. It is true that these estimates are crucial for the new gas
costing, but they are not crucial for the end result. As you may know, I do not
have any faith in the costing methodology and the resultant estimates. I believe
697
that the most valuable source of information on the current gas supply situation
lies in the experience of gas procurement personnel of pipeline companies. Are
we confident that the pipeline companies will provide adequate testimony on their
efforts to purchase new supplies and on the state of the gas supply market as they
see it? Is there anything we can do in advance to make certain that the pipeline
company witnesses will cover the subject in depth?
On March 23. 1970. Wald addressed another memo to the General Counsel on the
subject "Propriety of Pre-Hearing Off-the-Record Meeting with AGA Witness in
AR69-1" (Exhibit X of Release). This is the memo which Anderson contends
"is worth quoting at length for it shows more vividly than any of the Nassikas
papers the Byzantine world of the FPC, where pro-consumer and pro-industry
factions are locked in combat." At page 2 in a footnote, Wald expressed his legal
opinion that attendance at the April 2 meeting by bureau or oflBce chiefs (or their
deputies) "would appear to violate the Commission's rule on ex parte communica-
tions." Section 1.4(d) of the Commission's Rules of Practice and Procedure (18
CFR 1.4(d) ) reads, in pertinent part, as follows :
(d) Ex parte communications. In order to avoid all possibilities of prejudice,
real or apparent, to the public interest and persons involved in proceedings pend-
ing before the Commission
(1) No person who is a party to, or his counsel, agent, or other person acting
on his behalf, and no interceder in, any on-the-record proceedings, shall submit
ex parte, off-the-record communications to any member of the Commission or of
his personal staff, to the hearing examiner, or to any employee participating in
the decision in such proceeding, regarding any matter at issue in any contested
on-the-record proceeding, except as authorized by law : and no Commissioner,
member of his personal staff, hearing examiner, or any employee participating in
the decision in such proceeding, shall request or entertain any such ex parte,
off-the-record communications.
Anderson was even stronger in his legal analysis of the Commission's Rules
when he wrote :
FPC rules clearly state that no staffer can meet of-the-record with a potential
witness who is directly involved in a disputed case. This rule is designed to
prevent the FPC from giving away its case or making any deals with the potent
industries it is supposed to regulate.
There is no rule at the FPC which prohibits members of the staff from con-
sulting with actual or potential non-staff witnesses in a proceeding unless such
consultation would not conform to the standards of ethical conduct required of
practitioners before the Courts of the United States. Such conduct is required
of all persons appearing before the Commission or the presiding officer by
§ 1.4(a) (3) of the Comission's Rules of Practice and Procedure (IS CFR
1.4(a)(3)). The Commission, through its staff, has the affirmative obligation
to inquire into and obtain all relevant facts in cases before it ; see e.g., Scenic
Hudson Preservation Conference v. F.P.C,. 354 F.2d 208, cert, denied 384 U.S.
941 (1965). There is nothing improper in securing non-staff testimony. The ex
parte rule, on the other hand, prohibits attempts by outsiders to communicate
with the Commission and certain other designated employees in an effort to
influence the decision of the Commission or the hearing examiner in a pending
case. This distinction was set out in the memo of March 25. 1970, from the General
Counsel to Wald (Exhibit O of Release) .
Those who read the Anderson articles may be mislead into believing that the
only function of the Commission's General Counsel is to advise tlie Commission
itself on pending decisions. Such is not the case. The General Counsel has a dual
role, as set forth in the job description for that position, (attachment 15) ap-
proved by the Civil Service Commission on September 20. 1960. In addition to
advising the Commission, the General Counsel is responsible for the Office of
General Counsel, which provides staff counsel in all Commission hearings. As the
job description states, the General Counsel is "responsible for planning, organiz-
ing, directing, and executing the work of the Office of General Counsel . . .
[which] . . . involves the preparation, trial, and argument of all the Commis-
sion's cases before hearing examiners, before the Commission and before State
and Federal Courts ..." This dual role of the General Counsel is in acordance
with the Administrative Procedure Act. which does not require a separation
of functions in proceedings "involving the validity or application of rates,
facilities, or practices of public utilities or carriers.'' 5 U.S.C. § 554(d) (2) (B)
The dual role of the present General Counsel's predecessor was challenged in
another tvpe of case in International Paper Co. v. F.P.C, 438 F.2d 1349 (CA2
698
1971). The Second Circuit there lield that issue to be waived, and a petition for
certiorari is pending before tlie Supreme Court.
In the memo of March 25, 1970 to AVald (Exhibit O of Release), tlie General
Counsel responded that he found Wald's objections to be wholly frivolous, but
that he nevertheless asked that the meeting be postponed for the sole reason
that Wald objected. On March 27, 1970, the Chief of the Bureau of Natural Gas
sent a memo cancelling the meeting (Exhibit P of Release) .
An uninformed reader of the Anderson articles would likely conclude that the
Commission's OfBce of Economics was opposed to any rate increase being granted
to the natural gas producers. For example, in his June 14 article, Anderson
states that "one of the FPC documents shows how the economic division had it
tried to persuade the FPC to uphold the consumers." In the June 23 article. An- |
derson states that the economists requested that their dissent be registered to a
statement in the staff brief "that the rate increases are necessary." To clarify
this misconception, two internal memoranda from Haskell Wald, Chief of the
Office of Economics, which are addressed to this point, are attached. His memo-
randum of August 26, 1969 to the Commission (attachment 16) states that "a
shortage of gas .supply is unmistakable evidence that the prevailing prices are
too low to maintain a supply-demand equilibrium." The recommendation is
therein made that "we believe that a price increase in the neighborhood of 5
cents per Mcf could be justified."
Additional elucidation of the position taken by the Commission's Office of
Economics is made in Haskell Wald's memorandum to Chairman Nassikas of
June 16, 1971 entitled "Policy Position of Office of Economics on Area Rate
Regulation" (attachment 17). Wald summarizes the position of his office as
follows :
The Washington Mei-ry-Go-Round columns by Jack Anderson on June 14 and
15 — which we must asume to be based in part on pirated FPC staff memoranda —
present an erroneous view of the differences between this Office and other parts
of the Commission on the conduct of the area rate proceedings. By quoting state-
ments out of context and misinterpreting the purpose of the internal memoranda,
the columns wrongly imply that this Office has denied the existence of a gas
shortage, has opposed higher rate ceilings, and has attempted to forestall Com-
mission action to raise the ceilings.
In summary, this Office's disagreements with OGC and BNG in the area rate
proceedings have focused on evidentiary i.ssues, not on rate level recommenda-
tions, while the Office's objections to the course being followed by the Commission
reflected our concern that the gas supply shortage was being aggravated by the
delays associated with the continuance of area-liy-area litigation in the Permian
format. In our view, the objective of protecting consimiers required prompt,
'once-and-for-air nationwide rate increases to assure the future adequacy of gas
supply. The Office's policy agenda rejected end-use control, except as a measure
of last resort, and favored, instead more flexible use of the supply-eliciting in-
centive of higher rates to restore supply-demand balance. Two of the Commis-
sion's actions during the past year — namely, the R-3S9A rulemaking and the
'sanctity of contract' legislative proposal — have been key elements in the Office's
policy program.
In summary, a dissection of these five articles appearing in the Jack Anderson
columns discloses that not one charge or accusation is supportable, but that
every direct allegation or innuendo is based upon misrepresentations, distortions,
fragmented quotations, or phrases taken out of their proper context.
Stephen A. Wakefield.
Federal Power Commission,
Washington, D.C., July 29, 1971.
Hon. Philip A. Hart,
Chairman, Suhcommittee on Antitrust and Monopoy,
U.S. Senate,
Washington, D.C.
Dear Mr. Chairman : This will reply to your letter of July 23, 1971, concern-
ing the release of intra-agency documents in the above-designated proceedings.
In accordance with your request I am enclosing copies of the "Order Concerning
Ex Parte Communication and Authorizing Release of Intra-Agency Documents"
issued July 2, 1971 ; the "Release of Intra-Agency Documents" also issued July
2, 1971, together with copies of the released documents ; and an example of the
699
letter used by the Chairman and the General Counsel in responding to Congres-
sional inquiries concerning the Jack Anderson columns.
In addition to the documents you have requested, I am also enclosing the Prin-
cipal Statement of Chairman John N. Nassikas, Appendices A through K of the
Principal Statement, the Summary Statement of Chairman Nassikas with the
attachment of July 21, 1971, analyzing the Jack Anderson columns of July 14, 15,
20, 23 and 26, and the Statement of Commissioner Lawrence J. O'Connor, Jr.,
presented at the hearings before the Subcommittee on Special Small Business
Problems, Select Committee on Small Business, of the House of Representatives,
on July 22, 1971, pertaining to the subject matter of your inquiry.
If we can be of further assistance, please advise.
Very truly yours,
Kenneth F. Plumb, Secretary.
Federal Power Commission
Before Commissioners : John N. Nassikas, Chairman : Lawrence J. O'Connor,
Jr. ; John A. Carver, Jr. ; Albert B. Brooke, Jr. ; Pinkney Walker.
July 2, 1971.
Area Rate Proceeding ( Southern Louisiana )
Docket Nos. AR61-2, et al. Docket No. AR69-1.
Order Concerning Ex Parte Communications and Authorizing Release of
Intra-Agenct Documents
The Commission takes note of certain articles appearing in the Washington
Post (and other newspapers, sometimes in different text) under the by-line of
Jack Anderson on June 14. 1.5, 20. 23, 26, 1971. Each Post article, which is at-
tached hereto as exhibits A, B. C. D, and E. respectively, may constitute an at-
tempt to influence the Commission's decision in the consolidated proceedings
which bear the docket numbers AR61-2 ; AR69-1, by off-the-record communica-
tions. This case was instituted by Commission order May 10, 1961 and will be
decided on the basis of the hearing record and pursuant to the Natural Gas Act
and the Administrative Procedure Act. The record in the case is presently before
the Commission. All parties have been given an opportunity to file evidence and
to cross-examine witnesses, to file briefs and reply briefs. By order of March 15,
1971, the Commission found that due and timely execution of its functions re-
quired the omission of the intermediate decision by the hearing examiner, pur-
suant to Section 1.30 of the Commission's Rules of Practice and Procedures (18
CFR 1.30), and the case is now pending before the Commission for decision.
Since the Anderson articles, exhibits A to E of this order, may constitute ex parte
communications within the prohibitions of Section 1.4(d) of the Commission's
Rules of Practice and Procedure (18 CFR 1.4(d) ), we have determined to apply
subparagraph 2 of that Section :
All written communications prohibited b.v subparagraph (1) of this paragraph
shall be delivered to the Secretary of the Commission who should place the
communications in the public files associated with the case, but separate from
the record material upon which the Commission can rely in reaching a decision.
II
Exhibits A to E refer to intra-agency memoranda which, under the Freedom of
Information Act, 5 U.S.C. Section 552(a) (5), are privileged. Under the exception
to the Freedom of Information Act, the Commission is not requiretl to release the
memoranda. However, since this may be an attempt to prejudice or to influence
the Commission's decisions in these proceedings, we find it to be in the public in-
terest that the Commission's right to invoke this exception be waived on this
occasion.
The Secretary, after consulting such other staff as he may deem necessary, is
authorized to designate such intra-agency memoranda which he can identify from
exhibits A to E of this order or related thereto which he will then place in the
public files associated with this case.
700
The Commission finds :
1. Exhibits A to E consisting of articles appearing in the Washington Post
and other newspapers on June 14, June 15, June 20, June 23. and June 26, 1971
may be ex parte, off-the-record communications by an interceder and an attempt
to prejudice the public interest and persons involved in this proceeding, within
the prohibitions of Section 1.4(d) of the Commission's Rules of Practice and
Procedure.
2. The public interest under the circumstances of this case requires that the
Commission waive its right, under the Freedom of Information Act. 5 U.S.C. Sec-
tion 552(d) (5), to maintain the confidentiality of the intra -agency memoranda
referred to in the above-mentioned articles by Jack Anderson, and certain related
memoranda.
The Commission orders :
1. The following communications shall be delivered to the Secretary of the
Commission who shall place the communications in public files associated with
these proceedings, but separate from the record material upon which the Com-
mission can rely in reaching decisions :
Exhibit A. The article by Jack Anderson api>earing in the Washington, Post
on Monday, June 14, 1971.
Exhibit B. The article by Jack Anderson appearing in the Washington Post
on. Tuesday, June 15, 1971.
Exhibit C. The article by Jack Anderson appearing in the Washington Post
on Sunday, June 20, 1971.
Exhibit D. The article by Jack Anderson appearing in the Washiyigton Post
on Wednesday, June 23, 1971.
Exhibit E. The article by Jack Anderson appearing in the Washington Post
on Saturday, June 26, 1971.
2. The Secretary is authorized to place the intra-agency memoranda which he
designates pursuant to Part II of this order in the public file in the consolidated
proceedings which bear the docket numbers AR61-2 ; AR69-1.
By the Commission.
Kenneth F. Plumb, Secretary.
Exhibit A
[From the Washington Post, June 14, 1971]
FPC Chief and Natubal-Gas Bate Rise
(By Jack Anderson )
Federal Power Commission Chairman John Nassikas, who is supposed to pro-
tect the housewives from excessive gas charges, is pu.shing instead to add a
whoi>ping $4 billion to their bills based on industry-supplied information that con-
flicts with a study by the commission staff.
He has gone so far as to fail to reveal certain evidence and to mislead .senators
about the basis of the $4 billion rate increa.se.
The evidence — in the form of studies, letters and memos — has been kept under
lock by Nassikas. Nevertheless, we have obtained copies of the.se documents.
Squeezing $4 billion out of the housewives, of course, is a complex operation.
But here are the facts as simply as we can present them :
The Federal Power Commission fixes the basic rates that millions of consumers
pay for natural gas. The gas producers always want to rai.se the rates, naturally,
to increase their profits. But the FPC was established to keep the public from
being gouged.
The producers are now seeking a rate increase on the gas they will draw from
a vast Louisiana reservoir. The higher rate, which would be tacked on to the
monthly bill of every householder who uses the gas, is supposed to be an incentive
to encourage the producers to sink more wells.
FIGURES DISPUTED
The producers, according to the FPC staff, have greatly understated the amount
of natural gas available under the Louisiana bed. Their figures make the risk and
expense of sinking new wells appear to be far higher than is true.
The American Gas Association, which .speaks for the producers, estimated one
part of the Louisiana reserves to be 24 trillion cubic feet. But the FPC's own
701
experts, after careful calculation, came up with a 34 trillion figure. The difference
of 10 trillion cubic feet would seriously weaken the producers' case for a rate
increase.
Nassikas not only accepted the producers' figures but failed to reveal estimates
that were damaging to the producers.
We know from copies of documents in our possession that the Federal Power
Chairman was fully informed as early as February 1970, by both his Economics
and Producers divisions that the industry's figures were suspect. Yet he failed to
reveal the discrepancy and sided with the gas producers in public statements.
Senate hearings and congressional correspondence.
The FPC's experts based their estimates, in part, upon figures furnished by the
pipeline companies. These figures were far higher than those submitted by the gas
producers. But Nassikas told Sen. Philip Hart (D-Mich.), the Senate antitrust
chairman, that the gas reserve figures from the producers and pii>eline operators
"closely parallel" each other. Nassikas knew from his own economic study, dated
Feb. 12, that the figures were "surprisingly wide apart."
One of the FPC documents shows how the economic division had tried to per-
suade the FPO to uphold the consumers. Failing this, an appeal was made to
Nassikas's general counsel, Gordon Gooch, to amend the legal brief to show that
the economics division had objected.
The economics oflBice wrote a strong, detailed dissent. It not only was excluded
from the legal brief but was put away in locked files. Thus, the economics experts
were denied even the dignity of dissent.
Then, over the protests of consumer advocates, Nassikas took the $4 billion
rate case away from a tough hearing examiner, Martin Rendelman. The American
Public Gas Association, which fights for the consumers, tells us this move was
unprecedented.
A formal ruling from the FPC is still pending. Only an outpouring of mail from
the housewives can save them from $4 billion in extra gas payments.
In coming days, we will quote more fully from the FPC documents. We will also
turn the documents over to appropriate congressional authorities for action.
Footnote : Nassikas refused to talk with us. Gordon Gooch, his chief counsel,
explained Nassikas cannot comment because the case is still pending. Gooch him-
self spoke emphatically with us for an hour, denying any suppression or wrong-
doing by Nassikas or other FPC oflBcials.
WASHINGTON WHIRL
Phony Savings — The Office of Education has boasted in a house organ about
reducing "the national debt by $169.45." This is the first royalty check from its
program of copyrighting contract studies. What the office didn't mention is that it
has spent tens of millions of tax dollars to pay for the studies, which will now be
copyrighted. Not only does the contractor get a piece of the royalties, but he also
collects greater profits from the original contracts.
Animal Cruelty — A dog peddler, who was caught nearly three months ago with
107 uncaged dogs and nine cats in his stuffy, unventilated truck, is still licensed
by the Agriculture Department to .ship animals across state lines. The depart-
ment's Animal Health Division, which is charged with enforcing federal animal
care laws, hasn't bothered to revoke the license of North Carolina dog dealer
John G. Seward. This is typical, say insiders, on the department's lackadaisical
enforcement.
©1971, Bell-McClure Syndicate, Inc.
****♦♦•
Exhibit B
[From the Washington Post, June 15, 1971]
FPC Staff Disputed Industry Data
(By Jack Anderson)
We have detailed how Federal Power Commission Cliairman John Nassikas
failed to reveal evidence and misled Congress on a proposed $4 billion rate in-
crease for the natural gas producers.
This is a stupendous sum. which would be squeezed out of the customers in
the form of higher monthly gas payments.
702
We have pieced together the story from a sheaf of memos and studies kept
under lock at the FPC. Through a maze of intermediaries, however, we have ob-
tained the papers.
It would take dozens of columns to publish them all, with their legal pro-
fundities and complexities. But here is the outline of our case against Nassikas.
The papers reveal that Nassikas ignored the studies of his own economists
and relied upon the gas industr.v's information. The FPC, of course, is supposed
to protect the public against the depredations of the gas barons. Yet Nassikas,
speaking for the FPC, quoted industry figures to senators — figures that had been
contradicted by the FPC's economists.
These figures had to do with the Louisiana gas reserves, which eventually will
supply half the nation. The FPC's chief economist, Haskell Wald found the
industry's figures to be dubious.
On Feb. 12, 1970, Wald wrote a personal memo to Nassiskas, warning that two
crucial sets of industry data on gas reserves "can hardlv be said to match each
other."
He could see "no way of corroborating" some of the industry data. The FPC's
own auditing, he said, "tells us nothing about the reliability" of the questionable
information.
The industry's estimates, which should l)e consistent, show "surprising large
differences" with many specific figures "surprisingly wide apart," he wrote.
The following day, Nassiskas received another personal memo from Edward
McManus. chief of the FPC's producer division, who warned that "the reliability
of gas reserve estimates (by the industry) for any specific reservoir or field
initially is suspect."
On Feb. 19, Wald sent an even blunter memo to Gordon Gooch, whom Nassikas
had picked to be the FPC's chief counsel.
"We are concerned over the apparent lack of adequate checks on the statistical
reporting operations," wrote Wald. He called attention to an industry error of
1.3 trillion cubic feet.
At this point, Nassikas and Gooch should have ordered an immediate, massive
FPC staff investigation. Instead, they accepted the gas producers' figures.
Senate Antitrust Chairman Philip Hart (D-Mich.) got wind of the matter. In
a Sept. 1 letter. Hart asked Nassikas explicitly about the information furnished
by the natural gas industry.
In Nassikas' reply, dated Sept. 15, he said the two crucial sets of data "closely
parallel" each other. To buttress this statement, he added : "Tlie staff has also
made specialized reports and conducted investigations."
This made it appear that the staff backed up the gas industry's figures when,
in fact, the staff memos said exactly the opposite.
On Nov. 12, Nassikas again cited the industry figures at a Senate hearing be-
fore the Senate Fuels Subcommittee.
Chairman Frank Moss (D-Utah) asked : "You do have to rely ... on industry
figures?"
"Yes, but not entirely." said Nassikas. Later, he adder! that "there is substan-
tial reliance but ... it is not nonanalytical reliance." In its context, the state-
ment gave the impression that the FPC's "analytical" studies, supported the |
industry's figures. The opposite, of course, was true.
The next day, Wald jolted Nassikas with another memo disclosing that the
FPC's studies and the industry's figures were out of kilter ]»y a startling 42
per cent.
Wald followed this up with a strong memo to Gooch's office on Dec. 1 reiterat-
ing that the evidence indicated errors up to 40 per cent in some of the industry
data.
Eight days later, both Nassikas and Gooch again used the industry's figures at
a Senate hearing chair«d by Sen. Lee Metcalf (D-Mont.), an expert on the sub-
ject. Gooch testified that the industry's figiires were "reasonably reliable."
Footnote : As we previously reported. Nassikas refused to discuss the $4 billion
increase with us on the grounds that the case is still before him. Gooch has
denied any wrongdoings by Nassikas or himself.
Sen. Gaylord Nelson (D-Wis.) is introducing a bill this week to force out-
board motor firms to install anti-pollution devices. The motors dump millions
of gallons of gas and oil in to U.S. lakes and rivers each year. The bill would
give the Environmental Protection Agency power to set standards for both old
and new motors.
703
Exhibit C
Navy Finds Flaws in Lockheed Ships
The great Lockheed conglomerate, whose aircraft operations have become a
front-page scandal, has also had unpublicized troubles with its shipbuilding. One
piece of machinery aboard a Locklieed ship, according to the Navy Inspector's
confidential report, was held together with baling wire.
The embattled corporation is building five new destroyers for the Navy in
Seattle. Navy inspectors found enough problems in the first Lockheed ship, the
Rathburne, to fill a 148-page, single-spaced "Acceptance Trial Deficiency List."
"Lube oil leaks under turbine are cooking on turbine drain lines, possible
fire hazard," is just one of the hundreds of faults found on the Rathburne.
A few others : "unreliable" weapons systems, malfunctioning radar, steering
system breakdowns, hot pipes that lack guards "to protect ship's personnel from
burn injuries," faulty firefighting gear. The goofs have now been laboriously
corrected.
The second Lockheed destroyer, the Reasoner, also was plagued with prob-
lems. These included the machinery fastened by baling wire, numerous oil leaks,
faulty welding and crumbling fire bricks in the boiler.
Only the last-minute intervention by an alert admiral in Washington held up
the Reasoner's acceptance trials and prevented a possible disaster at sea.
Rear Adm. Nathan Sonenshein, 3.000 miles away from Seattle, studies his in-
spectors' pre-trial reports before the Reasoner was supposed to i)ut to sea. He
noted that fuel drips had been detected near the boilers and insulation was miss-
ing on hot steam pipes.
Lockheed put off the trials until the safety-related failures have been fixed
to the admiral's satisfaction. Sonenshein says the Reasoner is now shipshape and
should be accepted by the Navy this month.
GAS SCANDAL
We have reported how the Federal Power Commission, under the prod of
Chairman John Nassikas, has suppressed its own figures and adopted the gas
industry's figures to justify a .$4 billion rate increase.
This staggering amount would be added to the monthly bills of the gas users.
The industry's request for higher rates is based upon gas reserve figures that
FPC economists have warned may be off as much as 40 percent. Yet their warn-
ings have been hushed up to keep the consumers from finding out how badly they
would be bilked.
The sheer magnitude of the figures makes the story diflicult to comprehend, but
the documents Nassikas has tried to suppress show all too clearly that he has been
scheming against the consumers.
As we have reported, the gas producers are trying to wangle a rate increase
from the FPC for the natural gas they draw out of a vast Louisiana reservoir.
At issue are trillions of cubic feet of Louisiana gas reserves, which eventually
will supply half the nation.
To support their case for higher rates, the gas producers have furnished the
FPC with figures which the FPC's economics chief, Haskell Wald, has challenged.
He expressed his concern in a confidential memo, dated Dec. 1, 1970, to the legal
office.
Like all bureaucratic communications, the memo was worded cautiously. Wald
knew his boss, the fiery-tempered Nassikas, was pushing to raise the rates.
The figures provided by the American Gas Association, representing the pro-
ducers, might be helpful on broad trends, Wald suggested tactfully. But the in-
dustry figures were highly questionable, he cautioned, for assessing the need for
a rate increase.
Nassikas' general counsel, Gordon Gooch, completely ignored Wald's warnings
and prepared an FPC brief so larded with pro-gas arguments that it is incredible
it could have come from a federal regulatory agency established to protect the
consumers.
Instead of condemning the industry's misleading figures, Gooch actually cited
them as evidence that the gas producers deserve a rate increase.
Footnote : Gooch told us all sides presented their arguments at the hearings
and all elements of the FPC were heeded in the preparation of his briefs. But
he acknowledged the final wording, which omitted Wald's views, was his own.
Wald, when we asked him about his memos, said : "You have no business having
them. All that is an internal matter." Nassikas himself has refused to speak to
us, claiming he can't comment while the case is before him.
704
Exhibit D
[From the Washington Post, June 23, 1971]
May 14 FPC Gas Memo Most Damning
(By Jack Anderson)
Of all the suppressed documents dealing with the attempt to add $4 billion to
the consumers' gas bills, the most damning is a May 14 memo written by Federal
Power Commission economists.
They flatly refused to go along with Chairman John Nassikas' plan to grant
$4 billion in rate increases to Gulf. Texaco. Humble. Sunoco. Shell. Mobil. Phil-
lips and other gas giants with holdings in the vast Louisiana natural gas fields.
Nassikas suppressed the economists' objections, ignored their figures and ac-
cepted the self-serving figures of the gas industry. We have already reported how
he also withheld the facts from Congress and the public.
The case for raising rates was made by Nassikas' general counsel, Gordon
Gooch, who drafte<l a lengthy legal brief justifying the gigantic hornswoggle.
The OflSce of Economics took vigorous exception to Gooch's figures, facts and
arguments. Not only were ringing dissents made, but the economists demanded
that their disagreement be w'ritten into the brief.
Instead, the dissenting memo was locked up with the other Nassikas papers,
which reveal how the Federal Power Chairman has promoted gas interests in-
stead of the public interest he was sworn to uphold.
Gooch contended in his legal brief, for instance, that an FPC "field audit
served to verify the accuracy" of industry figures on natural gas reserves. The
economists dissented.
Gooch also claimed that "capital is now and will continue to be in short supply"
to "overcome the current gas supply crisis." Tliis was a key argument for giving
the gas boys what they wanted. The economists vigorously disagreed.
Gooch argued that granting the rate would automatically "make the drilling
for gas . . . more attractive" to the gas companies. The economists objected.
Gooch's brief also made the point that "uncommitted proved reserve held by
producers is extremely small" and, therefore, that the rate increases are nec-
essary. Register our dissent, said the economists.
Dissents were entered against Gooch's pro-industry findings on the cost of
wells, production, operations, exploration, and royalties. Indeed, the OflBce of
Economics refused to go along with 13 consecutive pages of Gooch's brief, the
heart of his argument for tlie $4 billion boondoggle.
In a word, the economists took exception almost to the entire Gooch case.
Yet Gooch buried the memo deep in his files and submitted liis brief to the
commissioners with no hint that the FPC's l)est economists had raised a howl
against the $4 billion giveaway.
CAB REPAIK kickback
Most auto body shops would think twice before committing to paper a kick-
back arrangement with insurance agents who send them clients' cars to be
repaired.
No such modesty possessed Larry Brotman. president of Brotman Autobody
Center, a Los Angeles repair service since 1935. Brotman gleaned the names of
100 insurance men from the telephone book and wrote them that "the big idea
behind this letter is to tell you that I want to work with you.
"I have the pleasure of paying the rent for quite a few insurance men who refer
their customers to me. You will receive as much as .$80 for any referral you may
make to me."
To further enhance the kickback scheme. Brotman agreed to provide the in-
surance clients with free cars during the repair work.
We asked Brotman about his brazen plan, and he was as frank as his letter.
Yes, he said, "perhaps it was" unethical. But he said he was careful to avoid
offering the kickback to insurance companies themselves, because this might
have violated the law.
"These are kickbacks to (individual) agents," he explained. However, Brot-
man said, not a single insurance man had accepted a kickback and he had gotten
only $.390 in business of his 100 letters.
Brotman said his advertising agency put him up to tlie letter writing. But. he
added ruefully, "It didn't work at all."
705
TOTAL RECALL
The Pentagon, wary of further leaks of the top secret documents on Vietnam
which were front-paged by the New York Times, is recalling the 15 volumes of
the documents knov\7i to exist. Actually, hints of the document's existence have
been known to millions of Americans for months. PARADE'S Lloyd Shearer first
revealed that the controversial Vietnam volumes were being hidden away at the
Pentagon. On Oct. 25, 1970, he wrote that "several months before Lyndon Johnson
oozed him out of the Pentagon, (former Defense Secretary Robert McNamara)
assigned a task force under Les Gelb to undertake the most thorough, in-depth
study of the war.
"There are relatively few copies in existence,'' Shearer wrote. "There are no
plans to make it public."
Exhibit E
[From the Washington Post, June 26, 1971]
Secret Gas Rate Session Is Thwarted
As part of a Federal Power Commission effort to ramrod through a $4 billion
gas rate increase, FPC oflBcials set up an illegal, secret meeting with an Industry
spokesman only weeks before his case was to be heard.
The clandestine affair was thwarted by a pro-consumer FPC oflBcial who
charged that the secret session would violate FPC regiilations and could lead to
a sellout to the natural gas industry.
We learned of the meeting from a sheaf of confidential documents which
were slipped to us so that we might inform the public of the costly hornswaggle
which would affect half the United States.
The plot to sock the American housewife with a shopping gas rate increase
is a complicated affair, as we explained in earlier columns. What it boils down
to is this :
FPC Chairman John Xassikas and his pro-industry underlings sought to
grant $4 billion worth of increases by using gas industry figures which they had
already been told were unreliable. These figures — disputed by Nassikas' own
economics staff — attempt to show that the industry must get huge rate increases
if it is to develop new gas reserves.
FPC rules clearly state that no staffer can meet off-the-record with a potential
witness who is directly involved in a disputed case. This rule is designed to
prevent the FPC from giving away its ease or making any deals with the potent
industries it is supposed to regulate.
Yet Tom Joyce, head of the Bureau of Natural Gas, set up a closed-door
meeting between the FPC top brass and John Jacobs — the persuasive chairman
of the Gas Reserves Committee of the American Gas Association.
The conference was expressly designed to exclude consumer advocates like
the American Public Gas Association, who were also parties to the rate cases.
In a memo dated March 18, 1970, FPC General Counsel Gordon Gooch, the
very man charged with enforcing the commission's rules, gave the meeting his
personal approval — even though John Jacobs was scheduled to testify on the
case on May 1, 1970.
On March 23, a few days before Jacobs was to huddle with his supposed
regulators, an FPC oflScial revolted.
Haskell Wald, head of the FPC Office of Economics and long a fighter for the
consumer, outlined his apprehension in a confidential memorandum to General
Counsel Gooch.
Wald's memo is worth quoting at length for it shows more vividly than any
of the Nassikas papers the Byzantine world of the FPC, where pro-consumers
and pro-industry factions are locked in combat.
"It will be a closed meeting," Wald wrote. "There will be no transcript or
official minutes and there will not even be a public announcement that it is
being held."
Some quarters already viewed the industry figures with "intense suspicion,"
Wald said. He warned of the "danger of criticism of word of the meeting and
the subjects discussed reaches outsiders."
Jacobs would be "clued in" by the meeting on what his te.stimony should be
and might "also gather suggestions on how he should shape the responses on
cross-examination. No other witness will be given this advantage."
706
Wald frankly suggested it might well "create an impression of collusion."
Finally, he said, such a meeting validated both written rules and "definite instruc-
tions" and therefore should be called off.
Wald's timely protest succeeded. The meeting was canceled a few days before
it was to be held.
Gooch asserted to my associate Les Whitten that he was "responsible for
calling it off." He did not mention Wald's protest or his own earlier approval of
the meeting. Nassikas has declined comment. Jacobs was in Morocco and could
not be reached.
Footnote: Rep. Neal Smith (D-Iowa), chairman of the House Small Business
Special Problems subcommittee, is calling Nassikas in July to testify on our
revelations. Our documents, said Smith, cast doubt on the FPC's figures. Smith
said it appeared that small businessmen, housewives and the poor would be
victimized by $4 billion increase.
BRAZILIAN SUGAR PLUM
We told earlier this month how millions of dollars in U.S. sugar quotas
were handed to racist South Africa despite congressional strictures against buy-
ing sugar from nations that discriminate against American citizens.
We have now learned that the Brazilian dictatorship will receive a 519.909-ton
sugar quota worth millions depsite a congressional edict from the House Agri-
culture Committee barring quotas to countries where the benefits don't sift
down to the people who grow the sugar.
Instead, Brazil's dictatorship sees to it that the sugar oligarchs in the north-
east plantations get the sugar cash from the U.S. Few of the benefits reach the
workers.
Sen. Fred Harris (D-Okla.), however, has been working to curtail giveaways
to countries where the American bounty never reaches the workers in the
field.
Federal Power Commission — Release of Intra-Agency Documents
July 2. 1971.
(Area Rate Proceeding (Southern Louisiana)) [Docket Nos. AR61-2, et al
Docket No. AR69-1].
Pursiuint to the "Order Concerning Ex Parte Communications and Authorizing
Release of Intra-Agency Documents" and the authority which has been delegated
to me thereunder, I designate the following intra-agency memoranda to be placed
m the public file in the consolidated proceedings which bear the docket numbers
AR61-2andAR69^1:
Exhibit A. Memorandum to Chairman Nassikas from Chief, OflSce of Economics
(Wald), dated February 12, 1971, subject: Comparison of Form 15 and AGA
Statistics for Gas Reserves.
Exhibit B. Memorandum to Chairman Nassikas from Producer Division Bu-
reau of Natural Gas (McManus) dated Februarv 13, 1970, Reliability of Proven
Reserve Estimates.
Exhibit C. Memorandum to the General Counsel (Gooch) from Chief, Office of
Economics (Wald) dated February 19. 1970. subject: Questions regarding AGA
reserves data.
Exhibit D. Memorandum to Commission from Chief Econometrician, Office of
Economics (Khazzoom) dated February 19, 1970. subject: Issues in Gas Rate
Determination (referred to in item C, supra ) .
Exhibit E. Memorandum to Commission and Office Heads from Chief. Bureau
of Natural Gas (Joyce) subject: Meeting on Gas Reserves Estimation >rethods.
Exhibit F. Memorandum to Chief, Bureau of Natural Gas from Chief, Ofl^ce of
Economics dated March 11, 1970, Meeting with AGA Reserves Committee.
Exhibit G. Memorandum to Commission from General Counsel (Gooch) dated
March 12, 1970, subject : Mr. Joyce's meeting on Gas reserves Estimation Methods
with Mr. Jacobs.
Exhibit H. Memorandum to Mr. Mattingly. Oflfice of General Counsel from
Chief, Office of Economics (Wald) dated March 13, 1970, subject: Comments on
Questions for AGA, copy to Gooch.
Exhibit I. Memorandum to Mr. Mattingly from F. W. Lawrence dated March
16, 1970, questions for Mr. Jacobs of AGA.
707
Exhibit J. Memorandum to Mr. Mattiiigly from Assistant Chief, Office of Eco-
nomics (t>chwartz) dated March 16, 1970, Comments Concerning Questions for
Mr. Jacobs of AGA.
Exhibit K. Memorandum to Mr. Wald from Mr. Gooch dated March IS, 1970.
Exliibit L. Memorandum to Mr. Gooch from Mr. Wald dated March 18, 1970.
Exhibit M. Memorandum to General Counsel (Gooch) from Chief, Office of
Economics dated March 19, 1970, Miscellaneous Observations on Arrangements for
AGA Witness on Reserves Estimates.
Exhibit N. Memorandum to General Counsel (Gooch) from Chief, Office of
Economics (Wald) dated March 23, 1970 subject: Propriety of Pre-hearing Off-
the-Record Meeting with AGA Witness in AR69-1.
Exhibit O. Memorandum to Mr. Wald from Mr. Gooch dated March 25, 1970.
Exhibit X. Memorandum to Chief, Office of Economics (Wald) from General
Counsel (Gooch) dated March 26, 1971, subject: Staff's Brief, AR61-2 and
AR69-1 : relating to memo dated March 23, 1971.
Exhibit Y. Memorandum to General Counsel (Gooch) from Chief, Office of
Economics (Wald) dated March 26, 1971, subject: Relating to General Counsel's
memo of March 26, 1971.
Exhibit Z. Memorandum to Mr. Mattingly from Assistant Chief, Office of Eco-
nomics ( Schwartz) dated April 2, 1971, subject : Review of Draft Brief in AR69-1.
Exhilnt AA. Memorandum to David Schwartz from Richard V. Mattingly dated
April 9. 1971, subject : Staff Brief in AR61-2 and AR69-1.
Exhibit BB. Memorandum to Mr. Mattingly from Chief, Office of Economics
(Wald) dated April 20, 1971, Comment on Initial Staff Brief, AR61-2 and
AR69-1.
Exhibit CC. Memorandum to Mr. Mattingly from Office of Economics dated
April 20, 1971, Response to Objections to the Econometric Model.
Exhibit DD. Memorandum to Phyllis H. Kline from Mr. Mattingly dated April
21, 1971, subject ; the Econometric Model.
Exhibit EE. Memorandum to Chief, Office of Economics (Wald) from Mr,
Mattingly dated April 21, 1971, subject: Southern Louisiana Brief.
Exhibit FF. Memorandum to Mr. Mattingly from Assistant Chief, Office of
Economics (Schwartz) dated April 30, 1971, Comments Concerning AR69-1 Reply
Brief.
Exhibit GG. Memorandum to Messrs. Gooch and Joyce from Assistant Chief,
Office of Economics (Schwartz) dated May 14, 1971, transmitting alternatives
A, B, and C to errata of reply brief.
Kenneth F. Plumb, Secretary.
Exhibit GG
May 14, 1971.
Messrs. Gordon Gooch, Thomas J. Joyce,
Assistant Chief, Office of Economics
Attached are the alternatives which were prepared in conformance with our
discussion last evening with the Executive Director. The explanation provided
on alternatives A and B are self-explanatory. Alternative C relates to a proposed
errata going to the initial brief which I feel is necessary if alternative B (which
represents the OGC-BNG position) is adopted.
David S. Schwartz.
Attachment.
Alternative A
This alternative is premised upon the OEC position that there be equal treat-
ment of air Offices and Bureaus where there is a difference of position on variou.s
issues.
The following changes should be added to the proposed errata to Staff Replv
Brief in AR61-2, et al. and AR69-1.
3. A footnote should be added immediately following the heading at the top
of page 39 to read as follows :
" ^ The views expressed at pages 39-41 of this brief dealing with the reliability
of cost estimates are the views of the Office of the General Counsel and the Bureau
of Natural Gas."
4. A footnote should be added immediately following the heading at the top
of page 42 to read as follows :
" ^ The views expressed at pages 42-43 of this brief dealing with new gas well
gas cost issues are the views of the Office of the General Counsel and the Bureau
of Natural Gas."
708
Alternative B
This alternative is premised upon the OGC-BNG position tliat tliese Bureaus
represent the staff view and therefore OEC sliould except to any material that
they do not agree with.
The following changes should be added to the proposed errata to Staff Reply
Brief in AR61-2, et al. and AR69-1.
3. A footnote should be added immediately following the heading at the top
of page 39 to read as follows :
" ^ The Office of Economics excepts to the views expressed at i>ages 39-41 of
this brief dealing with the reliability of cost estimates."
4. A footnote should be added immediately following the heading at the top
of page 42 to read as follows :
" ^ The Office of Economies excepts to the views expressed at pages 42-48 of
this brief dealing with new gas well gas cost issues.
Alternative C
Before the Federal Power Commission
Area Rate Proceedings (Southern Louisiana Area) [Docket Nos. AR61-2. et al.
and AR69-1]
Errata to Staff Initial Brief
The following changes should be made in the initial brief submitted l)y the
staff in these consolidated proceedings.
1. The Office of Economics excepts to the following sentence on page 10 con-
tained in the section of the brief dealing with the gas supply situation :
"The staff's field audit served to verify the accuracy of the uncommitted re-
serves volumes as initially reported. ( TR 5201-02) ."
2. The Office of Economics excepts to the following sentences on page 19 con-
tained in the section of the brief dealing with the availability of resources :
"The evidence in the present record indicates that capital is now and will
continue to be in short supply in relation to the capital requirements necessary to
overcome the current gas supply crisis. (TR 1465, 6771). * * * The need for
internally generated funds to finance an increased program of exploration must
therefore be considered in the establishment of rates for gas already dedicated
luider long-term contracts."
3. The Office of Economics excepts to the following sentence on page 20 in the
staff brief dealing with the response of gas supply to price :
"It is also contrary to the facts, which show that the volume of uncommitted
proved reserves held by producers is extremely small."
4. The Office of Economics excepts to the following sentences on pages 23 and
24 in the section of the staff brief dealing with the response of gas supply to price :
"Price increases for gas will obviously make the drilling for gas more profitable
and therefore more attractive.*** If the requirements for wildcat acreage,
equipment, labor, and capital are met, then an increase in gas price can be
expected to have a direct, positive effect on the exploration effort, and the
greater the price increase the greater will be the increase in the exploration ef-
fort, until the point of full resource utilization is reached. Beyond this point
price increases will have little effect. ( Ibid. ) ."
5. A footnote should be added immediately following the heading at the top
of page 61 to read as follows :
"^ The Office of Economics excepts to the views expressed at pages 61-64 deal-
ing with the American Gas As.sociation reserves data."
6. A footnote should be added immediately following the heading at the top of
page 66 to read as follows :
"^ The Office of Economics excepts to the views expressed at pages 66-80
dealing with the recent nationwide cost of nonassociated gas."
7. The Office of Economics excepts to the follf»wing sentences on page 95 deal-
ing with the elimination of offshore price differentials :
"As noted earlier, the industry paid approximately $850 million for offshore
leases in December 1970. The cost of carrying the investment in these leases for
one year ,at 13 percent is $110 million. If this total cost is spread over the current
offshore production volume of about 1.4 TCF, the unit cost result is almost 8
cents per Mcf. It is true that some leases involved will undoubtedly be trans-
709
ferred to producing accounts or written off during the first year. Nevertheless,
this provides a striking measure of the cost of doing business in the offshore
area.
"From the standpoint of both risk and cost, the evidence of record fully jus-
tifies elimination of offshore price differentials."
Resijectfully submitted.
Richard Y. Mattingly, Jr.,
Commission Staff Counsel.
Exhibit FF
April 30, 1971.
Memorandum to : Richard V. Mattingly, Jr., Office of the General Counsel.
From : Assistant Chief, Oflace of Economics.
Subject : Comments Concerning AR69-1 Reply Brief.
I have reviewed the proposed Reply Brief in AR69-1 and discern that there
are two areas which are directly related to economic analysis. I vpill address my-
self to these areas with the hope that you will objectively evaluate my com-
ments and modify the presentation.
In the section entitled, "Supply Demand Issues." there is a subsection (page
4) designated as "III. Interest Rates Do Not Account for the Gas Shortage."
As you are aware (See memo of April 12. 1971 pertaining to Initial Brief
in AR69-1. ), I do not feel that you have accurately assessed the impact of
high interest rates on the cost of money and the profitability of developing and
exploring for marginal prospects. In addition, I believe that discussion on pages
4-6 is contradicted by the testimony of Witness Stalon (OEC) w4th respect to
the impact of interest rates on the cost of holding gas in the ground and the
effects on the producers' incentives to explore and drill for new reserves.
As Stalon indicated it is an elementary principle of economics that where
we have a positive interest rate a dollar received today is worth more than a
dollar received in the future. Therefore if we utilize a 10% rate of interest this
would mean that the present market value of a dollar to be received one year
from today will be approximately 91^ and two years from today about 82<*.
The present value of money to be received in the future depends on the rate of
interest which is used for discounting the future payments. The higher the
interest rate, the greater the likelihood that producers will defer decisions to
develop potential supplies or undertake new exploratory effort. Higher interest
rates also penalize any withholding of reserves from the market.
In addition, it is diflicult for me to understand the nature of your resistance
in acknowledging the impact of high interest rates on the gas supply picture,
in light of the fact that high nterest rates as a cost of capital component indicate
the need for higher prices. This, I believe, is symmetrically related to the general
thesis that you have been propounding concerning the inadequacies of prices
as a causal factor for the present unavailability of supply.
In light of these factors, I slggest you modify the above-mentioned subsection
along the lines of the language suggested below. I would change the heading to
read as follows : "III. The Gas Shortage Cannot Be Primarily Attributed to the
High Rate of Interest." I would delete the first two sentences and substitute
the following material : "MGD witness Paul Davidson stressed the importance of
rising interest rates as a factor influencing the unavailability of gas in recent
years. Unfortunately, he did not place the significance of high interest rates in a
proper perspective. Obviously, since high interest rates result in a higher cost
for holding gas, it would appear that this would run contrary to his contention
that supplies are being held off the market because of anticipated higher ceiling
prices. In addition, the higher interest rates provide a disincentive to withhold
gas from the market. Lastly, higher interest rates associated vrith a higher cost
of capital require higher gas prices because interest is a cost component to be
considered in setting ceiling prices."
I wo'Ud move the material following the first two sentences which I suggest you
delete (going to the top of page 5) dealing with other factors involved in eco-
nomic rent to follow the discussion of interest rates. Picking up on the first full
paragraph on page 5, 1 would modify that sentence to read : "With respect to
the specific issue of interest rates, it is obvious that Mr. Davidson failed to di-
rectly and precisely correlate the level of interest rate and its specific impact on
gas supply." Then. I would follow up with the following language : "Interest rates
should be viewed as one of the relevant factors involved in costs, along with the
availability of resources including capital, and the relative profitability of al-
710
ternative investment opportunities, as it affects the price required to bring forth
necessary supplies."
I would eliminate the discussion starting with the first full sentence on page
6, "Consequently the effect ..." until the conclusion of the section. These sen-
tences erroneously convey the impression that high interest rates do not play an
important role in development and exploratory activities.
In the section entitled, "The Reliability of Cost Estimates," there is a discus-
sion of the producers' contention that it is difficult to determine unit costs of gas
because it is a product produced under conditions of joint cost. My concern is
that there appears to be a lack of comprehension concerning the distinction
between joint and common costs. The discussion that follows distinguishing joint
and common costs is provided to help you modify the material on the bottom
of page 1 going over to page 2 of the above cited section.
Products produced under conditions of joint costs, such as beef and hides or
cotton fiber and cotton seed, are produced in more or less fixed proportions.
Therefore, you cannot vary the amount of one of the products without producing
a corresponding proportion of the other product. Frm the standpoint of cost
analysis, it can be seen that a joint cost is truely an unallocable cost.
Goods produced under conditions of common cost can be varied in amount even
though the production process is indigeneous to both. Your discussion with regard
to wellhead production of gas in contrast to the production of goods by "many
major American industrial corporations" should be developed along the lines that
I have suggested. What I think you are trying to say is that the many diverse prod-
ucts utilizing raw materials of varying amounts re.sult in the production of
goods which in fact share in common costs such as overhead costs and the capital
investment in plant and equipment. In a multiproduct firm it is unnecessary to
allocate common costs, since it is only necessary to maximize the excess of sales
revenue from each product over the directly assignable costs of each product
Associated natural gas in fact is produced under conditions of joint costs similar
to the examples given above (meat and hides) and is distinguishable from the
situation involving common costs.
As I read your analysis there appears to be confusion on these points and I
think it behooves the staff to provide a clear and accurate analysis of these very
important economic concepts. It may be advisable to omit any reference to the
nature of costing and pricing in American industry generally in light of the
difficulties associated with generalizations of ths nature. I would be glad to
discuss any of these matters with you prior to your finalization of the brief.
David S. Schwartz.
Exhibit EE
April 21, 1971.
Memorandum to : Chief. Office of Economics.
From : Richard Mattingly.
Subject : Southern Louisiana Brief.
Thank you for your recent memorandum concerning the staff brief in AR69-1.
While I do not agree with you on the conclusions to be drawn from the December,
1970 offshore lease sale, I can nevertheless appreciate your position. I feel sure
that had you brought this to my attention earlier an accommodation could have
been reached.
As you may remember, you returned your copy of the AR69-1 draft brief to me
without comment, and further indicated you did not wish to participate in the
draft review procedures. Your instructions were to coordinate preparation of
the brief with Dave Schwartz of your office. This procedure was followed. I had
a number of discussions with Dave and with Roy Nierenberg of OGC. As a result
of these discussions a number of substantive changes were made in the brief
at their request, and it is my impres.sion that virtually all disagreements were
resolved to their satisfaction. However neither you. nor Dave mentioned the
problem which you raise in your memorandum, and I was thus totallv unaware
of your disagreement.
Every effort should be made to resolve issues such as this at the staff level
prior to issuance of the brief. Criticisms such as yours are essentially destructive
rather than constructive when, as here, they are made after the fact. I assure
you that I will continue to make every effort to accede to the susrgestions ad-
vanced by your office on any issue, and I hope in the future anv questions or dis-
agreements will be brought to my attention in time to permit their resolution to
the satisfaction of all concerned.
711
Exhibit DD
April 21, 1971.
Memorandum to : Phyllis H. Kline.
From : Richard Mattingly.
Subject : The Econometric Model.
Thank you for vour recent memorandum concerning the econometric model.
As suggested I have reviewed pages 4.5-4S of the brief as well as Exhibit No. 46
itself, in an effort to gain further insight into the critical issue of whether, how,
and to what extent the model makes provision for existing or anticipated cost
and profit levels in estimating the response of gas supply to price. This review
serves to further confirm my prior conclusion that Dr. Khazzoom did not con-
sider costs or profits, past, present or future, in any meaningful way.
Reference to page 45 of the brief indicates the analysis "implicitly considers
costs", and "implicitly includes provision for profits". The implicit nature of
the cost and profit analysis is emphasized again at page 48. In my opinion an
"implicit" analysis of costs and profits by reference to prices or price trends is
not sufficient. Specifically, historical ceiling price data do not indicate whether
the sales at those prices were profitable, or if profitable, how profitable. Like-
wise, it is impossible to determine future profitability at any assumed price level
without a related assumption as to anticipated cost. Profit is the primary incen-
tive factor involved, and unless and until it is quantified for past periods and
estimated for the future, its effect on the producing industry cannot be reliably
predicted. In order to determine profit, it is necessary in turn to determine cost,
since it is the difference between price and cost which determines profit or loss.
These comparisons must in my view be explicit rather than implicit. This is
especially true where there has been a substantial lapse of time since the last
price increases. Such is the situation with respect to ceiling prices for natural
gas, which have been more or less declining since 1960. It is probable that find-
ing and producing costs have increased substantially during the period since 1960,
and even substantial price increases at the present time may well go primarily
to cover increased costs rather than contribute to increased producer profit. How-
ever, if an additional price increase were allowed a year later, the effect on
producer profit and supply resijonse could be expected to be much more positive,
since cost increases would ordinarily be minimal over a one year period, and
the bulk of the second price increase consequently would contribute primarily to-
ward increased producer profit. Thus, the greater the period between price in-
creases the greater the need to quantify costs and profits, and conversely the
shorter the i)eriod between price increases the less the need to quantify costs and
profits.
Probably more significant than the failure to adequately consider costs and
profits is the lack of an adequate data base necessary to support the desired
projections of supply response. Assuming future supply response can be pre-
dicted by reference to historical experience, it is nevertheless clear that judged
by any reasonable standard the available historical ceiling price data are totally
inadequate for the purpo.?e. The data utilized by Dr. Khazzoom, as set forth at
Table A— 1 of Exhibit No. 46, indicate clearly that gas ceiling prices for all areas
have generally declined or at best remained static during the entire period
1961-1969 as a result of Commission regulation through its Policy Statement No.
61-1, "in-line" proceedings, company-wide settlements, and area rate proceedings.
As a result, these historical ceiling price data cannot be expected to provide a
reliable basis fqr determining the response of gas supply to price increases,
particularly increases of several cents per Mcf or even six cents per Mcf as
recommended under the terms of the settlement proposal. This alone would
seem to render the model fatally defective.
It might also be noted that the model does not measure the impact on supply
of price increases for flowing gas. In my opinion this is a serious omission in
Dr. Khazzooms analysis, since the cost of finding new reserves must be defrayed
largely out of revenues generated from current production. The availability of
capital is a critical factor which simply cannot be ignored.
Going beyond even these considerations, however, it appears that the inherent
nnreliabi'ity of the Khazzoom model is demonstrated by the recently available
gas reserves statistics for 1970. Reference to page 162 of Dr. Khazzoom's Exhibit
No. 46 (Column 2) indicates that under the recommended equation 5**, nation-
wide new discoveries of approximately 2.7 TCF are projected for 1970. The actual
volume of 1970 new discoveries as reported by the AGA amounted to 5.1 TCF.
27-547 O — 74 46
712
Thus Dr. Khazzoom's nationwide forecast for 1970 was 90 percent in error. His
forecast for selected districts was in error by over 50 percent and liis forecast
for Southern Louisiana was in error by 130 percent !
It ttierefore appears that the model is not only defective in theory but that
it is also wholly unreliable in application. The evidence continues to demonstrate
the futility of attempting to measure gas supply response to price by means of
mathematical formulae where the necessary underlying information is not
available. The lack of adequate data cannot be overemphasized.
Exhibit CC
April 20, 1971.
Re Response to Your Objections to the Econometric Model.
Mr. RiCHABD V. Mattingly,
Office of the General Counsel,
Office of Economics.
Mr. Schwartz asked me to respond to your memorandum of April 9, "Staff
Brief in AR61-2 and AR69-1."
Your objections to the econometric model are answered on pages 45-48 of the
Staff Brief in the section headed : "F. The Staff's econometric analysis deals
separately with the costs of inflation and real costs of finding future supplies
of gas. Thus the analysis implicitly considers costs." In addition, we call your
attention to the consideration of profitability by Dr. Khazzoom in Exhibit 46
(pages 9, 11, and 42-43, among others) and to his discussions of supply elas-
ticity. The essence of the supply elasticity concept is the variation of costs (in-
cluding profits) with changes in new gas supply.
It appears from your memorandum that you have missed the meaning of the
supply elasticity estimates provided by the econometric model. These estimates
measure the producer's response to price, but in doing so they also measure his
response to costs and profitability. If costs had been too high, or profits too low,
the response to price indicated by the model would not have occurred. Not only
does the model include an explicit adjustment for the effects of inflation — since
the prices are deflated by the wholesale price index — but it also includes a
straight-forward recognition of changes in "real" costs.
We recognize that non-technicians will be baffled by the mathematics of the
model, but there is no reason for anyone to fail to see that its purpose is to
present a quantitative expression of the conventional supply curve showing
rising supply with higher prices. The slope of the supply curve — that is, the
amount of additional supply induced by each i^nny increase in price — is deter-
mined by the additional cost and additional profitability associated with new
increments of supply. In one bold stroke, so to speak, the model analyzes the
industry's past performance and derives estimates of the increment in price that
is necessary to cover both the higher costs of an expanded supply and the in-
creased profits to induce larger investment in gas exploration and development.
It is of course assumed that the supply curve estimated from past observations
offers a reasonable starting point for projecting the suppl.v response to price in
the years immediately ahead. Economic phenomena of this sort are usually char-
acterized by systematic behavior.
We trust that this elementary explanation of supply curves will serve to as-
sure you that Dr. Khazzoom did not overlook costs and profitability when he
formulated his model. He did not want to engage in loose guesswork about future
costs, instead, he devised a refined method of projecting these costs using tested
equations based on past performance. If you know of a more reli>ible methoi of
forecasting the probable supply response, we would welcome hearing about it.
Phyllis H. Kline.
Exhibit BB
April 20, 1971.
Re Comment on Initial Staff Brief, AR61-2 and AR69-1.
Mr. Richard V. Mattingly,
Office of General Counsel,
Chief, Office of Economics.
Permit me to call your attention to one line of argument in the Staff Brief
which is completely erroneous. Noting that the industry paid approximately $850
million for offshore leases in December 1970, you draw the conclusion that "this
provides a striking measure of the cost of doing business in the offshore area"
713
(page 95). On the contrary, the staggering amount the industry voluntarily bid
for these leases is a striking measure of the high profits anticipated from drilling
the leases. The industry would not have paid as much as $850 million unless it
estimated that it could afford to do so, and also pay a % royalty, and still reap
an adequate return on its investment. In effect, the lease sale invited the indus-
try to share its expected profits with the U.S. Treasury.
In other words, the correct interpretation of the $850 million is that the in-
dustry is optimistic about finding large reserves and selling the gas at a price
which will yield revenues far in excess of the estimated costs. We do not know
what price the industry used in its calculations. If the price was no higher than
26 cents per Mcf, in all probability the industry is anticipating lower unit costs
offshore than onshore.
Haskell P. Wald.
Exhibit A A
Apeil 9, 1971.
Memorandum To : David S. Schwartz and Roy A. Nierenberg.
From : Richard V. Mattingly, Jr.
Subject : Staff Brief in AR61-2 and AR69-1.
I have reviewed your draft on econometrics for the staff brief in AR61-2 and
AR69-1. Based on my own analysis of this material and the evidence to which
it relates, I conclude that Dr. Khazzoom did not consider in any meaningful way
the level of profitability required to induce producers to commit capital to the
search for non-associated gas reserves. More importantly. Dr. Khazzoom did not
consider either the current or anticipated cost of finding and producing non-
associated gas. As a result, the model does not determine what portion of any
potential price increase would go to cover increased costs, and what portion, if
any, would be left for the producer. In these circumstances it is diflBcult to under-
stand how the model could be expected to forecast producer or supply response
with any degree of reliability. The Khazzoom model seems clearly subject to
the same fundamental criticism made of the Edmonston model, namely that it
does not consider costs or profits. (Austral, 428 F. 2d 407, 436; footnote 91).
Nevertheless. I do not intend to prejudice your position on this issue, since it is
for the Commission ultimately to decide. Accordingly, I have no objection to the
inclusion of your material in the brief.
Richard V. Mattingly, Jr.
Exhibit Z
April 2, 1971.
To : Richard Mattingly, Jr.. OflBce of the General Counsel.
From : Assistant Chief, Oflice of Economics.
Subject : Review of Draft Brief in AR69-1.
The comments that follow are in response to your memo of March 30, 1971
and will be organized along two lines. Firstly, I will have some general observa-
tions with respect to the draft and, specifically, as it pertains to the OEC wit-
nesses other than Dr. Khazzoom. Secondly, detailed comments relating to the
section entitled, "The Response of Gas Supply to Price," will be provided.
General Comments
Unlike previous staff briefs in the various area rate proceedings, this draft
does not provide a detailed analysis of the direct testimony of the various staff
witnesses. The emphasis appears to be on providing the procedural history
together with a very general evaluation of special problem areas relating to
gas supply, the demand for gas, the desired level of service, and supply response
to price and a number of specific considerations going to recommended rates and
other special problems. While it appears that these are major areas for analyt-
ical effort, nonetheless, they are not fleshed out and documented with primary
reliance upon testimony and exhibits of various staff witnesses. (With the
exception of the anonymous reliance on Engel)
For example, there is no mention made of Mr. Lawrence's testimony or re-
liance on his exhibit in your discussion concerning the demand for gas or ex-
pected supply availability. Although it would appear from the subject headings
of your draft, the purpose of his testimony would, indeed, be organically related
to the subject matter. As you are aware, the objective of Lawrence's testimony
as stated in the transcript is as follows :
714
"My testimony is concerned with the relationship between gas requirements
and potential sources of supply in the near term future. In this testimony I
compare the projected requirements for gas with the expected supply avail-
ability, including prospects for gas imports and synthetic gas. In audition, I
review the potential new demands for gas which may develop during the next
few years, and indicate the alternative sources of fuel which may be called upon
in the event that the market for gas exceeds the available supply, and suggest
steps to avoid a gas supply-demand imbalance.
While it is true that Dr. Charles Stalon's testimony is of a more theoretical
nature and could not easily be fit into the framework of the draft as it is now
postulated, nonetheless, this may reflect on the infirmities of the structure of
the draft rather than on the lackofcogencyof Stalou'spresentation.Asyouareaware
the draft rather than on the lock of cogency of Stalon's presentation. As you
are aware the purpose of Dr. Stalon's testimony is as follows :
"Stated broadly, the purpose is to provide an analytical framework for con-
sideration by the Federal Power Commission (P^PC) to use in reaching a tenable
decision on the ceiling price to be established in this proceeding. This will be
done by examining the structure of incentives within which the producers and
users of natural gas make their decisions. The analysis concentrates on the
role of "prices" and "costs" as determinants of the "supply" and "demand" for
natural gas. The analysis is abstract in the sense that it simplifies and formu-
lates a number of generalizations concerning economic processes which are in
themselves exceedingly complex. The generalizations developed are then used to
clarify the options available to the FPC in its role as regulator of field prices
of natural gas. In summary, my objective is to provide for the record a set of
economic principles which I think must be considered in establishing a price
structure for natural gas."
Perhaps, the Oflice has no cause for complaint over your ignoring the testi-
mony of Lawrence and Stalon because you have treated virtually all staff wit-
nesses with an evenhanded disregard. By doing so you have seriously detracted
from the value of your brief.
The Response of Gas Supply to Price
The primary concern of this OflSce goes to the above captioned section. This
is particularly true because the material contained therein is unnecessarily
at odds with the economic relationships postulated by the econometric model.
I find the level of economic analysis contained in this section (pages 17-23)
shallow, incorrect, and lacking in logical cohesiveness. For example, the sen-
tence, "The proposition that gas supply is price elastic (i.e. responsive to price)
would ordinarily be expected not to require extensive discussion." is meaning-
less. There is a multifaceted number of analytical concepts which could give
this sentence meaning but they do not necessarily all move in one direction.
We could have very little elasticity in the short run as a response to price, or
greater than or less than unitary elasticity in the Innff run in response to price.
To say that gas supply is price elastic does not tell you anything with regard
to whether the elasticity is positive, negative, or unitary.
More disturbing is the reference to the earlier econometric model in AR61-2.
No use is being made of this model by the staff because it has been replaced
by the new model. It is totally inappropriate, therefore, to include a discussion
of a model which was prepared 10 years ago to deal with the issues of that
period (see below). In addition, the characterization of the model is a gross
misstatement and completely contrary to its economic implications. Any dis-
cussion of that model in a staff brief should at least reflect an understanding
of its basic features and should not mimic the attacks by politicians.
One must realize that when the earlier model was formulated, the cost of
alternative fuels was at a level approximating the price of gas ; in fact, in cer-
tain industrial markets coal was relatively less expensive. In addition there
was no demand-supply imbalance ; if anything, a surplus of gas overhanging
the market. Therefore, the model indicated that a price increase could reduce
demand and this then in turn would ultimately press upon the supply factor
and reduce exploratory effort. It did not purport to show that gas supply was
not responsive to price and was responsive primarily to demand irrespective
of cost or profit considerations, as stated in your draft. I cannot understand
why it is diflScult for you to conceive of the fact that an increase in price for
any commodity could in fact reduce demand if there are alternatives available
or if consumers can curtail their consumption because of the higher cost now
associated with its purchase. There are many examples of consumer response
715
to price increase which resulted in a reduction of the demand for the product
and subsequently, a reduction in the supply of the product. For example, look
what happened to the demand for cars in 1970 after the increase in the price
of cars over that obtaining in 1969.
The statement that subsequent history demonstrates the invalidity of the
earlier economic studies is outright nonsense, because we now have a whole
new set of factors in play (e.g., inflation, environmental concerns) which in
fact were not existent at the time the earlier model was formulated. The Com-
mission in not adopting the earlier model indicated its promise and urged con-
tinued effort to refine and perfect tlie results.
If the desire to discredit MGD Witness Davidson is predicated upon his posi-
tion somewhat paralleling the results (as you perceive them) of the earlier model,
I think there are more valid bases for criticizing his presentation. For example,
his discussion of the industry's desire to withhold reserves to obtain higher prices
could be criticized on the basis of his failure to calculate the cost of withholding
reserves and the present value of the revenues that could be received from
these reserves and, therefore, an inability to assess the economic advantage of
selling gas in a period where interest rates are very high. Additionally, I think
it is incorrect to deny, as you do on page IS, the fact that in a period of high
interest rates the cost of money will affect the profitability of marginal prospects
and will have an influence on new exploration.
One of our major concerns goes to your treatment of gas supply response to
price (beginning on the bottom of page 20 and continuing through page 22)
because this undermines the econometric testimony provided by Dr. Khazzoom.
It is difiicult for this Office to understand why the views of an engineer (Tr.
pages 6770: 6791) should provide a predicate for a conclusionary statement
(which follows) when the subject matter is uniquely economic in nature. The
statement I am referring to is as follows :
"While the responsiveness of gas supply to price is certain, it is most difficult
to accurately forecast in advance the specific volume of gas which will be dis-
covered in relation to any given price."
The truth is this is another statement which superficially appears to have
meaning but, in fact, is of very little substance. Certainly, gas supply will
respond to price, but the important consideration is, how? Again, while it is
difficult to forecast accurately with regard to new discoveries in relation to
price, nonetheless, it is not impossible to do so within certain parameters and it
obviously is appropriate for the staff to attempt a forecast. This, of course, is
the objective of the econometric model, namely, to gauge the relationships of
those factors that are affected by price and to interrelate those factors to get
reasonable forecasts.
Another sentence which is difficult to understand (page 21) is as follows:
". . . then an increase in gas price can be expected to have a direct, positive
effect on the exploration effort, and the greater the price increase the greater
will be the increase in the exploration effort, until the point of full resource
utilization is reached." The implications of the greater exploratory effort asso-
ciated with ever increasing prices reflect the supply side of the equation. You
seem to have divorced the implication of ever increasing prices on the demand
side. Additionally, I do not know what is meant by "until the point of full
resource utilization is reached." This appears to be a physical concept (extrac-
tion of gas from the ground) but I do not see its relationship to the prior
discussion.
At page 21 (last sentence) you question the ability to determine the volume
of reserves discovered which can be estimated from the amount of footage
drilled. The fact is that BNG does assume that a certain volume of reserves will
be forthcoming on the average from drilling activity and your statement runs
contrary to the assumption in the BNG costing.
Lastly, you contend, because of the many variables, that it is meaningless to
"project future supply" and that supply response "must be considered on the
basis of an informetl judgment." This, of course, begs the question. The econo-
metric model was formulated as an empirical evidentiary predicate so that
the Commission could exercise informed judgment. What I am fearful of is that
your view of informed judgment excludes the necessary factual unden^inning
which is essential for intelligent informed judgment.
It may be advisable that we di-scuss the problems articulated before the draft
is finalized.
David S. Schwartz.
716
Exhibit Y
March 26, 1971.
Memorandum to: General Counsel.
From : Chief, Office of Economics.
Subject : Your Memo of March 26, 1971 (Re : Staff Brief in AR61-2 and AR69-1).
You are correct in stating that I am not seeking a commitment from you "that
the brief will support the OEC position over the BNG position . . .". In the first
place, there is no "OEC position," but only the testimony of an OEC witness.
Dr. J. Daniel Khazzoom (and also that of other OEC witnesses whose testimony
is not relevant to the subject of our exchange.) Secondly, there is no incon-
sistency between the prepared testimony of the BNG staff and Dr. Khazzoom's
testimony. The only suggestion of a possible conflict is the following response
of staff wutness Engel to a question on cross-examination, "To what extent did
you rely upon that econometric model ?" :
Well, I did not rely upon this model specifically, because I feel that you
cannot set forth in a mathematical formula the relationship between change
in gas price and a change in supply to be forthcoming. But I do agree with
the general proposition that a change in price is related to a change in
gas supply to be forthcoming. (Tr. Page 7461, Volume 56.)
You will agree, I am sure, that the above statement can hardly be interpreted
as expressing the "BNG position." In his prepared testimony Engel in fact calls
attention to the Khazzoom model as addressing itself to the price-supply rela-
tionship. Furthermore, the opinion of a staff engineer does not dispose of a
question which is uniquely within the province of a professional economist,
namely, whether the price-Siupply relationship lends itself to quantitative
analysis.
My March 23 memorandum was written to express our concern over Mr.
Mattingly's apparent intention to inject his own personal skepticism of the value
of econometrics into the staff brief. The staff presentation does not support
such an argument which can only be interpreted as unudermining the Khazzoom
testimony.
Mr. David S. Schwartz is prepared to review the draft of the staff brief.
It is our understanding that Mr. Mattingly is planning to have it ready about a
week before it must be sent to the printing plant. Mr. Schwartz will discuss his
comments with Mr. Mattingly and, if necessary, directly with you.
Haskell P. Wald.
Exhibit X
Makch 26, 1971.
Memorandum to : Mr. Wald, Chief, Office of Economics.
From : General Counsel.
Subject : Staff's Brief, AR61-2 and AR69-1 ; your memo dated March 23, 1971.
It is premature for me to interfere with the preparation of the brief in this
case. Mr. Mattingly and Mr. Nierenberg have been given their assignments, and
the brief when prepared, ^Aill be reviewed by me. At that time, I will be pleased
to discuss any comments that you have. If, in fact, the BNG testimony is in-
consistent with the OEC testimony, it will be necessary for Mr. Mattingly to
deal with both. It is my intention to minimize any differences, but, if the record
reflects inconsistencies, the brief can neither ignore nor conceal the inconsist-
encies. I am sure that you do not intend to seek a commitment from me at this
point, that the brief will support the OEC position over the BNG position, what-
ever it is. It is the duty of the lawyers to bring all pertinent evidence to the at-
tention of the Commission, regardless of its source.
Gordon Gooch.
Exhibit W
March 23, 1971.
Mr. Gordon Gooch, General Counsel.
Chief, Office of Economics.
Staff Brief, AR61-2 and AR69-1.
We are seriously concerned over a problem which has developed in connec-
tion with the preparation of the Staff Brief in this proceeding. We would wel-
come your assistance in resolving the problem at this early stage, but if you do
not wish to involve yourself we would like you to delegate the responsibility
to the appropriate person in OGC.
From our conversations with Mr. Mattingly we learned that he plans to take
the position that it is impossible to establish a quantitative relationship between
717
the price of natural gas and the supply response. If this line of argument is pur-
sued in the Staff Brief, it would have the effect of undermining the value of the
econometric testimony by Dr. Khazzoom.
You will agree, I am sure, on the desirability of a unified staff position in the
Brief. Considering that the policy guidelines provided by the projections of the
econometric model are consistent with the staff testimony on rate design and
needed additional gas supplies, I believe that it is unnecessary for the Brief to
argue, among other things, that a quanitative relationship between price and sup-
ply cannot be estimated within a reasonable range of reliability. The Commission
should be encouraged to give as much weight to the econometric testimony as it
finds appropriate based on the record before them.
We would appreciate the assistance of your Ofl5ce in seeing that the Staff
Brief does not expose a conflict of views ^athin the Staff on the place of the
econometric testimony in the staff case.
Haskell P. Wald.
ExMUt V
December 16, 1970.
Memorandum to : Chairman Nassikas.
From : General Counsel ; Chief, Bureau of Natural Gas ; Chief, OflBce of Economics.
Subject : Comparison of Offshore Southern Louisiana Reserve Estimates.
The memorandum of November 13 from the OflBce of Economics compares
the estimate of Southern Louisiana reserves in the Federal Domain published
by the American Gas Association (24.1 billion Mcf) with the figures which
were introduced in AR69-1 in Staff ExhibitXo. 31-A for the same area and date
(34.1 billion Mcf). The latter figure consists of the total of reserves volumes of
gas dedicated to the interstate market, as estimated by the pipelines in their
Form 1.5 reports, reserves volumes which pipelines estimate they hold under
contract but have not yet been certificated, and uncommitted reserves volumes as
estimated by the controlling producers. We do not believe that the difference in
these two estimates should cause the Commission's staff to view either the AGA
or the Form 1.5 volumes as being unreliable.
As is adequately explained in the attached memorandum from the Chief,
Bureau of Natural Gas, the AGA uses different methods in estimating proved
reserves in an area than are used by the pipelines when estimating reserves for
their Form 1.5 reports. These differences become more pronounced in relatively
undeveloped areas such as Offshore Southern Louisiana. As BNG's memorandum
further points out, the difference in methods u.sed by AGA and the staff witness
in allocating "straddling" fields between the State area and the Federal Domain
accounts for 2.1 biPion Mcf of the difference in the estimates.
While the staff has not and does not suggest that a direct correlation exists
between the estimates of reserves made by the pipelines in their Form 1.5 reports
and those published by the AGA, the general trends shown by the Form 15
data for reserves to production ratios parallel and corroborate the trends of the
AGA data for the same ijeriod of time. Insofar as such ratios are useful in assess-
ing the adequacy of the current natural gas supply, the Form 15 reports tend to
confirm the information supplied by the AGA.
The Commission has made use of AGA published estimates for additions to
reserves and production volumes in determining certain unit cost components
when .setting area rates. The determination of the figures to be used for additions
to reserves is based on trends ranging from five to fifteen years. The estimate of
additions for any particular year, therefore, is significant only insofar as it may
affect the 'ong-term trend of reserves added. Since the cost components involved
are calculated from annual additions to reserves, the estimate of total proved
reserves at a point in time would not be a factor in the cost computations which
have been used in setting area rates. The figures introduced in AR69-1 in Staff
Exhibit No. 31-A do not in any way influence our opinion that the Commission
may reasonably rely upon the AGA reserve figures.
As pointed out in the BXG memo, pipelines companies assign productive acres
on the basis of a broader geoiosric interpretation than that used by AGA. However,
even were the same geologic interpretations followed by both, the estimates which
different geologists would make from the same geological and geophysical data
woukl be likely to vary. The judgmental factors involved make mathematical
precision impossible. Staff geologists believe that a difference of 20 percent, plus
or minus, appearing in the estimates of two geologists would not establish ether
estimate as being unreasonable. Thus a total range of 40 percent could be allowed
718
and might even be conservative in a relatively iindevelepod area such as the
Federal Domain.
Memorandum to Chairman dated December 16, 1970, regarding Comparison
of Offshore Southern Louisiana Reserve Estimates.
Gordon Gooch,
General Counsel.
Thomas J. Joyce,
Chief, Bureau of Natural Gas.
Haskell P. Wald,
Chief, Office of Economics.
Exhibit U
December 1, 1970.
To : Mr. Wakefield
Please add an asterisk (*) after my signature and type in the following
below :
"Comments by Mr. Wald :
1. A 40 percent allowance for judgmental factors may be appropriate for new
fields without production experience, but not for fields which have been in pro-
duction for a few years. Much of the offshore reserves is in the latter category.
2. I agree with the statement about corroboration of broad trends. However,
the reliability of the AGA data for estimating unit costs or for assessing the
adequacy of current supply is a separate issue — ^and a critical issue for the
Commission's area rate decisions."
I would of course welcome the appropriate changes in the memorandum
to accommodate my comments, so that I might sign without reservations.
Haskell P. Wald.
Exhibit T
November 19, 1970
Memorandum to : John N. Nassikas, Chairman.
From : General Counsel.
Subject : Testimony on Gas Reserves Estimates in Docket No. AR69-1.
In a memo of November 13, the Chief, Office of Economics, directed the Chair-
man's attention to a possible discrepancy between reserves estimated by AGA
and those estimated by Staff Witness Zabel in his Exhibit No. 31A which has
been introduced in evidence in Docket No. AR69-1. This same comparison was
made during the testimony of Associated Gas Distributors Witness Al Bass
on October 14, 1970. See transcript pp. 5530 f. The existence and meaning of this
discrepancy, if any, will be an issue when AR69-1 is before the Commission
for decision.
Gordon Gooch.
719
November 19, 1970.
Memorandum to : Chairman Nassikas.
From : Chief. Bureau of Natural Gas.
Subject : Docket No. AR69-1 — Comparison of Offshore Federal Domain Reserves
as Reported in Staff Exhibit No. 31-A and as Estimated by AGA.
This report has been prepared in response to your request of November 16,
1970. The reserve reported by staff are, at the most, 7.9 trillon cubic feet in excess
of the reserves reported by AGA. The difference is readily explainable.
The AGA reports remaining recoverable reserves in the Offshore Federal
Domain at December 31, 1969 of 24.1 trillion cubic feet. Staff Exhibit No. 31-A
report, for the same area and date, reserves of 34.1 trillon cubic feet. The re-
serves reported in the staff exhibit represent an allocation of the reserve reported
in Form 1.5 (27.6 trillion cubic feet), as supplemented by re.serves reported by the
pipeline companies as being dedicated but not in Form 15 (1.2 trillion cubic feet.
Prehearing Exhibit No. 10). and by uncommitted and other reserves reported by
the producing companies (5.3 trillion cubic feet. Commission Order of March 17,
1970) . The reserves were not estimated by staff.
First, AGA and staff used different methods in the allocation of reserves, to
State or Federal offshore Zones, for those fields which straddle the boundary be-
tween the State and Federal areas. AGA reported a total of 5.7 trillion cubic feet
in these fields. Staff work papers also show a total of 5.7 trillion cubic feet in these
fields. The AGA method of allocation placed 1.6 trillion cubic feet in the Fed-
eral Domain. The staff method placed 3.7 trillion cubic feet in the Federal
Domain. Parties to the proceedings agreed that the staff method was superior to
the AGA method and did not attack the staff method on cross-examination. The
different methods of allocation would therefore reduce the difference in Federal
Domain reserves to 7.9 trillion cubic feet from an apparent 10 trillion cubic feet.
The remaining difference can most probably be accounted for by the use, by
AGA and pipeline companies, of different methods of estimating reserves in rela-
tively wildest or undeveloped areas such as the Offshore Federal Domain. The
AGA has stringent rules regarding the productive acres that can be assigned
to a field in the early stages of development when only one to three or four wells
have been completed. The pipeline companies, on the other hand, assign produc-
tive acres on the basis of a broader geologic interpretation. ( See Appendix A for
an example.) Of course, the greater the productive area, the greater the reserves.
As these wildcat areas achieve a greater stage of development, the reserve es-
timates of AGA and Form 15 gradually become closer, until in the more fully de-
veloped areas, they become comparable. This is shown by the reserve estimates
reported above in the fields situated in both the State and Federal areas. These
fields lie close to shore, in shallow water for the most part, and have reached a
stage of high development. Both the AGA and Form 15 report 5.7 trillion cubic
feet for these fields.
As can be seen from the above, care should be exercised when comparing the
reserves reported in the Form 15 with reserves reported by another source in
areas in the early stages of development. A better comparison can be made in
larger, more fully developed areas.
Care should also be exercised when comparing Form 15 and AGA reserve data
on an annual basis. AGA reserves are reported in the year of discovery, but these
same reserves might not appear in a pipeline's Form 15 until a year or more later
due to the necessity of obtaining a contract with the producer and a certificate
from the Commission. Taking this in account, comparisons can be made between
Form 15 and AGA in trends of reserve increases or decreases, particularly in the
more fully developed areas.
Thomas J. Joyce.
720
-w rf.-..k^-^^»-i
Proved Productive f\rea.
A.n.A. Er^tji'ialsd
Proved rl'cd'active Ar-">'^
FI''.''.;;i.'.'. 1 - Veil !Io. 1 v.'a^ v."ot and ?.b?,ndrr.e.'J . V,'o]l To. 2 d:'5covcrod. p",iH~ '..•:■•,:■•.
dccrei^t i\'^r.ol?'?.',;ion of reror-v'oir to - 5^05. AGA r-roved-develcviod acrca^.? :'j7
bDock arojr:;i '-.'tO.l -io. 2. AOA provc»d-ur:d2Vclcp-.^i acraf.'E ?.s area lnf.-j.de dotted
conto'/r oxcjud.'ji- Moc': a2'ou-^.d V.'ell tic. 2.
...■^'^
P.L. Conr>ar.v Estimated
Proved P:>oduct?.ve Area
A.C-.f\. Er.t''.r;2ted
Proved '.productive ArcTi
Fir-Ji-i; ? -. V/ell ^:c•. 3 corpDetrd as -a? vrell rr: 5a:^e
A.Ol p:wc-d--d-."Vol'?:'^;d and rroved-'-i-idevclovod a:vias o^-'- .-^v! <,...-r^:
r Pt rat ion of ;e.-e:-/oir rerains at - S003.
re^ervoi)- ?s V;en Vc. 2.
ed. r>ve:v;ct
721
Exhibit R
November 13, 1970.
To : Chairman Nassikas.
From : Chief, Office of Economics.
Subject : Conflicting Estimates of Gas Reserves for Off-shore Louisiana (Federal
Domain).
The information on uncommitted reserves which was collected for the
AR69-1 proceeding is very useful for comparisons between the AGA estimates
and the Form 15 reports to this Commission. Up until now we have had no
way of filling the statistical gap represented by uncommitted reserves which
are intended to be included in the AGA reports but are of course excluded from
our Form 15 reports.
Mr. Ralph .Johnson of our staff has compiled the following comparison for
the Federal Domain Offshore Louisiana as of December 31, 1969:
Reserves
{tillion
Met)
Estimated by AGA 24. 1
Estimated by BNG staff witness ^ 34. 1
Difference 10. 0
1 Exhibit No. 31A, Schedule No. 1.
The BXG staff estimate is 10 billion Mcf higher than the amount reported by
AGA. The excess equals 42 percent of the AGA estimate. Several explanations
are possible: (1) pipelines may be over-generous in reporting their dedicated
reserves; (2) the AGA estimate may be based on more restrictive definitions
than those followed by the pipelines; or (3) some reserves may escape the
AGA reporting system. At the moment we do not know the true explanation.
The figures cited above are in the public record. The existence of so large a
discrepancy between the two sets of estimates suggests that our Form 15 reports
are useful for verifying the broad trends reported by AGA but not the reserves
reported in particular producing areas.
A copy of this memorandum is being provided to Tom Joyce.
Haskell P. Wald.
Exhibit Q
NOVEMBEB 10, 1970.
Memorandum to : Chief, Ofl5ce of Economics.
From : Ralph A. Johnson.
Subject: Comparison of 1969 AGA Reserve Estimates with Staff Reserve Data
for South Louisiana (AR69-1)
AGA's Committee on Natural Gas Reserves reiwrts that estimated proved
reserves for South Louisiana^ — Federal Domain were 24,102.454 MMcf in 1969.
By comparison, staff reserve estimates for the same area in AR69-1 (Exhibit
Xo. 31A. Schedule No. 1 totaled 34.138,S51 MMcf in 1969.^ Thus, the staff esti-
mate exceeds AGA's estimate by 10,036.397 ]Vnicf or 41.6 percent.
Apparently none of this substantial differential can be reconciled on basis of
uncommitted reserves being omitted from AGA estimates. AGA's 1969 reserves
publication (page 95) states:
These reserve estimates constitute an annual inventory of proved reserves
which include gas and natural gas liquids reserves of all types regardless of
size. avaUability of market, ultimate disposition or nse. (Emphasis Sup-
plied )
A comparison of AGA and staff reserve estimates for the South Louisiana area
(onshore and offshore) offers only a slightly better independent check of AGA
estimates. AGA shows reserves of 80,769,437 MMcf compared to staff's estimate
of 76.997,393 UMct.
Since the staff estimate does not include intrastate reserves, it is, therefore,
deficient by an undetermined amount. That amount is likely to be in excess of
the differential (3,772,044) MMcf between the AGA and staff esttmates.
Comment
Other things beinff equal. AGA resprve estimates should be greater than staff
estimates since staff estimates do not include intrastate reserves. The reverse
appears to be the case in this comparison.
1 Includes 1,094,607 MMcf available for sale.
722
On November 9, 1970, I spoke by phone with Mr. John C. Jacobs, Chairman of
the AGA's Committee on Natural Gas Reserves. Mr. Jacobs confirmed that un-
committeed reserves are included in the AGA reserve estimates. He also sug-
gested that a 10 percent differential in reserve estimates (AGA vs. staff) is not
considered unreasonable.
To the extent that there is a differential greater than 10 percent between staff
and AGA reserve estimates, AGA's estimates of the South Louisiana — Federal
Domain reserves appear to be low. Conversely, staff estimates may be higher
than reasonable for the area.
In summary, it appears that an independent check of AGA estimates of South
Louisiana reserves indicates that there is a substantial difference in the amount
of proved reserves that could be in the South Louisiana area.
Ralph A. Johnson.
Exhibit P
March 27, 1970.
Memorandum to : The Chairman ; Vice Chairman Brooke ; Commissioner Nagge ;
Commissioner Carver ; Commissioner O'Connor.
From : Chief, Bureau of Natural Gas.
Subject: Meeting on Gas Reserves, Estimation Methods.
The captioned meeting scheduled for April 2, 1970, is cancelled.
Thomas J. Joyce.
March 25, 1970.
Exhibit 0
Memorandum to : Mr. Wald.
From : Mr. Gooch.
Haskell : I appreciate very much the concern expressed in your memo of
March 23, 1970, questioning the "propriety of prehearing off-the-record meeting
of AGA witness in AR69-1." While I find the reasons given in your memo are,
if you will forget candor, wholly frivolous, I nevertheless have asked Mr. Joyce
to postpone the meeting with Mr. Jacobs for the sole reason that you object. In
doing so, let me make something very clear. Since the Jacobs meeting was not
intended to affect — and would not have affected — expedition in AR69-1, I have
accommodated you. Do not interpret this memo as a representation that the
OflBce of the General Counsel will not confer with lawyers and witnesses outside
of the staff. Such conferences are both legal and ethical.
As an example. OGC just put on a witness from Interior last week in the High
Mountain Sheep case, even though Interior is an adversary party. If OGC is
limited to staff witnesses and cannot even obtain relevant testimony from an
outside witness, with or without a separate lawyer for the outside witness, as the
witness chooses, I should know it as soon as possible. Such has been the practice
for years, even before Scenic Hudson.
I will be happy to have my decisions reviewed at the Commission level. As a
lawyer, I am bound to accept the methodology desired by the client, absent im-
propriety. Why don't you arrange for a meeting with the Chairman. Mr. Joyce
should also be invited to attend.
Gordon Gooch,
General Counsel.
Exhibit N
March 23, 1970.
Memorandum to : General Counsel.
From : Chief, Office of Economics.
Subject : Propriety of Pre-Hearing Off-the-Record Meeting with AGA Witness In
AR69-1.
As a follow-up to our telephone conversation, you asked for a memorandum
explaining my concern over the propriety of the scheduled meeting of the FPC
staff with Mr. John Jacobs, Chairman of the AGA Committee on Gas Reserves,
on April 2. Mr. Jacobs is one of the witnesses being sponsored by a group of gas
distribution companies in AR69-1. His testimony is due on May 1.
My reasons for concern are separate from any legal objections which miglit be
made. I am not taking a position on whether the meeting would or would not
723
violate either the letter or spirit of the Administrative Procedure Act or other
rules governing the conduct of hearings on matters being litigated before regula-
tory bodies. The following discussion involves the question of propriety in an
extra-legal context : Is there any possibility that the meeting will be interpreted
by other parties as an improper attempt by the FPC staff to influence the wit-
ness' testimony or to elicit information which might be of value to them if it
were made available on the record ? Should we expose ourselves to the iwssibility
of criticism because the meeting will afford an opportunity for the witness to
influence the FPC staff?
As I recall the original purpose of the meeting, it was to discuss possible ar-
rangements for FPC staff participation as obsen-ers in the work of the Committee
on Gas Reserves. It now appears that the purpose has been extended to include
discussion of all questions which our staff may have regarding the validity of
the AGA estimates of proved reserves. I draw this conclusion from your memo-
randum of March 18 inviting the OEC staff (and, presumably, also the BNG
staff) to take full advantage of the meeting with Mr. Jacobs to "ask him any
and all questions that you wish, in any form that you wish, . . ." You made this
suggestion partly because staff counsel Mattingly was unable to accept some of
our ideas for framing the questions being submitted to Mr. Jacobs in advance of
the hearing. We see an important distinction between submitting questions which
will be part of the official record of the proceeding and convening an off-the-
record meeting with Mr. Jacobs to explore on a preliminary basis many issues
being contested by other parties to the proceeding.
The root of my concern is that the meeting has the appearance of an ex parte
communication.^ It will be a closed meeting, there will be no transcript or of-
ficial minutes, and there will not even be a public announcement that it is being
held. Anyone who appreciates the intense suspicion with which the AGA
estimates are regarded in some quarters should be sensitive to the danger of
criticism if word of the meeting and the subjects discussed reaches outsiders.
Moreover, I am not at all convinced that the meeting's broadened purpose
is entirely consonant with the staff's role as an adversary party to the proceed-
ing. In effect, we will be holding a "moot court." Not only will the AGA witness
be clued in on various problem areas which he should be prepared to discuss
in his testimony, but he may also gather suggestions on how he should shape
his responses on cross-examination. No other witness will be given this advan-
tage of trying out his answers on the staff and using the experience, if he
wishes, to sharpen his defenses in advance of the hearing. Is it proper for
the FPC staff to engage in an activity which may help an outside witness
build his case? Will the fact that it will be done behind-the-scenes create an
impression of collusion? Isn't there some advantage in eliciting spontaneous
responses during cross-examination instead of well rehearsed ones? After all.
our interest is in full and accur-ite disclosure, which may not be Mr. Jacobs
primary motivation, since he may wish to build the best possible defense of the
AGA statistics.
In my opinion, the meeting is not needed to aid the objective of rounding out
the hearing record. This can be achieved in the usual manner — through cross-
examination, interrogatories, rebuttal testimony, off-the-record conferences in
the presence of the exammer and all parties, etc. The AGA witness will in
any case be primed for our questions, since we have already submitted a list
for him to cover in his testimonv. What further gain will be realized by a trial
run of his answers at the April 2 meeting?
It seems to me that a final decision on the meeting with Mr. Jacobs should
be po-stponed until the above questions concerning the meeting's propriety are
discussed with the Chairman or the full Commission. In the past we have op-
erated under definite instructions to avoid private discussions with witnesses
on matters in hearings. A change in these instructions should not be made at
the staff level. If we are advised to go ahead with the meeting, some considera-
tion should then be given to providing the participants with ground rules as
to the content and conduct of the meeting.
Haskell P. Wald.
^The Commission's rule on ex parte communications (§ 1.4(d)) prohibits "any employee
partlclpatlnj? in the decision" from havlnp off-the-record communications with a party to
a proceeding on anv matter at issue in a contested proceeding. Attendance by bureau or
office chiefs (or their deputies) at the April 2 meeting would appear to violate this rule.
724
Exhibit M
memokandum
March 19, 1970.
To : General counsel.
From : Chief, Office of Economics.
Subject: Miscellaneous observations on arrangements for AGA witness on re-
serves estimates.
1. In preparing the list of questions, I would like to see a distinction between
mock questions and genuine inquiries. The first category VN'ould include all ques-
tions where the answers are public knowledge and our purpose in including them
is simply to complete the hearing record. Instead of itemizing these mock ques-
tions, you might consider framing a general request to the AGA witness to
submit for the record the information on AGA membership, reserves committee
membership, etc., along with all published documents describing the work of
the reserves committee and the definitions used. The Hearing Examiner could
be asked to take official notice of these documents, or the parties could be asked
to stipulate that the documents are official AGA publications. I believe that it
is more appropriate to have this information provided as submissions for the
hearing record rather than in question and answer form. The second category,
which I describe as genuine inquiries, should be developed in depth so that there
will be no misunderstanding as to what we are seeking.
2. Is there any possibility of our persuading the AGA witness to provide for the
record various documents which have never before been released to the public?
For example : written insti-uctions to the members of the reserves committee ;
blank forms on which the raw data are compiled ; meeting dates for the various
subcommittees and parent committee ; written decisions by the parent committee
concerning the handling of difficult estimating problems, etc.
3. I believe that our correspondence with AGA should be placed in the public
information file. Are you planning to do that? Should we give other parties the
opportunity to supplement our list of questions?
4. Will there be an opportunity for us to add to our questions after the April 2
meeting with AGA? It is possible that the meeting will expose some important
areas not covered in our original list.
5. In my opinion, the most knowledgeable academician on the subject of re-
serves estimates is Professor Wallace F. Lovejoy of Southern Methodist Uni-
versity. His book. Methods of Estimating Reserves of Crude Oil, Natural Gas,
and Natural Gas Liquids (published by Resources for the Future in 1965) is
easily the most penetrating critique of these estimates. Perhaps we should
consider retaining Professor Lovejoy as a consultant to the staff for this phase
of the AR69-1 proceeding. If we see a need for a rebuttal witness, he would
be an excellent candidate.
6. I am concerned that we may be exaggerating the importance of the AGA
reserves estimates. It is true that these estimates are crucial for the new gas
costing, but they are not crucial for the end result. As you may know, I do not
have any faith in the costing methodology and the resultant estimates. I believe
that the most valuable source of information on the current gas supply situation
lies in the experience of gas procurement personnel of pipeline companies. Are
we confident that the pipeline companies will provide adequate testimony on their
efforts to purchase new supplies and on the state of the gas supply market as
they see it? Is there anything we can do in advance to make certain that the
pipeline company witnesses will cover the subject in depth?
Haskell P. Wald.
Exhibit L
March 18, 1970.
To : Mr. Gooch.
From Mr. Wald.
Before the existing misunderstanding is compounded. I hasten to assure you
that we firmly suijport — indeed, commend — your efforts to prepare the ground-
work for heljiful testimony from an AGA witness for AR69-1. My telephone
call was motivated by surprise that our FPC lawyers are so flexible and that they
believe we can submit advance questions without being accused of acting im-
properly on a matter that is in Hearing. It is a refreshing discovery to learn
that we can strike out along new paths. Your analogy of a "regulatory Perry
725
Mason" fits staff counsel's role in many earlier cases. I consider it to be a mis-
conceived role which should have been discharged long ago.
I hope you will agree with our view that Mattinglys list of 37 questions was
the wrong approach even for a start. The questions must be developed in rea-
sonable depth, so that the source of the staff's concern is clear to the AGA group.
Mr. Schwartz gave our suggestions to Mr. Mattingly by memorandum of March
16. You could hardly have expected a prompter reply. (Mr. Lawrence also sent
comments at the same time.) My own reply to Mattingly was sent within an
hour of our receiving his list on Friday the 13th. My February 19 list of questions
(which really contains all the information Mattingly needed to frame the ques-
tions which concern us) was prepared within a day or two of your request. Thig
record does not indicate that we have caused delay.
We were unsuccessful in getting Tom Joyce to change the April 2 date for the
meeting with Mr. Jacobs, Mr. Schwartz and I will be participating in a public
utilities conference in Michigan on that day. Mr. Lawrence will attend the meet-
ing and will be prepared to cover our areas of concern. Dr. Khazzoom will attend
if he is able to wind up his conferences at M.I.T. on April 1 and return in time
for the meeting.
We must protest any suggestion that our efforts to design a usable directional-
ity questionnaire have been a source of unnecessary delay. At the close of the
prehearing conference an agreement was reached with the producers for them
to start compiling the information at once, without waiting for the final ques-
tionnaire. Negotiations on the revision were held up because Mattingly was out
of the office for a period (o\^ing to a death in his family). BNG (Don Fisher)
had many .substantive difficulties with the way the questionnaire was framed
and our efforts have been aimed at accommodating his problems as well as at
making certain that we will collect usable data. We are unable to support Mat-
tingly's tendency to side with the producers as the quickest means of getting
the matter settled. A worthless questionnaire, .such as the staff has issued at
times in the past, is wor.se than none at all.
Haskell P. Wald.
Exhibit K
March 18, 1970.
Memorandum to : Mr. Wald.
From : Mr. Gooch.
Haskell : I have and note your and your office's memos criticizing the efforts
of OGC and BNG to obtain complete testimony concerning AGA Reserves by
submitting written questions to the witness through his counsel. I also note your
telephone call to me suggesting that the .submission of questions is somehow
improper and that the lawyer should reserve all questions for cfoss-examination
of the witness.
You must realize that AGA data is used by the staff. In fact, unless I have mis-
understood you, you believe the data to be accurate, within reasonable limits. Two
legal aspects are involved : One is admissibility — since, for the first time, a group
has refused to stipulate: second is the weight to be accorded to the data. To
resolve both questions, a witness is needed. I wanted the OGC lawyer to put the
AGA witness on in order to make sure that there was a full and complete record
for the consideration of the examiner and the Commission, as well as OEC and
BNG. AGA prefers a distributor group lawyer. This is fine. We could act like a
regulatory Perry Mason and save all questions for cross-examination as you sug-
gest— but for what purpose? If the witness did not know an answer to a question,
he would simply supply it by some other means — after delay. By advising him in
advance of the areas of interest, he may cover any or all of these questions on his
direct testimony, thereby providing information which we want. If his response
needs clarification, cross-examination will afford an opportunity to do this.
Result — no time wasted, and full and fair disclosure.
I would like to know if you still see anything improper in our submitting these
interrogatories. If so, I would like to know why you would suggest that we
reserve all questions for cross-examination.
As you know Jacobs will be here on April 2, not for purposes of preparing for
AR69-1. Nevertheless, I would suggest that your office ask him any and all ques-
tions that you wish, in any form that you wish, since you find the efforts of my
office to formulate the questions so unsatisfactory.
726
While I wish you to have full comprehension of these legal pi'oceedings, my
main concern is to avoid any delays in AR69-1 because of OEC. In my view, OEC
has already delayed the directionality questionnaire. I want to make sure that
your witnesses meet the schedule of testimony. Priority must be assigned to this.
Gordon Gooch, General Counsel.
Exhibit J
March 16, 1970.
Re Comments Concerning Questions for Mr. Jacobs of AGA
Richard V. Mattingly,
Office of the General Counsel
Assistant Chief, Office of Economics.
After a review of the proposed questions for Mr. Jacobs, I have concluded that
it would be a Herculean task to redraft, restructure, and with precise specificity,
to formulate question by question substitutes for the 37 appearing on the list.
Therefore, I will focus on four major areas that are of particular significance
to this Office and formulate the pertinent questions pertaining to this subject
matter. As an aside, it should be noted that the information sought in questions
1 through 4 are already a matter of public record.
REVISIONS OF AGA RESERVES (QUESTIONS 29 THROUGH 37 ON YOUR LIST)
One of the essential problems is whether this category is a residual which
commingles reporting errors as well as reclassifications of gas and oil wells,
Therefore ,in line with Mr. Wald's memorandum to the General Counsel of
February 19, 1970, entitled, "Questions Regarding AGA Reserves Data," the
appropriate questions would indicate a clarification of the specifics identified in
item 2. We should ask whether in fact the revisions category commingles report-
ing errors and reclassifications. Does the Committee have a year-by-year break-
out of the errors as distinct from reclassifications? In those instances where
sizable negative revisions for associated and dissolved gas were made, why
were these not accompanied by equivalent revisions in oil reserves? Are these
revisions made year-by-year or are they made intermittently depending upon
a determination to re-examine the basic data? If they are made sporadically,
what triggers the decisions to re-examine the data? Are these revisions made
for all areas every year or are they made for some areas in one year and other
areas in another year? Do the instructions provide that revisions are to be
reported promptly when they are of certain magnitude or do they provide that
they can be accumulated until a certain level of revision is indicated? Does
the Committee have year-by-year data (and how far back) and is it feasible
to publish a revised historical series adjusted for all reporting errors?
EXPENDIBLE HOLES (QUESTION 15)
Are the wells drilled and considered "expendable holes" in the offshore area
included as successful wells when they are plugged even though commercial
production from these wells is feasible and operationally possible? Are '"ex-
pendable holes" included in proved reserves?
PROBABLE RESERVES CLASSIFICATION (QUESTIONS 22 AND 23)
What information does the Committee have with respect to reserves which have
not been "proved up" and therefore could not be included in the proved reserve
category? How far back does this information go? Can the Committee provide
reliable reporting for a "probable" category in addition to its proved reserves
delineation?
ECONOMIC ASSUMPTIONS IMPLICIT IN "UNDER EXISTING ECONOMIC AND OPERATION
CONDITIONS" (QUESTIONS 16 AND 2 6 THROUGH 28)
The AGA Committee report indicates that the quantities of gas recoverable
"under existing economic and operating conditions" are relevant to the proved
reserves reported. There is no indication whether the reserve estimates relate
to the prevailing price level of natural g^s. If we assumed a price change upward
or downward, what effect would this have on their estimate of proved reserves?
If the price were changed, would the Committee re-examine its previous esti-
mates and add gas volumes if the price were assumed to increase and reduce
proven reserve estimates if the price were assumed to decrease? Is there any
727
other connotation, other than price, in the terms "existing economic conditions"?
If so, how do they affect proved reserve estimates?
In conclusion, I wish to indicate that I subscribe to the views Dr. Wald com-
municated to you in his memorandum of March 13, and I believe it will be
difficult for us to reshape the questions on your list because of the general
nature of their content.
David S. Schwartz.
Exhibit I
March 16, 1970.
Re Questions for Mr. Jacobs of AGA.
Richard V. Mattingly,
Office of the General Counsel
F. W. Lawrence.
After reviewing the question proposed for Mr. Jacobs, I suggest the following
additions or revisions :
2. (Revision) Can the current membership of the Committee on Natural Gas
Reserves be revealed? If so, please show the membership. If not, please indicate
what percentage of its members represent: (a) distributors, (b) pipelines, (c)
producers, (d) others (specify).
5 (a) What is the smallest geographical unit for which reserves are estimated?
If state figures are the sum of areas within the state, can you indicate how many
sub-areas are estimated but not shown? We would be interested in the number
in each state or part of a state that is published.
11(a) Are all estimates (including those not published) compared with the
estimate for a similar area for the previous year? Are revisions, extensions, and
new field and new reservoirs computed for all areas or only for the areas pub-
published ?
29(a) Are revisions to associated and dissolved gas reserves compared with
revisions to oil reserves for the same area? Are revisions to NGL reserves com-
pared to revisions to gas reserves?
38. Are area gas-oil ratios computed for oil fields?
F. W. Lawrence.
Exhibit H
March 13, 1970.
Re Comments on Questions for AGA
Mr. Richard Mattingly,
Chief, Office of Economics.
I have hurriedly reviewed your list of questions and they are now being studied
by others.
In my opinion, you are on the wrong track in the approach you have taken. I
see no value in a long series of largely one-sentence questions. The key ques-
tions must be developed in depth if we are to elicit useful responses. For exam-
ple, a general question on the economic assumptions underlying the estimates will
bring a general answer, such as the explanation appearing in published sources.
The committee has been asked the same question many times before, but they
have never provided a response which satisfies us. You must frame your question
so that they will understand why we are not satisfied with their earlier answers.
That is the reason why my question on their economic assumptions focused on
their nonsensical answers that price does not matter.
Another example of a question which should be spelled out is the one you ask
about probable reserves. You should indicate to the committee that we are rais-
ing this question because of the likelihood that some information on probable re-
serves is already being collected along with the data on proved reserves.
Because of our basic dissatisfaction with the list as drafte<l, it is going to be
difficult for us to be helpful to you in revising it.
Haskell P. Wald.
Exhibit G
March 12, 1970.
Memorandum to : The Commission.
From : General Counsel.
Subject : Mr. Joyce's meeting on gas reserves estimation methods with Mr.
Jacobs.
Since ]\Ir. Jacobs will be a witness in AR69^1 (Southern Louisiana) I sugge.st
that the Commissioners and their personal staff refrain from attending the
meeting.
Mr. Joyce understands the situation.
Gordon Gooch.
27-547 O — 74 47
728
Exhibit F
Mabch 11, 1970.
Chief, Bureau of Natural Gas,
Chief, Ofdce of Economics,
Meeting with AGA Reserves Committee.
In advance of the April 2 meeting with the AGA Committee, I believe it would
be appropriate for you or Mr. Gooch to distribute to the Commissioners my
memorandum of February 19, addressed to the General Counsel, raising questions
regarding the AGA reserves data.
As you know, Mr. Schwartz and I will be out of the city on the meeting day.
Perhaps the best way to stimulate discussion on the questions in my memo-
randum would be for the Chairman or yourself to bring them up. I expect that
Dr. Khazzoom and Mr. Lawrence will attend the meeting, but the "rules" for
meetings of this sort tend to inhibit staff participation.
I would appreciate having your reaction to the above suggestion.
Haskell P. Wald.
Exhibit C
February 19, 1970,
To: The General Counsel.
From : Chief, OflBce of Economics.
Subject : Questions regarding AGA reserves data.
Mr. Forquer asked us to submit a list of questions for discussion with the
AGA Committee on Natural Gas Reserves. The following cover the more obvious
questions which have concerned us for some time :
1. We are concerned over the apparent lack of adequate checks on the statis-
tical reporting operations. A memorandum being distributed by Dr. Khazzoom
to the Commission calls attention to a large reporting error in the reserves data
for 1967. Because of the error, the 1967-1968 decline in reserves is overstated
by 1.3 billion Mcf. If the Committee followed standard statistical procedure, they
would have issued an errata sheet ; instead, they adjusted for the error by
reporting it as a negative revision in 1968. We would like to know whether there
have been similar reporting errors of such large magnitude in the past. Would
it be feasible to publish a revised historical series adjusted for all reporting
errors? It should be obvious that our economists cannot make reliable studies
of supply-price responses if the basic data are distorted by reporting errors.
2. We have several questions concerning the "revisions" category of reserve
additions. It is a "catch-all" category including, for example, reporting errors
such as the one mentioned above. It also includes reclassifications of gas and oil
wells. In the ca.se of some sizable negative revisions for associated and dis-
solved gas, we have noticed that they were not accompanied by equivalent revi-
sions in oil reserves. We would ordinarily expect both types of revisions to be
in the same direction. We believe that the Committee carries a responsibility
to identify the sources of major revisions so that the analyst can make appro-
priate allowances in his interpretations of the data. Studying the year-to-year
behavior of revisions, we suspect that the revisions are not the result of a
continuing reappraisal of the estimates, but may instead be made sporadically
depending upon when the estimators decide to re-examine the basic data. Thus,
it is po.ssible that the need for a revision may have been appreciated several
years before the revision is reflected in the reported statistics. We wonder
whether the Committee members are instructed to report revisions promptly,
or whether they have some freedom in accumulating the revisions until the
amount is large. Also, do they make revisions for all areas every year, or do
they look at one area one year and another area next year?
3. The problem of "expendable holes" in the offshore area raises an intere.sting
question. We understand that these wells are plugged even though commercial
production is possible and that they are not counted as successful wells. We
would like to know whether the discoveries from these "expendable holes" are
included in proved reserves.
4. Is it possible for the AGA Committee to provide a breakdown of proved
reserves between reserves dedicated to interstate pipelines and all other? Such
a breakdown would facilitate comparison with our Form 15 reports. (It would
also be very useful to include a category for reserves committed to the intra-
state market and to direct industrial customers, but we may be going too far if
we ask for such detail.)
5. The economic assumptions underlying the AGA reserve estimates have
never been spelled out. The AGA Committee speaks of quantities recoverable
729
"under existing economic and operating conditions" without indicating whether
their estimates are tied to the prevailing price level for natural gas. Several
of us have questioned AGA representatives about a possible change in their
estimate of proved reserves if FPC's ceiling prices were raised. The answer
given to us is that a price change would not have any effect on the estimate.
We cannot make any sense out of such an answer unless the Committee's reference
to "economic conditions" does not mean anything. Each rise in field prices
should bring an upward adjustment in the AGA estimate of recoverable reserves.
When the price is changed, the Committee should re-examine its previous
estimates and add in those gas volumes which had been excluded because they
were uneconomic to produce but which can now be produced at a profit. If our
analysis is wrong, we need a more rational explanation from the AGA Com-
mittee than has been offered in the past.
6. We believe that the AGA Committee is in a position to provide much more
useful information than they are now publishing. Apart from the breakdowns
and explanatory data discussed above, the Committee should be able to report
a "probable" category which would be in addition to proved reserves. The
estimation of proved reserves automatically carries with it some knowledge
of reserves which are not yet "proved up." We understand that some pipeline
financing is based on "probable reserves" which do not qualify for the proved
reserves category. It would thus seem that, with a little more effort, the Com-
mittee could relax its restricted definition of proved reserves and provide the
public with another piece of information useful for analyzing the gas supply
situation.
Haskell P. Wald.
Exhibit D
E'EBRUARY 19, 1970.
Memorandum to : The Commission.
From : Chief Econometrlcian, OflSce of Economics.
Subject : Issue in Gas Rate Determination.
The attached is the first in a series of three papers on the subject. The second
paper deals with the use of historical cost in determining the ceiling price for
new gas, and the implication the procedure has on future levels of gas supply.
The third is a proposal for an alternative structure for the ceiling price of natural
gas.
J. Daniel Khazzoom.
February 1G, 1970.
Memorandum To : The Commission.
From : Chief Econometrlcian, Oflice of Economics.
Subject : The Nature of the Gas Supply Data.
In the final analysis, the question of whether or not an acute gas shortage
does exist will have to be resolved by reference to empirical evidence. At present,
the only evidence available — apart from the Commission's Form 15 reports — is
the gas supply data published by the Committee on Natural Gas Reserves of
the A.G.A. Many have expressed misgivings about tlie unknown nature of these
data. This has been particularly true since the publication of the 1968 reserves
estimates. Gross additions to gas reserves fell by 8.1 billion Mcf. About half
of this amount (4.4 billion Mcf) occurred in the revisions of associated-dis-
solved gas.^
At present relatively little is known about the factors behind this enormous
drop. Some of what is known raises several questions in one's mind about the
nature of the reserve estimates. There are also implications to the quality of
the data in past years.
In all fairne.ss, we cannot expect any estimates to be robust enough to score
lOO'"'^'- on every test. But a score commensurate with the purpose for wJiich the
data are used is and must be requiretl. The more is at stake, the higher are the
standards the data are required to meet.
If so little is known about the nature of the reserves data and if so many
reservations have been expressed about them, would it not be wise to require
them to pass the .scrutiny tests that any other evidence is required to pass before
they are accepted for important policy decisions. I wonder if we may not be
asking too much of these data by requiring them to serve as the arbitrator in
important questions such as the currently outstanding ones on the adequacy
1 A.G.A., Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the U.S. and
Canada as of December 31, 1968, Table VII, p. 126, and Table IX, p. 127.
730
of gas supply. If we know more about the si>ecifics, perhaps a different picture
will emerge. One should not assume that the picture will necessarily turn out
to be brighter. It may very well turn out to be dimmer than the data suggest —
at least, it apparently was so in 1967. But whatever the true picture is, we ought
to know it.
The concepts and some of the practices used in reporting the reserves data
were discussed elsewhere.^ Improvements have been made, in the meantime.
One need not subscribe to one variant or another of a conspiracy theory in
order to want to know more about the spec-ifies that go in the make-up of the
data. These data will be used as the ultimate ground on the basis of which
important issues may have to be resolved. There are therefore legitimate ques-
tions to ask, if one is to find out whether these data measure up to the task.
Let me cite two examples — first an illustration from the conceptual apparatus.
1. The concept of proved reserves as currently used has an economic content
to it — proved reserves being quantities recoverable "under existing economic
and operating conditions." ^ There is no elaboration on what is referred to as
economic conditions. Yet it is of more than passing interest to know what factors
are lumped under this term, and the way these are made to influence reserves
estimates.^ Logically we would expect gas price to influence reserve estimates.
An increase in gas price may be expected to lead to upward revisions of gas
reserves. Yet, the few industry men I talked to about the subject deny that this will
happen. To the extent that this is indicalive of the thinking among the members
of the Committee on Natural Gas Reserves, (we do not know if there is agree-
ment among the members on the interpretation of the concept) one may wonder
if proved reserves data indeed represent amounts recoverable under current
existing conditions. As it is, I find it diflicult to conceive of economic conditions
which influence re.ser\'es estimates, but which exclude gas price from the list.
Be that as it may, it is important to know more about the way this concept (and
similarly other concepts defined only in broad generalities) is translated in
operational terms.
2. Accounting practices and reporting methods also influence the picture con-
veyed by the data of the underlying situation.
In 1968, gross additions to non-associated gas dropped by 4 billion Mcf —
from 18 to 14 billion Mcf." One-third of this drop (1.3 billion Mcf) was due to a
computational error in the 1967 reserves for Texas R.R. Commission District
10. The error resulted in an overstatement of reserves in that district by .65
billion Mcf. When it was discovered in 1968 it was subtracted from the 1968
revisions.' As a result, a comparison of '68 with '67 shows an erroneous drop in
reserves of 1.3 billion Mcf (double the .65 billion Mcf error).
How do the mechanics of the internal reporting work? Is there a system
of checks through which data are channeled before publication? If adequate safe-
guards do exist, how did an error of this magnitude escape unnoticed?
Since the error was discovered in 1968, why was it withheld until 1969 when
the 1968 report was published, rather than made known as soon as it was
discovered? It is not uncommon for reporting agencies to send an errata sheet
to the users of their statistics.
This is not to suggest that it would be comforting to know that supply in '68
was .65 billion higher and in 1967 .65 billion lower than reported. But to the
extent that these data are to serve the decision maker as a signal of changing
conditions, it does make a difference when the change is reported. The earlier
the signal is received, the less drastic is the action necessary to correct imbal-
ances.
From the accounting point of view, the procedure used in correcting for this
error leaves much to be desired. Revisions refer to adjustments in gas reserves
due to the availability of new geological and engineering information on res-
ervoir characteristics. Certainly a computer error does not belong in this
2 Wallace F. Lovejoy and Paul T. Homam, Methods of Estimating Reserves of Crude Oil,
Natural Gas, and Natural Oas Liquids, (Baltimore, Maryland : The Johns Hopkins Press,
1965), pp. 97-144.
=» A.G.A., op. cit., p. lO.'?.
* Ineldentally, an earlier definition (used up until 196(5) of proved gas reserves made
no explicit reference to economic conditions, but was qualified only with the proviso "under
operating practices". Proved reserves of oil on the other hand were defined "under existing
economic and operating conditions". A.G.A., Reserves of Crude Oil, Natural Gas Liquids,
and Natural Gas in the U.S. and Canada, as of December, 1965, pp. 6, 20.
s A.G.A., op. at.. Table VIII. p. 121.
' Letter of Ed Parkes, Chairman of the Committee on Natural Gas Reserves to Honor-
able Lee C, White, dated July 11, 1969.
731
category/ Assuming the only medium for reporting this error were the 1968
report, it would have been far better to report errors of this nature unde a
separate category, and trace them to their year of origin. This should do much
to improve our notion of how gas reserves have been behaving.
In itself this error does not constitute the central problem. But it is sympto-
matic of a situation that requires looking into. There may also be a problem
of consistency and timing in the reporting of revisions. The effect is very similar
to that of accumulated depreciation deducted in one or two years leaving several
years with inflated profits and others with enormous losses. To some it may not
matter when the depreciation is deducted — in one year or over several years.
But no businessman would settle for such an accounting method. No decision
maker can function effectively when his notions about the underlying condi-
tions are subject to distortions by accounting imbalances. Data must reflect the
underlying situation, if the decision maker is not to be lulled into complacency
at one time, or rushed into hasty action under crisis conditions in another — when
in fact neither may be warranted.
The task of developing reserves data parallel to A.G.A.'s to serve as a source
of independent check may not be feasible for some time. But with so little
known about available reserve data. I reiterate what I said earlier: it would be
wise to require these data to pass the scrutiny test just as any other evidentiary
material. This means that the process of compiling these data should be exam-
ined by the FPC to learn in more than a superficial way about the specifics that
go into the make-up of these data. Where necessary, recommendations for im-
provements should be made — that is, if these data are to be accepted as
evidence. The inquiry can be conducted by a third party, if necessary.
The task will take time to complete. For the present, it is inevitable that these
data will have to be used in reaching a decision, as no alternative source of
information exists. It would be very wise though to treat any findings on the
basis of these data as provisional, and to limit the duration of any policy measure
taken by the FPC on the basis of these findings to the time period necessary
to complete such an inquiry.
J. Daniel Khazzoom.
Exhibit E
Memorandum to : The Chairman, Vice Chairman Brooke, Commissioner Bagge,
Commis.sioner Carver, Commissioner O'Connor, Bureau and Office Heads.
From : Chief, Bureau of Natural Gas.
Subject : Meeting on Gas Reserves Estimation Methods.
I have scheduled a meeting with Mr. John Jacobs, Chairman of the American
Gas Association's Committee on Natural Gas Reserves, to discuss the A.G.A.'s
methodology in developing reserve estimates. Mr. Jacobs may be accompanied
by one or more committee members. The meeting will be held 'Thursday, April 2,
1970, at 2 :00 p.m. in Room 2043.
Due to limited space, stafi: participation should be limited to those who can
derive the most direct benefit from these discussions.
Thomas J. Joyce.
Exhibit B
Febeuaey 13, 1970.
Memorandum to : The Chairman.
From : Producer Division, Bureau of Natural Gas.
Subject : Reliability of Proven Reserve Estimates.
It is believed the reliability of gas reserve estimates for any specific reservoir
or field initially is suspect. As the field or re.servoir is more fully developed by
additional drilling and production proceeds, the reserve estimates are revised
on the basis of such additional information and are much closer to the ultimate
recoverable reserves. However, even after considerable production experience,
unforeseen happenings such as failure of wells or an entire reservoir could make
the estimate erroneous.
^ NpRative extensions Is another instance where data are reported under revisions when
in fact they do not belong to tliat category. When the size _of the reservoir proves to be
larprer than orlpinally estimated, the difference in gras volume is reported as extensions.
But when the reservoir size turns out to be smaller than originally estimated the difference
is reported as negative revisions rather than extensions.
732
In assembling a total of reserve estimates, such as the AGA figures, the in-
cipient initial unreliability of the individual estimates are of course reflected in
the total. AGA recognizes this and by its use of revisions from year to year cor-
rects, to a considerable degree, the first estimate errors. Thus, in the AGA reserve
estimate series, a particular year (especially the latest) may be off.
The value of the AGA reserve estimates is that it is a statistical series com-
piled on a fairly consistent basis yearly and can be reliable when used as a trend
or guideline. Thus, a reversal from the past in an aspect of the series such as
the ratio of yearly findings exceeding yearly production if confirmed in the sub-
sequent year with production exceeding estimated findings appears to be a relia-
ble signal that additional exploratory effort is needed to enhance the existing gas
supply,
BBILIABILITY OF INDIVIDUAL FIELD EESEBVE ESTIMATES
An example of disparity in initial recoverable reserve estimates is extracted
from the Commission's Opinion No. 351 in the CATCO producer case. From 27
FPC 107, the following excerpt is taken.
Millions of cubic feet at 14.73 Ib/in^a
CATCO
Tennessee
Examiner*
Initial recoverable reserves
Recoverable reserves as of Jan. 1, 1960
Salable reserves as of Jan. 1, 1960
711,017
650,065
642,660
1,322,921
1,261,969
1, 245, 410
1,305,315
1,244,363
1,228,195
I Tfie examiner admitted the experts' testimony conflicted, but after a detailed analysis selected the factors he thought
better supported and derived his estimated reserve figure. 29 FPC 133.
The record shows that the major differences between CATCO and Tennessee
relate to net pay (thickness of gas bearing formations), areal extent of the reser-
voirs, porosity values, and connate water content. In important instances, there
were unreconcilable differences between the experts for CATCO and Tennessee,
and the staff in its brief contended that the recoverable gas reserves of the four
fields cannot be determined from the facts and testimony submitted by the par-
ties. The staff, however, advocated using Tennessee's higher estimate to avoid
injuring the public. On our part, the record does not permit us to arrive at a defi-
nite conclusion with respect to these reserves. . . ."
THE SHIP SHOAL BLOCK 28 FIELD RESERVE ESTIMATE
One of the most glaring miscalculations of initial reserve estimates occurred in
connection with Transco's purchase of gas from several producers from offshore
Louisiana in the Block 28 Ship Shoal Field. Transco's certificate application was
in Docket No. G-16603. The original recoverable reserve estimates in 1959 was
202,050 MMcf and Transco's contracts with the producers had take-or-pay
provisions based upon a 1 to 8030 ratio of recoverable reserves.' In 1960, the
recoverable reserve estimate was 278.711 MMcf and in 1961, the estimate was
795,272 MMcf. In 1963, after addition of a deeper zone in 1961. the original recover-
able reserve estimate had increased to 1,295.719 MMcf, a five-fold increase over
the original estimate. This rapid increase in recoverable reserves, combined with
other factors caused Transco to go into a large gas prepayment position (in the
order of $30 million but reduced to $16 million at the end of 1968).
THE RAYNE FIELD IN-PLACE SALE RESERVE ESTIMATES
Opinion No. 322 (21 FPC 865) states the original recoverable reserve estimates
for Rayne Field in 1959 were 988,771,000 Mcf and cites evidence of additional
reserves in untested sands.
In Opinion No. 378 (29 FPC 251), Texas Eastern, the in-place purchaser, had
increased its holding from approximately 79% to 81.5% and the reserve estimate
was 1,021,329,000 Mcf.
After approximately ten years of production, in Opinion No. 565, the original
recoverable reserve estimate used was 974,067,000 Mcf and was not contested in
the proceedings. The figure was used principally to establish a rate of take for the
producers.
- Take-or-pay provisions were later amended to be based upon a 1 to 7300 ratio and In
some contracts on a definite minimum quantity. Make-up time was also extended and is now
ten years.
733
The reserve estimates in this case were fairly consistent throughout and the
original estimate in 1959 was apparently a good one.
SUMMARY
Producer Division concludes that certainly initial reserve estimates are not
necessarily reliable for concluding a gas supply shortage exists but that a
statistical series, such as the AGA reserves studies consistently compiled over a
period of years and revised as additional information is obtained, is reliable
as a signal or trend to alert the Commission and the industry of a gas supply
problem. This is especially true if the first signal, i.e., excess of production over
findings is confirmed in a second year.
Edward M. McNanus,
Chief, Producer Division.
Exhibit A
U.S. Memorandum
February 12, 1970.
To : Chairman Nassikas.
From : Chief, OflBce of Economics.
Subject : Comparison of Form 15 and AGA Statistics for Gas Reserves.
We have made a quick check of the consistency of the reserves data reported
to FPC on Form 15 and the reserves data published by AGA. Our results are
summarized below.
The trends of the two series over the 1963-1968 period are broadly similar, in
that they both advance year-by-year until 1968 when they both declined. The
annual changes, however, can hardly be said to match each other, as shown below :
below :
Increase (or decrease) over
previous year, M ft^
AGA (revised)' Form 15
1964 4,698 453
1965 5,282 2,255
1966 2,208 3,624
1967 3,623 3,694
1968 (6,046) (3,392)
1 AGA total excluding reserves in Alaska, California, Illinois, Michigan, and Indiana. Reserves in these States are no
reoorted in form 15.
In the first two years, 1964 and 1965, the increases reported in Form 15 were
much smaller than the increases reported by AGA. In the next two years. Form
15 showed larger increases in reserves than the AGA data, while in 1968 the
decline shown in Form 15 was much smaller than the decline reported by AGA.
The AGA total of proved reserves at the end of 1968 was lower than at the end
of 1965. but the Form 15 total was 2 percent (or 3.9 billion Mcf ) higher.
The differences noted above may be entirely consistent with 100 percent ac-
curacy in the two series, since the series measure different quantities. Form 15
applies to dedicated reserves, defined as "remaining recoverable salable gas
reserves committed to, controlled by, or possessed by the reporting pipeline com-
pany." Form 15 reserves are those reserves covered by FPC certificate author-
izations.^ The AGA estimates are for proved reserves, which presiunably include
the dedicated reserves pledged for FPC certificates, plus the reserves underlying
intrastate contracts, plus all other economically recoverable reserves in proven
acreage. There is of course no rea.son why the two annual series should always
move together or maintain a constant relationship to each other, since the inter-
state pipelines may succeed in contracting for a very high proportion of new
reserve additions (or uncommitted reserves) in one year and a low proportion in
another year.
We probably have reliable information on the reserves available to support
the certificated volumes of interstate pipeline companies, and we are therefore
able to .speak confidently about the adequacy of these reserves to serve the
1 Warranted resprves (i.e., reserves guaranteed by contract but not supported by the
dedication of specific proved sources of supply) are also included in Form 15.
734
existing market, but our knowledge of uncommitted volumes is limited to the
information we can glean from the more comprehensive AGA statistics which
we have no way of corroborating. FPC auditing of the approximately 70 per-
cent of the AGA total which is reported on Form 15 tells us nothing about the
reliability of the estimates for the remaining 30 percent.
We have also compared the AGA and Form 15 reports area by area for 1964
and 1968, using the published geographical breakdowns. This comparison revealed
some surprisingly large differences between the two sets of estimates. The prin-
cipal ones are listed below :
1. In the San Juan Basin Area, the Form 15 reserves are about 40 percent
larger than the volumes reported by AGA. In Texas District 8 and in Wyoming,
the Form 15 reserves are also appreciably larger than the corresponding AGA
estimates. If both estimates rely on the same economic and geologic assumi)-
tions — apparently they do not — the Form 15 data should never exceed the AGA
estimates unless there are reporting errors.
2. The Form 15 data provide very low coverage — 35 percent or less — in several
parts of Texas. The size of the Form 15 "sample" is only 20 percent of the AGA
estimate in District 3. 30 percent in District 6, and 35 percent in District 4.
3. Between 1964 and 1968, the changes rejjorted by AGA and Form 15 were
in opposite directions in several areas. AGA reports a decline of 1.4 billion Mcf
in Oklahoma from 1964 to 1968, while Form 15 shows an increase of 0.9 bil-
lion Mcf. On the other hand, in Texas District 4 AGA reports an increase of
1.6 billion Mcf during this period and Form 15 shows a decrease of 0.4 billion
Mcf. There are other areas where the reported changes diverge. On the surface,
large divergences of this sort are suspect, although it is always possible that
they actually reflect major shifts in the relative holdings of interstate pipelines
and others.
4. In several areas where the AGA and Form 15 estimates move in the same
direction from 1964 to 1968, the magnitudes of the increases or decreases are
surprisingly wide apart. For example :
Change, 1964 to 1968
(billion Mft3)
Area AGA Form 15
Kansas _ —2.8 —1.3
North Louisiana —.6 —1.3
South Louisiana +9.5 +6.2
Texas, District8 +2.2 +9.1
These results of our AGA-Form 15 statistical comparisons are not necessarily
indicative of conflicting estimates, but they serve to illustrate how difiicult it is
to use the data from one source as a check on the accuracy of the data from
the other source.
Haskell P. Wald.
Federal Power Commission,
Washington, D.C., June 24, 1971.
Hon. ,
House of Representatives,
Washington, B.C.
Dear Congressman : You have inquired concerning a series of falsely mislead-
ing articles in the Washington Post and other newspapers carrying Jack Ander-
son's syndicated column styled, "The Washington Merry-Go-Round."
I can assure you that the integrity of the regulatory process is being fully
protected and observed at the Federal Power Commission by the Commission
and by myself as Chairman, and I categorically repudiate any assertions to the
contrary.
I am pleased to report that hearings relating to Federal Power Commission
proceedings for the prescription of just and rea.sonable rates protective of the
consumer interest have been announced by the House Small Business Commit-
tee, scheduled to begin on July 12, 1971. Specifically, we have been advised
that the testimony of the Federal Power Commission will include a discussion
of the following :
735
(1) Raw fuel companies acquiring competing energy resources and its effect
on the natural gas shortage.
(2) Coal supply shortages and increases in electric power rates.
(3) FPC procedures for estimating natural gas reserves and recent state-
ments challenging their validity.
(4) Brief discussion of the action taken by FPC to alleviate the natural gas
shortage.
AVhen these hearings have been concluded, the Committee Print will be avail'
able for public distribution.
I have enclosed a letter to you from the Federal Power Commission's General
Counsel, Gordon Gooch, which is further responsive to your inquiry.
Very truly yours,
John N. Nassikas, Chairman.
Enclosures.
Federal Power Commission,
Washington, D.C., June 24, 1971.
Dear Congressman : Your letter referring to a recent series of
articles appearing in the Washington Post herein "Post," (and other pai)ers) on
June 14, 15, 20, and 23. 1971, under the by-line of Jack Anderson pertaining to
a gas case pending before the Commission has been received. The Anderson
articles advert to a gas rate ease, the Southern Louisiana Area Rate cases,
AR61-2, AR69-1. which are i>ending before the Comiuission for decision now,
some 10 years after the case was first instituted, and after one appeal to the
Court of Appeals and after petitions for writs of certiorari were denied by the
Supreme Court of the United States. Please be assured that the claims made
in those columns are materially inaccurate and that omissions of material facts
have been made. As an index to the credibility of the articles, I enclose for your
consideration (1) a copy of Staff Exhibit 31-A in evidence in AR69-1 (see
Schedule 1, lines 20, 21) which is the evidence on reserves which Chairman
Nassikas is alleged to have suppressed (Post, June 14) Appendix 1 (2) a copy
of the "Errata to Stafif Reply Brief" noting the dissent of the Office of Economics
to portions of the Staff reply brief prepared by my office (Post, June 14 and 23),
Appendix 2 (3) a copy of the order of the entire Commission waiving the ex-
aminer's (Mr. Rendelman) decision in the case (Post, June 14) Appendix 3.
I invited the Anderson associate who telephoned me to come to the Commis-
sion to review the evidence in the public record in the Southern Louisiana area
rate cases, but he declined to do so.
While reporters such as Mr. Anderson are entitled to considerable license in
the interpretation that they choose to place on such data as they wish to con-
sider, conclusions made in newspapers are no substitute for evidence presented
in cases before the Commission, nor are charges made in newspapers a substitute
for judgments which Commissioners must make in the discharge of their re-
sponsibilities. It is now up to the five Commissioners to examine the evidence
adduced by all parties to that proceeding, including the Commission Staff, to
con.sider all arguments dealing with fact, law, or policy, and render a decision
setting just and reasonable rates for the sales of natural gas to interstate pipe-
lines in Southern Louisiana. That decision will be subject to appeal to the
United States Court of Appeals by any party. Thus, the rates finally set will be
tested, both by the Commission and the Courts, against the legal standards vset
by Congress and the applicable Court decisions. The Commi.ssion must e.stablish
a rate which will assure the public that gas supplies will be available when
needed. The decision of the Commission in the Southern Louisiana case will be
made public when issued.
Very truly yours,
Gordon Gooch,
General Counsel.
Enclosures.
736
Appendix 1
EXHIBIT NO. S/^^ (VHZ-2)
WITNESS; Victor H. Zabel
Federal Power Commission
bureau of haoisial oas
GAS RESERVES AND PRODUCTION DATA
PROM PPC
FORM 15
AND SUPPLEMENTAL
SOURCES
SOUTHERN ]
LOUISIANA
DECEMBER
31,
1969
WASMNaroN. a c 20426
September, 1970
Docket No. AR69-1
Area Rate Proceeding
Southern Louisiana Area
737
GAS RESERVES AND PRODUCTION DATA FROM FPC FORM 15 AND SUPPLEMENTAL SOURCES SOUTHERN
LOUISIANA— DOCKET NO. AR69-1, AREA RATE PROCEEDING SOUTHERN LOUISIANA AREA-TABLE OF CONTENTS
Description Item Pa!e No.
Summary of gas reserves and production, State area and Federal domain, As of Dec. 31, Schedule No. 1 1
1969.
Gas reserves and production trends 1963 to 1969.. Schedule No. 2 2
Trends in remaining recoverable gas reserves, 1963 to 1969 Chart No. 1 3
Trends in annual gas production 1963 to 1969 ..- Chart No. 2.. 4
Trends in annual revisions and additions to gas reserves 1964 to 1969 Chart No. 3 5
Trends in new gas reserve additions, 1964 to 1969 _ Chart No. 4 6
Gas production from available recoverable gas reserves 1963 to 1969. Schedule No. 3 7
Trends of annual gas production from available recoverable gas reserves, 1963 to 1969.. Chart No. 5 8
Summary, report of uncertificated gas reserves contracted by Interstate Pipeline Com- App. A 9
panies in southern Louisiana area as of Dec. 31, 1969.
738
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741
SOUTHERN LOUISIANA AREA
TRENDS IN REMAINING RECOVERABLE GAS RESERVES
1963 TO 1969
(DATA FROM FPC FORM 15 REPORTS)
100
90
80
Warrwty Conbaetf
Onshofi I
> $tit«Araa
Zontl (
Fedaial Domain
70
CO
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1963~ir&i~r555~9SS'"fS57 ISSSlsTs
lUU
1 1 1 1 1
RELATIVE IMPORTANCE
OF FEDERAL DOMAIN '
(Excluding Warranty Contracts) ;
90
»
80
y' '■'
^
^\ 1 i
PERCENT OF ; i j
TOTAL OFFSHORE [
70
\
■ \
<
1
60
i ' i !
1 i i
PERCENT
\ 1
\
1 1
40
30
y
r 1 i
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y
^ . . . \
y
^ ' 1 ■ >
PERCENT OF ' '
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TOTAL AREA 1 |
20
: \ \ >
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L'.,^. i
i
M i !
0
! i M i
1S53 1S&4 1S55 ISS: 1357 1952 1969
Pas'; 3
\
742
SOUTHERN LOUISIANA AREA
TRENDS IN ANNUAL GAS PRODUCTION
1963 TO 1969
(OATA FROM FPC FORM 18 REPORTs)
Chart Mo. 2
5500
CO
<§; 3000
00
=)
o
110
100
2500
2000
\m ^mi \m m^ ^
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1Sd3 1554 1955 19S6 19S7 19.53 1969
-L
RELATIVE IMPORTANCE
OF. FEDERAL DOMAIN
(Excluding Warranty Con'racts,'
H U '
70
60
^50
40
30
PERCENT OF
TOTAL OFFSHORE | i
I I
PERCENT OF
TOTAL AREA
/■ :
■^ I
I9S3 1954 1965 1955 1967 195^^ 1959
Page 4
9000
20OO
lOOO
743
Chart No 3
SOUTHERN LOUISIANA AREA
TRENDS IN ANNUAL REVISIONS AND ADDITIONS
TO GAS RESERVES
1964 TO 1969
(DATA FROM FPC FORM 15 REPORTS)
Watianty Cantiacts
Onshoia ,
Stata Area
Zone 1
Faileral Domain
'4^
ii
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120
110
100
90
80
: 70
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50
40
30
20
10
a:
RELATIVE IMPORTANCE
OF FEDERAL DOMAIN
(Excluding Warranty Contracts)
t
i
!
Ai :
1 1 / \ !
PERCENT OF / j . j
OFFSHORE 1/ 1 J '
1 1 / 1 X I
/
\
/
i\
/
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/
^
j
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/
PERCEN- OF
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19S3 19S4 1955 1966 1957 1968 1959
1963 1954 1955 1956 IS5:' TdS 1959
Page 5
27-547 O — 74-
-48
744
Chart No 4
SOUTHERN LOUISIANA AREA
TRENDS IN NEW GAS RESERVE ADDITIONS
1964 TO 1969
(data from FPC form 18 REPORTS)
1963 I9&« 19S5 1965 1967 1958 1969
1963 1964 1955 :?65 1967 1958 1969
Paee 6
745
SCHEDULE NO. 3
SOUTHERN LOUISIANA AREA GAS PRODUCTION FROM AVAILABLE RECOVERABLE GAS RESERVES,
1963 TO 1969, DATA FROM FPC FORM 15 REPORTS
[All volumes in MM ft ' at 14.73 lb/in 2 a]
Line Year
(a)
Remaining
reserves
(b)
Annual
production
(0
Total annual
reserves
(d)
Percent
produced >
(e)
1 Onshore
2 1963 43,559,415 2,082,065 45,641,480
3 1964 42,201,342 2,234,855 44,436,197
4 1965 . 41,503,948 2,332,622 43,836,570
5 1966 39,502,368 2,503,191 42,005,559
6 1967 - 39,105,538 2,695,555 41,801,093
7 1968 36,944,246 2,854,611 39,798,857
8 1969 - 34,034,982 3,097,331 37,132,313
Offshore zone 1:
9 1963 4,452,301 152,193 4,604,494
10 1964 4,674,285 147,710 4,821,995
11 1965 5,095,395 185,614 5,281,009
12 1966 6,003,155 216,336 6,219,491
13 1967 6,013,176 335,760 6,348,936
14 1968 5,454,050 337,255 5,791,305
15 1969 - 5,254,425 387,178 5,641,603
Total State area:
16 1963 48,011,716 2,234,258 50,245,974
17 1964 46,875,627 2,382,565 49,258,192
18 1965 46,599,343 2,518,236 49,117,579
19 1966 45,505,523 2,719,527 48,225,050
20 1967 45,118,714 3,031,315 48,150,029
21 1968 42,398,296 3,191,866 45,590,162
22 1969 39,289,407 3,484,509 42,773,916
Federal domain:
23 1963 14,048,448 489,347 14,537,795
24 1964 14,570,795 556,706 15,127,501
25 1965 17,088,894 616,692 17,705,586
26 1966 18,868,044 789,268 19,657,312
27 1967 21,221,801 952,254 22,174,055
28 1968 23,710,877 1,121,370 24,832,247
29 1969 27,659,043 1,464,405 29,123,448
Total southern Louisiana area:
30 1963 62,060,164 2,723,605 64,783,769
31 1964 61,446,422 2,939,271 64,385,693
32 1965 63,688,237 3,134,928 66,823,165
33 1966.... 64,373,567 3,508,795 67,882,362
34 1967 66,340,515 3,983,569 70,324,084
35 1968 66,109,173 4,313,236 70,422,409
36 1969 66,948,450 4,948,914 71,897,364
4.6
5.0
5.3
6.0
6.4
7.2
8.3
3.3
3.1
3.5
3.5
5.3
5.8
6.9
4.4
4.8
5.1
5.6
6.3
7.0
8.1
4.2
4.6
4.7
5.2
5.7
6.1
6.9
1 Column (c) divided by column (d)XlOO.
Note: Warranty contracts not included.
746
Chart No 5
SOUTHERN LOUISIANA AREA
TRENDS OF ANNUAL GAS PRODUCTION
FROM AVAILABLE RECOVERABLE GAS RESERVES
1963 TO 1969
{DATA FROM FPC FORM 15 REPORTS)
10
9
8
7
6
5
4
3
2
1
S 0
UJ
1 10
9
8
7
6
5
4
3
2
ONSHORE
J
J
/
^
/
^
1
i
!
TOTAL STATE AREA
! ■ i i
h-^^
I ! I -I ! I I r
1963 1964 1955 1965 1957 1958 1959
7
6
5
4
3
2
1
0
5
4
3
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1
0
■7
6
5
4
3
2
1
0
Page 8
OFFSHORE ZONE
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! / 1 1
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1963 1964 1965 1965 1967 1968 1959
747
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748
Before the Federal Power Commission
Docket Nos. AR61-2, et al. and AR69-1
Rate Proceedings (Southern Louisiana Area)
errata to staff reply brief
The following changes should be made in the reply brief submitted by the
staff in these consolidated proceedings.
1. A footnote should be added immediately following the heading at the top of
page 14 to read as follows :
"^ The views expressed at pages 14-38 of this brief dealing with econometric
issues are solely those of the Commission's Office of Economics."
2. The heading at the top of page 38 should be changed to read as follows :
"VII. The OflSce of Economics' Conclusion : The Commission Should Use the
Staff's Econometric Model."
3. A footnote should be added immediately following the heading at the top of
page 39 to read as follows :
"^ The views expressed at pages 39-41 of this brief dealing with the reliability
of cost estimates are not the views of the Office of Economics."
4. A footnote should be added immediately following the heading at the top of
page 42 to read as follows :
"^ The views expressed at pages 42-48 of this brief dealing with new gas well
gas cost issues are not the views of the Office of Economics."
Respectfully submitted.
RiCHADR V. Mattingly, Jr.,
Commission Staff Counsel.
Federal Power Commission — Order Granting Motion for Omission of
Intermediate Decision Procedure
Before Commissioners : John N. Nassikas, Chairman ; Lawrence J. O'Connor,
Jr., John A. Carver, Jr., and Albert B. Brooke. Jr.
Area Rate Proceedings (Southern Louisiana Area). Dockets Nos. AR61-2,
et al. AR69-1.
(Issued March 15, 1971)
On February 4, 1971, the Commission's staff filed in these dockets a motion
for omission of the intermediate decision procedure. The motion was reported
to the Commission by the Presiding Examiner on March 5, 1971, following the
filing of answers. Virtually all of the principal intervenors support the motion.
The only objection was filed by the American Public Gas Association.
There is a clear need to bring these proceedings to a conclusion as quickly as
possible. Reference to the procedural history of the proceedings will show that
it has been almost 10 years since the original Southern Louisiana area rate pro-
ceeding was instituted. Gas consumers and producers both are entitled to the
establishment of definite prices at the earliest possible date. The adequacy of
current gas reserve inventories to meet the increasing requirements for service
is a matter of increasing concern, and it is important that the Commission evalu-
ate the evidence at the earliest practicable time. At the present time and until
a decision is reached hprein. the i>rod'icer in Southern louisiana does not know
what the just and reasonable rate is for past sales, nor what the rate will be for
future discoveries. This un^ertiintv as to lo^^h past and fut'ire rates can serve
only to discourage exploration for new reserves. Such uncertainty can best be
eliminated by the prompt rendering of a decision herein.
Reference is made in the motion to the procedural circumstances here involved.
As a result of the court review proceedings in Docket Xos. AR61-2. ct al., the
rates previously set by the Commission in Opinion Nos. 546 and 546A are sub-
ject to modification. By order issued December 24, 1970, the AR61-2 proceeding
was reopened and consolidated with the second-round proceeding in Docket No.
AR69-1. It would not be appropriate to require or even permit a further inter-
mediate decision in Docket Nos. AR61-2, et al., since such procedure would
place the examiner in the position of reviewing the prior orders of the Commis-
sion. Nor is there any reason to require an examiner's decision in Docket No.
AR69-1. In order to act on the issues in the reopened proceeding in Docket Nos.
AR61-2, ct al., the Commission must have before it not only the record in Docket
749
Nos. AR61-2, et al., but also the record in Docket No. AR6&-1. This serves to
demonstrate the basic interrelationship and interdependence of the consolidated
proceedings, and indicates clearly that the proceedings should not be severed
for purposes of decision, intermediate or otherwise.
Finally it is noted that the parties are virtually unanimous in their support
of the motion. The major common-interest group participants supporting the mo-
tion include the Associated Gas Distributors, The United Distribution Com-
panies, the Pipeline Purchasers, the major producers respondents, and the Com-
mission's staff. The only objecting party is the American Public Gas Association.
However, the APGA in its answer to the motion sets forth no facts which would
warrant requiring an intermediate decision in light of the substantive and proce-
dural considerations discussed above. The motion for omission of the intermediate
decision procedure will accordingly be granted.
The Commission finds:
That due and timely execution of its functions imperatively and unavoidably
require that the intermediate decision procedure be omitted in these consolidated
proceedings.
The Commission orders:
(a) The intermediate decision procedure in these consolidated proceedings
shall be omitted.
(b) Oral argument before the Commission shall be omitted.
(c) Initial briefs shall be filed on or before April 15, 1971.
{d ) Reply briefs sliall be filed on or before May 6, 1971.
By the Commission.
Kenneth F. Plumb, Acting Secretary.
Area Price Regulation in the Natural Gas Industry of Southern Louisiana f
William P. Diener *
Production of hydrocarbons in the fields of southern Louisiana is a matter of
increasing interest, both locally and nationally. The oil and gas industry is the
most important single economic factor in the State of Louisiana.
The fact is that more than $1 million in taxes and fees is generated for [t'his'\
State every day of the year — and this represents more than half of all the income
which Louisiana realizes from any State source. Furthermore, $2 million per day is
invested in the cost of drilling and equipping oil and gas wells or drilling dry
holes — the largest capital investment in Louisiana.^
Louisiana's production of natural gas is particularly important to the entire
nation. Southern Louisiana, including the offshore areas, is the leading natural
gas source in the United States, according for about 33 percent of production and
30 percent of proved resefves.^ This article will focus on the producing segment
of the natural gas industry in southern Louisiana and the area price regulations
applicable to that segment.
Since 1954, when wellhead rates of "jurisdictional" sales of natural gas were
first subjected to regulation,'' the Federal Power Commission has generally held
the line on price increases by the producers. This hard-line approach, utilizing
traditional cost-of-service analysis while largely ignoring supply and demand,
alternative investment opportunities, and prices of alternative fuels, has been a
prime factor in the decline of exploration and developmental drilling and the re-
sultant decline in the nation's inventory of gas reserves. Thus, the actual im-
plementation of area price regulation has obtained a bargain fuel for the public.
tThe views expressed in this article are tliose of the author and not those of the Federal
Trade Commission or any other Rovernmental agency or commission.
♦Member of the Indiana Bar ; attorney. Bureau of Competition. Federal Trade Commis-
sion. B.A. 1964. Wabash College ; J.D. 1968, Indiana University ; LL.M. 1972, George
Washington University.
1 Hearings on H.R. 6737 and H.R. 5757 Before the Suhcomm. on Communications and
Power of the House Comm. on Interstate and Foreign Commerce, 90th Cong., 1st Sess. 11
(1967) (statement by Representative Hale Boggs).
2 American Gas Ass'n, Reserves of Crude Oil, Natural Gas Liquids and Natural Gas In
the U.S. and Canada (1970) (the statistics exclude Alaska).
3 The Supreme Court held that jurisdictional sales of natural gas were subject to gov-
ernment rate regulation in Phillips Pet. Co. v. Wisconsin, .S47 U.S. 672 (1954). Through-
out this article the term "jurisdictional" sales will refer to sales of natural gas either In
the interstate market or from federal lands. The term is a shorthand notation for the gas
that has been subjected to FPC regulation.
750
We are now paying the price for this short sighted policy— the inability of pipe-
lines to obtain sufficient supplies to meet consumer demands.
The debate over producer deregulation has been, and continues to be, a con-
troversial issue. What are the consequences of an absence of produced rate
regulation? This case study of the southern Louisiana area indicates that the
lack of competition among producers could have adver.se results. Tiie Louisiana
seller market is concentrated, with a high degree of accompanying bargaining
power going to the large producers, the major oil companies. Entry barriers
appear to be increasing, particularly barriers caused by rising exploration and
development costs. Too many structural imperfections exist in the southern
Louisiana natural gas producing industry to expect effective producer compe-
tition. Even aasuming there was no regulation, antitrust laws could not, or
would not, be enforced to remove these market imperfections. Thus, regulation
ol wellhead rates is necessary, however, a method more satisfactory than the
early approaches to area pricing must be found and implemented. General
knowledge of the economic and legal background of natural gas rate regulation
is a prerequisite to understanding the producers faced in the recent Federal
Power Commission proceedings to set producers' rates for southern Louisiana.
BACKGROUND
The natural gas industry may be divided into three distinct segments : pro-
duction, transmission, and distribution. Transmission companies (pipelines)
pipe gas from sources of supply to retail service areas where gas is wholesaled
to local distributing utilities for resale to consumers. Since this article analyzes
the production segments and the relations between producers and pipelines,
that portion of the industry concerned with distribution will not be considered.
Domestically produced natural gas is supplied by about 4700 independent
producers. There are 4630 small producers, those with annual jurisdictional
sales of ten million Mcf (thousand cubic feet) or les?. Small producers ac-
counted for about ten percent of the total 1968 United States jurisdictional
sales of natural gas.* Some 263 domestic producers and four foreign suppliers
provided 92 percent of the interstate pipelines' requirements in 1968." Twenty-
four domestic producers supplied almost 70 percent of the gas purchased by
interstate pipeline companies in the same year.' Thus, the term "independent
producer" is more a word of art than a functionally descriptive term.
The major producers of natural gas are the oil companies. Since gas is often
discovered or developed along with oil. and by similar technology, the role
of the oil companies in natural gas production could reasonably have been
anticipated. Of the 287.3 trillion cubic feet of total proved natural gas reserves
at the end of 1968. eighteen major integrated petroleum companies controlled
about 6.5 percent.' Approximately 37 percent of these resen-es was controlled
by four companies — Standard Oil of New Jersey, Standard Oil of Indiana,
Gulf Oil Corporation, and Texaco.®
The transmission and distribution segments of the gas industry are themselves
major industries. Tlie natural gas pineMne and distribiiting industry ranked
sixth in total gross investment in 1969.° Many of the transmission companies are
integrated to varying degrees, some backward into producing {r.ff., Pennzoil
United. Tenneco). some forward into distribution (r.g., Columbia Gas System,
Inc.), and almost all own some wells and reserves. The transmission segment of
the natural gas industry is composed of larp'e, beavilv-panifai'z<"d fi'-ms. A shpcpss-
ful gas system must be large : the system must provide dependable and adequate
pipeline service, obtain preconstruction contracts to insure markets, own or con-
trol tremendous reserves, and so forth. "The technological intpgration of a natural
gas system produces enormous pressures for economic integration : to make sure
of success at any one level of operation it is ndvantageous to have some measure
of control ovef the other two." ^^ In descriliing the state of the industry in 1935,
one commentator noted that the "producer had shared in the building of pipelines.
*FPC Prpss Release No. 20.1fiO04 (.Tnlv 23. 1970).
BFPC, Sales by Producers of Natural Gas to Interstate Pipeline Companies, at 2 (1968).
8 T(f.
7 Standarrt & Poor's Industry Surveys 57 (Dee. 11. lOfif)) (Oil).
^ Td. In addition to oil and sras. the maior oil comp.Tnies currently control twenty ner-
cen*^ of the United States coal production, nrobahly n irreater share of coal reserves, and an
estimated 80 percent of uranium reserves. Business Week, Nov. 7, 1970, at 54 ; Oil & Gas J.,
Mar. 1. 1971. .nt 19.
B Standard & Poor's Industry Surveys 56 (.July SO. 1970) (Utilities — Gas). The total
gross investment n-as about .'!.'^S billion at the end of 19*i9.
M R. Huitt, Public Administration and Policy Formulation 56-57 (1958).
751
The pipeline interests had leased acreage and bought utilities. Utilities had
joined pipeline ventures and had entered production." " Thus, it might prove
advantageous for a producer to have some control over a pipeline, thereby assur^
ing a captive customer for its natural gas, and accruing some cost benefits.
During periods of peak demand, these forces for integration would be even greater.
Many economists and lawyers have debated the rationale behind government
regulation of the natural gas producer." A concise statement of some major fac-
tors supporting regulation of producer rates has been presented by former Sen-
ator Paul H. Douglas. He argued that competition cannot effectively regulate the
industry. The consumer, as a result of his investment in appliances and equip-
ment, is a captive of the pipeline, and the pipeline a captive of the producer ; the
only true competition is between the pipeline companies. Senator Douglas noted
that in reality there is no effective competition among the 8,000 producers; in
fact, the "pipeline companies are tied to the giant producers in what amounts to a
monopoly situation."" In 1954, 197 pi'oducers (3.5 percent of the 8,000) sold
almost 90 percent of the natural gas retailed in interstate commerce.^" "Also of
major importance is the fact that 30 nontransporting producers and 16 utility
companies own 61 percent of the nation's estimated proven gas reserves." '^ There-
fore, he concluded that the industry's structure and behavior require govern-
mental regulation." Other economists have asserted that the production of natu-
ral gas is a competitive industry, characterized by low concentration." They have
recognized the possibility of market control by the producers ; however, they per-
sistently claim the industry is structurally competitive. Envisioning alternate
sources of supply and alternative buyers, this school has discounted the anticom-
petitive impact of long-term reser^-e contracts, immobility of pipelines, and long
time-lag between investment and production.^®
Having assumed jurisdiction over the producers' rates in jurisdictional sales
of natural gas, the Federal Power Commission embarked upon an area-wide
price setting approach. In the 1960 Phillips Petroleum Co. decision, the Commis-
sion abandoned the traditional individual company cost-of-service approach for
producers.-" Also, in 1960 the Commission instituted its first proceeding to deter-
11 Id. at 57. , . , c .^
1^ The following Integrated firms are seeking the advantages of control of other seg-
ments of the industry in southern Louisiana.
Controlled company Parent or controlling company
Pipelines : Tenneco.
Tennessee Pipeline Columbia Gas System.
United Fuel Gas Columbia Gas System.
Columbia Gulf Transmission American Natural Gas Co.
Michigan-Wisconsin Pipe Line Panhandle Eastern Pipeline.
Trunkline Gas Pennzoil United.
United Gas Pipeline Consolidated Natural Gas.
Consolidated Gas Supply Florida Gas Co.
Florida Gas Transmission Peoples Gas Co.
Natural Gas Pipeline Co Houston Natural Gas Corp.
Valley Gas Transmission
Producers :
Humble Oil & Refining Co Standard Oil of New Jersey.
Pan American Petroleum Corp. (name Standard Oil of Indiana,
changed to Amoco Production Co.).
Union Producing Co Pennzoil United.
California Co Standard Oil of California (Chevron).
Moody's Industrials and Public T'tllities Manuals 17.^8-76 (1969).
isChamplin Oil & Refining Co., Doc. No. G-9277. at 458 (FPC 1969) (testimony of
M. Adelman) ; Champlin Oil & Refining Co., 19 F.P.C. 198. 200 (1958) ; Champlin Oil &
Refining Co., l** F.P.C. 782 (1957) : Douglas. The Case for the Consumer of Natural Oas,
44 Geo L..T 566 (19.56) ; Kitch. The Permian Basin Area Rate Cases and the Regulatory
Determination of Price. 116 U. Penn. L. Rev. 191 (1967) : cf. Permian Basin Area Rate
Cases 390 U.S. 747, 795 n. 68 (1968). Although a substantial group advocates deregula-
tion, the Supreme Court has ruled to the contrary. The rates of an independent producer of
natural gas, one unaffiliated with but selling to Interstate pipelines, were held to be
within the purview of government rate regulation because the producer was engaged In the
"sale in interstate commerce of natural gas for resale." Phillips Pet. Co. v. Wisconsin, 347
U.S. 672 (1954).
1* Douglas, supra note 13, at 577.
« Id. at 584.
"7rf. at 586.
"7(7. at 60.5-06. The distribution segment is monopolistic, while the transmission seg-
ment approaches a monopoly. Id. at 576-78. The production segment Is the least concen-
trated, nn oligopoly with a small comnetitiye fringe. Id. at 578-81.
"Champlin Oil' & Refining Co., Doc. No. G-9277. at 458 (FPC 1969) (testimony of
M. Adelman) : Champlin Oil & Refining Co., 19 F.P.C. 198. 200 (1958) ; Champlin Oil &
Refining Co.. IS F.P.C. 782 (1957).
^^ See generally P. MacAvoy, Price Formation in Natural Gas Fields (1952) ; Douglas,
supra note 1.*^.
='1 Phillips Pet. Co.. 24 F P.C. 5^' (1960V aff'd sub nom., Wisconsin v. FPC. 303 F. 2d 380
(D.C. Clr. 1961), aff'd, 373 U.S. 294 (1963). In 1960. the Commission published guideline
rates for each area. Statement of General Policy No. 61-1, 24 F.P.C. 818 (1960).
752
mine just and reasonable rates under section 5(a) of the Natural Gas Act^
for producers in the Permian Basin area of New Mexico and the Texas pan-
handle, and in 1961 began a similar proceeding for the southern Louisiana area,
but did not issue its first area rate decision until 1965. In this ruling, the land-
mark Permian Basin Area Rate Proceeding," the Commission decided that the
area approach "offers a regulatory method which is best adapted to the dis-
charge of our responsibilities for protecting natural gas consumers while provid-
ing the greatest incentive to producers to continue their search for needed addi-
tions to our gas supply." '^ Although the Supreme Court affirmed the Commis-
sion's reliance on costs to determine producer area rates in Permian, a large
measure of latitude was left to the Commission. For instance, the Supreme
Court did not prohibit consideration of field prices in future area rate proceed-
ings,^ and it recognized that cost calculations were imprecise ^ and acknowledged
that noncost factors could be utilized in prescribing producer rates.^ Generally,
the Supreme Court indicated that the Commission could utilize a variety of
regulatory methods, in addition to the one affirmed by the Court."
The area ratemaking approach has been much criticized and an attempt to
discuss all the criticism is not warranted. However, the analysis of one com-
mentator is relevant. According to Edmund Kitch, the decision to impose price
control on the field market was based upon two assumptions: (1) the supply
of natural gas is unresponsive to price, and (2) price is an undesirable devise to
use in allocating available gas between competing users.^* In appraising the
two-price system in area ratemaking, one price for new gas and one price for old
and associated gas, Kitch concluded that part of the supply is responsive to
price. Of course, the supply of associated gas is an inevitable by-product of
oil production and will not be very responsive in the short run to gas prices.
Likewise, the market for old gas is not really responsive to price because the
producer is legally obligated to supply it. However, the market for new gas is
very much responsive to price.^ "The regulation creates a market in which the
amount of gas demanded is in excess of the amount that would be demanded if
purchasers were faced with prices based on the actual marginal cost of producing
the gas." '° Thus, the two-price system, coupled with the actual rates established,
may have created an artificially exaggerated demand for gas. Hence, it is impor-
tant that area prices accurately reflect long run costs of production.
2115U.S.C. 5 717d (1964).
22 Permian Basin Area Rate Proceeding, 34 F.P.C. 159 (1965), rev'd 8u1) nom., Skelly Oil
Co. V. FPC, 375 F. 2d 6 (10th Cir. 1967), rev'd sub nom., Permian Basin Area Rate Cases,
390 U.S. 747 (1968).
^-'f 34 F.P.C. at 180. The rationale and policy for the area rate approach had been out-
lined earlier in Phillips Pet. Co. v. Wisconsin, 373 U.S. 294 (1963). The Commission had
stated 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. . . ." Id. at 298-99. The cost-of-service method was
determined to be inadequate, since "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." Id. at 299. For the same rationale see Permian
Basin Area Rate Cases, 390 U.S. 747. 756-57 (1968). Further, the Commission felt the
area approach would avoid cost-allocation problems and be less of an administrative
burden. 373 U.S. at 300.
2* Permian Basin Area Rate Cases, 390 U.S. 747, 795 (1968).
^Id. at 761, 791, 804.
28 /d. at 815 n. 98.
27 /rf. at 767. 772 n. 37, 800.
28 Kitch, Regulation of the Field Market for Natural Oas hy the Federal Power Com-
mission, 11 J. Law & Econ. 243, 244-45 (196S). See also Kessel, Economic Effects of Fed-
eral Regulation of Milk Markets, 10 J. Law & Econ. 51 (1967).
2» Kitch, supra note 13, at 192.
3» Kitch, supra note 28. at 279.
Thus the consumer of natural gas will face a price based upon the average cost of all
gas — old [and] new. . . . Thus, to illustrate, the consumer may face a price based upon
an average field price of 18 cents plus transportation charges of 60 cents, but acquisition
of the supply necessary to satisfy his demand may cost a "new new" price of 26 cents.
Since more .consumers will be willing to pay 78 cents for the gas than 86 cents, the demand
for the "new new" gas will be greater than Is actually justified by its economic value to the
ultimate consumers.
753
In establishing the dual prices for a particular pricing area, the FPC con-
siders current nationwide costs in determining the price for new gas and actual
historical area production costs in determining the price for old gas. Current
nationwide costs include (1) exploration and development costs, including dry
holes, production operating expense, net liquid credit, adjustment for explora-
tion in excess of production, and other exploration costs, (2) depletion, deprecia-
tion, and amortization of production investment costs, (3) return on production
investment. (4) return on worlving capital, (5) regulatory expense. (6) royalties,
and (7) area gatliering expense.^^ These nationwide costs are determined from a
number of sources, including trade associations, producer questionnaires, the
Chase Manhattan Bank's annual financial analysis of petroleum companies, and
the United States Census Bureau. The price for old, flowing gas is determined
from historical data on costs in the i>articular FPC production area. Such area
costs would include (1) production costs (cash expense, depreciation, depletion,
and a return allowance). (2) exploration and development expenses and return,
(3) regulatory expenses, and (4) area gathering expenses.^ The use of averages
has been assailed .since they do not consider the individual producer costs. For
instance, costs vary from producer to producer depending upon gas pressure,
absence of gas impurities, depth of the producing horizon, BTU content, and so
forth.^ In a competitive situation, each producer's gas reserves would command
a price equal to its value to a pipeline ; this is not the ease where one price is
set for both high and low value reserves. The Commission has determined that
there is no need to offer a higher price for the old gas and the associated gas be-
cause the old gas is already committed to contract and the associated gas is
relatively unresponsive to price ; ^ however, a higher price is attached to new,
non-associated gas because it is more responsive to prices. "[T]he two-price rate
structure will both provide a useful incentive to exploration and prevent exces-
sive producer profits." ^
Further costs involved in regulating the industry are the costs occasioned by
the very fact of regulation, costs that must be absorbed by the regulated indus-
try. Costs of regulating the natural gas producer include administrative costs,
delay on the contract price, and contingency costs. These costs have been es-
timated as seven percent of the base price, or a 1.164 cents per Mcf burden to
the producers.'"' The overall cost of regulating gas field prices has been estimated
as $33.1 million.''
Although there are costs, direct or indirect, in regulation, the absence of
regulation may also impose costs. In 1969, 6,789 billion cubic feet of natural gas
31 See, e.g., Southern Louisiana Area Rate Proceeding. 40 F.P.C. 530. 589 (1968), aff'd
sub nom., Southern Louisiana Area Rate Cases v. FPC, 428 F. 2d 407 (5th Clr.), cert,
denied sub nom.. Municipal Distributors Group v. FPC, 400 U.S. 950 (1970).
32 40 F.P.C. at 60.3.
33 MacAvov, supra note 19, at 24.
3* Permian Basin Area Rate Proceeding, 34 F.P.C. 159, 188-89 (1965). The distinction
between casinghead gas and gas-well gas has been recently eliminated. Southern Louisiana
Area Rate Proceeding. Op. No. 598 (FPC, July 16, 1971). appeal docket sub nom.. Placid
Oil Co. V. FPC. Xo. 2761 (5th Clr., Sept. 9, 1971) ; Texas Gulf Coast Area Rate Proceeding,
Op. No. 595 (FPC, Mav 6, 1971). appeal docketed sub nom., P.S.C.N.Y. v. FPC. No. 1828
(D.C. Clr., Oct. 18, 1971) ; Hugoton-Anadarko Area Rate Proceeding, 44 F.P.C. 761, 787
(1970). appeal docketed, No. 1036 (9th Cir.. Jan. 7. 1971).
35 Permian Basin Area Rate Cases. 390 U.S. 747, 798 (1968).
38 The 1.164 cents per Mcf In costs may be further broken down to .039 cents for admin-
istration, .809 cents for delav. and .316 cents for contingencies. Gerwig, Natural Ga^ Pro-
duction: .4 Study of Costs of Regulation, 5 J. Law & Econ. 69. 85 (1962), cited in Permian
Basin Area Rate Cases, 390 U.S. 747, 786-87 n. 56 (1968). The cost from contract date to
commencement of delivery is most important.
37 The .$33.1 million total is composed of $3.1 million cost to the FPC and $30.0 million
cost to the producers. MacAvov, The Effectiveness of the Federal Power Commission, 1
Bell J. Econ. & Management Science 271. 300 (1970). The $30 million cost to the producers
represents direct expenses of certification and litigation and indirect expenses of delays
in production. If prices are reduced, a supply shortage results and the consumer losses in
output are estimated at $12 million and income distribution gains at $63 million. The net
benefit in income redistribution would be $51 million.
754
were produced in southern Louisiana.^® During 1968, revenues to southern Louisi-
ana producers were 19.84 cents per Mcf of jurisdictional sales.'"' Applying the
1968 revenue rates per Mcf to the 1969 production results in an approximate
total revenue of $1.35 billion. Assuming prices would increase if field regulation
were withdrawn from a noncompetitive market, revenues of $1.93 billion would
accrue from a price of 20.84 cents per Mcf. Thus a $70 million increase in revenues
to producers would be expected from a five percent hike in the average revenues
per Mcf.*'' This higher price could be passed on throughout the system to the
consumer or the revenues could be retained by the producer for future explora-
tion and development. Such a revenue increase would be expected if the regulated
price were artificially held below the true market price and the oligoiwly pricing
behavior of producers were exercised.
Whether the production segment of the natural gas industry should be regu-
lated and whether area ratemaking is the best regulatory procedure are largely
moot questions. The Supreme Court has acquiesced in both instances." How-
ever, one should note that the regulation of natural gas producers is different
than the regulation of other industries. The usual public utility dedicates a certain
amont of property to public service, incurs costs in rendering its service, cannot
cease to render service or abandon service without the approval of the regulatory
body, and is allowed a fair return on the rate base and a return of the costs
incurred. The natural gas producer, on the other hand, incurs exploration and
development costs, may curtail or cease his exploration and development activity
at any time without FPC approval, and is not compelled to make further in-
38 The natural gas production for southern Louisiana for the period 1964-70, expressed
in billion cubic feet units, was as follows :
Natural gas
production
Interstate
pipeline
production
1970.
1969.
1968.
1967.
1966.
1965-
1964.
7,326 ....
6,789
.5,287
6,003
4,649
5,296
4,194
4, 624
3,623
4,012
3,198
3,506
2,949
The proved reserves and dedicated reserves for the same approximate period, expressed
In billion cubic feet units, were :
Total proved
reserves
Dedicated
reserves
1970 79,093
1969 80,769
1968 _ 83,393
1967 81,424
1966. _. _ 78,613
1965 77,670
73, 289
72, 162
72, 729
69, 820
68,916
24 American Gas Ass'n, Reserves of Crude Oil, Natural Gas Liquids and Natural Gas
In th U.S. and Canada (1970) ; FPC, The Gas Supplies of Interstate Natural Gas Pipeline
Companies (1969).
The resulting reserve/production ratios are of interest, particularly when compared
with the ratios for the nation in the same years.
1964
1965
1966
1967
1968
1969
1970
Southern Louisiana.
21.0
19.4
17.5
17.2
16.4
15.2
15.8
13.9
116
11.9
12.9
10.8
United States
18. 2
11.7
24 American Gas Ass'n, Reserves of Crude Oil, Natural Gas Liquids and Natural Gas in
the U.S. and Canada (1970) ; FPC. A Staff Report on National Gas Supply and Demand
(Sept. 1969).
39 FPC, supra note 5.
«> The illustration assumes an inelastic demand for natural gas. (6,789 billion cubic
feet X 19.84 cents per Mcf =.$1.35 billion; 6,789 billion cubic feet X 20.84 cents per
Mcf =$1.42 billion.)
"Permian Basin Area Rate Cases, 390 U.S. 747 (1968) ; Phillips Pet. Co. v. Wisconsin,
347 U.S. 672 (1954).
755
vestments, to seek further supplies, or to dedicate additional supplies to inter-
state commerce.*^ The gas producer needs no certification of public convenience
and necessity for either drilling and other field operations or for sales, unless
the sales are jurisdictional.*^ Thus, the production and gathering of natural
gas is quite different from the traditional public utility concept. However,
that difference has not deterred price regulation.
A CASE STUDY IN AREA PRICE REGULATION
With the preceding background information, this article will examine price
regulation in a particular geographic area in the natural gas producing industry.
Although the relevant geographic market is nationwide via the intricate maze of
pipelines, a particular area is significant for the production segment of the
indu&try.
FPC Production Area No. 5 is that portion of southern Louisiana lying south
of the 31st parallel. Tlie area covers about .54,000 square miles, almost equally
divided between land and offshore waters of the G-ulf of Mexico. "From a national
standpoint, southern Louisiana is both the most imixjrtant and most productive
natural gas area in the entire nation." " The area accounted for about 40 percent
of the gas sold in the interstate market in 1989 '^ and for almost 30 percent of the
total reserve additions from 1956-66,*" and has contributed 63 percent of the na-
tional net increase in natural gas production since 1964.*' Estimated total reve-
nues to producers in the area in 1968 were $1.2 billion.*' The southern Louisiana
area is a significant, yet uniquely separate, part of the industry.
Field price regulation and the role of the natural gas producer should be
viewed within the parameters of the industry itself. Kaysen and Turner define
market structure as "those stable features of the environment of a business firm
which determine or condition the firm's [decisions]."*" A structural concept of
market power is defined as when "a firm can behave persistently in a manner dif-
ferent from the behavior that a competitive market would force on a firm, facing
otherwise similar cost and demand conditions." ^ Richard Caves outlines, in de-
creasing order of importance, the main elements of market structure: concentra-
tion, product differentiation, barriers to entry, growth rate of market demand,
price elasticity of market demand, and the ratio of fixed to variable costs in the
short rvm." This article deals primarily with concentration, while covering the
other elements of market structure more generally.
Concentration
Approximately six trilMon cubic f^et of natural gas were produced in southern
Louisiana in 1968. In excess of 20 i>ercpnt of this production went to the intra-
state market.^' The remaining 4.7 trillion cubic feet were jurisdictional, either
48 4Q p p c at 6^7 n 74.
4' 2.'? American Gas Ass'n. Reserves of Crude Oil, Natural Gas Liquids and Natural Gas
in the r.S. and Canada (lftfi9). „ ^
4' FPC supra note 5 (rough estimates by author). See notes 33-35 supra.
*9 C. Kaysen & D. Turner, Antitrust Policy 71 (1959).
50 jff ^f 75^
51 R. Caves. American Industry : Structure, Conduct, and Performance 16 (1967).
See also J. Bain, Tndustrial Orcnnizition (1959).
^Southern Louisiana Area Rate Proceeding, 40 F.P.C. 530, 616-18 (1968). Of course,
once pas is riedi^ated to interstate commerce, it may not be abandoned without FPC
approval. 15 U.S.C. 5 717f(ht (196.^). „.rr,^r.
*3.Tobnsnn, Producer Rate Reoulntion in Natural Gas Certification Proceedings: CAltO
in Contert. r,2 Colum. L. Rev. 773, 774 (1962).
" 40 F.P.C. at 546.
*5 FPC. si'prn note 5.
52 The Intrastate market in natural pas for southern Louisiana during the period 1964-68
Is set out below. The volume figures are expressed in billion cubic feet units.
Louisiana gas sold
intrastate Natural gas
Total — used in
production Percftntage Volume Louisiana
1968 6,003 22.7 1,363 1,366
1967."." 5,296 21.9 1,160 1,208
1966 4,624 20.7 957 1,068
196.5 .... 4,012 20.2 810 904
1964 3,506 16.1 564 870
24 American Gas Ass'n. Reserves of Crude Oil, Natural Gas Liquids and Natural Gas In
the U.S. and Canada (1970) (total production) : FPC. A Staff Report on the National Gas
Supplv and Demand. Table 21 (Sept. 1969) (Louisiana gas sold Intrastate) : 3 Denver
Research Institute, Future Natural Gas Requirements of the United States (1969).
756
going into the interstate market or coming from federal lands." Data on the
intrastate market is not readily accessible ; therefore, most of the information
gathered is prepared from submissions by producers and pii>elines to the Federal
Power Commission.
Seller concentration is greater in the southern Louisiana area than in the
United States as a whole. The top four producers in the United States accounted
for 24.3 percent of the total national sales to interstate pipelines in 1968 ; the top
eight accounted for 38.9 percent." In southern Louisiana, the top four accounted
for 34.5 percent ; the top eight, 53.3 percent.^^ These concentration figures relate
only to sales by producers. Paul MacAvoy obtained information on the con-
centration of "Gulf of Reserves" dedicated by the producers in southern Louisiana
for the periods 1950-53 and 1951-54. During the 1950-53 period there were 49
sellers who dedicated new reserves under 83 contracts. The four largest producers
dedicated about 46 percent of the reserves ; the top ten almost 80 percent."* The
concentration figures for the 1951-54 period are basically the same, although
there were 54 sellers and 93 contracts. Seller concentration data in the intrastate
market is not readily available. The 182 billion cubic feet of intrastate gas sold to
interstate pipelines in southern Louisiana represent about thirteen percent of the
area's estimated instrastate volume.^' Almost three-fourths of the 182 billion cubic
(million
cubic feet
units)
Percentage
of total
485,938
485, 580
350, &50
291, 205
10.4
10.4
7.5
6.2
1, 613, 373
276, 822
239, 445
202, 171
161,929
34.5
.5.9
5.1
4.3
3.5
2, 493, 740
4, 675, 935
53.3
100.0
" All sales from the offshore areas are by definition jurisdictional. The Natural Gas Act
defines interstate commerce as "commerce between any point In a State and any point
outside thereof, or between points within the same State but through any place outside
thereof. . . ." 15 U.S.C. § 717(a) (7) (1964). For the continuing controversy concerning
state-federal jurisdiction over the submerged offshore areas, see United States v. Louisiana,
394 U.S. 11 (1969) : United States v. Louisiana, 382 U.S. 288 (1965) ; United States v.
Louisiana, 394 U.S. 502 (1960) ; United States v. Louisiana, 363 U.S. 1 (1960).
" FPC. supra note 5.
^5 The sales by southern Louisiana producers to Interstate pipelines in 1968 were :
Volume
c
Producer
Humble Oil & Refining Co
Gulf Oil Corp
Union Oil Co. of California
SheUOilCo
Total, top 4
Texaco, Inc
Continental Oil Co.
Superior Oil Co
Mobil Oil Corp
Total, top 8
Total area sales
FPC. Sales by Producers of Natural Gas to Interstate Pipeline Companies (1968). The
percentage of sales controlled by the top producers did not change much between 1967
and 1968. Compare with the above the figures for 1967 : The total area sales amounted to
4,162.846 million cubic feet. The top four producers In sales were Humble Oil & Refining
Co.. Gulf Oil Co., Union. Oil Co. of California, and Texaco, Inc., combining for a sales
volume of 1,437,295 million cubic feet or 34.5 percent of the total for that year. Shell Oil
Co., Superior Oil Co.. Continental Oil Co., and Mobil Oil Corp. completed the top eight for
1967. The top eight accounted for 2,220,881 million cubic feet or 53.4 percent of the total.
FPC Sales by Producers of Natural Gas to Interstate Pipeline Companies (1967).
^ MacAvoy, supra note 19, at 174, Table 6 :6.
B' The following figures represent the 1968 intrastate sales by major producers to
Interstate pipelines in southern L-julsiana. A major producer Is one with annual sales of
2 million Mcf or more.
Volume
(million
cubic feet Percentage
Producer units) of total
Texaco, Inc
Humble Oil & Refining Co
Gulf Oil Corp _.
Union Producing Co
Total, top 4
Getty Oil Co _ _. __.
California Co
Forest Oil Corp
Pan American Petroleum Corp. (Amoco Production Co.)
Total, top 8
Total intrastate
45. 239
35. 240
34, 224
18, 485
24.8
19.3
18.8
10.2
133, 188
8,432
7,041
6,194
4,777
73.1
4.6
3.9
3.4
2.6
159, 632
182, 133
87.6
100.0
757
feet was sold by four producers, three of whom are among the top eight in the
jurisdictional segment. Moreover, all the intrastate sales of the major producers
to interstate pipelines icere directed toward one purchaser, United Gas Pipeline,
which in turn is controlled by Pennzoil United.
Buyer concentration is significantly greater than seller concentration in south-
ern Louisiana. Approximately 61 percent of the interstate production of natural
gas is accounted for by four pipelines, while the top eight represent almo.st 90
percent of production.^' Of the S3 trillion cubic feet of proved resen-es in 1968, 72
trillion cubic feet, or about 87 percent, were dedicated to interstate pipeline com-
panies.^' Within these dedicated reserves, four pipelines own about 57 percent
and eight own about 89 percent.*" MacAvoy's study indicated that in 1950-52 the
four largest buyers purchased about 92 percent of the reserves."
As was mentioned earlier, there is some evidence to indicate that industry
costs require a successful firm to be large.*'' Although one can still envision a need
and a place for the small entrepreneur in the exploration for natural gas (wild-
catting), to a large extent the need is a myth rather than a reality. There has
FPC, Sales by Producers of Natural Gas to Interstate Pipeline Companies, Table 4
(1968).
Compare the figures for 1967. notlnp that although the producers comprising the top
eight change relative positions from 1967 to 1968, the total percentage for the two years
remained 87.6 percent.
Volume
(million
cubic feet Percentage
Producer units) of total
Gulf Oil Corp.. 35,952 21.2
Humble Oil & Refining Co 33,901 20.0
Texaco, Tnc 28,757 16.9
Union Producing Co 19,405 11.4
Total, top 4
Pan American Petroleum Corp. (Amoco Production Co.)
Forest Oil Corp
Getty Oil Co
Louis J. Roussel
Total, top8 148.785 87.6
Total intrastate 169,828 100.0
FPC, Sales by Producers of Natural Gas to Interstate Pipeline Companies, Table 4
(1967).
6' Compare the Interstate buyer concentration figures for 1967 and 1968 for southern
Louisiana :
Pipeline
United Gas Pipeline
Tennessee Pipeline
Transcontinental Gas Pipe Line
United Fuel Gas
Total, top 4
Southern Natural Gas..
Texas Gas Transmission
Michigan-Wisconsin Pipeline
Texas Eastern Transmission
Total, top 8
Total area interstate
FPC, The Gas Suppliers of Interstate Natural Gas Pipeline Companies (1968) ; FPC,
The Gas Suppliers of Interstate Natural Gas Pipeline Companies (1067).
^ For the volume of dedicated reserves and the reserve/production ratios for the period
1964-70, see note 38 supra.
^'The top four pipelines based on ownership of dedicated gas reserves In 1967 and 1968
were Tennessee Pipeline, United Gas Pipeline, United Fuel Gas, and Transcontinental
Gas Pipeline. Completing the top eight were Texas Eastern Transmission, Southern Natu-
ral Gas, Texas Gas Transmission, and Michigan-Wisconsin Pipeline. The percentage figures
stated in the text did not change significantly from 1967 to 1968. FPC, The Gas Suppliers of
Interstate Natural Gas Pipeline Companies (1968) ; FPC, The Gas Suppliers of Interstate
Natural Gas Pipeline Companies (1967).
"1 MacAvoy, supra note 19, at 170, Table 6 :5.
•» Hultt, lupra note 10.
118,015
69.5
13, 737
8.1
6,636
3.9
5, 431
3.2
4.966
2.9
Production
cubic feet
(million
units)
Percentage of total
1967
1968
1967
1968
864, 034
761,040
500, 547
433, 550
959,313
840,832
568, 185
448,407
20.6
18.1
11.9
10.4
20.6
18.1
12.2
9.7
2, 559, 171
368,765
329, 219
273, 464
238, 175
2,816,737
367, 459
365,386
291, 452
325, 548
61.0
8.8
7.9
6.5
5.7
60.6
7.9
7.9
7 0
6.2
3, 768, 794
4, 193, 544
4,166,582
4, 648, 768
89.9
100.0
89.6
100.0
758
been a rising attrition rate among small producers. Industry association meas-
ures indicate that more than 25 percent of the small producers have disappeared
from the market over the last ten years.^ Even though the small producers may
still outnumber the large producers,** there is a marked disparity in their influ-
ence since eight large, integrated petroleum companies control over half the
supply of natural gas in southern Louisiana.
The term "structural oligopoly" describes a market "in which the few largest
sellers in the market have a share of the market sufficient to make it likely that
they will recognize the interaction of their own behavior and their rival's response
in determining the values of the market's variables." *° Many indices are con-
sidered in determining whether a particular market structure is an oligopoly.
Kaysen and Turner begin testing for an oligopoly by requiring that the eight
largest firms share one-third of the market. They then delineate two types of
structural oligopoly. Type I occurs when the top eight firms have 50 percent of the
market and the top twenty firms have 75 percent. Type II occurs when the top
eight control one-third of the market and the remaining two-thirds is highly
fragmented. In southern Louisiana, the top eight firms have over 50 percent of
the market and the top twenty control about 71 percent of the interstate sales.
Applying the Kaysen and Turner classification, the southern Louisiana market
would be denominated a Type I loose oligopoly, since no one firm has more than
a fifteen percent share and there is a fringe of small firms that may act as a
competitive restraint.**
Buyer concentration, however, is much higher than seller concentration. In
fact, in southern Louisiana the top eight pipelines control about 90 percent of
the production in the interstate market and about 89 percent of the reserves
dedicated to interstate pipelines. By comparison, the twenty largest pipelines
control 90 percent of the national interstate pipeline production. Therefore, buyer
concentration in southern Louisiana can be characterized as a tight oligoi)oly.*^
In summary, seller and buyer concentration figures are higher in southern
Louisiana than they are on a national level. Both the production and pipeline
segments of the industry in southern Louisiana can be classified as structural
oligopolies.
Other Factors
In examining the market structure of a particular industry, there are several
other factors that merit attention. Product differentiation is, for all practical
puriwses, not germane to the natural gas industry. Although there may be minor
quality differentials, natural gas is basically a homogeneous commodity. Barri-
ers to entry are probably lower in the producing segment of the natural gas
industry than in most mnnufacturing industries.** Capital requirements are rela-
tively modest by comparison, although drilling equipment and outlays in the
offshore areas are becoming increasingly expensive.'* There are no apparent econ-
omies of scale in discovering and producing natural gas.™ However, there prob-
ably is an advantage to the larger concern that can afford to spread the risks by
drilling many wells. Indeed, from the risk standpoint, there may be definite econ-
omies of scale if it is recognized that risk, though not an obstacle to entry, may
be inversely related to size.
Thus, product differentiation is inapplicable to the natural gas producing in-
dustry. Most of the gas produced in southern Louisiana is high pressure, sweet
gas, which is delivered to the pipelines at or beyond a central point in the field ;
In essence, the gas is a commodity fuel. Barriers to entry are probably lower in
M-PPC New Orlpnns Hearine. No. R-.-^SflA. at 5.=; (Aug. 10, 1970) (testimony of James C.
Templptoni : Initial Rates for Future Sales of Natural Gas, Doc. No. R-389A, 35 Fed.
Res?. IIR.*?*? nOTO).
•^ See note 4 ativra and accnmpanvlntr text.
"s Knvsen & Turner, supra note 49, ch. II.
•« Tff. ch. III.
87 Tfl.
"^ l^frvrfiire of the 'Natural Gnu Pmrluciva Inrt'infrit. Address bv Clark A. Hawkins,
Seminar on Retrnl.ntion of the N-itural Ons Producinsr Industry, Washlnerton, D.C., Oct. IS,
1970. pptroleum re<^ninc, on the other hand, does hove substantial entry barriers.
M. deChazeau «& A. Kahn, Integra tion and Competition In the Petroleum Industry 18
(19.59).
"9 Clark, supra note 68.
759
this industry tlian iu most manufacturing industries. Althougli these other fac-
tors should not be ignored, market concentration is tlie most influential feature
of the southern Louisiana marliet.
Prif'rng of Natural Gas
The purpose of measuring concentration is to predict tlie extent that price
will depart from the competitive price level. '^ The price ceiling for jurisdictional
gas is established by the Federal Power Commission ; prices for gas in the intra-
state market are unregulated and are only controlled by the market mechanisms.
For a variety of reasons, the intrastate market has remained more attractive
than the interstate market." Generally, as long as there are adequate supplies
for both markets, the intrastate purchaser can obtain a price concession reflect-
ing the benefits to the producer fi-om an unregulated sale.'" For instance, the
producer faces a degree of rate uncertainty in making a regulated sale. This is
particularly important in southern Louisiana where close to 80 percent of the
production is jurisdictional. Jurisdictional sales of gas have commanded pre-
mium prices since 1954."^ However, intrastate prices on new contracts in 1970
exceeded the interstate prices for the first time. The higher intrastate prices
might indicate a new desire on the part of tlie producers to sell in the intrastate
market, outside governmental price regulation. On the other hand, higher intra-
state prices may refiect a short term, thougii perhaps persistent, scarcity in un-
committed gas available for intrastate sales.
Average wellhead revenue per Mcf increased nationally Ity about seventeen
percent in the period 1960-68, compared to an eleven i-ercent increase in
southern Louisiana for the same period.'^ Dui-ing the
"Wholesale Price Index increased about eight percent.
Price Index was up eighteen percent. However, during
average wellhead revenues exhibited a modest decline in Louisiana but increased
about six and one-half percent nationwide. The Wholesale Index was up about
eight percent ditring 1964-68; the Consumer Price Index increased about twelve
percent. Generally, wellhead prices for natural gas have followed the rise in con-
simier prices, except in the last few years. Louisiana field prices, on the other
hand, have largely been stabilized since 1961. The leveling of wellhead prices in
1960-68 period, the
and the Consumer
the 1964-68 period,
^ G. Stiller. The Organization of Industry .30 (1968).
•js Permian Basin Area Rate Cases, .390 U.S. 747, 799 n. 74 (1968>.
"3 Generally, the major demand for natural gas from southern Louisiana is from the
pipelines supplying distributors in the Middle West and Northeast.
''^ Note the price difference between intrastate and jurisdictional cas contracts in south-
ern Louisiana for the years 1966-70. The figures are for the first half of each year only
and represent contracts by producers with ten million Mcf or more in sales.
Intrastate
Annual
volume
(millions of
cubic feet)
Weighted
average
contract
rate (cents
per million
cubic feet)
•Turisdietional
Annual
volume
(millions of
cubic feet)
Weighted
average
contract
rate (cent)
per million
cubic feets
State taxing jursidiction:
1970 72,028,165 22.98 11,
1969 10,438,812 19.34 83,
1968 59,594,990 20.21 .58,
1967 21,178,226 19.40 139,
1966 5.5,343,591 19.38 136,
Federal domain:
1970.... 22,
1969. 194.
1968.... 115,
1967 163,
1966.- 94,
345, 634
175, 000
7.53, 289
862, 464
196, 976
827, 818
064, 600
819, 308
233, 115
120, 567
21.75
21.26
20.88
21.05
20.07
21.87
21.06
20.76
19.73
19. 21
Reply of the FPC staff. Bureau of Natural Gas, Initial Rates for Future Sales of Natural
Gas. Doc. No. R-389A. 35 Fed. Reg. 11638 (Oct. 1. 1970).
""Southern Louisiana Area Rates. 40 F.P.C. 703, 781 (1966). Although State of Louisi-
ana prices are used, southern Louisiana accounts for over four-fifths of the state's gas
output. In terras of jurisdictional sales, southern Louisiana accounts for about 94 percent
of the state's gas sales. FPC. supra note 4.
The following figures show the relative increases in the value of well head gas In
27-547—74-
-49
760
Louisiana might be the result of several factors, including FPC price control.'"
The area prices set for southern Louisiana by the FPC were recently atRrmed
by the Fifth Circuit : ''
However, these rates were stayed by Commission and court orders and were
never implemented.'** The Fifth ' Circuit, although affirming the Commission's
rates, indicated that the Commission was free to make retrospective as well as
prospective changes.'^ On July 16, 1!>71, the Commission, in accepting a settle-
ment proposal, determined new area rates of 26 cents per Mcf for contracts dated
on or after October 1, 1968, and 22.375 cents per Mcf for contracts prior to that
date.^°
Prior to FPC regulation, gas prices in southern Louisiana were far from
stable. Through 1950, the unregulated price of gas did not exceed nine cents per
Mcf. Prices increa.sed substantially thereafter, and in 195S the price spiral peaked
when Trunkline contracted for gas at 24.05 cents per Mcf .^^ Average wellhead reve-
nue per Mcf increased 158.3 percent for the United States in the period
1947-62 ; over the same period the increase was 447.2 percent in southern Louisi-
ana.^^ Until 1950. there was only one major pipeline purchaser in the area. United
Gas Pipeline. Through the pipeline's exercise of monopsony power, one should
expect a wellhead price below competitive levels and an artificially high trans-
mission price. The entrance of additional pipelines in the 1950's broke down this
monopsony. By 1955 there were seven transmission companies with overlapping
supply areas. The new transporters had disrupting effects upon the previously non-
competitive buying practices, with a resulting increase in wellhead prices. In
addition, extensive demand for gas also contributed to the price increase.*^ More-
Louisiana and thp United States, the Wholesale Price Index, and the Consumer Price Index
for the period 19oO-6S.
Average value of natural
gas at wellhead (cents Price indexes (base
per million cubic feet) years, 1957-59)
Louisiana
United
States
Wholesale
(all com-
modities)
Consumer
(all com-
modities)
19G8
1967
__ 18.9
18.5
16.4
16.0
15.7
15.6
15.4
15.8
15.5
15.1
14.0
12.9 ...
11.9 ...
11.3 ...
10.8 ...
108.7
106. 1
105. 9
102. 5
100. 5
100.3
100. 6
100.3
100.7
121. 2
116.3
1966 - --
18.3
113.1
1965
18.2
109. \)
1964 - - -.
19.1
108.1
1963
19.8
106.7
196'' - -
19.7
105. 4
1961
18.7
104.2
I960
17.1
103.1
1959
1,5.4
19.58
12.9
1957
11.2
1956
. . n.4
1955
19.50
11.3
5.3
10.4
6.5
93.2
SG.8
93.3
S3. 8
U.S. Bureau of Mines, Mineral Yearbook (1950-68) ; Dep't of Labor, Bureau of Labor
Statistics. Price Indices (1950-68).
•» Kiteh. stiprii note 28, at 26-5-70.
" Southern Louisiana Area Rate Cases v. FPC, 428 F.2d 407 (oth Cir. 1970).
Cents per million cubic feet
Onshore OfTshore
Contracts after Oct. 1, 19 8.... 20.0 18.5
Contracts dated Jan. 1, 1961, to Oct. 1, 1968.. 19.5 18.0
Contracts before 1961 and casinghead gas 18.5 17.0
■J' FPC Order of Dec. 24, 1970. In re Southern Louisiana Area Rate Cases, 444 F.2d 125
(5th Cir 1971) ; FPC Order of July 2, 1970, In re Southern Louisiana Area Rate Cases,
444 F.2d 125 (5th Cir. 1971) ; FPC Order of Ma.v 29. 1969, Southern Louisiana Area Rate
Cases V. FPC, 428 F.2d 407 (5th Cir. 1970) ; Court Order of May 13, 1969, Southern
Louisiana Area Rate Cases v. FPC. 428 F.2d 407 (5th Cir. 1970).
'■^ In re Southern Louisiana Area Rate Cases, 444 F.2d 125, 126 (5th Cir. 1970).
80 Southern Louisiana Area Rate Proceeding. Op. No. 598 (FPC. July 16. 1971), appeal
docketed suh nom.. Placid Oil Co. v. FPC, No. 71-2761 (5th Cir., Sept. 9, 1971).
« 40 F.P.C. at 553.
^^ Southern Louisiana Area Rates, 40 F.P.C. 703, 753 (1966).
S3 MacAvoy, suura note 19, at 206.
761
over, although tlie price spiral was a result of the change in buyer structure and
the strong demand for gas. producer contracts accentiiated the increased prices.
With the entry of alternative pipelines, a few sellers were supplying a few buyers
in southern Louisiana. Under such a bilateral oligopoly, price and output are nor-
mally determined by bargaining because there is an absence of impersonal market
forces." In a bilateral oligopoly, there may be either balanced power, buyer
dominance, or seller dominance. "The scales are fairly strongly tipped in favor
of the buyers . . . since each of them can act independently to drive a hard bar-
gain as he seeks supply, whereas to resist this pressure the sellers must have
effective collusion over price and maintain it under duress." ^ Whether the pro-
ducers can exert such power must be viewed in light of the pipelines' bargain-
ing position and the demand for natiiral gas.
The producers presented evidence in i^oiifhern Louisiana Area Rate Proceed-
infj ^ to prove the producing industry competitive. The major producer group
relied on the testimony of Dr. James W. McKie.^^ Dr. McKie used three criteria
to analyze the industry. He found that the top four producers accounted for 29
percent of the total interstate deliveries of gas in 1960-61 ; the top eight, about
50 percent. He compared concentration ratios with those published by the
Bureau of Census. Well over half of 1,000 product classes had higher concentra-
tion ratios.^ McKie next observed the turnover of leading firms, noting that with
resi>ect to the top ten suppliers in 1961 under contracts signed from 1957-1!;>60. no
supplier appeared among the top four in all four contract years.'" Finally, he
ascertained that there were low barriers to entry. New entrants accounted for
seven i)ercent of the volume of natural gas delivered in 1961. under contracts
signd between 1957 and 1959."" "[E]ven though each individual new entrant
may account for a small percentage of available supplies, the fact that firms
enter the market in considerable numbers is an additional indicator of effective
competition." "^ McKie's conclusions were an absence of concentration in producer
control over suppl.v and reasonably effective competition on the supply side.
The Hearing Examiner considered McKie's testimony ; however, he reached
an opposite conclusion based largely upon the Commission's reasoning in Permian
Basin Area Rate Proceeding.^'- The Commission indicated in this first area x-ate
proceeding that
[t]here are admittedl.v many producers selling gas to the interstate pipe-
lines . . . but nothing in this record suggests that any competition among
them in making sales to the pipelines is in any way adequate to assure that
the public will secure gas at just and reasonable prices in the absence of
regulation."'
The Commission must look behind the price negotiated by the producers with
the pipelines. The "supply of gas controlled by the producers was so restricted
in relation to demand that they have economic power to bargain for prices that
will be injurious to the public." ''* Furthermore, individual states influence the
available supply of gas. The Louisiana Department of Conservation can prohibit
the production of gas which exceeds the market demands."" The Commissioner of
Conservation can likewise determine the allowaljle production of gas among
fields."* Generally, these state regulations seek to prohibit misuse of a wasting
resource, particularly when supply exceeds demand, a situation not encountered
in the last several years.""
In making his determination the Examiner recognized the tran.smission
companies' weak bargaining position in relation to the producers. The pipelines
8* .J. Bain, Price Theory 394-06 (1966). See also J. McKie, Tin Cans and Tin Plate, A
Studv of Competition in Two Related Marliets 25 (1959).
~^ Bain, supra note 84, at 395. See also id. at 332-39. Where there is a lack of product
differentiation, as in natural gas, all rival prices tend to be identical. Likewise, since the
product is not differentiated, there is a lack of advertisinjc and sales promotion. Rivalry
revolves around price and agreements to eliminate price cutting tend to become important.
^«4n F.P.C. 703 (1966),
*" Ylsitinsr Professor of Economics, University of California, Berkeley,
88 40 F,P.C, at 710-11.
«>I<1. at 711,
'•>" Id. at 711-12,
« Id.
»2 34 F.P.C, 159 (1965),
o"7f?, at ISl.
s* United Gas Improvement Co, v, FPC. 290 F, 2d 133, 135 (Sth Clr,), cert, denied sub
nom.. Sun Oil v. United Gas Improvement Co., 36S U.S. 823 (1961).
^■- La. R.S. 30: 41 (1950).
9" La. R.S, 30: 11 (1950),
9' ^lany states control the quantity of production (proration) by regulating allowables
(level of production) and the division of production (ratability). See A. Leeston, J. Crich-
ton, & J, .lacobs. The Dynamic Natural Gas Industry 26-45 (1963).
762
have to contract for large blocks of uncommitted reserves at increasing prices.
Only a few producers have the large volumes required by the pipelines. The
pipeline is willing to pay these higher prices since it can pass the increase on
through its regulated cost-based resale rates. In addition, many pipelines are
themselves producers with an interest in generally higher producer prices."*
The Examiner felt the key to determining the strength of effective coraix>titioa
was the amount of uncommitted reserves controlled l>y the large producers. "Here,
as in Permian, the producers' principal witness on the issue of effective competi-
tion iiresented no data on the concentration in ownership of uncommitted gas
reserves, although the producers themselves have exclusive possession of these
facts." "' The Examiner inferred such control by a limited number of producei-s
from several facts, including: (1) Eight producers accounted for over 50 percent
of tlie sales and fourteen for over 71 percent. (2) There were 1,19S non-producing
gas wells or potential gas wells in southern Louisiana as of .Tune 1962 ; five
producers controlled 52.5 percent, and ten producers controlled 70.4 percent.
(3) '-[TJhree packages of gas dedicated by Humble and Gulf in South Louisiana
in 1963. totalling 12 trillion cubic feet, were larger than the total volume of com-
mitments by all producers to all inter.state pipelines in South Louisiana in any
two years combined during the 1951-1961 period." ^'"^ From this influence, plus
the producers' failure to rebut the same, the Examiner implied control of uncom-
mitted reserves in the hands of a few large producers.
lu addition to finding concentration in control of uncommitted reserves, the
Examiner outlined the pattern of producer contracts. In Permian, the Commis-
sion found that favored-nation and spiral escalation clauses were "calcnhited to
assiire that all producers would be treated alike and receive the highest going
price both at the time of the contract and in the future." "^ The Examiner made
a comparable finding in southern Louisiana. ^- He further found that the terms
•of the contracts created an artificial demand for gas.
"[T]];e 20 year sales contract in this industry has the obvious effect of con-
centrating the demand for a 20 year supply of gas at the time of purchase. This
C-fmcent ration is compounded when, as was the case in South Louisiana, iiiuie
one pipeline is seeking supply for major expansions. The result of such concen-
tration of requirements is an abnormal ballooning of demand.^""'"
The Examiner found a lack of competition in southern Louisiana, based upon
the pattern of producer contracts and the concentration of reserves. Dr. 2iIcKie's
statistics were largely discounted. "The presentation by producer witness McKie
in the instant case does not meet or answer the practical facts of life witli respect
to the jiast history of the production industry during the non-regulatory jie-
riod.'" "^ The Commission upheld the Examiner's findings :
"Based upon this analysis we must conclude that there are serious murKfi
imperfections which preclude us from relying upon the free operation of the
market, as evidenced by arms' length bargaining, to protect the ultimate con-
sumer frrim unreasonable purchased gas rates.^'^'""
The Fifth Circuit supported the Commission's conclusion of an absence of
effective competition. However, although concurring in the findings of oligo))o-
listic behavior in the contracting practices of p.roducers and of the relative
weak l>argaining position of the pipelines, the court still felt the market was at
least structurally competitive."* However, the court was much more concerned
about potential supply problems than about competition among producers. "The
most serious problem is that of possible supply deficiencies, together with cor-
relative failure of the Commission to consider supply and demand." ^"^ Further.
Judge Thornberry's opinion was critical of the Commission's reasoning behind
"noncost elements" in the rate ceilings. Although deferring to the Commission's
expertisp in the area, the Fifth Circuit would require tlie Commission to assess
the consequences of its order, particularly how the order might affect industry
structure, the availability of capital to the industry, and "most importantly,
the industry's probable conduct and performance as a result of the order." ^'^ The
9-40 F.P.C. at 717-18.
»9 7rf. at 71 fi.
i»o/(/. at 716-17.
iM ?A F.P.C. at 184. Indefinite escalation clauses are prohibited. FPC v. Texaco, 877 U.S.
3H (1964 t.
10=40 p.p.c. at 716.
^"■■■■Td. at 717.
^"^1(1. at 718.
303 40 F.P.C. at 554.
1"" Snnthprn Louisiana Area Rate Cases v. FPC, 428 F.2d 407, 416 n. 10 (5th Cir. 1970).
"" Id. at 441.
i"8 Id.
763
court outlined three steps the Commission should follow in evaluating rates :
(1) estimate the demand for gas. (2) fix the level of desired service, and (3) de-
termine how the rate will affect the industry's tendency to meet that level of
gervice.^"" Some twenty-five years ago, the Supreme Court expressed similar
ideals for gas rate regulation.
"Far-sighted gas-rate regulation will concern itself with the present and future,
rather than the past as the rate-base formula does. It will take account of con-
ditions and trends at the source of supply being regulated. It will use price as a
tool to bring goods to market — to obtain for the public service the needed
amount of gas. Once a price is reached that will do that, there is no legal or eco-
nomic reason to go higher ; and any rate above one that will perform this function
is unwarranted."""
Such a goal in rate regulation is still adhered to by the Commission. The Fifth
Circuit, referring to Permian, noted that price should be used to elicit an appro-
priate level of future exploration and development."^ However, establishing a
price which "brings the gas to market" may not be a sufficient standard in and of
itself. The source of supply is controlled by integrated corporations. To the ex-
tent there are more attractive investment opportunities, either in other geo-
graphic areas or other industries, a management decision would be based upon
anticipated financial rewards. Thus, if price is to be a regulatory tool, it must
be considered within the context of the regulated supplier's alternative for in-
vestment in other industries.
The Commission recently approved a 30 percent rate increase, from 20 cents
to 26 cents per :Mcf. in order to provide incentive for increasing gas explrn-ation.
The FPC staff's econometric model in the Offshore Louisiana Area Rate Proceed-
ing "^ concluded that "assuming discoveries equal to 30% of reserve additions
a rate increase in the neighborhood of 6(? Mcf will achieve the target for needed
reserve additions calculated by the Commission's Bureau of Natural Gas for
1975.""* An econometric model was also prepared in Southern Louisiana; how-
ever, this demand model was rejected by both the Commission"* and the Fifth
Circuit.""' The mndel's underlying assumption — the rate of exploratory drilling
is more dependent on the rate of production and consumption than on prevailing'
field prices — was successfully countered by the protlucers" witness."*^
The Commission's recent Southern Louisiana decision represents a marked
departure from prior area rate detenninations."' Rather than quantifying with
precision the several rate components, a zone of reasonableness concept has been
adopted."* Instead of adhering to a dogmatic cost-of-service princijile. the Com-
mission has approved a total rate design package, including rates, incentives,
automatic and contingent escalations, and refunds. The Commission has con-
sidered a multitude of economic factors in addition to costs, including alternative
fuel costs and investment f>pportunities. the producer's capital requirenieuts,
supply and demand, and the intrastate market. Applying economic considerations,
in addition to cost factors, represents a novel and, hopefully, successful attempt
at producer regulation. In the 1971 Southern Louisiana^^ decision, the Commis-
sion stated that, as a result of its rate orders, there should be no increase in
market concentration in the southern Louisiana area and that new producers
should be attracted to the area.™ However, the Commission was more com-erned
with remedying a gas siiortage. and the prior evidence of noncompetition in
southern T.ou.isiana was not discussed.
^'■'■>Id. at 444.
110 Colorado Interstate Gas Co. v. FPC, 324 U.S. 581, 612 (1945) (Jackson, J., con-
curring).
HI 42S F.2d at 419.
112 Initial Rates for Future Sales of Natural Gas, Doc. No. R-3S9A, 35 Fed. Reg. 11638
(Oct. 1. 1070),
113 Id., exhibit 4(5.
114 40 F.P.r. at 02.1-26.
lis 42S F. 2d at 4.30.
iie40F.P.C. at 857.
H" The same m.Tv be said of the decisions in the Texas Gulf Coast Area Rate Proceeding,
Op. No. 595 (FPC. May 6. 1971), appeal docketed sui nom.. Public Serv. Comm'n v. FPC,
No. 1828 (D.C. Cir.. Oct. 18. 1971).
lis Indicntions of this conceiit as applied to producer area rates were seen in Commis-
sioner Carver's dissent in Southern Louisiana Area Rate Proceeding, 41 F.P.C. -301, 367
(1969).
iw Op. No. 598 (FPC, July 16, 1971).
1-" /f?. at 44-45. It could be arjrued that two factors, (1) discharge of refunds worth one
cent per Mcf and (2) contingent escalations only for pre-October 1. 1968, gas, would dis-
courage new entrants, since only producers presently in the area receive such incentives.
7G4
CONCLUSION
"Maintenance of a healthy industry is an important FPC responsibility. . . .
IT] he Commission must assess how circumstances other than structure and
■capital will affect the orderly development of the industry." "^
Responsibility for regulation of producer wellhead prices was thrust upon the
FPC by the Supreme Court in the Phillips decision.^" Many authorities sub-
sequently criticized this decision and many have advocated deregulation of the
producers. The area rate method of regulating producer prices has done little to
lieip tlie producer. Until very recently, the FPC has generally held a lid on prices
with the result of affording consumers a bargain fuel but artificially increasing
the demand for gas in relation to other fossil fuels.
This author contends that producers of natural gas are properly subject to
price regulation.^ However, a rate-setting procedure other than the area approach
is necessai-y. A procedure that is less time consuming and that considei-s the
realities of the marketplace to a greater extent is certainly preferable. Kitch
recently reviewed some alternative theories for setting field prices of natural gas :
(1) surrogate market, seeking to balance supply and demand by setting a market
price adjusted for market imperfections ; (2) price-result, setting a price to elicit
the supiily of gas needed; (3) traditional cost method; (4) price control, based
on historical price data; and, (5) industry protection, setting prices high enough
to restrict entry, thereby insuring that the firms in the industry would operate
profitably. ^^ The traditional cost method is the approach used in setting pipeline
rates and is essentially the one utilized in I'erminn in setting producer area rates,
with tlie addition of certain noncost elements. A price control alternative would
be conn>arable to in-line pricing resulting from Catcol^ An industry protection
approach would be more feasible in a single product industry ; there would be
serious drawbacks in attempting to regulate one facet of an international, multi-
product, integrated petroleum corporation. The surrogate mai-ket would afford
the advantiige of realizing a market-oriented pricing system. At the same time,
however, this latter method would initiate a great deal of controversy when
market imperfections need to be quantified in cents per INIcf. The price-result
approach appears to be coming to the forefront with the FPC.
On June 17, 1970, the Commission issued notice of its proposed rulemaking
for new gas sales.^" This notice was subsequently expanded on .July 17, 1970.^^^
Flecognizing the energy crisis and the 196S-69 declines in proved reserves, the
FPC sought to issue nationwide rules fixing the terms for permanent certificates
for new gas under contracts dated after June 17, 1970. These rates, established
under a rulemaking procedure as opposed to an adjudicatory framework.^
would be firm rates not subject to refund obligation, but could be modified by
any subsequent area rate proceeding. The FPC staff and all interested parties
were requested to submit (1) estimates of current, nationwide costs of finding
and producing nonassociated gas, (2) information relating to rates of return,
(3) recommendations concerning the weight to be aft'orded contract prices in
considering producer rates, and (4) analysis of the extent to which the market
mechanism w^ill adequately protect consumers. Subsequent to the notice of rule-
making, hearings were held throughout the country. The vast majority of testi-
mony at the Xew Orleans hearing on August 10. 1970, indicated an immediate
interest in raising wellhead prices. For instance, C. C. Aycock, the former
lieutenant governor of Louisiana, testified that restrictions on the wellhead
price had reduced the potential return on investment,^^ and J. M. Menefee,
>2i Southern Louisiana Area Rate Cases v. PPC, 428 F.2d 407, 442 (5th Cir. 1970).
^2.347 U.S. fi72 (19.54).
-:^23 Senator Tower introduced a bill to amend the Natural Gas Act, 15 TT.S.C. §717Ca)
(1964); to exempt producers from '■natural sas companies." S. 2442, 92d Cong., 1st Sess.
(1971). Another bill, the so-called ""sanctity of contract ' 1411 was introduced in 1971. The
bill would prohibit the Commission from using its traditional cost-of-service analysis in
reviewing the rates in new producer contracts. H.R. 2."il.'^ (S. 2505). 92d Cong.. 1st Sess.
(1971). This bill wt>uld require the Commission to consider the supply and demand for
gas and the price levels necessary to bring the gas to the interstate market.
124 Kitch. supra note 1.^, at 191-97.
^-■■"^ Atlantic Refining Co. v. Public Serv. Comm'n, 360 U.S. 378 (1959).
1=9 Natural Gas in Permian Basin, Doc. No. R-3S9. 35 Fed. Reg. 10152 (June 20, 1970).
127 IS r.F.R. 2.56(a) (1971).
12'' Briefly, the contention is that ratemaking is rulemaking under the Administrative
Procedure Act, 5 U.S.C. § 551(4) (Supp. V, 1967). Thus, notice and opportunity for inter-
ested parties to submit tlieir views are required, but a full adjudicatory hearing is not,
J(h §55.S(6). See generaUv Hunt Oil Co. v. FPC. 424 F. 2d 9S2. 9^5 f5th Cir. 1970) ;
Lonir Island R.R. v. United States, 31.S F, Supp. 490, 498-99 (E.D.N.Y. 1970).
i^f'FPC New Orleans Hearing, Doc. No, R-3S9A, at 17-19 (Aug. 10, 1970) ; Initial Rates
for Future Sales of Natural Gas, Doc, No. R-3S9A. 35 Fed, Reg, 1163S (1970).
765
Louisiana Conservation Commissioner, stated that tlie Southern Louisiana Rate
Cases had set rates not conducive to the production of natural gas.^'^ The
Commission has recently taken concrete steps in setting rates through the rule-
making process for the Appalachian and Illinois Basin Areas and the Rocky
Mountain Area."^ However, producer price ceilings should continue to reflect
costs. To formulate rates based upon national market forces, contract prices, or
prices of alternative fuels could conceivably amount to de facto deregulation.
On the other hand, price ceilings, once established, could be made more stable
over a longer period of time, with allowances for automatic adjustments. The
latter would remove some of the uncertainty as.sociated with regulated rates.
Finally, since 70 producers account for about 90 percent of the jurisdictional
sales,^ all producers with annual sales of ten million Mcf or less should be
exempted from federal rate proceedings.^^ Thus, by concentrating on 70 pro-
ducers, the Federal Power Commission would in fact regulate 90 percent of the
market, and the regulated would represent less of an administrative burden.'**
There is no reason to expect that perfect competition, absent regulation, would
operate in this industry, at least in the southern Louisiana area. Seller concen-
tration, both in terms of interstate sales and control of gas reserves, represents a
classic structural oligopoly. Buyer concentration is even greater; however, in
light of the current demand for gas, the contracting practices of the producers,
and the pipelines' supply requirements, buyers lack the corresponding market
power which would normally be associated with tight oligopoly. The producers
are in a much stronger bargaining position currently, through alternative invest-
ment opportTmities and other sources of revenue. Even more importantly, bar-
riers to entry, although still comparatively low, appear to be increasing. A larger
company caii afl'ord to drill moi-e unsuccessful wells than a smaller firm. The
Supreme Court recognized this situation in Permian:
'•[A]lthough the resources of the small producers are ordinarily more limited,
their activities are characteristically financially more hazardous. It appears that
they drill a disproportionately larger number of exploratory wells, and that
these are frequently in areas in which little exploration has previously occurred.
Their contribution to the search for new gas reserves is therefore significant, biit
it is made at correspondingly greater financial risks and at higher unit costs." ^
Moreover, the costs and procedures utilized in bidding for offshore leases is
becoming more and m(n-e something only the large producer can accommodate.
For instance, the federal offshore lease sale of Decern! ler !."», 1970. resulted in high
bids of $850 million for 127 blocks in Offshore Southwest Louisiana. However,
the eight largest interstate sellers of gas,"" either alone or in concert, had higii
bids of about $22.") million on 40 blocks.^'" either alone or in concert, had high
entry barriers in the industry, particularly in the offshore areas."*
When an industry is noncompetitive liecause of its market conduct, the offend-
ing conduct should be remedied tlirough injunctive action. However, where effec-
tive competition is absent because of an industry's market structure, dissolution
or divestiture are desirable tools."* These policy considerations, although super-
i"'/f7. at 21-2.3. See also id. at 29 (testimony of Neal Powers, Jr.) ; id. at 36 (testimony
of Wilbur R. Lilly).
i"i Initial Rates for Future Sales in the Rocky Mountain Area, Order No. 4.35 (FPC,
.Tulv 1.5. 1071), appeal docketed sub nam., A.P.G.A. v. FPC, Nos. 1812, 187.3 (D.C. Cir.,
Oct 12, 1971) : Area Rates for the Appalachian and Illinois Basin Areas, Order No. 411
(FPC. Oct. 2. 1070).
13- See note 4 sKpra.
isa xhe Commission recently announced a policy of blanket certification of small pro-
ducer sales. Order No. 42SB (FPC. Julv 1.5. 1071), appeal docketed sub nom., Tennessee
Gas Pipeline Co. v. FPC, No. 71-1558 (D.C. Cir., filed July 15, 1971) ; Order No. 428 (FPC,
Mar. 18, 1971).
13* The Supreme Court has implied that such exemption might be reasonable. Permian
Basin Area Rate Cases. 390 U.S. 747, 785-87 (1968) ; cf. Guss v. Utah Labor Relations
Bd.. .353 U.S. 1. .3-4 (1957).
13^ 390 U.S. at 784-85.
136 See note 55 supra.
13^ World Oil. Jan. 1071, at 74-75. There are many indications that the bidding proce-
dures adopted by tlie Secretary of the Interior are themselves barriers to entry. For
instance, by using a cash bonus (determined by bidding) plus a royalty at 16% percent,
tl-e smaller companies can be forced out of the bidding. However, by utilizing a fixed bonus
plus a royalty determined by bidding, smaller companies could afford to participate to a
greater degree. See aenernUy Krueger, Study of the Outer Continental Shelf Lands of the
U.S., 1 Pub. Land L.Rev. Comm'n 207-208 (iOflS).
i^** Hawkins, supra note 68. The risk case is still unclear since it may be an Inducement
to venture capital that would be in the high marginal tax bracket. High risk may not be a
deterrent to entry, as witnessed by the number of mutual funds selling pieces of drilling
ventures.
138 Kaysen & Turner, supra note 49, ch. III.
766
ficially elementary, should underlie the current thrust of antitrust enforcement in
the natural gas producing industry. There have been many actions in the
petroleum industry to deter inappropriate marketing practices, ranging from
reciprocity and price-fixing to false and misleading advertising. However, when
the problem arises from market structure, such actions necessarily miss the
mark. From the period 1956-68, twenty petroleum companies made 226 acquisi-
tions, 29 horizontal, 169 vertical, and 28 conglomerate."" Although many of the
firms acquired may have been insubstantial in terms of assets or sales, these
acquisiti<ms have largely escaped prosecution by either* the Federal Trade Com-
mission or the Justice Department.
Competition is likely to lie greatest when there are many sellers, none having
any significant market share."^ Where the number of sellers is limited, competi-
tion gives way to parallel policies of mutual advantage."- The term "independent
producer"' is erroneous, since the large, integrated petroleum companies are the
producers. Not only do they control the supply and production of oil ^^"^ and gas,
they have significant interests in coal and uranium."* It is questionable whether
the public interest is best served Ijy a few firms controlling the energy supplies of
this nation. There has always been an air of cooperativeness in the oil industry,
as evidenced by its powerful lobby for tight oil import quotas and its relationships
with oil-producing states to eliminate excess output. ^*"'^ Uniform pricing is clearly
the rule for oil, where nonprice-competitive advertising is so prevalent and con-
centration is even less significant. Even though the producer is outside the normal
public utility rationale for regulation, public policy requires regulation, if not
for the noncompetitive structure of the industry, then on the theory of scarce
resource allocation or wasting resource preservation. Such regulation must be
creative yet cognizant of the structure of the regulated industry, or it must neces-
sarily fail.
The National Energy Crisis — Revisited
(By John N. Nassikas)
The energy crisis on the horizon three years ago when I last spoke to the
National Press Club has now emerged as a dominant issue requiring resolution on
a top priority basis. In the near term, our preoccupation is to resolve chronic
energy imbalances to avoid disruptions of service to consumers and our economy.
Over the long term, our concern must be the assurance of reliable energy supplies
to guarantee our survival as the world's greatest Nation. As then predicted,
there has been an increased downward trend in our domestic reserves of usable
fossil fuels and a corresponding acceleration of demand for these fuel resources.
The staff of the Federal Power Commission predicts that gross energy consump-
tion in the United States, which was 69 quadrillion Btu ^ in 1971, will triple by
the end of the century. Nonetheless, despite declining reserves of proven and
usable reserves of our fossil fuel resources, it is estimated that by the year 2000,
we will still be dependent upon petroleum and natural gas to meet more than 50
percent of our energy needs.
'*'' U.S. Oil Week. Mar. 2, 1970, No. 2.50. See In re Kenuecott Copper Corp.. Doc. No. 8765
(PPC, May 5, 1971) (opinion of FPC invalidating acquisition of Peabody Coal Co. by
Kenuecott Copper Corp.).
"il'nitpfl Stares v. Pliiladelphia Nat'l Bank. .374 U.S. ,321. 363 (1963).
^^" Brortley, Oligopoly Pouer Under the Sherman ayid Clayton Acts — Economic Theory
to Legal Policy, 19 Stan. L. Rev. 2So. 298 (1967).
1*^ Twenty-seven petroleum companies produce about 70 percent of the domestic crude
and account for about 87 percent of the refinery runs. The Chase Manhattan liank. Annual
Financial Analysis of a Group of Petroleum Companies (1969). At the retail level, four
companies control 31 percent of the gasoline sales, whereas in Louisiana (the twentieth
largest gasoline consuming state), the top four companies account for .51 percent. Bachman
& Wilson. Major Slices of Gasoline Pie Still Slipping in the United States, Oil & Gas J.,
Sept. 13, 1971, at 4.3-47.
m Four oil companies control 20 percent of the coal production. Keystone Coal Industry,
U.S. Coal Production by Company (1969). Two oil companies control over one-third of tlie
domestic uranium milling capacity. Arthur D. Little. Inc., Competition in the Nuclear
Power Supply Industry : Report to the Atomic Energy Comm'n and the Dep't of Justice
(Dec. 1968).
'"See generally La. R.S. (1950). See Connally Hot Act. 15 U.S.C. §§715-15(k)
(1964) (prohibiting the interstate movement of oil produced in excess of state allowables).
See also Attorney General Report Consenting to the Interstate Compact to Conserve Oil
and Gas 69 (Apr. 1969) ; Attorney General Report Consenting to the Interstate Compact
to Conserve Oil and Gas 84 (July 1967).
1 Energy produced from coal represented about 18 percent of this consumption with
natural gas accounting for apriroximately 33 percent, petroleum and its by-product 44 per-
cent, and the remainder from water power and uranium.
767
Furtliermoi-e, this reliance on fossil fuels will be severely aggravated unless
nuclear energy fulfills current projections of supplying about one-third of our
energy needs by the end of the century." Because of current r^ulatory, environ-
mental and technological problems, we cannot predict with confidence that cur-
rent foi-ecasts of nuclear availability will be met. Presently, there is substantial
slippage in the installation of nuclear generating facilities to meet power needs.
In February 1973, our Bureau of Power reported that nuclear units, with a total
capacity of 27,3«0 niw, would not be available on schedule this summer to meet
power needs.''
Currently electric power generation is responsible for about 25 percent of our
primary energy consumption. By the year 2000 it is estimated that the electric
industry's share of primary energy consumption will be about 50 percent. If
nuclear power is not available to provide a substantial part of this primary energy
supply to the electric power industry the reference to fossil fuels may not be
capable of fulfillment.
Quantitatively, in absolute terms, our domestic energy resource base is adequate
to meet energy demands through this century. However, this assumption ignores
the fact that there has developed a chronic shortage of deliverable and recoverable
resources of the required environmental quality, which are economically accessi-
ble. Any number of present constraints continue to preclude timely resource de-
velopment, including government leasing and tax policies, inadequate capital
formation, and investment in exploration and development, prolonged licensing
delays, stricter environmental air. water and land use standards, requirements
of the National Environmental Policy Act, producer price control under the
Natural Gas Act. and the uncertainties arising from current economic conditions.
In our restructuring of energy priorities and government controls these con-
straints will have to be reassessed for their consistency with the overall long-
range national interest.
The Federal Power Commission is deeply involved in the effort to resolve our
energy dilemma. Our jurisdiction extends to approximately 25 percent of dom>^s-
tic primary energy consumption (natural gas and hydropower) which includes
more than two-thirds of the annual production of natural gns. approximately 23
Tcf in 1972. We also regulate LNG imports and exports. Since our ratemaking
powers are limited to sales for resale in interstate commerce and do not extend
to direct sales, we do not occupy the entire interstate field. Nor do we have au-
th.ority either to compel producers to explore for or develop gas reserves or
dedicate or commit gas to the interstate market.
Our jurisdiction over the production of electric energy is limited to the licens-
ing and regulation of non-federal hydroelectric power projects. Our rate jurisdic-
tion in the electric power area is also considerably more circumscribed than
our correspondeing jurisdiction over the rates for the sale and transmission of
natural gas in interstate commerce. We regulate al)Out 15 iiercent of the kilo-
watt hours sold annually by jurisdictional electric companies (excluding inter-
changes) which represents less than 7 percent of the annual dollar volume of
their sales. We have, however, been charged by the Congress with the respon-
sibility of monitoring national power supplies and "of assuring an abundant
supply of electric energy throughout the United States with the greatest pos-
sible economy and with regard to the proper utilization and conservation of
natural resources * * *" *
Tlie most critical issues confronting the Commission in its regulation of the
natural gas industry are the formulation of policies to correct our supply def-
icit, to allocate existing supplies for optimum utilization and to regulate the
level and structure of rates to serve the interest of consumers in an adequate
and reasonably priced gas supply. Similarly, our chief concerns in regulating the
electric power industry are the formulation of policies and voluntni-y pro-
grams that will assure the availability of needed generation on a timely basis —
including fiiels to drive the turbines of thermal electric generating plants.'' In
-In my Aiisiiist 1970 remarks to you. I pointed out: "The program for installations of
nuclear power j^eueration has hifrged two to three years beliind the predicted level of
five years ago. when orders for phmned systems were largely placed by utilities."
"The slippage of 27.3S'J mw is equivalent to 1.4 trillion cubic feet of gas annually
measured in terms of the volume of gas required to generate this power — an amount equal
to 3.5 percent of the 3.9S Tcf of gas used as boiler fuel for electric power generation in 1972.
* Federal Power Act. § 202(a i , Ifi TI.S.C ft24!> 'e i .
= In my August 1970 remarks to the National Press Club I stated: "I believe that the
basic fossil fuel shortage is the most acute phase of our developing energy crisis, dwarfing
the formidable problem of installing adequate generation and transmission facilities to
meet short-term demand."
768
addition, we are directly concerned with the encouragement of research and
development to provide new and improved power sources, as well as the pro-
tection of the public interest in just and reasonable wholesale rate levels and
adequate environmental protection on the construction and operation of juris-
dictional power facilities.
These priorities can be expected to i>ersist for the foreseeable future.
ENERGY SUPPLIES— GAS
There is a pervasive and deepening gas supply crisis in the United States.
For the last five successive years, we have produced twice as much gas as we
have found and our reserves in the lower 48 states have declined by 54.7 Tcf.®
Over the last decade the domestic gas reserve-to-producrion ratio for the lower
48 has been cut in half to a current ratio of about 10. Unless we can more than
double the ten-year average finding rate (jf 17 Tcf (sharply reversing the average
finding rate for 1968-72 of 10 Tcf) the Commission's Bureau of Natural Gas
projects an unsatisfied level of demand for gas of 3.6 trillion cubic feet in 197.5,
v.irh a widening supply shortfall in the period beyond 1975 and anticipated
supply deficiencies of 9.7, 13.7 and 17.1 trillion cubic feet in 1980, 1985, and 1990,
respectively, despite the addition of supplemental gas sources to pipeline supply
of natural gas in the lower 48 states.'
Interstate pipelines have curtailed and are curtailing both firm and interruptible
gas service with widespread adverse economic, social and environmental results.
Direct industrial sales declined 7.4 percent in 1972. For the April 1972-March
1973 period, fifteen major pipelines have projected deficiencies of almost one
trillion cubic feet or about 10 percent of the annual sales of those pipelines repre-
senting almost five percent of total annual domestic gas production. This repre-
sents a sharp increase from reporte<l deficiencies of 453 billion cubic feet for
the April 1971-March 1972 period.
While many of the changes needed to balance the gas supply and demand
equation require governmental action, there is one vital activity in which we all
can participate — energy conservation. This nation has been profligate in using
Its energy resources, but the time has come when we must develop and use bet-
ter methods to produce and transport our energy : to convert and utilize our fos-
sil fuels ; and to reduce energy waste to the extent possible. I don't think we
will need to forego the leisure and the comforts we get from an al)undant energy
supply, but we all need to look around and see what we can do to cut down the
waste. Consumers can no longer afford to be prodigal in their use of energy.
American industry too. with all its efficiencies, has been an energy spendthrift
not only Isecause tlie supply was seemingly inexhaustible but also because it was
cheaper to use cheap energy inefficiently tlian to install more efficient but higher
cost equipment. As energy prices rise — and they must — economic trade-off's of en-
ergy costs for equipment costs will change and industrial efficiencies will im-
prove. Steam electric power plants for example operate at only about 30 to 35
l)ercent efficiency. Two-thirds of tlie injmt energy is wasted, and not only wasted
but at the .same time creating additional thermal pollution problems. We must
jmt forth the research and development effort needed to examine new conver-
sion techniques. The fuel cell is a good example. This space age technology,
lironght down to earth and adapted to our commercial needs, offers the potential
of significantly increasing the efficiency of converting fossil fuels to electricity,
and with a bonus of reduced pollution.
As to ga.s supply, it is high time that we all face up to the fact that there is
a shortage of deliverable natural gas in this nation of formidable proportions
and that there is urgent need tf> suiiport j-lans for reversing the dismal trends
of the past — even though higher costs to tJie consumer may lie the price for a
reliiible supply. In one of my earliest appearances I)efore a Congressional com-
mittee as Chairman, in November 1969, I pointed to the growing gas supply-de-
mand imbalance, and dealing with this problem has been a top priority ta.sk at
the FPC since I have l>een there. After over 50 Congressional hearings and par-
ticipation in seemingly endless interagency conferences, st\idies and reviews I
believe that there is now a consensus that the gas shortage can no longer be
either underestimated or tolerated. The consumers' interest in a reliable supply
" A*; reported hv the American Gas Association.
"The stnfF estimate posits net pipeline imports of l.fi Tof in 1980 increasing to 1.9 m
19il0. I>XG imports of 2 Tcf in IflSO doublinjr to 4 Tef in litfiO. gas from coal at n level of
0..-^ Tr-f in 1'.iS0 increasing to 3.3 Tcf in 1990, and gas from Alaska at .7 Tcf in 1980 and
2.3 Tcf in 1990.
/
69
of gas at a reasonable cost and the environmentalists' interest in clean air should
coincide in support of attaining national objectives which serve our economy, as
well as enabling us to meet our social and international goals.
In 1970, we initiated our investigation into the reliability of gas and electric
service," an investigation which led to formulation of our curtailment programs
to insure that the continuing needs of high priority residential and commercial
customers, as well as industrial uses where no satisfactory substitute could be
used — could be met with a minimum of economic dislocations. On January 8th
of this year we issued a Policy ►Statement ^ which, along with its subsequent
amendments, set forth a list of priorities of service which will best serve the pub-
lic interest dtiring times when gas service must be curtailed by the pipeline.
Briefly, these are the principal groupings of customers: (1) the highest prior-
ity classes are reser\'ed for residential and commercial customers, storage gas
requirements, and industrial customers needs for plant protection and direct
manufacturing process uses: (2) the next lower priority is firm industrial gas
reiiuirements for boiler fuel use where alternate fuels could have been used; and
(3 1 the lowest priority is interruptible boiler fuel uses w'here alternate fuels
could have l)een used. These groups are further subdivided with larger users
falling into a lower category since fuel substitution is usually easier in larger
installations and the pollution control equipment necessitated by the switch to a
less clean fuel is more easily and economically installed.
While our program for dealing with the current problem in an equitable manner
is continuing, we must also look to the intermediate term. What will the appli-
cable rules of gas conservation and allocation over the next 5 to 10 year period —
a period during which we must live with a chronic shortage of gas? Even if all
our technological goals are realized, and we are able to compete for supplies in
the worldwide gas market, the tangible results of our efforts are several years
away. Early this year the Commission put before the public a proposed policy
statement which, if adopted, would provide to all concerned : producer, utility and
consumers, the guidelines under which we think the gas industry could operate
and maintain its economic viability in this period of .shortage. Our stated purpose
is to solicit comments which will assist us in arriving at a rational solution to the
optimum allocation of limited gas resources in a time of gas shortage. As of the
end of last week, we had received a total of 324 comments.
This proposed statement sets forth the priority of service against wiiich we
would evaluate any proposals for new or additional service to direct or resale
customers, and any" other Commission actions which could affect gas deliveries to
•customers. In addition, we have sought comments on two other gas conservation
measures : (1) ways in which we might use our pipeline rate design powers as a
means of conserving gas and reducing demand for inefficient uses, and (2) con-
sideration of requiring abandonment of low priority uses. To accomplish this
latter goal we have proposed a change of our regulation which would reciuire that
all large volume interruptible gas sales, whether for resale to or direct delivery to
individual customers, would be made only under contracts which are interruptible
at the pipeline's option.
Oil
Our reserve-to-production ratio for crude oil for the lower 48 has been below 10
for the last five years and domestic production has remained relatively stable
since 396(1 Even considering the 10 billion barrels of crude oil reserves in Alaska,
our reserve-to-production ratio would only l»e about 11. From 1967-1972. there
was a 16 percent decline in our domestic daily production capacity of crude oil.
To the extent we are compelled to import more crude, as the result of a widening
gap between domestic production and demand, rather than discover and find oil
within our continental resource base, we aggravate the natural gas shortage, in-
asmuch as over one-fourth of our natural gas is discovered as an incident to the
directional search for oil. Thus, imported oil requirements are further augmented
by the limitations on domestic gas supply in part created by expanded oil imports
to alleviate a domestic oil shortage.
It has been estimated that by 1980 about 50 percent of our oil consumption will
be imported and about two-thirds of these imports will come from the Eastern
Hemisphere. There are serious national security considerations involved in such
dependence on foreign oil. Equally serious is the fact that not only are higher oil
import prices likely but there is no assurance that this country will be able to
^ Pcilicv statement Notice of Investlg;ation and Proposed Rulemaking with Respect to
Develojiihc Emersencv Plans. Docket No. R-40."). dated November 4, 1970.
'■' Order No. 467, dated January 8, 1973, Docket No. R-469.
770
secure these necessary crude oil imports in the first instance in view of the highly
competitive world energy market that is developing/"
Even if the necessary oil imports are forthcoming, we will have serious balance
of payments problems to resolve. Despite profit repatriation from oil companies
and shipping companies, the direct effect of projected imports on our account
balance could am(nnit to an outflow of $5 billion to $10 billion by 1980."^
Oil and gas shortages serve to illustrate the interrelationship and interde-
pendence among primary and secondary energy sources. We must not lose sight
of the fact that we have a developing shortage of all usable and deliverable
domestic primary energy resources. These shortages have been induced in part
by the failure to estaldish long-range stal)le policies which can be relied upon
to produce the required quantities of energy resources under acceptable environ-
mental standards and at price levels which will attract capital to market the
resources. Too often, the natural gas shortage has been use<l as a convenient
crutch for the failure to develop other resources, particularly oil and coal, which
are crucial to this Nation's energy balance. Once and for all we .should cast
aside the myth that a solution to the gas supply problem will solve the energy
crisis. Increased domestic gas supply is an energy policy imperative. However, our
national energy policy must be so designed as to assure the rational and timely
development of all domestic energj- resources — coal, oil, uranium, hydro and
gas. The energy crisis is a world phenomenon and cuts across the whole speetnun
of the diminishing worldwide supply of politically and economically accessil>le
fossil fuels.
DOMESTIC EJfERGY RESOUKCES
Based upon government resource estimates and conservative projected growth
rates of domestic energy demand, we have :
"Potentially recoverable petroleum resources adequate to meet future demand
growing at the rate of 3 percent yearly for 44 years :
"Recoverable shale oil reserves at present demand levels to implement oil
supplies for about 35 years after depletion of present potentially recoverable oil
reserves :
"Potentially recoverable gas resources adequate to meet future demand grow-
ing at the rate of 1.4 percent yearly for fi.'i years ;
"Identified coal resources equivalent to 300 years' supply at a growth rate of
demand of 2.4 percent yearly ;
"Recoveralile uranium resources at .$30 per pound would be adequate to meet
the projected levels of nuclear generation imder present technology (without
ithe breeder reactor) growing at the rate of IS percent yearly for 32 yenrs.'^''
The economic accessibility of these resources would be importantly influenced
by environmenal standards relating to extraction, land use and air and water
quality, in addition to the economic and technological factors involved in con-
verting resources to proved reserves.
We cannot expect to produce these resources to fulfill energy demand unles.s
(a) prices are set at levels to attract capital and produce a reurn on invest-m<^nt
commensurate with risk and (b) environmental protection standards permit
the transitional development of these resources compatibly with energy needs.
It slinnld be noted that prices paid to natural gas producers have generally
lagged behind in the consumer price index in this inflationary period, resulting
in an erosion of earning capacity and reduced en pifal fonnation cannbili^ies of
the gas producing industry. The followinc: tabulation shows the piices paid by
interstate natural gas pipelines to domesitc producers and the consumer price
index :
If As stnted by James E. Alcins : "But to sustain thp vi^w that phvsical supply anrl cnst
arp dpoisirp. one must assiimp tint the world's oil is rlistribiited. if liot uniformly, at least
so that adequate amounts will always be ayallalile to all users, in all eiriiimstan'o'^s nml at
rp^souahlp prices. This is an assumption that has never been well founded " Akins James E
"The Oil Crisis : This Time The Wolf Is Here," Foreion Affairf:. April 197?,. p. 465.
" See the Annual Report of the Council on International Economic Policy March '>0
197.^?. ■ ■
1= The above forocasts assume: (1) estimated remainins recoverable resources discovered
and undiscovered that could be made available under certain economic and technological
conditions, and (2) define proved reserves as those recoverable under existing economic
and operating conditions.
771
Year;
1972.
1971.
1970.
1969.
196S.
1967.
1S66.
Is65.
1964.
Consumer Price 1
idex'
Prices paid togas
producers by
(1964=
= 100)
interstate pipelines
2
Residen-
Index
Total
tial gas
Cents, IVl ft3
(1964
= 100)
134.9
123.2
20.54
123.9
130.6
119.0
19.23
116.0
125.2
109.3
18.11
109.2
113.3
103.5
17.62
106.3
112.2
101.7
17.32
104.4
107.6
100. 7
17.13
103.3
104.6
100. 9
16.87
101.8
101.7
100. 3
16.70
100.7
100.0
lUO.O
16.59
100.0
1 Derived from Department of Labor, Bureau of Labor Statistics Consumer Price Index, wherein 1967 equals 100.
2 Federal Power Commission form 11.
Insofar as practicable, government policies must be firm, stable, and predictable
so as to enable the attraction of capital on a timely basis and in the order of
magnitude required for planning, exploration, production, development and mar-
keting of resources and to remove a climate of regulatory uncertainty which
deters productive investment. Government should encourage inter-fuel competi-
tion in place of artificial government regulatory restraints. With appropriate
cou.servation and environmental standards, workable competition among pri-
mary energy industries could be the foundation for a marked improvement in
domestic resource development.
Oar primary objective should be the maximum efiicient development of our do-
mestic resource base, including Alaska and federal onshore and offshore areas.
As of Oft<3ber l'JT3. only about one percent of the Outer Continental Slielf had
been leased, despite strong evidence that it contains over half our potential
gas and oil resources. These leasing schedules must be expanded and accelerated
on a priority basis. Over one-third of the potential gas supply of the lower 48 is
locared in the South Louisiana and Texas Gulf areas and over lialf our current
domestic gas production comes from these two prolific areas. Along the Atlantic
offshore areas, there is a potential of 12 billion barrels of oil and 67 trillion
cubic feet of gas, yet not one exploratory well has l)een drilled from ilaine to
,F:orida.'^ Even if prompt leasing is begun, there exists a long lead-time of up
to seven years, to locate prospects, acquire leases, drill exploratory wells, install
tjlatfnrms. drill developmental wells, and constriict pipelines, before production
begins. There are about 327 trillion cubic feet of potential gas reserves and 31
Tef of proved rt-serves in Alaska which will l)e marketable only as the oil re-
serves are developed and a pipeline certified for oil transport."
Increased imports of liquefied natural gas and accelerated development of
synthetic gas from naphtha and gasification of coal are necessary and important
adjuncts to our gas supply, even if we succeed in an unprecedented turnaround
in the development of our continental natural gas resources.
Based upon a staff analysis of the data on file for supplemental .gas projects,
the investment costs (dollar per daily cubic feet) approximate $1.62 for LNG
imports. .$.2o-$.40 for SXG, $168 for coal gas, and about $1.05-$1.45 for Alaskan
sas. The indicated prices of these supplements (dollars per INIcf) are $.84-$.91
for LXG.'^ $1.10-$1.80 for SXG. $1.00-$1.25 for coal gas, and $.75-$1.2r; for
Alaskan gas. The approximate prices paid to interstate pipelines by distributors
for natural gas from the lower 48 states is about 52 cents in New York. 36 cents
in Chicago and 40 cents in Los Angeles. Based upon FPC Form 11 data, the
average price paid to producers by interstate pipelines was 20.38 cents per Mcf
in 1972.''
-3 Tlip Canarlinn Pptrolf>iim Association estimatps potential reservps of 110 trillion cubic
fppt in offshore eastprn Canada and the Gulf of St. Lawrence, with some recent develop-
nipnt in the Sab'e Island area.
" Thp most recent chapter in the TAPS saga is the decision of the U.S. Supreme Court
of Aiiril 2. 107.S. den.vinsr certiorari frnm the decision of the Court of Appeals for the Dis-
trict of Colnmhia in Wilderness Society v. Morton. CADC 72-179fi. et nh, Febrn.nrv 0. 1973.
In that dpcision. the Court held that the mineral leasing: Act of 1020, .30 U.S.C. ISo, pre-
vpntcd approval of the Alaskan pipeline project. The Court deferred resolution of the envi-
ronmental issues pending determination of the right-of-way dispute. Congressional action
on the right-of-way controvei's.v is pending.
'° Delivered price to liquefaction fariJities, East Coast. U.S.
1" Thp price to the rnnsumer must include not only producer costs, but also pipeline
-trnnsportarion and distributor costs. Typically, for residential gas heating consumers in
the northeastern T'nited States, the price to the consumer mav approach $1 .S2-iSl 90 Of this
.cost, the distributor receives ,'51.40-$1.4o, the pipeline $.22-$.25 and the producer $ 20.
772
While there is considerable debate about the causes of energy shortages and
the efficacy of various proposed solutions, there should be no dispute about the
cost of halting the decline of energy reserves. The capital demands to meet the
required exploratory and development effort will be unprecedented. One recent
estimate states that the petroleum industry will require about one trillion dollars
to meet the non-Communist world's need for oil products between 1970 and
1985.^' In this same timeframe, the National Petroleum Council has estimated that
the capital requirements of the domestic oil and gas industry will range from
$186 billion to $257 billion, or from an annual average of $12.4 billion to $17.1
billion. By comparison, the industry invested at home and abroad an estimated
$11.9 billion in 1970. At the high end of the projected range, the additional
capital required would represent about a 4o percent increase over the 1970 level.
Whether or not such an expansion of tinancial requirements- will strain the indus-
try's ability to attract funds will depend on whether the build-up is gradual
or is compressed within a short period of time. The financing, of course, if suc-
cessful, will be accomplished by way of adequate profits to attract funds in the
highly competitive capital market. The allocation between oil and gas will lie
determined by the prospects for profits in each sector. The allocation between
domestic and foreign investment will be similarly determined. To maintain the
required profitability, the industry's selling prices must be permitted to adjust
to tlie level of costs that will be experienced as the industry seeks to explore and
develop new sources of oil and gas reserves. In addition, the industry will require
reasonable assurance of stability in government programs that affect its
profitability.
The 1970 National Power Survey projected the capital requirements of the
electric power industry (inclusive of distribution investment) between $400 bil-
lion and'$500 billion for 1970-1990. For the 1971-1985 period, the National Petro-
leum Council estimated the electric industry capital requirements at $235 billion
dollars (1970 dollars), or $15.7 billion per year (exclusive of distribution invest-
ment). Investment outlays by the power companies reporting to the Federal
Power Commission totaled $14.5 billion in 1970, whereas the National Power
Survey forecasts an increase to $20 billion per year by 1980 without any allow-
an( e for the effects of inflation.
In view of the investment that will be required and the urgent need for ex-
pedited action, federal-industry research and development programs similar to
our crash eft"orts in the area of space technology should be given serious con-
sideration. Such an effort could conceivably be modeled along the lines of
COMSAT or some other quasi-public corporation concept. In the event that mas-
sive government participation in energy resource development Iiecouies essential.
I would prefer joint government-industry efforts along these lines to unilateral,
direct involvement in energy research and development by federal entities.
In addition, energy research and development must continue to be increased
substantially. Where possible, joint federal-industry efforts such as those under-
way in the development of coal gasification technology ,^^ development of oil shale
and tar sands and breeder reactors should be pursued, together with a greatly
augmented research and development effort by all energy industries — including
fuel cells, fusion, solar energy, geothermal resoiirces and magnetohydrodynamics.
In this regard, the electric utility industry is to be commended for the leadership
role it has assumed in energy research and development. The formation of the
Electric Power Research Institute to undertake a comprehensive R&D effort
funded by all sectors of the industry is a model program that other energy indus-
tries should emulate." The natural gas industry's efforts in the area of fuel cell
i' The Chase Manhattan Bank, Capital Investment of the World Petroleum Industry,
1971.
^* Undoubtedly, jras from coal will be an important future supplementary source of gas
supply. However, the magnitude of coaTs contribution to cas supply could be affected by a
variety of potential restraints, including: financial considerations, strip mining and asso-
ciated" environmental restvlctions. a vnilability of sites and the scarcity of water to supply
the gasification process. Currently there are pending before the FPC two applications to
develop coal gasification facilities and associated coal resources representing almost a !?1
billion Investment. (El Paso Natural Gas Co.. CP7.3— 1.^1, and Transwestern Coal Gasifica-
tion Co., ef al., CPT.S-212.) The combined annual output of these plants is estimated to be
between 170 and 180 billion cubic feet.
18 To encourage a vastly expanded R&D program., the Federal Power Commission
amended the Uniform System of Accounts on August 20. 1970. so that R&D expenditures
can be fuTy recovered tlirough charges to operating expenses on either a current basis or
over a period of y?ars and to allow jurisdictional companies to earn a return on unrecov-
ered expenditures. (Order No. 40S. 44 FPC 639) At present, as we indicated in Order Xo.
40S. we are proposing to redefine research and development in the Uniform System of
Accounts to encourage the kind of Innovative research eiforts future energy systems will
renuire and to allow recovery of funds advanced through charges to utility operations and
also to allow an earned return on unamortized balances in the R&D account. (R-462, Notice
of Proposed Rulemaking, December 13, 1972).
773
development and coal gasification are al.«o highly commendalile and should serve
as the springboard fur launching an unprecedented new R&D coninutment by the
distribution, transmission and production sectors of that industry.
Congress must reevaluate the interrelationship between adequate and secure
domestic energy supplies and the legitimate and urgent need to protect our en-
vironment. As a minimum, there must be a critical reappraisal of the procedural
reiiuirenients of the National Environmental Policy Act. The detailed and, at
times, redundant procedural steps required by that statute have proven to be a
windwall for those bent on blocking any and all energy development. Opponents
of nuclear power, offshore oil and gas exploration and the development of Alaskan
oil and gas resources have succeeded in seriously delaying these vital energy proj-
ects by utilizing the procedural I'oadblocks of XEPA. Often substance yields to
form to the prejudice of the public interest. Consistent with full pul)lic disclosure
and review and the mandate of due process, the procedural nightmares of cur-
rent legislative requirements should be carefully reexamined and revised to avoid
inordinate delays. If procedural methods of carrying out substantive public
policies, as well as the finality of the decisional process, are clearly defined by
the Congress, the adversary process before regulatory agencies and subsequent
appeals to the courts will no longer succeed in delaying crucially needed energy
resource development.
ENERGY DEMAND
There are some who advocate zero growth in energy demand as the solution to
our domestic energy supply crisis. In my judgment, such an alternative is an un-
acceptable option that would adversely affect our economic growth requirements
and the attainment of our environmental and social objectives.
We must more efiiciently utilize our resources by diverting demand from waste-
ful uses of limited resources and substituting other energy resources so that fuels
will be better allocated according to their end use value. As much as is prac-
ticable, all costs — from extraction to consumption — should be internalized and
the social costs of using energy and reclaiming the earth incluued in the cost of
the final product.
Research and development funding of programs to improve the conversion
efficiency of primary energy resources, as well as electricity, will conserve our
finite resources without inhibiting essential economic growth.'" In addition, we
must critically evaluate modes of transportation required by a mobile society to
conserve resources while protecting our urban environment. The transportation
market consumed almost one-fourth of the 1970 energy output, and within this
sector, almost three-fourths goes to power automobiles, trucks, and buses. The cdii-
version efficiency of automotive engines, the nation's interstate highway system,
air emission standards, mobility of society, and lack of an integrated mass transit
system, all impact upon the consumption and demand levels of this sector.
There ai-e also opportunities in the commercial and residential sectors (which
collectively consumed about 20 percent of our 1970 energy output) for improved
efficiencies in space heating through revisions to municipal building codes,
architectural redesign and improved insulation standards.
Furthermore, to attain our national objective of environmental protection,
we must remember that more energy will be required to meet our environmental
objectives, whether it be for recycling, secondary and tertiary treatment of water
wastes, land restoration, or an adjustment within our energy mix towards those
sources which degrade the environment the least."
COMMISSION ACTIONS
Since I last addressed this distinguished forum in August 1970, the Commission
has taken numerous actions and adopted innovative policies to stimulate domestic
gas exploration and development to assure consumers with an adequate gas
^'> While there is nhoiit an SO percent offlcieney in recovery of natnrnl eras, coal's recovery
efficiency is ahont 57 percent. Even after secondarv and tertiary recovery, the efficiency
for petroleum is only 30 percent, and that level is affected by state conservation retrnlations
and tlie sibsence of compulsory ntilization in manv prodncinjr areas. There is about a
70 percent loss in energy efficiency throusrh conversion to electricity by fossil-fuel steam-
electric plants. There is about 10 percent loss in kilowatt-hours between the generating
plant bus bar and the electricity-consuming appliance.
21 For example, in order to meet the 1975 automobile emission standards, it has been
estimated that 18 percent more energy is needed with present technology. Also, in order
to control thermal pollution and remove particulates and sulphur oxide, it is estimated
that power plants will require 7 percent more energy.
774
supply at the lowest reasonable cost. Many of such actions and policies have not
had their full impact as of yet because of the uncertainty of court appeals of
which we average about 60 litigated cases at any given time. Among our more
important actions are :
Prescribing increased area rates nationwide'^ (except flowing gas in the
Rneky Mountain area). We are currently considering proposing by rule-
making the establishment of uniform national wellhead rates ;
Substantial price increases in establishing area rates ranging from 30 to
50 percent in the principal producing areas of the United States ; ^
Exempting over 4.0W independent gas producers from price ceilings ; ^
Stimulating jiippline inve'^tnient through advant^e payments to producers
in return for drilling commitments and gas dedications to the interstate
market ; ^
Short-term emergency purchases ranging from 60 days to three years for
emergency purchases of natural gas prices above ceiling rares ; ^"
Placing pipelines on a parity with producers as to sales by pii^eline affi-
liates : ^
Optional procedure for certificating producer sales for natural gas at
prices in excess of area ceilings by application of economic and market
factors in an intercompetitive fuel economy as relevant price determi-
nants ; "^
Rulemaking proceedings to permit higher prices to producers for installa-
tion of compression facilities to increase production of gas not otherwise
deliveraide and to avoid premature abandonment : *
Added imports of pipeline gas from Canada : '"' and
Authorization of LNCJ imports and encouragement of synthetic and gas
refinement projects to develop supply increments whicli the domestic mar-
ket has been unable to develop.^^ The Columliia LNG project, initiated by
filings with the Commission in September 1970, was approved initially on
June 28, 1972. and recertified on March 30, 1973. The facilities and ships
in that project are estimated to cost $1.7 billion. The Export-Import Bank
has agreed to extend $157 million of credit to Algeria for the li(]uef action
facilities and to guarantee al)0Ut half of the $400 million to be furnished
by private banks for Sonatrach, the Algerian government corporation which
will produce the gas.
Following Congressional authorization in December 1970, the Commission
Instituted a National Gas Survey in January 1971. The Surve.v will include an
independent analysis by the FPC staff, the U.S. Geological Survey and tech-
-- Our authority to prescribe area rates through our rulemakinjj authority for flowing gas
in the Rockv Mountain area was recently affirmed. Phillips Petroleum Co. v. F-P-Cj/So.
71-1659. 10th Cir., February 20, 197.3.
-' C)nr rate determination for the Hugoton-Anadarko area has been affirmed by the United
States Court of Appeals for the Ninth Circuit. California v. F.P.C., No. 71-1036, July .31,
1972. Our area rate decisions in the Other Soutliwest, South Louisiana, and Texas Gulf
areas and our initial new gas rates for the Rocky Mountain area are all pending court
review at this time.
-■' This Commission action. Order No. 428, was recently set aside by the United States
Court of Appeals for the District of Columbia Circuit. Texaco, I>ic. v. F.P.C., No. 71-1560,
December 12, 1972. The Solicitor General has agreed to petition for certiorari from that
reversal.
-^ As of August 31. 1972. pipelines had advanced capital of about $1.25 billion as a result
of our program to which approximately 9.5 trillion cubic feet of proved reserves may be
attributed in the lower 48. See Order No. 465, issued December 29, 1972.
-"These purchases, made pursuant to Order No. 431, issued April 15, 1971, have resulted
in dedications of over one trillion cubic fet^t of gas to the interstate market. These sales
have averaged 5t to 10? per Mcf above area price ceilings, with the highest single sale of
45e per Mcf.
-" This Commission policy, designed to increase competition in the exploration for, and
development of, natural gas, was affirmed in City of Chicago v. F.P.C., 458 F. 2d 731 (D C.
Cir. 1971). cert, denied 405 US. 1974 (1972).
=' This procedure is pending judicial review. John E. Moss, ct al. v. F.P.C., No. 72-1837.
D.C. Cir.
-■> On November 8. 1972. the Commission issued a Notice of Proposed Rulemaking to con-
sider special reiief from area ceilings for gas from reservoir.s with reduced pressures, or
where deeper drilling and reconditioning was reriuired Docket No. R-45S. The Commis-
sion issued a similar notice on November 9. 1972. concerning special relief from area
ceilings for gas being flared or vented. Docket No. R-459.
3" Pipeline imports from Canada are currently at an annual rate of about 950 billion
cubic feet, or about 4 percent of domestic demand.
SI The Commission authorized the long-term imi>ortation of LNG from Algeria In
Disirifins, Opinion No. 613, about 15.4 million Mcf per year, and in Colmnhia LNG. Opinion
No. 622. 390 million Mcf per year. In Opinion Xo. 637. thr- Commission authorized Algonquin
G:!s Transmission Co. to purchase up to 40.2 million Mcf per vear of SNG which would
ultimately add 30 percent to the volume of gas availai)l(' in that pipeline's service area.
iiical experts from the U.S. Navy of the Nation's current proved natural gas
reserves. We expect that the Survey will be completed by December 31, 1973,
and that the independent reserve study will be issued by May 31, 1973.
On June 29, 1972, the Commission instituted a new National Power Survey
which will focus on problem areas of crucial importance to the electric utility
industry and the Nation's power consumers.
In addition to rulemalvings and policy statements on conservation of electric
energy, expanded research and development and improved reliability, the Com-
mission is receiving detailed reports on the cost and quality of fossil fuel sup-
plies of electric utilities. These data will facilitate the evaluation of fuel supply
developments which may affect the reliability of electric service, emergency pre-
paredness and environmental improvement programs.
ENERGY POLICY
As I indicated to you in August 1970, "There is no single Federal agency with
the authority and responsibility to formulate an overall energy policy or to
execute a balanced national objective of efficient and productive utilization of our
enei'gy resources." As early as January 30, 1970, I had recommended a National
Energy Resources Council. Subsequently, I reaffirmed on numerous occasions
the need for a Council on Energy Policy. On March 27, 1973, the Senate Commerce
Committee favorably reported S. 70, a bill to establish a three-member Council
on Energy Policy, to advise the President and the Congress. The President's
Depai'tment of Natural Resources should be authorized by the Congress to en-
able effective Executive coordination of energy policies.
I have recommended a Federal Energy Commission to consolidate the exist-
ing economic regulatory functions affecting energy. The responsibility for energy
import policies, for oil. petroleum products, gas and uranium should be consol-
idated in either an Executive agency or independent regulatory agency. Such
reorganizations of existing responsibilities could provide the institutional frame-
work within which rational energy policies can be developed and executed to
serve the national interest.
Congress has not yet adopted "sanctity of contract" legislation to enable the
Commission to (1) prescribe producer prices on the basis of economic and market
factors, rather than on the basis of cost and (2) provide firm rate levels not sub-
ject to later revision. The Commission is limited in its power to establish prices
to attract capital investment at levels necessary to expand exploration for and
development of incremental gas supplies. We are also restricted in our powers
to utilise rate design as a method of more effective resource allocation.
As a result of air quality standards, the demand for gas increases at a time
of diminishing supply of other environmentally acceptable fuels. At the same time,
the pricing of gas at its economic cost to divert demand to alternate fuels is
constrained. Appeals to the courts of any Commission policies designed to serve
the consumer interest in a reliable, reasonably priced supply of gas and to allo-
cate our gas resources to higher uses delay the finality of regulatory policies upon
which industry can predicate their financial and technical planning. Lead times
of five years and more between exploration, development and marketability of gas
resources underscore the urgency of adopting governmental gas policies to enable
the prodiiction of the necessary increments of supply.
Gas producer re.sponse to the Commission's policies to revitalize the regulatory
climate and increased lease sales by Interior is somewhat encouraging, if belated :
In 1972, gas-well development drilling totaled 22.2 million feet — and increase of
28.7 percent over 1971 — the highest since 1962 ; gas-well exploratory drilling
totaled 4.6 million feet, the highest since 1960 — an increaase of 19 percent over
1971 : drilling and production budgets for 1973 are reported to be 7 Dercent over
1972.
Regraettably, this modest upturn is not enough.
Perhaps in time, particularly with a renewal of oil drilling in the United States,
our potential gas resources can be co.nverted to marketable resources with sig-
nificant increases of the magnitude required to reduce the impact of the gas
short-fall. However, we cannot afford the luxury of time. We must accordingly
establish a program that will not defer the urgent necessity of a radical upturn
in discoveries and dedications of new gas supplies to the interstate market. In the
final analysis, regulation of producer prices by the Federal Power Commission re-
quires Congressional action to amend the Natural Gas Act to decontrol the price
of new gas supplies which would not otherwise be committed to the interstate
market, along the following lines :
27-.547 — 74 .50
776
"1. FPC price control would be remoA^ed for contract commitments to the
interstate market of gas from new discoveries, dedications and wells ;
"2. The FPC would" monitor the effectiveness of decontrol in securing new com-
mitments of interstate gas supiilies at a reasonably competitive price with
alternative sources of gas and competitive fuels ;
"3. The FPC would report annually to the Congress the results of new gas
decontrol with recommendations as to continuance or revision ;
"4. There would be mandatory Congressional review in 3-5 years to determine
whether direct price controls should be reimposed ; and
"5. A coordinate leasing program would be instituted for Outer Continental
Shelf and other federal domain lands under acceptable environmental standards
to insure prospects for investment of venture capital to develop new gas resources
for the interstate market consistent with the national interest."
In conclusion, I submit that price decontrol of nevr gas supplies is not a Utopian
solution to either the national gas shortage or our overall energy problems. But,
it is worth tniiny on an eminrical basis to see if the economics of the market
place ivill elicit greatly expanded gas development over the course of the next
2-0 years.
The argument that trorJcaMe competition is absent in the gas producing seg-
ment of the industry should not be a deterrent to decontrol legislation for new
gas with proper surveillance of market behavior by the Department of Justice
and the Federal Trade Commission.
Pending legislation, I v.-ill continue to strive for Commission solutions within
the ambit of our regulatory powers delegated by the Congress.
AX OUTLINE OF NATIONAL ENERGY POLICY : SOME PERSONAL REFLECTIONS
The energy crisis confronting the L'nited States can be resolved only by a
comprehensive national energy policy designed to fulfill energy needs of our
society by the efficient utilization of all energy resources.' While the FPC is
charged with regulatory responsibilities designed to assure the most efficient and
productive utilization of our gas and electric energy resources insofar as dele-
gated by the Natural Gas Act and the Federal Power Act, there is no single
federal agency to carry out total energy policy to attain a balanced national
ob-jective of efficient and productive utilization of our total energy resources —
oil, coal, gas, water, nuclear energy. In addition to multiple responsibilities at
the federal level, the problem is further compounded by the reality of a state-
federal system of economic regulation and resource i>reservation."
To place the problem in perspective. Table I below outlines the composition
of energy production and consumption in the United States for the year 1968
and Table II sets forth the composition of production and consumption of liquid
and gaseous hydi'ocarbons in the United States in 1968.
1 1 outlined the dimensions of the electric power crisis, systems reliability reserves, fuel
shortages, in my testimony on May 7, 1970 before the Subcommittee on Communications
and Power. Committee on Interstate and Foreign Commerce, House of Representatives.
" Tax policies affect exploration and development for oil and natural gas. Anti-trust and
resiulatory policies signidcantly affect inter-fuel competition. The leasing policies of the
Departme'nt of Interior including the Bureau of Land Management and the Bureau of
Indian Affairs in large measure control the minerals extracted from federal and Indian
holdings. The U.S. Geological Survey supervises the drilling on all Department of Interior
off-shore leases. State pro-rationing agencies affect the amount of oil and gas to be
extracted from each lease hold to meet demand. The Federal Power Commission controls
the sale of gas in Interstate commerce through Its certificating powers and control of rates
and affects the level of required supply by its regulatory policies relative to producer rates.
The Oil Import Administration, the Office of Oil and Gas of the Department of the Interior,
the Foreign Trade Zone Boards directly or indirectly affect the amount and price of oil
reaching domestic consumers. The Interstate Commerce Commission substantially influences
oil markets through its jurisdiction over oil pipeline, road and rail transport, and the
Federal jNIaritime Commission exercises its jurisdiction in the area of water transport on
the high seas. Similarly, coal supply is affected by the Federal Coal Mine Health and Safety
Act. export policies, transportation policies of the Interstate Commerce Com.mission and the
Federal Maritime Commission, by the polices of the Biyeau of Mines or by governmental
policies with reference to the development of nuclear power or other energy sources.
777
TABLE I.— COMPOSITION OF ENERGY PRODUCTION AND CONSUMPTION IN THE UNITED STATES, BY ENERGY
SOURCE, 1968'
Percentage of total
Production Consumption 2
Coal (including lignite) 25.3 21.3
Crude petroleum and products 33.5 39.9
Natural gas, dry 1 oy q 31.3
Natural gas, liquids 1 ' 3.6
Electricity, hydro 4.0 3.7
Electricity, nuclear _ .2 .2
Total. .- 100.0 100.0
' Each energy source is converted to its energy equivalent in terms of Btu's.
2 Consumption includes net imports of fuel amounting to 7.6 percent of total consumption in 1968.
Source: U.S. Bureau of Mines.
TABLE II.— COMPOSITION OF PRODUCTION AND CONSUMPTION OF LIQUID AND GASEOUS HYDROCARBONS
IN THE UNITED STATES 1968
Percentage of total
Production Consumption
Crude petroleum and products.. 47.5 53.3
Natural gas, dry | 52 5 541.9
Natural gas liquids) ' ( 4.8
Total 100.0 100.0
Source: Derived from statistics of U.S. Bureau of Mines.
A Commi.ssion staff analy.si.s of the anticipated relative u.se of the various
fuel.s to be converted to energy by tlie electric utilities during the period 1970-
1990 projects the followin.g requirements for fuel expressed in tons of coal having
a heating equivalent of 25 million Btu :
TABLE III.— PROJECTED FUEL USE BY ELECTRIC UTILITIES •
[Amounts in millions of tons]
1970 1980 1990
Amount Percent Amount Percent Amount Percent
Coal - 304.6 56.7 472.0 42.5 613.6 38.8
Gas 145.S 27.2 195.9 17.2 245.9 11.6
Oil '"r'"""""'-". 59.5 11.1 35.8 7.8 91.8 4.3
Nuclear 27.2 5.0 356.5 32.1 1,176.1 55.3
42.5
613.6
17.2
245.9
7.8
91.8
32.1
1,176.1
Total 537.2 100.0 1,111.2 100.0 2,127.4 UOO.O
I All forecasts of the relative energy mix for power generation are based on the assumption that those fuel resources
will be available at the requisite quality level of prescribed environmental standards at an economically feasible price.
To attain the national energy policy objective of the most efficient and produc-
tive utilization of our energy resources, I have recommended the establishment
of a National Energy Resources Council with the primary purpo.se of examining
the nation's energy resources in relation to long term requirements under a
"total-energy" concept recognizing the need to balance economic and environmen-
778
tal concerns.* The Council on Energy Resources would be the counterpart to the
Council on Environmental Quality to serve the national interest in an assured
development of energy resources to meet energy needs in a dynamic economy
under a free enterprise system.
The National Environmental Policy Act of 1969 is a comprehensive declaration
of national environmental policy with far-reaching effects on the energy indus-
try— gas, electric, coal, oil, hydro. Air, water and land quality standards cannot be
developed in an environmental vacuum witliout consideration of tlie cost impact
on the consumer, the effect of the standards on the availability of the basic re-
sources required to operate our vast technological society, including the genera-
tion of electricity,^ and on the ability of industry to supply needed facilities on a
timely basis.
A cardinal tenet of a national energy policy is the formulation of environmental
quality standards consistent with the national objective of the most efficient and
productive utilization of our energy resources. Fossil fuels are our chief reliance
over the next two decades for the generation of electricity which is expected to
quadruple by the year 1990. Government policies must be responsibly formulated
and executed to improve fossil fuel supply both in the near and long term. A
reliably engineered electric system with adequate reserve capacity is a momen-
tal exercise in futility if the es.sential fuels to operate the plant are lacking.
I have requested the electric utility industry to seeli new methods of insuring
the continued reliability of their fuel resources, determine the requisite courses
of action for solution of resource supply problems so as to effectively meet demand
under practical environmental standards, including the level of funding necessary
to develop the required level of all energy resoiirces. To this end I have recom-
mended that an industry task force l)e convened consisting of representatives of
all sectors of the electric utility industry, manufacturers of electrical equipment,
the oil, gas. coal and nuclear industries.
I have also recommended — as has the Office of Science and Technology — ^that
the electric utility industry undertake an unprecedented program of research and
development to gain the necessary scientific insight into the technology of pro-
duction, transmission and consumption of electric power with minimum degrada-
tion of the environment. This means a higher level of research and development
expenditures than has been invested by the electric utility industry in the past
to carry out the necessary programs for energy research including the accelerated
development of the liquid metal fast breeder reactor ; basic fuel research to mini-
mize air pollutant effects ; pollution abatement procedures for disposal of waste
from fossil fuel and nuclear power plants ; high voltage direct current trans-
mission ; undergroundiug of high-voltage transmission lines ; fuel cell research ; ^
solar research: magnetohydrodynamics (MHD) or other methods for converting
heat energy directly into electrical energy without the need for conventional
turbines and generators ; basic research and ecology in the life sciences with re-
spect to air and thermal pollution effects ; study of long-term effect on human
health and other life forms from nuclear and fossil fueled power plant effluents ;
and development of automatic data processing techniques to predict the environ-
mental impact of planned systems as well as refining regional and national elec-
tric load forecasts.
The needs for electric power in the United States are in danger of running a
collision course with our demands for clean air. Since natural gas is in tight
supply and our nuclear plant construction program has fallen behind schedule.
3 Tf'stimony .January 30, 1970 before the Subcommittee on Energy, Natural Resources
and th(> Environment, U.S. Senate, Committee on Commerce.
* In my testimony before tlie Joint Committee on Atomic Energy, on October 28. 1069. I
stated the issue confronting the electric utility industry, the regulatory agencies and federal-
sta*"e governm.cnts as follows :
"The establishment of an equitable balance in the public interest between the economic
and social concerns of reliability, adequacy of supply and preservation of the environment
by an enlightened State-Federal regulatory process in cooperation with a massive industry
effor*^ implemented by such State, regional, or Federal legislation as may be necessary to
stabilize these objectives is the greatest challenge confronting us today. I have faith that
we can meet this challenge, as indeed we must."
^ The gas industry in association with an aircraft engine manufacturer has made an
intensive research effort to develop a commercially feasible fuel ceU. The gas industry,
however, lags far behind the necessary research and development level required to develop
new discover.v techno'ogy, improved methods of fuel conversion, basic energ.v and equip-
ment studies" As in the case of the electric utility industry. I urge that all sectors of the
natural gas industry — producers, pipeline companies, distributors — invest a substantially
liicrber proportio'; of their operatinc: revenue in research to accelerate the development of
new and more efficient methods of utilization of our energy resources. Large capital com-
mitments to fund advancing technology may require consolidation and pooling of interests.
779
we should recognize that much of the short-term burden of meeting the newly
established air quality standards will be concentrated on suppliers of coal and
residual fuel oil." The adequacy of our coal supplies cannot be judged by the
simple test of heat content. We must also consider the sulfur content of coal and
tl)e adequacy and cost of desulfurizing facilities.
The small margin that now exists in our coal productive capacity is probably
insufficient to accommodate any major new demands for low sulfur coal. The
major reserves of low sulfur coal in the United States are in the western
states rather than in the traditional supply areas of West Virginia, Kentucky,
Pennsylvania, and Illinois. The facilities for delivery of coal — by rail, barge, or
truck — also have finite capacity. If the average haul for a load of coal is sharply
increased, either because of coal being shipped from more distant mines or
because of changes in the geographical pattern of coal consumption by utilities,
new transportation bottlenecks could develop.
I understand that we now have the technology for the removal of sulfur
oxides from the stack gases of power plants, but that the necessary equipment
is not yet available in the required quantity for installation. Yet we may be
better off if we defer final action until the equipment can be purchased than
if we force companies to switch fuels immediately when they have no guarantee
of supply adequacy over the long run. This is a typical planning problem which
requires a balancing of short-run against long-run solutions.
Similarly, the supply prospects for residual fuel oil over the next few years
are not encouraging. Most of the world supply of residual fuel oil is high in
sulfur content. Thus far, the east coast utilities have not experienced serious
difficulties, other than higher costs, in switching from coal to low sulfur residual
fuel oil to meet air pollution control regulations. Their experience has encour-
aged some mid-west utilities to apply for permits to import low sulfur oil.
Large additional supplies of low sulfur residual fuel oil would most probably
come from North and West Africa. Even if we assume tanker availability, it
will still be necessary to establish a new distribution network to bring the
supplies to power plants which are not adjacent to deep water ports. Oil com-
panies claim that they can economically transport residual fuel oil by pipeline
inland 250-350 miles. Over longer hauls, it probably must be transported inland
by barge, rail, or tank truck. This will add substantially to fuel costs.
As with coal, high-sulfur residual fuel oil could be burned without causing
air pollution if effective stack cleaning devices could be installed. Apart from
this possibility, which could become a reality a few years from now, we can
also expect relief from the construction of additional plants to desulfurize the
fuel oil. The oil industry in Venezuela has substantial desulfurizijng facilities
under construction and additional desulfurizing facilities are projected in other
parts of the world. The worldwide demand for the low sulfur product is expand-
ing so rapidly, however, that we cannot predict the availability of sufficient
new supplies to meet growth.
The hard fact is that we cannot assume that adequate supplies of low sulfui
fuels will become available simply because they are needed. Not only does it
take time and money to open new coal mines, build new refineries, expand the
capacity of our transportation network, and take the many other necessary steps
to bring the desired fuels to the ultimate consumers, it also requires coordinated
long-range planning by the utilities, the fuel suppliers, and the air pollution
control officials, but we have not yet made the institutional arrangements to
facilitate this type of planning.
The air pollution control program will experience a major setltack if the
new regulations lead to power supply crises which compel a suspension of the
regulations so that the public can be supplied with electricity. In view of our
current tight supply situation for electric power, the risk of that happening is
acute.
Costly past experience has taught the power industry that it must give proper
consideration to the effects of its actions on the environment. Those responsible
for the promulgation of air quality standards carry a parallel responsibility for
I
« Wp are continuing our siirvpillancp of coal supply, inBtitntert in Spptenibpr 19fi9. and
our rpvievv- of available residual fupl oil resources to meet projected air pollution standards,
and are currently workinff in conjunction with the Office of Emerarency Preparedness to
survey electric power problems and adopt policies to improve near term fossil fuel supply,
particularly coal. The Committee consists of representatives of : Atomic Enerjry Commission,
Federal Power Commission, Department of Health, Education and Welfare. Department of
the Interior. Interstate Commerce Commission, Office of Science and Technology, and Office
of Emergency Preparedness.
780
considering tlie impact of their decisions on tlie power industry. Their plans will
be connterprodvictive if they neglect this responsibility.
We can agree, I believe, that the shortest path to solving onr air pollution
problems in the electric utility industry is through mutual accommodation of air
quality goals and power supply requirements.
National energy policy embraces the concept of sound en\'ironmental planning
which, in turn, encompasses rational evaluation and balancing of all national
needs in order to maintain and advance economic progress while preserving the
integrity of our land, air and water resources." Unless we are prepared to sac-
ritlce decades of important advances in our standard of living, we cannot con-
demn out of hand every major industrial and economic decision that results in a
change in our land, air and water resources.^ As a fundamental premise of na-
tional energy policy, its primary responsibility for the reliability and adequacy of
electric service must be centered in the electric utility industry. The Federal
Power CommisS'io}! has embarked with the electric utility industry on a national
program of paramount importance to improve electric power reliability through
the Commission's Policy Statement on Reliability and Adequacy of Electric Serv-
ice, Order No. 3S3-2, Docket No. R-362, issued on April 10, 1970. System planning
and reporting procedures cover ten-year projections of data relating to utility
construction and operation. Nine regional electric reliability councils and the
National Electric Reliability Councils are working in conjunction with the Fed-
eral Power Commission and state regulatory commissions to undertake regional
planning, construction and coordination of bulk power supply facilities. The reli-
ability councils will coordinate with 22 formal power pools throughout the United
Slates to attain the declared national objective of Sec. 202(a) of the Federal
Power Act of ". . . an abundant supply of energy throughout the United States
with the greatest possible economy and with regard to the proper utilization and
conservation of natural resources."
With reference to the natural gas industry I conceive as our regulatory objec-
tive the utilization of the Commission's regulatory powers in a way which will
assure adequate gas service for the consumer at a reasonable price by measures
designed to restore the necessary balance between supply and demand and to
encourage investment in needed facilities. It is apparent that the most critical
issue facing the Federal Power Commission and its jurisdictional sector of the gas
industry (pipeline companies and producers) and the state regulatory agencies
and their jurisdictional sector of the gas industry (the distribution companies)
is the adequacy of gas supply to meet the incremental demands of an expanding
national economy. This crisis has developed slowly over the course of the past
decade, accelerating in the past five years. Analysis of discernible demand-supply
trends impels the conclusion that proved, deliverable reserves to service consumer
demand are becoming inadequate."
In the face of ever increasing demands, reserves have been dropping. The
American Gas Association, in its recent report on proved reserves, indicated that
for the second consecutive year, production exceeded reserves additions. In 1968,
when 19.3 trillion cubic feet were produced the findings/production ratio was 0.G9.
That is, for each ^Mcf produced only 690 cubic feet of reserves were added. In
19f>9, the f/p ratio dropped to 0.4 and reserves at the end of 1969 stood at 275
trillion cubic feet.
The Federal Power Commission has attacked the gas supply problem through
its regulatory procedures, recommended changes in gas leasing policies of the
Department of the Interior, proposed continuance of tax policies designed as an
T Tpstimonv before the Committee on Interior and Insular Affairs, United States Senate,
April 20. 1970.
8 Testimony before the .Toint Committee on Atomic Energv on the Environmental Effects
of Prodiicinsr Electric Power, 91st Cong:.. 1st Sess.. Ft. 1. pp. 32-82 (October 28, 1969).
^ In my testimony on January .^0, 1970 before the Subcommittee on Enersry, Natural
Resources and the Environment. Committee on Commerce, U.S. Senate, I stated. "Dis-
cernible trends of supply and demand indicate a growinij national {ras shortaere in the United
States reQuIring action to arrest undesirable trends." citinji: a Staff Report on National
Gas Supply and Demand, Issued by the FPC on September 1. 1969. which'asserts (at pape
1) : "Kvidence is mounting: that the supply of natural sras is diminishinjr to critical levels
in relation to demnnd." An FPC Staff Report entitled. "The Gas SuppMes of Interstnte Natu-
ral Gas Pipeline Companies, 1968," issued in January 1970, concludes that, based on pas
supply and deliverability information filed by interstate natural sras pipeline companies,
by 1974. nssumin? continued trends of reserve additions and increasinsr market require-
ments, there may be a 10 percent deficiency in the ability of the natural gas industry to
meet requirements, with the level of deficiency varvin{r from company to companv. The
FPC Staff Report underscores estimates made in earlv 1969 bv 11 major pipelines that the
increased market demand for the 1970-71 heatinc season indicated a need for new gas in
excess of two billion cubic feet daily which at that time had not been contracted.
781
incentive to natural ga'^ exploration, development and production, participation
by its Cbairman in the Cabinet Task Force study (>£ Oil Import Controls with par-
ticular reference to the adverse effects of greater oil imports on gas supply.'"
On August IS, 19G9, the Commission urged the Secretary of the Interior to
resolve pending regulatory issues "so that systematic leasing and development of
new gas reserves may be promptly resumed" in the Outer Continental Shelf. These
offshore areas, particularly in offshore Louisiana and Texas, have contributed a
rising proportion of the national gas supply and are estimated to be the source
of approximately 25 percent of the additional potential reserves of the lower 48
states. The Commission also has pointed out that the -leasing policies for federal
domain lands may be too restrictive and some consideration might be given to
royalty with fixed bonus bids rather than high bonus bids, so as to conserve cash
flow and reduce the initial capital commitment of independent producers to
stimulate exploration and development of new gas reserves.
The Commission recognizes the importance of tax incentives to encourage
domestic natural gas supplies. In a letter to the Vice Chairman of the Joint Eco-
nomic Committee, dated July 11, 1969, the Commission expressed the view "that
reductions in the present tax allowances for natural gas exploration, develop-
ment, and production . . ., unless offset by raet increases or other relief, would
also tend to reduce the level of exploration effort upon which new supplies of
natural gas depend, at a time when the adequacy of gas supplies has been calletl
in question." The Commission observed that "there is general agreement that the
tax incentives described above have a positive effect in promoting natural gas
exploration and production."
Some of the regulatory actions of the Commission relative to gas supply are
next summarized.
In Opinion No. 567, October 3, 1969, revision is proposed of the Commission's
area rate policy to encourage the search for gas in reservoirs which underlie
acreage already committed to the interstate market.
In Opinion No. 568, October 7, 1969, the Commission encouraged intensified
natural gas exploration by interstate pipelines by placing pipeline producers
on a parity with independent producers allowing area rate pricing of pipeline
produced gas.
The Commission has issued a Notice of Proposed Rulemaking to establish
ceiling pricing for natural gas produced in the Appalachian and Illinois Basin
areas by using the rulemaking approach. We are reviewing the feasibility of ex-
panding this approach to other areas.
We may also cite rulemaking proceedings relating to proposed amendments of
the Uniform System of Accounts under the Federal Power Act and the Natural
Gas Act to reflect changes in accounting treament of research and develop-
ment expenditures, to rulemaking proceedings relating to land acquix-ed for fu-
ture use and to a pending rulemaking proceeding relaing to advance payments
which are designed to establish the basis for additional capital commitment and
investment return.
One of the most important actions by the Commission relevant to gas in-
dustry problems is our order for a complete analysis of area rates in what may
be the most prolific gas field in the continental United States — South Louisiana,
FPC Docket No. AR69-1.
Since Docket No. AI109-1 is an adjudicatory proceeding, I cannot discuss any
evidentiary details at this time. However, our order of December 15, 1969, and
the pre-trial conferences in that proceeding, contemplated that the Commis-
sion staff would elicit relevant supply data subject to FPC staff audit and cross-
examination in order to protect the public interest. In addition, our staff, within
limits of its manpower resources is reviewing all available data relating to gas
supply generally in an effort to evaluate its reliability.
We have requested funds to conduct a National Gas Survey similar to the
National Power Survey. When completed, we should improve our continuing
1"! havp discussed jras supply In : Hearinsrs before the Subcommittee on Minerals. Mate-
rials ."nd Fuels of the Committee on Interior and Insii^ir Affairs. United States Senate,
91st Consrress, 1st Session. November 14. 3969. Committee Print, pages 11.5-18?.: State-
ment of .John N. Nassikas. Chairman. Federal Power Commission, Hearinjr before the
Subcommittee on Energy. Natural Resources and the Environment. Committee on Com-
merce. United States Senate. January 30. 1970. pasres 71-95 ; and Separate Report on the
Oil Import Question by the Secretary of the Interior, the Secretary of Commerce, and the
Chnirman of the Federal Power Commission, released Februarv. 1970 pa.eres .Sfi9-393
examines the Impact of the Oil Import Control Prosram on the Natural Oas and Electric
Utility Industries. The use of natural gas in electric power generation is summarized in
detail at pages 390-393.
782
regulatory capability by more reliable factual information relating to reserves,
deliverability, and industry's potential as well as realized performance.
The South Louisiana Area Rate Cases (Austral Oil Co., et al., No. 27492, et ah,
in the United States Court of Appeals for the Fifth Circuit, March 19, 1970) out-
lines a broad mandate to the Commission for further action in the area of prices
and other relevant considerations affecting supply under legal standards defined
by the court. The case is now on rehearing. The majority of the Commission has
requested a remand of the case to carry out the court's decision. Whatever tlie
ultimate disposition of that case may be, whether by further appeal to the
Supreme Court of the United States, remand or affirmance — the Ct)mmission will
take positive action to secure gas supply through reexamination of area rate
pricing policies, nationwide or area by area, or by whatever modifications of
regulatory policies as may be necessary to serve the public interest.
AVe are attempting to give all relevant matters adequate consideration but as
an administrative agency, governed by Congressional mandate, we cannot take
any action to raise or lower the price of gas — or take any other action relating to
regulation — without affording due process to those affected and without satisfying
ourselves on an evidentiary record that the public interest, including the consumer
interest in an adequate supply of natural gas, is protected.
While national energy policy may, in the near term, be preoccupied with the
resolution of shortages, over the long term it must be developed with an eye to-
ward the ultimate goal — that of assuring adequate energy supplies vv-hich will
allow the nation to grow and prosper. In the near term we must look to conven-
tional gas sources in the lower 48 states and the outer continental shelf, supple-
mented by Canadian pipeline gas and small quantities of liquefied natural gas
from foreign countries. In the second half of the 1970 decade we may acquire
substantial additional quantities of pipeline or liquefied natural gas from the
Prudhoe Bay Area of Alaska. ^^ Our policies with respect to the development of
supplementary sources should be such that these sources will be ready when tlie
need arises, but these policies should not permit the development of supplemental
sources to interfere with the fullest possible economic iitilization of our conven-
tional gas supply or our national security. Three primary supplemental sources:
liquefied natural gas, pipeline quality gas from coal, and oil shale, and nuclear
stimulation of tight reservoirs appear to offer the greatest potential.
LIQUEFIED ^'ATURAL GAS (LNG)
The importation of LXG via cryogenic tanker ship to provide svipplementary
supply for the near term future looms ever larger. The eastern seaboard appears
particularly of interest, and as you know The Columbia Gas System recently
announced the selection of a site for LNG receiving facilities in Maryland.
Previous obstacles to large scale imports of LXG into the United States
in the areas of technology, availability of gas, and economics are apparently
being overcome. The recent public announcements of plans for two large scale
imports of LXG to the United States bear testimony to these advantages. El
Paso X^atural Gas Company proposes to import one million Mcf per day of LXG
from Algeria to the east coast, using approximately ten tankers, with deliveries
to commence in 1973. United Fuel Gas Company, a subsidiary of The Columbia
Gns System Inc., agi-eed to purchase from El Paso, LXG equivalent to 300,000
Mci of dry gas daily for 25 .vears. Philadelphia Gas Woi-ks has indicated that
they plan to import 500,000 ^Nlcf per day of LXG from Venezuela to the east
coast by 1974, Philadelphia Gas Works feels that this LXG will be competitive
with comparable pipeline supplies in the respective service areas. Should these
two projects reach fruition on schedule, they would represent less than 2 per-
cent of anticipated annual natural gas requirements in 1975.
At present, the Commission staif is analyzing an application by Distrigas, an
LX"^G marketing firm, to import several shiploads per year to the eastern sea-
board. While this service is aimed toward meeting peak shaving gas needs, it
nevertheless adds to the nation's gas supply.
" The Presklpnt of tlie United States has "clirectecl the Department of State to continue
to examine witli Canada measures lookinsr toward a freer exchange of petroleum, natural
fras and other energy resources between the two countries." The formulation of a common
energy polic.v with Canada offers promising potential for additional natural gas from
Canadian gas reserves as well as Alaska gas reserves via pipeline across Canada to the
vast mid-continent market. Recent exploratory and drilling activities in eastern Canada
and offshore in the area of its maritime provinces offer the hope of developing an additional
gas supply near the Northeast market.
783
Even though these and similar projects may do much to help the nation
meet its energy needs, they raise very serious policy questions, questions which
must be resolved within any national energy policy. For instance, the policy
must consider the extent to which the United States can afford to become depend-
ent on a foreign supply. Decisions to import may also have an impact on the
national economy and should be undertaken only after consideration by the
appropriate agencies. Imports from abroad could become important elements
in our foreign relations and trade policies as well.
COAL AND SHALE GASIFICATION
For the longer term future, a national energy policy must anticipate the
development of commercial processes for the conversion of coal and oil shale to
pipeline quality gas. We have heard reports today on the technical and economic
advances which are being made, and even though there is still a long path ahead,
an energy policy must seek to place these developments in their current perspec-
tive. It has been estimated that this country's existing coal reserves represent
almost 12,000 trillion cubic feet of gas. This is about a 600-year supply at
present rates of gas consumption. Obviously, all of these recoverable reserves of
coal are not earmarked for the production of gas, nor could they all be mined
at present prices. However, this example serves quite well to point up the
vastness of U.S. coal reserves and indicates the coal reserves are adequate
as a long range supplemental sources of gas. Additionally, no other source of
supplemental gas is more reliable from a standpoint of national security.
The technology for the conversion of coal to gas is not new ; the difficulty has
been to produce a synthetic gas in commercial quantities at prices competitive
with natural gas. Much developmental work is currently being directed toward
this end by both industry and government and two pilot plants are now under
construction and should be completed in the near future — one in Chicago and one
near Rapid City, South Dakota. It is hoped that data gathered from the opera-
tion of these pilot plants will permit the design and construction of commercial
scale plants by the late 1970's. The commercial scale versions of these plants are
expected to produce 250-500 million cubic feet of synthetic gas a day. The com-
bined output of two commercial-scale plants, when constructed, would represent
less than 2 percent of the estimated U.S. consumption of natural gas in 1980. To
make a significant contribution to gas supply in 1980, for example, 10 percent,
it would take the combined annual output of about 15-20 such plants and 217 mil-
lion tons of coal. This is approximately 35 percent of the total 1969 U.S. coal pro-
duction. "We must recognize that enormous investments of money, manpower and
other resources wir be required to achieve a significant level of gas production
by this process.
The timetable for development of this potentially significant adjunct source of
gas is already excessively long. The uncertainties of funding the next necessary
developmental phase can only extend this timetable, thus further delaying at
least partial relief from ihe gas supply shortage.
OIL SHALE GASIFICATION
The United States possesses the largest single hydrocarbon deposit in the
world — the vast oil shale deposits of western Colorado and Utah. While these
have been primarily considered as the source of liquid petroleum products, they
could also be converted to pipeline quality gas. Limited research work so far has
indicated that oil shale can be gasified to produce gas which could be introduced
directly into pres.sure transmission lines at a cost of 500 to 70^* per thousand
cubic feet. But exploitation of these reserves must await the implementation
of a national energy policy which will foster their development. The policy must
consider not only tiie implications of development of what is a largely federally
owned resource but also the legal problems arising from past leasing practices
and the impact of such a development on the environment.
NUCLEAR STIMULATION
On the electric power side, the role of nuclear energy in relation to the energy
policy matters is well recognized and publicized. Now, as a result of technological
development, nuclear energy may play a significant role in gas supply as well.
Nucelar explosive stimulation of tight gas reservoirs offers a potentially effec-
tive and economic means of increasing the Nation's natural gas reserves. How-
784
ever, the technology is still in its earliest development stages and it appears that
the research and development program will, at best, require several years. Even
then, the technique likely will be applied only to those formations which can-
not be produced by "conventional" techniques. These conventional techniques
themselves are also continually evolving and being improved so that by the time
the nuclear well stimulation technology is adequately refined, there may be
other, non-nuclear methods for accomplishing the same ends.
However, because of the great potential this method holds, and the relatively
small research and development expense involved, continued testing and investi-
gations are merited.
The Bureau of Mines has estimated that 317 trillion cubic feet of natural gas
might be made available through successful nuclear fracturing of low permea-
bility formations. However, this estimate should be viewed as a speculative indi-
cation of what full utilization of the technique could bring about. Also, the practi-
cal and economic removal of radioactive material from the gas has not, as yet,
been fully developed.
The possibility of realizing proven gas reserves from this type of projection is
not yet fully defined. Though many such experiments are projected, only tv\'o are
under way. Gasbuggy in the San Juan Basin of northwestern New Mexico and
Rulison in the Piceance Basin of west central Colorado.
GasViuggy with a 26 kiloton device was detonated December 10. 1967, at a depth
of 4250 feet in the Pictured Cliffs Formation and has been undergoing production
tests. These tests indicate a rather rapid draw-down of both reservoir pressure
and production. This behavior is characteristic of low permeability reservoirs
and has, in many cases, caused fracture stimulation projects in low permeability
reservoirs to have an initial success in increasing production but to become later
an economic failure as production rates decline too rapidly to recover costs
within a reasonable length of time.
Rulison with a 40 kiloton device was detonated September 10. 1969, at a depth
of 8430 feet in the Mesa Verde Formation. Well tests are presently under way
but no data have been released other than a recent report indicating that shut-in
pressure had reached 2410 psi sometime in Novem])er. AEC and Austral Oil Com-
pany engineers expect the final formation pressure to be 2500 psi.
Both of these experimental projects have lieen too expensive to be even con-
sidered for commercial applications. However, AEC and Austral engineers pre-
dict that should the Rulison project be a success, future Mesa Verde wells in
that area can be drilled and fractured with a nuclear device for about $750,000.
A second factor which liears an energy policy concern is the radioactive ma-
terial formed during the explosion which contaminates the gas in and adjacent
to the explosion chamber. To date, no technology exists to remove this radio-
active material and make production of clean gas possible. Contamination of
the subsurface environment is of equal concern if the contaminants find their
way into water supplies.
A third factor is public acceptance. Public acceptance of the use of nuclear
devices and of the use of gas that has been produced from, a well fractured with
nuclear devices may require a long educational process. Com,plete acceptance of
the thought of detonating nuclear devices and the thought of using gas from
nuclear stimulation in the home may be slow in coming.
There are many problems to be solved before tlie Bureau of :Mines' estimat'^d
317 trillion cubic feet of natural gas reserves can be put on production and con-
nected to the interstate pipelines systems.
The status of the Canadian and U.S. gas industries can be illustrated by com-
paring the degree of development of the natural resources bases of the two
countries. At tiie end of 1968, aliout 90 percent of Canada's estimated r;as resource
base of 725 trillion cubic feet had not yet l)een found and only about 1.5 percent
of this amount has been produced. This compares with an estimated gas resource
base of 1.426 trillion culiic feet for the contiguous T'nited States of which approxi-
matelv 56 percent lias not vet been found and about 24 percent has been produced.
The R/P ratio for Can.nda in 1968 was 34.2 al)out the I^.S. R/P ratio level of 1946.
In 1968. Canada produced 1.4 trillion cubic feet of natural gas and exported 43
percent of this amount to the U.S.
In the short term, net imports from Canada have been projected by our
staff to meet about 3.5 percent of U.S. consumption. Even for this short term
this percentage could be increased if the presently proposed projects to import
more gas can be used as an indicator. For the longer term, the Canadian National
Energy Board has suggested that, under certain circumstances, Canada could
785
be supplying as much as 15 percent of U.S. gas demands by 1990. Wliile this
estimate assumes extensive development of the frontier provinces, the long term
outlook for increased imports of Canadian gas is favorable. Since the recent
discovery at Prudhoe Bay on Alaslca's North Slope, Canadian exploratory
efforts have shifted northward from the area where most of Canada's presently
proved reserves are located. The oil and gas potential of the Canadian Arctic
is expected to be very large because the geologic conditions are similar to those
of Alaska's North Slope.
While there are no large supplies of presently proved reserves of natural gas
or oil in the Canadian Arctic many experts believe the area has great potential.
The Canadian Petroleum Association has estimated that the Arctic Islands Area
alone has a natural gas potential of 260.7 billion Mcf. This is approximately 36
percent of the total estimated natural gas potential of Canada and does not
include the Mackenzie Delta Area. Recently, plans were announced to conduct
a feasibility study with respect to a pipeline extension from the Northwest
Territories to the Mackenzie Delta in the Arctic Area of the Northwest Terri-
tories. The Mackenzie Delta Area is approximately 400 miles east of the Prudhoe
Bay Area and a pipeline into this area could" provide another possible outlet
for natural gas from Alaska's North Slope. While oil imports from the Arctic.
(Prudhoe Bay) appear to be nearer at hand, the timing of any substantial
imports of natural gas from either the Alaskan North Slope or the Canadian
Arctic is very speculative. It is unlikely these resources could become available
before the last half of this decade.
It has been suggested that the au.swer to regulatory problems is to deregulate
producer pricing. I do not agree. At a time of a developing national supply
crisis deregulation of producer price controls would be contrary to the national
interest. There is serious question whether natural gas prices would be com-
petitiveli) determined in the absence of producer regulation, or whether interfuel
competion can provide a meaningful restraint on the prices that can be charged
by producers in all markets. While there may be active interfuel competition in
certain industrial and commercial markets, price competition may be seriously
impaired in the residential market. Residential consumers may therefore be
subjected to unreasonable prices and producers could receive excessive returns
and windfaU profits to the detriment of the consuming public.
Reliance on antitrust enforcement to assure free competition is not an answer
to today's natural gas shortage. The ansicer is in ietter regulation — not its
avoidance. I believe at a time of scarce supply that deregulation could result in
astronomical price increases from competing pipeline companies attempting to
meet demands for gas. If the gas supply crisis which developed over the past-
five years cannot be resolved in time to meet demands then it may be preferable
to establish end-use controls to allocate ga& resources by regulation than to
abandon regulation and let an unrestrained market operate.
We must reexamine the relationship of prosi^eetive price ceilings to market
conditious — including the price of LNG. Canadian imports, and increasing
quantities of gas sold intrastate — within a regulatory context which recognizes
the realities of a reliable supply curve.
Whatever level of rates may be prescrilied they must be just and reasonable
in the sense that they will produce an adequate level of return to attract the
necessary capital for investment in the needed facilities for required service
to the consumer.
No examination of national energy policy would be complete without recogni-
tion of antitrust considerations. There are substantial economic benefits to be
derived from unified planning of generation and transmission, pooling of business
and financial risks and the consolidation of managerial talent. Economies
of scale have propelled the electric utility industry toward fuller physical
interconnection ad more complete management coordination. I can also envision
the necessity of consolidating capital and pooling of interests in the gas industry.
It is, of course, essential to answer the threshold question as to whether the
potential benefits of larger industrial concentrations require more concentrated
ownership of gas and electric systems. This issue must be resolved as the cases
develop with such participation by the Justice Department as the pultlic interest
demands. In any event, it seems to me that sulistantial argument can be made in
support of the proposition that anti-competitive effects of a proposed course of
action should he conclusively determined and adjudicated by the Federal Power
Commission with reference to its jurisdictional companies rather than con-
tinuance of the present regulatory and antitrust dichotomy.
786
United States of America Federal Power Commission
Belco Petroleum Corp., Agent, et al.
Docket Xos. C173-293, et al.
Opinion No. 639
Appearances
Richard C. Wolfe, Daniel L. Bell, and Tejinder S. Bindra for Columbia Gas
System Service Corporation.
A. D. Gray and Jack W. Hanks for Pennznil Offshore Gas Operators, Inc.
John E. Holzinger, Jr., Frederick Moring, and Richard Morgan for Associated
Gas Distributors.
Hon. George E. Brown, Jr., a Representative in Congress, State of California.
Joseph M. Wells, Paul E. Goldstein, and Ronald Strote for Peoples Gas Light
and Coke Company.
Thomas G. Johnson and William G. Riddoch for Shell Oil Company.
J. Evans AtUvell, William P. Pannill, and Charles F. Savage for Belco Petro-
leum Corporation, Agent.
John E. Watson for Tenneco Oil Company.
Kirk W. Weinert, John M. Young, C. Fielding Early, Jr., and J. Donald Annett
for Texaco Inc.
Harry S. Welch, J. R. Pankonien, L. F. Cadenhead, Lilyan C. Sihert, Roy C.
AUctag, Harry S. Litttnon, and Melvin Richter for Tennessee Gas Pipeline
Company, a division of Tenneco Inc.
Robert D. Haworth, Roscoe Elmore, Carroll L. Gilliam, and Philip R. Ehren-
kra)i~ for Mobil Oil Corporation.
Peter H. Schitf and Richard A. Solomon for the Public Service Commission of
the State of New York.
Charles F. Whcatlcy, Jr., and William T. Miller for American Public Gas
Association.
Edward W. Stern for Philadelphia Gas Works.
Edward S. Kirby and James R. Lacey for Public Service Electric and Gas
Company.
Sherman S. Poland for Cabot Corporation.
Peter H. Schuck for Consumers Union of United States, Inc.
Martin N. ErcJc, John R. Rehman, and John H. Cooper, Jr., for Exxon
Corporation.
Douglas C. Gray, George C. Bond, and Dec H. Richardson for Union Oil Com-
l)any of California.
Michael J. Manning, Michael J. Hannigan, Frank X. Kelly, and William J.
Ryan for the Staff of the Federal Power Commission.
Before Commissioners : John N. Nassikas, Chairman ; Albert B. Brooke, Jr., and
Rush Moody, Jr.
Moody, Commissioner :
OPINION AND ORDER ISSUING CERTIFICATES OF PUBLIC CONVENIENCE AND NECESSITY
AND DETERMINING JUST AND REASONABLE RATES
(Issued May 30, 1971)
1. The instant proceedings afford a complete evidentiary hearing presentation
of applications for certificates of public convenience and necessity pursuant to
Section 2.75 of the Commission's General Policy and Interpretations, the Option-
al Procedure for Certificating New Producer Sales of Natural Gas as set forth
in Order No. 456.'^
2. On October 24, 1972, Belco Petroleum Corporation. Agent (Belco), in Docket
No. CI73-293, filed an application pursuant to Section 2.75 seeking authorization
for the sale and delivery of natural gas in interstate commerce to Tennessee Gas
Pipeline Company (Tennessee) from the West Delta Block 64 Field, Offshore
Louisiana. On November 8, 1972, Texaco Inc. (Texaco) and Tenneco Oil Company
1 St.Ttement of Policy Relating to Optional Procedure for Certificating New Producer Sales
of Natural Gas. Docket No. R-441 (August 3, 1972), as amended by Order No. 455-A
(September 8, 1972).
787
(Tenneco). in Docket Nos. C173-335 and C173-336, respectively, each filed an ap-
plication pursuant to Section 2.75 seeking certilicares autlioriziug sales and
deliveries of natural gas in interstate commerce to Tennessee from acreage in
the East Cameron Block 271 Field, Offshore Louisiana. By Order issued Decem-
ber 26, 1972, the Commission consolidated the above-mentioned applications for
hearing and ultimate disposition. Belco, Texaco, Tenneco, and Tennessee are
hereinafter referred to as "Applicants".
3. Belco submitted to the Commissiim a contract dated June 8, 1972, providing
for an initial sales price of 45<^ per Mcf with annual rate escalations of 1.50 /Mcf
for the 10-year contract term. Its application requests pregranted abandonment
autliorization, effective as of the date of expiration of the contract. The Belco
contract dedicates approximately 60 Bcf of new gas reserves to Tennessee.
4. The terms and conditions of Texaco's and Tenneco's contracts with Tennes-
see are identical. The proposed initial price is 450/Mcf with annual escalations of
1^/Mcf over a 20-year contract term. The Texaco and Tenneco contracts dedi-
cate approximately 175 Bcf in new gas reserves to Tennessee.
5. A prehearing conference was held on January 17, 1973 ; the hearing com-
menced on February 28, 1973. and concluded on March 27, 1973.
6. During the course of the hearings certain questions arose which resulted
in our Order of April 10, 1973, directing the certification of the entire record
to us. "We have now reviewed the record, and the briefs of the parties, and find
that the intermediate decision should be waived and final orders entered herein.
POSITIONS OF THE PARTIES
7. Applicants urge certification of service as provided in their contracts. In this
they are supported by Exxon Corporaticm (Exxon), Union Oil Company of Cali-
fornia (Union) and Mobil Oil Corporation (Mobil). The American Public Gas
Association (APGA) urges certification at 2(><t/Mvf with a Ic escalation in 1974
on the basis that this rate structure prescribed in Opinion 598 ' is still binding
on all producers. Congressman George E. Brown and the Public Service Com-
mission of New York (New York) urge denial of certificates, with Congressman
Brown arguing that the Applicants have not discharged their burden of proof, and
New York arguing that our issuance of a Notice of Rulemaking in Docket No.
R-389-B ^ makes use of Section 2.75 undesirable. Commission Trail Staff (Staff)
would have us certificate service at an initial rate of 35<j(/Mcf with annual escala-
tions of .54- Associated Gas Distributors * (AGD) supports a forward-looking rate
based on cost and non-cost factors, but urges that the Commission formally an-
nounce such rate as being of general applicability for a minimum of three years.
Philadelphia Gas Works (Philadelphia) not only supports Staff's rate recom-
mendation, but also urges that this rate be declared as a "firm"' rate applicable
to all Southern Louisiana sales for the next two to thi-ee years. Consumers Union
of the United States, Inc. (CUUS) opposes certification at 45^, but supports a rate
based on Opinion 598 findings '"with only such adjustments as are appropriate
to account for changes in area or national costs" since Opinion 598 was decided.
8. The adversary system has produced a record which fully explores the
determinative issues. A substantial number of irrelevant issues have also been
tried, due in large part to a basic misunderstanding of the nature of this case. To
dispel such misctmceptions we will comment briefly on the optional certification
procedure which Orders No. 455 and 455-A brought into our Regulations as Sec-
tion 2.75.
= 46 FPC S6 (1971) ; aff'd Placid Oil Co. v. F.P.C., CA5, No. 71-2761, slip opinion dated
April 16. 1073.
3 .S8 FR 10014. Notlcp l.-^sued April 11, 197.3.
* The AGD is composed of the following : Atlanta Gas Lierht Company ; The Berkshire
Gas Compan.y, Bo.ston Gas Company, Bristol and Warren Gas Company, Brockton Tannton
Gas Company, Cape Cod Gas Company, Commonwealth Gas Company, City of Ho'yoke,
Massachusetts Gas and Electric Department, City of Westfield Gas and Electric Light
Department, Concord Natural Gas Corporation, the Connecticut Gas Company, Connecticut
Natural Gas Corporation, Fall River Gas Company, Fitchburjr Gas and Electric Licht
Company, Gas Service, Inc., the Greenwich Gas Company, The Hartford Electric TJpht
Company, Haverhill Gas Company, Lawrence Gas Company, Lowell Gas Company, Lynn
Gas Company, Manchester Gas Company, Mystic Valley Gas Company, New Bedford Gas
and Edison Liarht Company. The Newport Gas Light Company, Northampton Gns Light
Company, North Attleboro Gas Company, Northern ITtllities, Inc., North Shore Gas Com-
pany, the Peqnot Gas Company, Providence Gas Company, South County Gas Company.
Southern Connecticut Gas Company, Springfield Gas Light Company, and Tiverton Gas
Company (lointly) ; The Brooklyn tJnion Gas Company; Central Hudson Gas and Electric
Corporation ; Consolidated Edison Company of New York. Inc. ; Ellzabethtown Gas Com-
pan.v ; Jjong Island Lighting Company : New .Jersey Natural Gas Company ; New York
State Electric & Gas Corporation ; Philadelphia Electric Company ; Philadelnhia Gas
Works : Piedmont Natural Gas Company. Inc. ; Public Service Company of North Carolina ;
Public Service Electric and Gas Comnanv : Rochester Gas and Electric Corporation ; UG.
Corporation ; and Washington Gas Light Company.
27-547—74 51
788
THE OPTIONAL PROCEDURE
9. If we are to avert the economic paralysis which a critical shortage of nat-
ural gas threatens, new regulatory procedures are necessary to elicit a supply
responsive to increasing demand pressures. Section 2.75 is one of these. Through
this procedure we seek sufficient flexibility in rate regulation to permit a matching
of pipeline supply needs and an available supply, with due regard to the function
of price as tool to bring goods to market, but with adequate consideration also
of other factors which bear on protection of the public interest.
10. Our reasons for establishing Section 2.75 optional procedures are set forth
in our Notice of Rulemaking,^ in Order 455," and Order 455-A' and need not be
restated in full. We incorporate our findings there made into this Opinion and
Order.
11. As we proceed under Section 2.75, we intend to examine each application, or
set of related applications, as a single gas supply project, in much the same
manner as we consider a proposed LNG supply increment as one project to be
decided on its own merits,* or a proposed SNG purchase as one project to be de-
cided on its own merits." We do not herein set a producer rate of general, indus-
try-wide applicability, any more than we bind ourselves in a particular LXG
case to make identical findings in all LNG cases.
12. In considering a supply project, whether it be an LNG or SNG proposal
or a Section 2.75 application, we will endeavor to consider all relevant factors —
such as cost, return, alternate supplies and energy sources, supply and demand —
to insure that gas consumers are receiving the lowest cost available increment of
supply. We described this balancing of public interest in Opinion 622-A in these
terms : ". . . At any time a . . . supply project comes before us, it must pass the
the test of being the cheapest alternative supply of gas currently available to the
affected interstate pipeline. If the . . . project does not meet this criterion, we
will not approve it for sale in the interstate market." "
13. In applying the lowest cost alternative test, we will continue to analyze
costs and rate of return, but we will not, and we cannot, be bound to costs as the
sole standard of regulation in producer rate matters." This latitude has been
granted us by the Courts. ^
14. In insisting that our decision here is to be read only as a decision on the
applications before us, we seek to underscore the essential nature of Section 2.75
cases as proceedings which do not carry industry-wide consequences. Our decision
here establishes rates and conditions of service for three individual sales. It does
no more." By contrast, an area rate order carries with it straggering implica-
tions for national gas supply for years to come.
15. The Commission is not infallible, particularly in that most diflicult of
regulatory tasks of setting an industry-wide rate which is high enough to elicit
the needed supply of gas. but low enough to insure that consumers pay no more
than lowest reasonable cost. We created Section 2.75 to permit individualized
consideration of pipeline supply acquisitions so that a safety valve would be pres-
ent outside the industry-wide rate structure. If the continuing impact of an in-
dustry-wide rate level is to depress gas exploration and development at a time
when it should be increased. Section 2.75 affords a means whereby individual
pipeline demands and individual producer supplies can be balanced. So also, if
through the weight of the administrative or judical process there is such a delay
s 37 FR 7.S45, April 6, 1972.
«^ — FPC . Aiiirust .3, 1972.
7 FPC . September 8. 1972.
s Cf Opinions 622 and 622-A, Columhia LNG, et al., FPC , 1972.
9 Cf. Omnions 637 and 637-A, Algonquin SNG, et al., FPC . 1973.
10 Opinion 622-A at p. 8.
-^'^F.P.C. V. Natural Gas Pipeline Co., 315 U.S. 575 (1942) ; Forest Oil Corp. v. F.P.C.,
263 F.2d 622 (CA5. 1959).
1^ Colorado Interstate Gas Co. v. F.P.C., 324 U.S. 581 (1945) : Permian Basin Area Rate
Cases. 390 U.S. 747 (1968) ; Austral Oil v. F.P.C., 428 F.2d 407 (CA5. 1970), cert, denied
400 U.S. 950; Huooton-Anadarko Area Rate Case, 466 F.2d 974 (CA9, 1972) ; Placid Oil
V. F.P.C., No. 71-2761. (CA5. 1973). slip oninion issued April 16, 1973.
"The failure to grasp this fundamental point leads APGIA to sa.v (Reply Brief, p. 13)
that approval of a 45(f rate here "translates to a IS. 8 billion" windfall to the produeins
industr.v. APGA so concludes by multipl.vins: 19? (the difference between Opinion 598 new
jrns rates and the 45(4 proposed) by the Potential Gas Committee's estimate of 99 Tcf
Southern Louisiana potential reserves. The APGA assertion is wholly false, not only
because of its etroneous a.ssumption that any rate over 26*' is unearned profit, but also
because we make no rullncr here that would support the premise that all potential reserves
in Southern Louisiana will be admitted to the market under Section 2.75 at 45«'/Mcf. It
goes without saying that potential reserves do not equate with deliverable reserves avail-
able for consumption.
789
in setting industry-wide rates of general applicability that current costs and
current market conditions cannot be attended, Section 2.75 is an avenue for
regulatory response to immediate needs.
16. In promulgating Section 2.75 we were convinced that a "supply project" ap-
proach should be tried because it promised consumer price and supply protection
not possible under an area rate approach. This Commission has experimented
with producer regulations since 1900 with full recognition that a Commission-
established rate had to fulfill a suppiy-eliciting function. "\Ye now recognize
that a Commission error in assessing the supply response to an industry-wide
rate level adversely affects every consumer in this country by causing a decline
in drilling and developing efforts. Since 1969, every Commission decision in this
field has agonized over the supply consequence of the rate orders promulgated,
always with a recognition that no device known to man could accurately predict
supply elasticity at any given level of prices.
17. Through Section 2.75 we seek to remove the predictive function from rate-
making, at least as to industry-wide consequences. When we approach a Section
2.75 case, we know what gas supply is being brought to the interstate market ;
and if we do our job properly, we will insure that the increment of supply is
added at the lowest reasonable cost. The consumer pays a just and reasonable
rate, as determined by this Commission, only for the new gas supply. Necessarily,
our actions must insure that each increment of gas added is the lowest cost
alternative available to the purchasing pipeline, and that the rate authorized
by us, including fixed escalations, for that increment will not change as industry
costs move upward, or as additional supply incentives on an industry-wide basis
become necessary. This is the certainty of supply, and price, that gas consumers
so badly need.
IS. The ai'gument for this approach can best be illustrated by comparing the
effect on consumers of rising costs when those costs are translated into necessary
changes in industry-wide rates. Compare base rates (without regard to state
taxes, refund workoffs, or escalations) in Southern Louisiana :
[In cents per thousand cubic feet]
Southern Louisiana Southe'^n Louisiana
I, opinion 543, II, opinion 598,
Sept. 25, 1968 July 16, 1971
Flofl/ing gas (prior to Oct. 1, 19S8).
New gas (after Oct. 1, 1968)
18.0
18.5
21.375
26.0
We would emphasize that both Commission rate orders were sustained on
appellate review, by the same Court of Appeals, so that it is beyond cavil that the
1971 increases were proper to (a) cover increased costs and (b) provide
necessary incentives to expand supply. Under the area rare approach, these in-
creases were granted to all gas sales with the expectation, but without any
guarantee, that more gas would he obtained. Under a "supply project" approach,
we do not grant industry-wide increases, but rather we add known and meas-
ura'ole increments of supply at carefully regulated rates which will not be
subject to change through later industry-wide rate orders.
19. In short, we require a flexible, promj)!, effective means of securing adequnte
new supplies of gas for the interstate market at the lowest reasonable cost. That
is the purpose of Section 2.75.
20. At the same time we assert the individuality of this decision, we acknowl-
edge that, because this is the first decision under Section 2.75 on a contested record,
other applicants and other intervenors will look to it for guidance, as hopefully
will also our Staff, as to the type, character, and quantum of proof that we
feel necessary to a Section 2.75 decision. What guidance we can give we v^'ill give.
We state our views fully on the factors we deem significant.
Industry Stetjcture and Rate Regulation
21. A large portion of the record before US' is addressed to an examination of
industry structure, and particularly, FPC Economist Dr. John Wilson's testi-
mony. From this testimony, synthesized into Exhibit 33. which purports to show
existing business relation.'-iiips among some producers, it is argued that :
(1) Producer rate regulation must be cost-based, without regard to market
conditions ; and
790
(2) Acceptance of the contract prices negotiated by tlie Applicants here is
tantamount to deregulation.
22. The second argument is a non sequitur, and may be dealt with summarily.
This proceeding is not one to determine if bargained-for rates should be accepted.
Thus we find ourselves in complete agreement with Staff in its assertion (Reply
Brief, p. 13) :
"Entrusting the Commission's designated role as guardian of the public interest
to 'negotiations' between producersp and pipelines is completely unwarranted
and beyond the Commission legal authority."
We are well pleased that Staff grasps so firmly the essence of the Natural
Gas Act. But despite its recognition of the obvious fact that we cannot abdicate
regulation by unreasoned acceptance of privately bargained-for rates, our Staff
undertakes to tell us, at some length, why market prices cannot act as the sole
referent in adjudicating Section 2.75 cases.
23. The major premise of this argument, that Section 2.75 was intended by the
Commission to function as a regulatory blessing of privately bargained-for
rates, is in error. We do not propose to decide this ease, nor any Section 2.75 pro-
ceeding, on the basis of "what the market will bear." We have always rejected
from the inception of Docket R-411, the premise that we are abandoning gov-
ernmental regulation for market place regulation. In Order 455 we stated :
"Certain comments filed . . . suggest that the Commission is abdicating its
ratemaking responsibility by permitting producers and purchasers to set rates
by private bargain. Such is not the ease. Our actions in individual proceedings
arising iinder the.S'e new procedures will answer this objection." "
On Order 455-A we stated :
"The second contention . . . that the major premise of the optional procedure
is to set natural gas rates solely upon 'market conditions' is similarly without
merit. This contention is made without regard or recognition of the evidentiary
burden iinpos>ed on a seller applicant by Section 2.75(g) and upon the purchaser
by Section 2.75(h).'"'
24. We have not approached these applications on the basis of deferral to private
bargain: to the contrary, we have made an appraisal of the applications through
consideration of costs, return, supply needs, alternative supply costs, competing
fuels costs, and intrastate rate comparisons.
25. The more cogent argument made from the Wilson opinion that the producing
industry is not competitively structured is that our rate decision must be
based solel.y on costs. We did not originally believe this to be the litigable issue.^"
but since the issue has been joined on the record, we have undertaken an exhaus-
tive review to determine if there is any substantial doubt as to the reliability or
materiality of intrastate gas prices, the costs of alternate fuels, or any other
non-cost factor.
26. Comment on the mode of presentation of evidence by Staff as well as the
validity of that evidence is called for.
27. First, we observe that the vast bulk of evidence on the market structure
of the gas producing industry came into record through cross-examination of Dr.
Wilson. This occurred, of course, during hearing and long after Dr. Wilson's di-
rect testimony had been filed, and the Applicant's rebuttal testimony had been
filed.
28. For the record let us state that it is not our desire to reintroduce the games-
manship theory of trying cases, and we expect our Staff to assume a leadership
role in this regard. The public interest is not advanced by tactics which result in
denial of fair notice of what is to be tried, or denial of a fair opportunity to be
heard on those issues.
29. Dr. Wilson's testimony is not, however, of such significance that its in-
clusion in the record is prejudicial to the Applicants, nor does it require further
rebuttal. Staff would have us look to various combinations of producers for
si>ecific purposes in specific projects and establish a presumption on anti-com-
petitive behavior. In so arguing, however. Staff recognizes that many combinations
are necessary, either because of the need to share risk, because compelled bv
resource conservation considerations, or because dictated b.v state law. Staff
would also recognize that many combinations result from, and are approved
" Order 45.5, supra, at pp. 15-16.
^^ Order 4.'i5-A. .luprn, at p. 4.
1* See Order of December 26, 1972, In these dockets setting this matter for hearing wherein
•we stated our Intention to consider cost and non-cost factors, and directed that questions
concerning the purported legality of the Section 2.7.5 procedures be reserved for resolution in
the pending Court of Appeals proceeding directed to this issue. Moss, et al. v. F.P.C., Nos.
72-1837, et oJ., (CADC).
791
by, actions of the Federal government, particularly with respect to Department
of Interior leasing and production policies on Federal lands. We cannot, there-
fore, conclude that proof of combination is, without more, proof of conduct
detrimental to the public interest.
30. We note also Staff's study does not define the relevant product market or
geographic marliet under consideration, nor is it identified as to a time frame,
nor does it purport to consider all jurisdictional producers. Staff's study is silent
on whether or not producer membership of the groups presented is so static that
the combinations have become cohesive entities. Of particular note, we find not
one shred of evidence that the end result of such groupings is contrary to the
public interest. There is no evidence that unlawful conspiracy exists. There is
no evidence of price rigging, either by concerted withholding from the market,
or by direct or indirect collusion. There is no evidence of market division. In
short, after a full and detailed review of the record, we conclude that :
"1. Tliere is no evidence tliat these Applicants have engaged in anticompetitive
conduct in the marketing of gas.
'•2. There is no evidence that intra- or interstate gas contract prices are tainted
with anticomi)etitive eouduet by gas producers.
"3. There is no evidence that the prices of alternate fuels are tainted with anti-
competitive conduct by oil, coal, or gas producers.
"4. There is no evidence that the prices of supplemental gas sources are
tainted with anticompetitive conduct.''
31. In 1970. tlie United States Court of Appeals for the Fifth Circuit said in its
Austral decision :
"... there seems to be general agreement that the market is at least struc-
turally competitive. The Supreme Court in Permian described producers as
'intensively competitive.' 390 U.S. at p. 757, 88 S.Ct. at 1354. See also P. MacAvoy,
supra note 9. at 7 ; E. Neuner. snpra note 9, at pp. 178-204, 280-381 : M. Adel-
man. The Supply and Price of Natural Gas 39 (1962)." 428 F.2d 407, 416. n. 10.
32. This conclusion regarding competitive structure has be-en independently
drawn by many economic experts. See Martin L. Lindalil, Federal Regulation of
Natural Gas Producers and Gatherers, Papers and Proceedings of the American
Economic Institute, May 1956 ; Leslie Cookenboo, Jr., Competition in the Field
Market for Natural Gas, The Rice Institute Pamphlet. Vol. XLIV, No. 4, 1958;
Edward J. Neuner, The Natural Gas Industry, Monopoly and Competition in
Field Markets (University of Oklahoma Press), 1960; Clark A. Hawkins,
Structure of the Natiiral Gas Produciny Industry, Regulation of the Natural
Gas Producing Industry (edited by Keith C. Brown), "Resources for the Future,
Inc." (1970).
33. This record does not demonstrate that there has been a factual change in
market structure since the Austral decision in 1970.
34. Unrealistic "cost based" pricing over the long haul has the same effect as
cut throat competition where below real cost prices are used to drive competitors
from the market place. We are mindful that in 1960, before the advent of "cost
based" area rates, this Commission reported to Congress that there were 18,807
gas producers under its jurisdiction.^" Our Staff has estimated that, in 1971,
domestically produced gas was supplied by less than 4.000 producers." Obviously
the producers leaving tlie field have found more profitable activities elsewliere.
Dr. Wilson so recognizes when he states. "There is no reasonable explanation as
to why a prudent businessman would decline to take advantage of an opportunity
to develop a highly profitable enterprise." (Tr. 352. )
35. While the 26(^ area rate in Soutliern Louisiana was proper when set. on
the record tlien made, most parties herein (including Staff) agree that circum-
stances, and costs, have changed to a marked extent. To adhere rigidly to such a
rate after it has become less than cost compensatory would certainly tend to
drive more producers out of business and tend to create the very anticompetitive
structure of which Staff is fearful. The public interest would be donlily dis-
served by such a course of action, as badly needed exploration and development
efforts will be discouraged. Today, we face a situation where additions to i)roven
gas reserves are insufficient to meet existing contract demands (which are
substantially below the demand for natural gas), to sa.v nothing of any future
growth. At this point in time we need more, not fewer, producers in the natural
gas industry.
^" U.S. Honsp of Representatives. Special Subcommittee on Legislative Oversight. Inde-
peniient Regulatory Commifisiorts. Sfith Congress. 2n(l Session (lOfiO) at p. 76.
'^ 1971 Stales hyProiiiicers of Natural Gas to Interstate Pipelines, FPC Office of Account-
ing and Finance, at pp. V-VI.
792
36. Prices commensurate with the risks incident to exploration for and de-
Telopment of natural gas reserves will encourage others to enter (or re-enter)
the field, and otherwise stimulate and sustain increased exploration and develop-
ment. The benefits to a producer, both existing and potential, are well set forth
iu evidence by Mr. Belfer, president of Belco, including the ability to raise the
necessary capital. (Tr. 104-113.) The same considerations which encourage more
intensive exploration and development by existing producers naturally encourage
and facilitate market entry by others.
37. We are mindful also of what our oflScial records show. Annually since
1961. our Office of Accounting and Finance has summarized data reflected on
FPC Form No. 2 and 2-A, and published a study entitled Sales by Producers
of Natural Gas to Interstate Pipeline Companies. The most recent edition of
this study, issued in October, 1972, and covering the calendar year 1971 reflects
that interstate pipelines purchased approximately 13 Tcf from domestic pro-
ducers in 1971.^^ Tlie domestically produced gas was supplied liy 101 producers
each having annual sales of 10 Bcf or more,"'^ 195 producers each having annual
sales of more than 2 Bcf but less than 10 Bcf,^' and an estimated 3,449 producers
whose sales were less than 2 Bcf annually."
3S. The 296 producers with annual sales of 2 Bcf or more provided 94 percent
of the pipeline purchases."^ The top 22 producers, by volume sold, furnished 71
percent of the gas supplied by all dome.stic producers in 1971."*
39. In 1971, Texaco was the seventh largest seller, with an annual volume
of approximately GIO Bcf; Tenneco Oil was the fifteenth largest, with sales of
approximately 276 Bcf, and Belco was fifty-seventh, with sales of approximately
2S Bcf.''
40. Texaco sold to 27 different jurisdictional pipelines in 1971, Tenneco sold
to 21 different pipelines, and Belco sokl to 3 interstate pipelines.-*
41. In such sales, Belco's average imit revenues ranged from 13.73{5/Mcf to
19.32C-/:Mcf, while Tenneco sold in the range from 10.64<f/Mcf to 32.040/Mcf,
and Texaco sold in the range from 10.200/AIcf to 36.74c/Mcf.-" There is not only
substantial variance in the rates charged different pipelines, but also the rates
at which each producer sold to the same pipeline in 1971 reflect sharp dis-
parities. For example, Belco sold some Wyoming production to El Paso at
20.1(>d/Mcf, and some gas from the same area to the same pipeline at
17.2lf/Mcf.*® Tenneco sold some Louisiana production to Texas Gas at 17.S90/Mcf,
and other Louisiana production to the same purchaser at 18.G90/Mcf.-° Texaco
sold some Louisir.na production to United Gas at 19.G10/Mcf, and other Louisi-
ana production to United at 24.500/Mcf.'"' In short, actual sales in 1971, as
summarized in Table 2 of the 1971 OAF Report, reflect a full exercise of mutual
bargaining.
42. We are also aware that in 1971, 60 different producers sold gas in the
interstate market from offshore Southern Louisiana.''^ The revenues ranged from
18.42C/Mcf to 2S.660/Mcf.'"
43. In 1971 Tennessee purchased from 7S different large producers,^ buying
from 13 different large producers in offshore Southern Louisiana alone.^^ For
offshore gas, Tennessee paid prices ranging from 20.050/Mcf to 26.200 /Mcf.^
On the average, Tennessee paid Tenneco less per Mcf than Tennessee paid any
other Southern Louisiana producer for offshore gas.'^
44. The foregoing partial summary of 1971 sales reflects no basic change
in structural competition on both the buying and selling sides of the natural gas
market, which was noted in the Austral decision iu 1970. Inasmuch as virtually
i» Table A, p. VII. 1971 Report.
^0 Preface, p. VI, id.
21 Table 1, pp. 1-6, id.
22 Preface, p. VI, id.
2« Id.
21 Id.
-■■^ Table 1, pp. 1-2. id.
28 Table 2, pp. 34-.S5 ; pp. 137-140 ; pp. 141-147, 1971 Report.
2- Table 2. pp. 34-3.5 ; pp. 137-140 ; pp. 141-147, id.
2« Table 2. pp. 34-3.5, id.
20 Table 2, p. 140. id.
3" Table 2. p. 148, id.
31 Table 3, pp. 212-219, id. The total of 60 includes only those with sales In excess of
2 Bcf/year.
3= Table 3, at pp. 212-219, id.
33 Table 5, pp. 493-495, 1971 Report.
3* Table 3, pp. 212-219, id.
3'' Table 3. pp. 212-219. id.
?» Table 3, p. 218, id.
793
all interstate sales reported in 1971 were long-term, there is no basis for
assuming any diminution in the ranks of competing buyers or competing sellers.
We are convinced, however, that the level of seller competition is increasing in
offshore Southern Louisiana, for the results of the most recent Bureau of Laud
Management Offshore lease sales clearly so indicate.
45. In the September 12, 1972, sale, of the 78 tracts offered, bids were received
on 74 tracts and bids were accepted by the Bureau of Land Management on 62
tracts containing 290,321 acres. A total of 324 bids were submitted by all parties
participating in the sale. A total of $1,599,155,464 was exposed by all bidders. The
total bonus for the accepted bids was $585,827,925.
46. In the December 19, 1972, sale, of the 132 tracts offered, bids were
received on 119 tracts and bids were accepted by the Bureau of Land Manage-
ment on 116 tracts containing 535,874 acres. A total of 690 bids were submitted
bv all parties participating in the sale. A total of $6,191,018,227 was exposed
by all bidders. The total bonus for the accepted bids was $1,665,519,631.
47. At the December sale, 13 pipelines and affiliates exposed $1,324,786,154 for
119 tracts. They expended $332,294,182 for interests in successful bids on 63
tracts.
48. On the basis of the subject two lease sales, it can be concluded there is
intense competition for available acreage, and that interstate pipeline com-
panies and their affiliates have increased their participation in the competition
for offshore Louisiana acreage. This increase has been in the number of com-
panies involved, the funds exposed and expended and the number of tracts for
which they submittetl bids. The i>ipelines and affiliates obtained interests in
53.2 percent of the leases awarded at the September sale and 54.3 percent of the
leases awarded at the December sale.
49. We believe that competition for leases presages competition in selling
gas. Accordingly, we conclude that an industry that is already structurally
competitive will become even more so.
50. Finally, we address the peripheral issues involved in Staff's industry
structure arguments.
51. Staff argues that Tennessee is not an independent buyer, as it is in fact
buyng gas from itself, and therefore the higher the purchase price, the greater
the overall corporate profit. In this regard. Staff is either naively unaware of, or
or completely ignores, the fact that Tennessee has neither a purchased gas ad-
justment clause nor authority to track increased purchased gas costs in its
rates. At this time, Tennessee cannot pass through such costs and the allegation
that the higher the purchase price, the greater the overall corporate profit
is patently false.
52. Furthermore, Tenneeo's basic stance in this proceeding is to seek price
parity with Belco ad Texaco. Tenneco urges the Commission to set a just and
reasonable rate for this gas based on the presentations of the two sellers
not associated with the buyer and then allow Tenneco the same price. We con-
elude that this is the proper approach to this case, and we will follow this
reasoning. To treat the Tenneco sale differently because of the affiliation between
Tenneco and Tennessee would be directly contrary to our decisions to treat
pipline production on a parity with independent production.'^'
53. Staff's view of the broad issue presented — whether natural gas pricing
should encompass a review of alternative fuels markets — is tragically short-
sighted. This nation is faced with an energy shortage of potentially critical
proportions. While the nation cries out for a national energy policy, our Staff
fiddles witli a natural gas pricing issue as though it can be divorced from energy
market considerations. Without regard to the fact that natural gas is a wasting
asset, irreplaceable in kind and with the most desirable burning qualities of any
of tlie known fossil fuels. Staff urges a pricing system with a demonstrated pro-
pensity for both waste and stultification of development, all in the guise of public
interest advocacy.
54. Astonishingly, Staff presses, as evidence of noncompetitive industry
structure, the argument that the history of the oil and gas industry is replete
with numerous complaints of anticompetitive violations. Complaints are no
evidence of a fact asserted, but they are indicative of the vigorous surveillance
activity on behalf of those affected or charged with the responsibility. We are
not persuaded that the activities of the Department of Justice and our legal
system — both civil and criminal — are as sterile as Staff necessarily implies.
•■'■' Orflor No. 465. Issued Dpcember 29. 1972. In Docket No. R-411 ; Opinion 568, Pipeline
Production Area Rate Proceeding, 42 FPC 738 (1969).
794
55. While the foregoing is by no means an exhaustive critique of Staff's anti-
competitive presentation, it demonstrates that wliat we have is tlie application
of a little book learning without appreciation of the factual setting of this case.
Staff has ably demonstrated that a text without context is pretext.
DETERMINATIVE ISSUES
56. Basically, we seek determination of but two issues: (1) Should certificates
of public convenience and necessity be issued with respect to each proposed pro-
ducer sale? and (2) what rate level is just and reasonable for these sales?
57. In this opinion we undertake an analysis of the supply project offered by
Belco, et al., by considering cost and non-cost market factors. We turn to economic
factors other than costs because we believe that rate regulation must conform to
economic reality, and that cost calculations can serve only as a point of departure
in attempting to determine a proper rate level. In a case such as this, where many
assert that we should look to costs alone, it is tempting to do precisely that. As
shown at pp. 27-32, iwst, cost analysis yields an estimate of 1971 costs in excess
of the 450 rate here proposed.
58. We yield not to temptation. The truth is, most simply put, that "costs" re-
flect judgmental decision, not factual determinations. Accordingly, we utilize
costing concepts only as one tool of many, and we turn to other relevant stand-
ards for additional guidance in reaching our decision on appropriate rate levels
and certificate conditions.
I. COST FACTORS
The Staffs Approach
59. In this record, the Commission Staff undertook the presentation of an up-
dated cost study built along Opinicm 5US lines. This was, in Commission parlance,
a "new gas" cost study, as opposed to a "tlowing gas" cost study,^ and involves
the application of judgmental factors in balancing historic averages with antic-
ipated drilling results.
60. The Applicants sought to counter Staff's presentation through the testi-
mony of Dr. Stephen Sherwin, who recalculated costs by making selective attacks
on the Staff study.
61. At the outset of considering the Staff study, and the evidentiary weight to
be given it, we must recognize one fundamental problem. A "new gas" cost study
is, as used in area rate cases, a predictive rate. An assumption must be made
as to the future level of productivity ^^ of gas well drilling, and the assumed fig-
ure then becomes the keystone of the cost study.*"
62. We are not here dealing with anticipated productivity, for the results of
drilling efforts in 1971 (the year in which the Applicants' wells were drilled) are
a matter of history. It is most difficult, therefore, to apply cost calculations built
on an assumed future level of productivity to test a project which is now ready
for commitment to market.
63. In essence. Staff's cost analysis was directed to the determination of that
rate which would be proper for future sales, brought about by future drilling.
Thus, Staff's study assumed a productivity factor of 600 for its "low" cost esti-
mate, and a productivity of 555 for its "high" cost estimate. The productivity
assumptions clearly reflect Staff's judgment of what future productivity of
gas-well drilling will be. We recognize that this is appropriate when attempting to
set a rate of future applicability, tout such an assumption is of limited usefulne.ss
here.
64. Because of our reservations concerning the validity of using a predictive
rate as a means of testing a present sale, we do not attempt full discussion and
resolution of all costing issues raised by Staft''s evidence and the Applicants' rebut-
tal, Imt rather examine this evidence for what it can impart as to the range of
costs which are pertinent to Applicant's proposals.
65. As set forth in the attached Appendix A, the Staff, through Mr. Engle, ar-
rives at a current low cost of 28.27c'/^Icf and a current high cost of 35.580/iMcf,
before state taxes. Witness Sherwin, for the producer Applicants, arrives at a
low estimate of 40.44^/Mcf and a high estimate of 44.370/Mcf as shown in Ap-
pendix B.
3^ See Opinion 468. Permian I, at pp. 28-35.
3» "Prodnotlvity" is the term applied to the avernge nonassociated gas reserves added
per foot of suoeessfiil pas well drilling- in a year. Opinion 468. Permian I, H4 FPC 159
(1965) at p. 209. Thus, In a vear when 17.284 Bcf of reserves are added through the drilling
of 20.790.000 ft. of gas well footage (1967), the productivity for that year is 806 Mcf/ft.,
and in a year when 7.597 Bcf of reserves are added through the drilling of 26,571,000 ft.
of gas well footage (1972), the productivity drops precipitously to 286 Mcf/ft.
*« Opinion 598 at p. 50.
795
SUCCESSFTTL WELL COSTS !
66. Engle computed his low estimate of successful well costs as follows :
$27.7/ft.^600 Mcf/ft.=4.62^ per Mcf
and his high estimate as follows :
$27.7/ft.^555 Mcf/ft.=4.99^ per Mcf
The $27.7 per foot represents a 1971 drilling cost computed by the Joint As-
sociation Survey (JAS). The 600 and 55.5 Mcf per foot figures represent produc-
tivity of drilling ; 600 reflects the productivity average for 10 to 25 year periods
while 555 reflects the average of tlie 1967-1971 period. It is Engle's view that
future productivities will increase above the low figures reported for the last
three years.
67. Sherwin, on the other hand, computed his low estimate :
$27.53/ft.H-579x .95=5.02^ per Mcf
and his high estimate :
$27.63/ft.Xl.04-=-53lX.95=5.70^ per Mcf
His figures differ from those of Engel in part because he excluded data from
Alaska (Tr. 2680, 2794). The $27.63 represents the JAS successful gas drilling
cost per foot for 1971. In the higher estimate, he introduced the factor of 1.04
to reflect inflation. The productivity flgures of 579 and 531 reflect the use of
drilling footage published in World Oil for the 1957-1971 and 1967-1971 periods.
Because he said that since the World Oil footage figures liave been consistently
understated, he reduced the productivity figures by multiplying them by the
factor of 0.95, thus arriving at productivity factors of 550 and 504 as the basis
for his cost studies.
68. It is clear that both Engel and Sherwin adhered to the predictive function of
"new gas" costing by utilizing a productivity figure derived from historic averages.
By variance in the data base from which the averages were drawn, they arrive
at an estimated level of fiiture productivity ranging from 504 INIcf/ft. (Sherwin)
to 600 Mcf/ft. (Engel). We are not persuaded that either judgment should be
accorded controlling weight when we consider the following productivity trends :
Productivity
Tear: (Mcf/ft.)
1967 831
1968 613
1969 285
1970 409
1971 379
1972 284
69. The importance of the productivity factor is highlighted when we bear in
mind that Engel's low estimate of 28.7^/Mcf (built on a productivity of 600)
becomes an estimate in the range of 48</Mcf when the actual 1971 productivity of
379 is used. *^ We conclude, therefore, that successful well costs are substantially
understated for 1971 drilling results.
DRY HOLE EXPENSE
70. An assumed productivity factor is again a key component of these calcu-
lations. Engel worked from assumptions of 600 and 5.55, while Sherwin retained
his 550 and 504 assumptions. In addition. Sherwin argues that Engel's use of an 8
percent factor as the net adjustment for the greater cost of gas dry holes because
of greater depth is taken from the Permian I Opinion in 1965, and that current
data demonstrate that that gas well dry hole costs are some 17 percent-24 per-
cent greater than oil well dry hole costs, rather than 12 percent higher as was
true at the time of Permian I. Recognizing the need to adjiist for the higher
success ratio of gas well drilling, Sherwin's testimony indicates that a 12 percent
factor overall is now appropriate. We find Engel's dry hole expense to be under-
stated.
*^ See Appendix C.
796
EETtTRN PERIOD
71. Eugel applied a 15 percent rate of retuiTi over 9 years in his low estimate,
and over 10.5 years in his high estimate. This record supports the view that a
depletion period of IS years is reasonable, but acceptance of a 9-year investment
return period would then give no effect to the lag time between the investment
of lease acquisition funds- and the commencement of revenues. Lag time is shown
here to be at least 1^ years (Sherwin argues for 1.66 years), and we regard it is
imperative that the time value of mouey invested for exploration and development
be recognized. The return period should be not less than 10.5 years.
ROYALTY
72. Engel uses a 15 percent royalty figure in his low estimate and a 16 percent
figure in his* high estimate. Federal leases in the offshore area carry a royalty
of 16% percent, and we believe 16 percent is more nearly representative of
current royalty costs.
SUMMARY
73. "We cannot accept Staff's assumption of a 600 Mcf/ft. prQductivity as ap-
propriate in the light of the 1988-1972 productivity trend. Nor can we conscien-
tiously calculate royalty at 15 percent when we know this figure to be inap-
plicable to offshore Southern Louisiana leases, nor can we adojit a 9-year return
period and thereby deny any time value to money invested. These three factors —
productivity, royalty and period of return — account for virtually all of the
differencess between Staft''s "High" cost and "Low" cost estimates. From our
rejection of unrealistic productivity, royalty, and return period assumptions,
it necessarily follows that Staff's so-called "High" cost figure of 36.58(?/Mcf is in
fact the proper starting point for cost consideration.*^
74. From this starting point of 36.58('/]\Icf, we believe upward adjustments
have been shown to be necessary for lease acquisition costs *^ and dry hole co.sts.
Use of the Sherwin adjustments for these cost components would indicate ui>
ward revisions in the general range of 1.6S(*/Mcf (1.14(5' for increased lease
acquisition costs and .54(^ for increased dry hole costs), and accordingly, if we
employ a traditional area rate "new gas" costing approach, we would find a
minimum cost base of approximately 38.25^/Mef as proper.
75. As already noted, this approach to costing involves the use of a predictive
judgment. The 38.25«S/Mcf is an estimate of the future cost of new gas, built
on the assumption that an average of 555 Mcf of gas res-erves will be added for
each foot of successful gas well drilling. What, then, is the estimated cost of
finding and producing gas which was broungh to market in 1971? No precise
answer can be given, but by returning to Permian I,** we can add to our analytical
base as we search for a range of costs.
B. The "Test Year" Approach
76. The gas which is today offered to the interstate market is the result of
1971 drilling and well completion. Cost considerations can, therefore, be based on
a 1971 data base. To analyze costs, still recognizing the lack of mathematical
*2 We are indeed uncomfortable with a cost study based on a 555 Mcf/ft. productivity
figure when this record demonstrates that this level of productivity has not been achieved
in any year since 1968. Since we are, however, dealing with costs as only one of several
points of reference, and since we are dealing with a range of costs which can only be
estimated, we adopt Staff's 36.58^5 cost calculation as a starting point.
*3 Engel based his estimate on a straight cost relationship to successful well costs. For
his high estimate of 2.86 cents he multiplied his high estimate for successful well costs of
4.99 cents by a factor of 0.5738, representing lease acquisition costs divided by cost of
producing wells (Ex. 11).
Sherwin argues for a factor of .739, which is Intended to represent an allocation of
leasehold expenditures in proportion to successful drilling costs with an upward adjust-
ment of 18 percent to reflect the current and expected future higher cost of gas than of oil
leases. Such an upward adjustment was foreshadowed in Opinion No. .598 (Southern
Louisiana) : "Assuming only the relationship between this item and the item for successful
well costs, the calculation of a future gas cost would be marginally higher. However,
expected higher costs could well be added. . . ." 46 FPC at p. 132. We agree that such an
adjustment is now appropriate, particularly in light of the escalating costs of acquiring
leases in the offshore area.
Sherwin's estimate of 4.00 cents for lease acquisition costs also gives effect to the eub-
stantial leasehold acquisition expenditures in 1972.
" Opinion 468, supra.
797
certainty in any costing methodology,*^ we turn to the basic formula established
in Permian I,** which was approved by the Supreme Court.^'
77. In so doing, we agree with, and accept the position of all parties, as ex-
pressed on the record, that the concept of average national industry costs, as op-
posed to individual company costs, should be employed.** We will not rei)eat the
error of attempting individual producer cost-of-service regulation.**
78. In promulgating Section 2.75 of our Regulations, we clearly stated our in-
tent to rely upon recently completed area rate tindings as the cost foundation for
consideration of optional procedure applications.^ We have also clearly stated,
prior to the commencement of hearings on the Belco et al., applications, our intent
to review Section 2.75 ai)plicatious in the light of :
". . . costs developed in recent area rate decisions (and) increased costs
since the close of hearing records, of which this Commission can take official
notice . . ." °'
7!». Our cost analysis then, is predicated upon Opinion 468 (Permian I)
methodology, and Opinion 598 (Southern Louisiana II) cost findings, modified
only to reflect 1971 known results as reflected in various statistical studies ^^
upon which the Commission has relied,^ with judicial approval," in the past.
80. Signiflcant cost changes have occurred since the record in Southern Loui-
siana II was closed, best illustrated by the following comparison of costs reported
by JAS :
1969 1971
Drilling costs (per foot)
Dry hole costs (per foot)
Cost of producing wells...
Dry hole cost
Lease acquisition cost.
Exploratory overhead
Other exploratory costs
While drilling costs rose by more than 10 percent and dry hole costs more-
than 20 percent in this two-year period, other costs vi'hich affect FPC costing:
metiiodology dropped significantly. We recognize and give effect to both increases
and decreases in our analysis.
81. Another major change which has demonstrably occurred since Opinion
598 was issued is found in comparing the results of gas-well drilling in 1971
with the anticipated results used by the Commission in formulating Southern
Louisiana area rates. Opinion 598 costing assumed a productivity figure of 600
Mcf ; unfortunately, 1971 drilling resulted in a productivity of only 379 Mcf per
foot drilled. This change sharply influences at least six cost components.
*'- Cf. Opinion 59S. Southern Lotiisiana, supra, at pp. 46-47 ; Opinion 595, Texas Gulf
lonst, 45 FPC 674 (1971) at pp. 10-11.
$25
$27. 60
12.80
15.84
1,723
1, 508. 003
88S. 000
864, 000
,137,000
642,000
210,000
206, 000
782,000
746,000
to whether a single year cost analysis -would be appropriate when we determine a supply-
eliciting rate of indnstrv-wide applicability,
*• .390 U.S. 747 (196S).
^■^ In our December 26. 1972. Order setting this case for hearing, we left to the Admin-
istrative Law Judge the determination of whether or not special circumstances reipiired
the presentation of cost evidence. This question was fully explored on the record, with the
result that no party offered evidence on individual company costs.
*» See Phillips 11,24 FPC 537 at 547 (1960), aff'd 373 U.S. 294 (1963).
60 Order No. 455. supra, at p. 21.
^1 Order denying rehearing, McCulloch Oil Corp., Docket No. CI73-13(3, Issued January 18,
1973.
^- We take notice of 1971 cost components as reported in the most recent edition of the
Joitit Association Surrey of the United States Oil and Gas Producing Industry (.TAS 1971),
the Statistical Record of the Qas VtUitu Industry in 1971 (AGA). and American Associa-
tion of Petroleum Geologists 1971 Report on Drilling Footage (AAPG). The sources are In
the record m connection with Staff's cost evidence.
53 Reliance by the Commission on statistical sources was expressly noted In Opinion 468
(Permian I) 34 FPC 159. issued August 5. 1965, where the Commission described them as
well-recognized and authoritative". 34 FPC at 191. The Commission has utilized these
statistical bases in all subsequent area rate decisions.
^ In revie^-lng Permian I, the Supreme Court approved the use of nationally published
statistics (.390 U.S. at SOD in producer ratemaking proceedings. More recently, when our
use ofsuch data sources was again challenged, the Ninth Circuit affirmed the propriety of
Commission use of recognized statistical sources, whether incorporated in the hearing
kTeVRaT C ) ^«''-^°^"»'* V- F-P-C, 466 F. 2d 974 (CA9, 1972) (Hugoton-Anadark5
798
82. For example, the unit cost of gas attributable to successful well costs is,
under Permian I :
"... determined ... by dividing the cost per foot of successful wells drilled
in 1960 by the average of gas reserves added per foot of drilling in a year." ^
As further explained in Permian I, "The total reserves added were derived
from the AGA proven reserve statistics." ^
83. Following this formula, Opinion 598, recorded that, on the basis of the
record before it, successful well costs, on a unit basis, were in the range of 4.4^/
Mcf."
84. For the year 1971, when drilling costs were .$27.64/ft. and the average gas
reserves added per foot of drilling was 379 Mcf,^ successful well costs rose to
7.290/Mcf.
85. The final major change necessary to adjust Opinion 598 findings for actual
1971 results lies in the expense component for dry holes drilled. As already noted,
dry hole costs rose to $15.83/ft. in 1971 (compared with $12.80 in 1969). Permian
I methodology calculated dry hole expense by a formula recognizing dry hole dril-
ling costs, divided between oil and gas well footage averaged over a period of
years, and adjusted for the greater depth of gas dry holes."* In Opinion 598,
dry hole expense was calculated by use of this formula :
Drilling cost/ft X 1.0 X1.08-^average of reserves added per foot drilled.'"
86. Utilizing ths formula. Opinion 598 calculated dry hole expense in the range
of 2.5<:'/Mcf, but when 1971 data is inserted, the result is 4.51^/Mcf.
87. Making use of 1971 data, and adjusting for cost increases and decreases
since 1969, we thus see that 1971 costs compute as follows :
Cents/Mcf
Successful well costs 7. 29
Lease aeqiiisition costs 3. 10
Other production facilities 1- 65
Subtotal 12. 04
Dry hole expense 4. 51
Other exploratory expense 3. 60
Exploration overhead 1- 04
Subtotal 9. 15
88. We have no evidence, or statistical basis, for trending Opinion 598 cost^ in
any other respects, and accordingly we continue to rely upon Opinion 598 findings
as to: ^ .. ,„ ^
CeHts/Mcf
Production expense 3. 10
Regulatory expense • 20
Net liquid credit 3. 89
1 Opinion 598, at p. 53, et seq.
89. So also we retain our Southern Louisiana and all other recent area rate
decision findings, that a fair rate of return on investment is in the range of 15
percent. "^
90. By way of summary, accepting from the Southern Louisiana proceeding
those findings which are not shown to have changed, and adjusting for known
1971 results in aiipronriate instances, we find, through application of traditional
FPC costing methodology to 1971 data, that Southern Louisiana gas found as a
result of 1971 drilling efforts is produced at an estimated cost of 48^/Mcf, before
state production taxes. This estimate, together with the supporting calculations,
are set forth in Appendix C.
CONCLUSIONS CONCERNING COSTS
91. In analyzing costs by traditional Commission standards, and by a "test
year" approach, we impart a sense of precision and certainty which can be mis-
^^ Opinion 4fi.S at p. 5_(>.
E- Opinion 598, at 'In^ 53-54. A procluctivity factor of GOO Mcf/ft. formed the base of this
' sH Ti'je AGA estimated nonassociated jras reserves added durinff 1971 jfexflxidln? Alaska)
was 8.565 Bcf at 14.73 psia : gas well footage drilled in 1971 was 22,608,000 teet, as
reflected in the AAPG 1971 report.
50 Opinion 468. at pp. 39-42, and Appendix B thereto.
8" Oninion 598, at pp. 53-54.
«7d.
799
leading. We have, from time to time, noted tlie inherent difficulties of cost alloca-
tion, and we would again state :
"The assumptions and selections w^hich are possible, using the same data
base, are almost unlimited, and the factors are so interrelated that errors tend
to cumulate. . . . The judgmental process is bound to suffer if the goal is to
settle upon a mechanical process of pricing gas." *^
92. We have undertaken a cost review to see where cost considerations lead us
in determining a proper rate level. We estimate that the 1971 cost of finding and
producing gas is in the range of 38(*-48<yMcf, before production taxes.^ We must
move forward, however, to examine these transactions before us by other stand-
ards. We use cost as a point of departure ** and not as a final determinant.
BATE OF RETURN
93. We have heretofore determined that a return in the range of 15 percent is
just and reasonable for gas producers.*" Staff offered testimony here that a 15
percent rate of return is appropriate. No party sought to contradict the pro-
priety of this allowance. In the applications before us, an initial rate of 450/Mcf
is proposed, and as discussed above, cost fall in the range of 3.S0-4.S0/Mcf. At the
4S<j' cost level, 27.660 recovers the cost of service. The return component (16.46(f)
produced by a sale at 450/Mcf yields a rate of return of 12.4 percent.*' At the 3S(^
cost level, 2SAQ(^ recovers the cost of service. The return component (20.43^)
produced by a sale at 450 yields a rate of return of 17.8 percent.*'
94. Calculation of yielded return can be no more precise than the cost of service
figures involved in the calculation ; accordingly, we can only estimate that the
Applicants will earn between 12 and IS percent if sales commence at 45<'/Mcf.
We have already noted our skepticism of the 3S«?/Mcf cost calculation, because
of its reliance on a productivity factor of only 555, and our belief that costs
are closer to the 48<;' estimate because of declining productivity. Accordingly, we
estimate that the return allowed here, at a rate of 450/Mcf, is within a zone of
reasonableness centered around 15 percent.
U. NON-COST FACTORS
95. We turn now to other relevant considerations affecting a determination of
rate and certificate issues.
A. Supply Considerations
96. The proposed sales will add approximately 235 Bcf of natural gas reserves
to the Tennessee system, wath estimated first year deliveries of approximately
36 Bcf. In 1971, Tennessee was able to contract for only 4.50 Bcf of new gas re-
serves, and for only 820 Bcf of new gas reserves in 1972. In each year, the new
gas contracted for was less than Tennessee's system requirements.'^ The last
time Tennessee was able to purchase enough new gas to equal the amount it sold
was 1965 ; the last time Tennessee was able to make a net addition to its gas
supply position was in 1960, when it wa.s able to purchase more than it sold.'''
Clearly, it is not in the public interest for Tennessee to continue depletion of its
reserves. This trend nnist be reversed if the consumers dependent on Tennessee
are to continue to have a reliable and adequate supply of gas.
97. This record establishes Tennessee's inability to contract for a gas supply
equivalent to the proposed Belco, et al., sales at a lower price than 450/Mcf.™
98. As noted in our Order setting these dockets for hearing, no party by its
pleadings raised an issue concerning Tennessee's need for the supplies here
offered, and no evidence was offered during the hearing that qustions the urgency
of Tennessee's supply procurement eft'orts.
«- opinion 598 at pp. 4S^9. , .^ „ ,,, ^ ,. ^
«3 In Opinion .598 we conchided that there -was a cost range of 4^-60/Mcr which coula not
be narrowed further with any degree of accuracy. We now estimate the range to be 10?/Mcf.
While we might wish for greater precision, it is not possible and we prefer not to delude
ourselves, or a reviewing court bv pretense to greater certainty than exists.
8* Cf. Ciiii of Detroit v. F.P.C., 230 F. 2d 810 (CADC, 1955, and Hugoton-Anadarko Area
Rfitp Cases, supra, at p. 22.
8-'' Opinion 598, supra, at p. 52 : see also Hugoton-Anadarko Area Rate Case, supra, at
fn. 12.
"■■ See Appendix D for return calculations.
^ See Appendix E for return calculations.
«'■ Tr. 82 : 65^ 659.
e» Tr. P.o6-fi60.
'c- Tr. 79-8.3 ; 811-813.
800
99. The public convenience and necessity clearly require certification of the
proposed sales at the rate we herein determine to be just and reasonable, for
without additional long-term supplies Tennessee cannot continue to meet the
needs of those who rely upon it for gas service.
B. Comparison with Other Contracts
100. The initial proposed rate of 45«?/Mcf should be tested against the current
market for natural gas in Southern Louisiana as demonstrated by other con-
tracts. This record reflects the following with respect to recently negotiated
contracts :
Price range
Short-term interstate sales, 35 cents to 50 cents.
Lung-term intrastate sales, 38 cents to 52 cents.
101. We cannot safely ignore this data. Short-term interstate purchases are
being made under our Order 431 " and pursuant to our approval by pipelines
facing emergency conditions. This form of gas procurement is not available
to Tennessee. '^ Nonetheless, Tennessee must compete for new gas supplies or
it. too. will face an emergency. Accordingly, the price paid by others, with our
approval, is material to consideration of the supply project under consideration.
As to intrastate sales, even though intrastate prices cannot reach gas produced
from the federal domain, we must face economic reality. If interstate prices lag
far behind intrastate prices, we can only expect a concentration of drilling
activity to occur in those areas where the intrastate market is in a biiying position,
with a consequent diminution of activity in the federal offshore area. This
result wf)uld harm interstate gas consumers by causing a lessened effort at
timely development of a supply area fully committed to the interstate market."
Accordingly, while we do not give controlling weight to current market trends
as reflected in current contract prices, we consider these facts together with all
others in arriving at our determinations herein.
C. Comparison with Other Sources of Supply
102. In testing the proposals before us, bearing in mind that our primary
purpose is the identification and protection of the public interest, we weigh
the effect on the consumer of adding this increment of gas at 45«i?/Mcf, as compared
with the consumer effect of adding supplemental supplies from nonconventional
sources. All parties to this case agree, and most certainly we find, that
Tennessee has an immediate need to contract for additional base load volumes
to meet existing customer needs. If Tennessee purchases from non-historic
sources, this record reveals the estimated cost to be :
Source and estimated cost
Canadian gas — ^112 cents to 132 cents per I\Icf.
Coal gas — 120 cents per Mcf .
Reformed gas (petroleum feedstock) — 105 cents to 143 cents per ]Mcf.
LXG— 91 cents to 100 cents per ]Mcf ".
These prices are estimated on the basis of city gate deliveries in New York.
The approximate pipeline cost of moving gas from Southern Louisiana to New
York is 30(''/Mcf ", so that the proposed sale at 450 at the wellhead represents
a substantial saving to customers served by Tennessee.
"1 Issued April 15. 1971. in Docket No. R— US. We have approverl 225 short-term sales at
rates ranging- from 260/Mcf to 45^/Mcf. No appeal of any certificate issued, even at
45<'/Mcf. has been taken.
■2 Our order of .Tiily 30. 1971, in Docket Nos. CP-71-275 and CP-71-.502 denied Tennessee
the use of Order No. 431 procedures because Tennessee v,as not in "an emergency".
"•' We categorically rc.iect the concfpt advanced by some that the price of gas sold from
the federal domain should be held down because the producer there cauuot sell his product
without our approval. Federal domain rates shall be determined fairly, and consistently
with all other rates. Any other approach would be antithetical to our basic decision in
Opinion 598 granted, in effect, a 2.30/Mcf rate incentive to federal domain production
this area holds the greatest Immediate promise for alleviation of the supply shortage. In
Opinion 598 were granted, in effect, a 2.3?'/Mcf rate incentive to fed<^ral domain production
by allowing offshore gas to be sold at the same rate as onshore gas subject to state produc-
tion taxes. This approach has been expressly sanctioned. See Placid Oil Co. v. F.P.C., supra,
at pp. 40-41.
^« Exhibit 7 ; Tr. 175, et aeq.
T6 Tr. 281.
801
D. Commodity value of Natuial Gas
108. The Commission has uot, historically, undertaken to test a producer
rate proposal in terms of the value of natural gas to the consumer. Although it
is without question that price relationships bet\Yeen substitutable fuels in the
energy market aft'ect the supply of and demand for each fuel component, the
Commission has not turned its attention to fuel price relationships. Today,
witli a gas shortage of critical proportions causing reverberations throughout
the economy, we undertake consideration of this question because of our rec-
ognition that effective, efiicient resource allocation cannot take place without
full consideration of the totality of the energy market. If natural gas sells at
too low a pi'ice in relation to other fuels, the demand for gas will continue to
mount astronomically through an artificial stimulus. Irreplaceable volumes
of this valuable finite resource will be consumed, not because gas is the best
fuel for the particular need, but because it is the cheapest fuel. Nationally, we
cannot afford the luxury of such waste.
104. This record reflects a detailed study, on a comparative basis, of the cost of
substitutable forms of energy in sixteen areas served by Tennessee and its res'ale
customers."® While, as New York points out," this study is predicated on an
averaging of fuel costs for different types of service, we find it useful in our
determination of this case. This generalized study, purporting to arrive at a
"commodity value" on the basis of averages and assumptions, lends the appear-
ance of precision and certainty. We have no blind faith that such an appearance
is warranted, and accordingly, we do not embrace this study as determinative of
our decision. We accept it as a useful tool in measuring the pruper level of rates to
apply in this case.
105. The comparative fuels cost analysis sponsored by Texaco shows that the
present retail price of gas sold by Tennessee is 48(^-/MMBTU below the cost
of substitutable energy sources. When consideration is given to protection of
residential and small commercial uses during times of curtailment, '* and the
conse<]uent possibility of lessened industrial service, the study reflects that gas
sold by Tennessee i-s 26(i/]\IMBTU below the price of substitutable energy sources.
106. The commodity value differential is relatable to the price paid by Tennessee
for gas purchases in the held by adjusting downward for fuel and compression
co.sts '" and adjusting upward for BTU differentials. "" After adjustment, the
differential is 2.5.1^'/Mcf, which when added to Tennes.see's current cost of gas
from offshore Loui-siana (23.2^), results in a stated commodity volue of gas at
the wellhead of 48.3<l^/MGf. ^ This latter figure is, of course, the overall average
price which Tennes.see could pay for all Southern Louisiana purchases and
still deliver gas to market on a basis competitive with other fuels. A single pur-
chase, or group of purchases such as proposed here, at rates siibstantially about
48€-/Mcf could l)e made without adversely affecting inter-fuel competition. *-
107. We consider this evidence, together with the balance of the record, in
arriving at our decision herein.
RATE DETEKMINATION
108. We conclude, based on a broad consideration of cost and noncost factors,
after applying those standards which our experience indicates are of conse-
quence, that service by Applicants shoidd be certified at a rate of 45<#/Mcf. We
find this rate to be just and reasonable, and we find that the present and future
puljiic convenience and necessity require certification at 45<^/Mcf. No one factor
among those discussed in this Opinion is determinative of our decision. We have
weighed all relevant evidence and reached our conclusion on the totality of w^hat
has been presented to us. We find that the increment of gas supply represented
by the applications here, if made available at 45^/Mcf, is the lowest cost supply
source presently available to Tennessee.
PBEGRANTED ABANDONMENT
109. Belco, in its application sought permission to discontinue service at the
end of the ten-year term of its contract with Tennessee. Section 2.75(e) permits
consideration of such a request.
7« Tr. 136 et seq. ; Exhibit 5, Shantz.
■" Initial Brief, pp. 12-14.
''^ Order 467, as amended, issued in Docket No. R-469.
™ 6.9 percent ; Tr. 160-161, Shantz Exhibit 5.
s" Tennessee gas averages 1015 BTU : Tr. 160-161.
^ A concise statement of the commodity value methodologv Is provided at pp. 20-21 of
Texaco's Initial Brief. We append this material as Appendix F.'
82 Tr. 161.
802
110. Under Section 7(b) of the Act, the Commission may, after hearing, and
upon finding that the available snpply of gas is depleted to the extent that further
service is unwarranted, or that the present or future public convenience or neces-
sity permit abandonment, authorize discontinuance of service to the interstate
market.
111. Belco presented no evidence in support of its request, and offers no argu-
ment in its briefs on this issue. It is clearly within our power to make a present
determination of depletion of supply over time and the requirements of tjie
present or future public convenience and necessity, given an adequate record.
We have no factual basis for exercise of abandonment authority here, however,
and Belco's application is therefore denied.
FIXED ESCALATIONS
112. Belco proposes certification of service under a contract calling for 1.5(i^
annual escalations, while Tenneco and Texaco seek authorization for 1.0(^ annual
escalations.*^' Staff proposes .5(# annual escalations for each Applicant, concluding
that such are required to compensate for future cost increases, replacement of
equipment, installation of compression, and additional drilling on the tracts
covered by the Tennessee gas purchase contract. We agree that escalations are
necessary to compensate for future expenditures not included in an analysis
of cf)sts already incurred.
113. We conclude that the fixed escalations are proper. From the standpoint of
present costs, we have seen that the cost of 1971 gas may be as high as •^80/Mcf.**
so that a sale at 4.^<f produces a return on equity of only 12 percent. By this stand-
ard, annual 1.00 escalations over six years would produce an average return of
15 percent, clearly within the zone of reasonableness approved by the Courts.'*
The trend of cost increases also argues for the necessity of definite escalations.
On this record our Staft" has compiled a "new gas" costing study which reflects
a current cost range of 28.27('/Mcf — 36.850/Mcf, while only two years ago, the
Staff estimated in Southern Louisiana II tliat the then current cost range was
24.91(*/Mcf— 26.680/Mcf.''' In 1968. the Conmiission found then current costs to be
in the range of lS.80c'/Mcf.*" Quite clearly if costs continue to escalate at the same
rate as they have from 1968 through 1972, a 1(1: annual escalation is just and
reasonable, and will not return excess profits to the applicants.
114. A 10 annual escalation of a base rate of I.^kj* is a 2.2 percent annual in-
crease in the first year, but drops to a 1.6 percent increase in the twentieth year.
We recognize that nationally the annual rate of inflation has been in the range of
5 percent.^ While this trend will, we trust, be reversed, it is a present fact of life
and its effects on costs must be acknowledged.
115. The fixed escalations are the only price protection available to the Ap-
plicants in view of our insistence that Section 2.75 applications be accompanied
by a specific waiver of "all rights to seek future rate increases under Section 4
of the Natural Cas Act . . .".*'* and our requirement that Section 2.75 contracts
contain no "area rate or FPC clauses.""" By these provisions we seek for the
consumer the protection of a long-term, determinable rate, which will not escalate
because of cost fluctuations or supply incentives that the Commission might
utilize in future industry-wide rate cases. Thus, if the Commission finds it
necessary in any future proceeding to prescribe a national rate in excess of the
rate approved for the Applicants here, consumers will pay no more for the .235
Bcf of gas reserves here committed. This long-term rate certainly is badl.v
needed.
116. Two other factors must be considered in examining the escalation pro-
visions, both factors having relation to the waiver requirements of Section 2.75
(m). First, as a matter of recent history, industry-wide rate increases at a rate
« Tlie iliffprpnce in pscnlations Is more apparent than rpal. BpIco's gas has a BTU content
of 1041 BTTVfiibio foot, and its contract with Tennessee calls for BTU adinstments only
aViove lO.'jO BTl', The Tenneco and Texaco contracts call for BTU adjustments above IO1.5
PTT'. As a result. Belco's proposed 1.50 escalation results in a hiijher price to Belco
v-iijrher than the other applicants would pet at 1^ annual escalations) only 'n the fourth
Through the thirteenth year : Texaco and Tenneco will receive slisrhtly higher rates in the
first three years, and again in the fourteenth through twentieth years. On the whole, con-
siilering the full contract life, and the BTU adjustments, the escalations may be treated
as the same, and we do so.
^ See pp. 27-.S2. supra.
s= See PlnHfl Oil v. F.P.C., supra; Hugoton-Anadarko Area Rate Cases, supra.
^ See Opinion .'iflS. at pp. 4fi-.'59.
s^ See Opinion .546, at pp. 62-63.
*''Tr. 147S: 21. S9.
sf Section 2.7.5(m).
»c' Section 2.75(f).
803
greater than 10/year have been found necessary by this Commission."* From a
rate for "old gas'' of 18.00/Mcf set in September, 1968, an increase to 21.3750/
Mcf was necessary in July, 1971. From a rate for "new gas" of 18,50/Mcf in
September, 19(j8, an increase to 26.0f/Mcf was necessary in July, 1971. The up-
ward treud in costs has appai-eutly not ended.""
117. Secondly, to prosecute these applications, Texaco and Tenneco were re-
quired *^ to waive all contingent escalations in the price for "old gas" produced
by them in Southern Louisiana, to which escalations they were entitled as a
matter of right under Opinion 598, as recently aftirmed by the Fifth Circuit
Court of Appeals. Waiver of these escalations, totaling 1.5c/Mcf over time, rep-
resents a substantial sacrifice to botli Applicants, inasmucli as Tenneco's South-
ern Louisiana jurisdictional sales exceeded o6,(X(0.0(X) Mcf in 1971. and Texaco's
Southern Louisiana jurisdictional sales exceeded 385,000,000 Mcf in the same
year."^ While the dollar loss in revenue required by the waiver cannot be precisely
quantified, Tenneco offered testimony that the loss to it would exceed $35 million
over an estimated depletion period of 23 years. As already noted, Texaco has
roughly ten times the Southern Louisiana production as Tenneco, much of which
would be eligible for the Opinion 598 contingent escalations. By contrast, an
annual fixed 1^ escalation will produce, at most, an additional .$200.000/year to
Tenneco and Texaco,'*^ or $4,000,000 to each producer over the full period of the
escalations.
118. We are not so sanguine as to believe that companies as experienced as
these have yielded two birds in the hand for one in the bush, as these figures
would indicate. The uncertainty of when, if ever, the full range of the contingent
escalations will take effect reflects that the escalations are, after all, contingent
on the happening of future events. Accordingly, while we cannot conclude that
the Waiver of contingent escalations on a large volume of production in return
for fixed escalations on a smaller volume of production is an even tnide, we can
reason that the required waiver contributes to the justification for our ap-
proval of escalations here."*
119. Finally, we are constrained to recall that in approving a base load LXG
import recently, we expressly approved flowthrough to the American consumer
of periodic open-ended escalations for the Algerian producer.**^ The escalation
there was tied to changes in certain I'LS indices, and the Administrative Law
Judge found that the escalation, at he end of the first full year of operation of
the LXG project would produce a price increase of 1.880/MMRTU.'* Our ap-
proval of the Algerian escalation has become final, with no appenl taken as to
that aspect of the case. At a time when domestic resource development is of
paramount importance, it would make little sense indeed for us to permit a
foreign producer escalation rights but deny the same to domestic producers.
120. On balance, we are persuaded that the annual escalations proposed are
just and reasonable, and certificates so authorizing are required by the present
and future public convenience and necessity.
COLLATERAL ISSUES
121. Our findings and conclusions heretofore stated are. we believe, fully
dispositive of the applications before us. Nonetheless, we deem it appropriate to
address certain collateral issue.s raised on this record to the end that the partie.s,
and any reviewing court, might better understand fiur approach to this case.
1. Setting of "guideline" rates of future applicability
122. AGD and Philadelphia argue that the Commission shoiild announce its
decision here as setting a prevailing rate which will hold firm for the next
several years. Rate stability and the need to "cool" producer expectations are
cited as the principal reasons for this policy.
"1 Cf. Opinion 546, Southern Louisiana I, supra, with Opinion 598, Southern Louisiana IT,
sunra.
Bsspe Notice of Rulemaking, Docket No. R-.389-B. issued April 11, 1973: 3R FR 10014.
S3 Tlie same v aiver wat^ reiMiireti of B'lco. but since, according to the record this Appli-
cant hag no "okl gas" production, in the Southern Louisiana area, the waiver has no dollar
effect.
^ Sales hy Producers of Natural Gas to Interstate Pipeline Companies, 1971; (Federal
Power Commission Office of Accounting and Finance, published October 1972).
"■"'Deliveries from the Tenneco-Texaco block are estimated at 110.000 Mcf/day (Tr. 76).
8" Belco's escalations will return dollar for dollar Into Southern Louisiana exploration.
»^ Opinion 622-A, Columbia LXG, et al.. Docket No. CP71-68, et al., FPC ,
October 5. 1072.
*s Initial Decision, p. 46, and Appendix A, thereto, p. 3.
27-547 — 74 52
804
123. Acceptance of this argument would convert this proceeding to an area rate
case, with the consequent loss of flexiljility and regulatory responsiveness which
have characterized that form of regulation since its inception. In our judgment,
we do not need Section 2.75 if it is but a vehicle for determination of industry-
wide rates. If Section 2.75 is to be of help in overcoming the supply shortage it
will be through an expeditious "supply project" approach as outlined at pp. 4-7
above.
124. The Commission is attempting to demonstrate to producers and potential
producers that this is the time to expand the search for gas. The expectation
factor referred to by these intervenors— that producers will withhold action to-
day in the expectation that prices, and profits, will be higher tomorrow — is, we
believe a factor that can be made to work in another way. Put more bluntly, if
the producing industry is convinced that individual consideration of supply
projects is now a reality and not a promise, producers response should be
immediately affirmative. It must surely be obvious that Section 2.75 was initiated
by the Commission, and it may be rescinded or modified by the Commission.
2. The earmarking of funds.
125. New York advances the belief that any Applicant under Order 455 should
be required, as a condition in the certificate issued, to devote all revenues re-
ceived in excess of the applicable area rate to exploration and development. This
is not a new concept, having been advanced, and rejected, in Southern
Louisiana.""
126. While we have lecognized the desirability of earmarking additional rev-
enues created by rate increases in certain instances ^*'. the Commission has never
imposed such a condition in certificating new service. Those who argue for it
here operate on the premise that any rate in excess of 260/Mcf is not justified,
and accordingly, all revenues in excess of 260 should be devoted to a particular
purpose. We cannot accept this basic premise. Our study of this record per-
suades us that an initial rate of 45(* is proper, liased on costs and non-oost factors.
There is no "windfall" that requires special handling.
127. We believe any restriction on the Applicants' revenues ^"^ would be unwise
as it is unnecessary. This Commission is not equipped to determine an exphjra-
tion or development pmgram for any producer or group of producers. If we at-
tempt to compel expenditures of certain amounts in certain areas over a stated
time span we will coerce geologic and management decisions that are beyond
our ken. Sound management will see that gas revenues are reinvested in the
search for gas if persuaded that such investment Is a sound investment. In-
trusion of additional regulation into exploration and development decisions is
unwise.
3. APGA's Motion to Strike.
128. The American Public Gas Association (APGA) on March 15, 1973. filed
an appeal from a ruling of Presiding Administi*ative Law Judge Nahum Litt in
the above-entitled proceedings denying APGA's nu)tion to strike evidentiary
presentations by Staff and by Applicants. If the appeal is denied, APGA asks that
it be granted 60 days in which to file rebuttal testimony.
129. APGA's appeal is directed to the cost evidence of Mr. Engel for the Staff
and Mr. Sherwin for the Applicants, which has been previously discussed.
130. On March 8, 1973, APGA made a motion to strike this evidence.'"^ After
argument by Counsel, the Administrative Law Judge denied the motion and
denied APGA's request for additional time to file reliuttal testimony.
131. As already noted "^ we find the area cost evidence relevant, but of limited
usefulness.
132. In determining to accept the area cost evidence up-dating the data set
forth in Opinion No. 598 we emphasize that we do not intend that these pro-
ceedings, or any others brought under Order Xo. 455. lie transformed into an
area rate proceeding. We think however, that the evidence presented by witness
Engel and Sherwin helps demonstrate the need for rate flexiliility and is some use
in determining whether the rates proposed are lawful and whether the sales
=>" See Placid Oil v. F.P.C., supra, at pp. .32^.34.
iw See, e.g., Opinion 626, Panhandle Eastern Pipeline Co., — — FPC , September 20,
1972.
"^1 Belro's proposal for reinvestment is acceptable as being in the public Interest and will
be embodied in the certificate issnerl. •
^02 Witness Kneel: Tr. 316. Line 18 thronch Tr. .317. Line 4: Tr. 320, Line 22. through
Tr. 326. Line 25, and Exh. 11. Witness Sherwin : Tr. 393, Line 9 through Tr. 413, Line 12
and Exh. 13.
103 See pp. 20-26 supra.
805
should be certifiratecl. ^Ve do not now wish to deprive ourselves of this assistance.
133. The Administrative Law Judge was correct in not granting APGA 60
days in whicli to file rebuttal testimony. To .judge from its appeal, APGA
appears to want the 60 days to run from the date we deny its request to strike
tlie cost evidence. By notice of January 5, 1973, the Secretary provided that
hltaff's direct case be served on February 12, 1973, and rebuttal by Applicants
be served on Feliruary 21, 1973. At .^he prehearing conference on January 17,
1973. Staff made known that it would file evidence to update the Opinion No. 598
data and Counsel for APGA asked for opportunity to respond to Staff's evidence.
The Administrative Law Judge then ruled that by February 21, 1973, any
interveuor might file rebuttal evidence limited to Staffs direct case. Witness
Engel's evideiice was actually filed February 9, 1973, and that of Applicants'
witness Sherwin on February 21. 1973.
134. APGA did not file any rebuttal but at the hearing session on February 28,
1973. its Counsel stated that he intended to move to strike Staff's cost testimony,
and if the motions were denied, he would ask for 60 days to respond. It was
not until the hearing session of March 8, 1973, that the motion to strike was
made and the 60 days was requested in the alternative. In denying both
requests the Administrative Law Judge pointed out that APGA had already
liad over six weeks to make an evidentiary showing in response to Staff's
presentation and that the Applicants had made their rebuttal presentation within
the time allowed. APGA's rights have not been prejudiced.
4. The call for a Texaco ''Policy" witness.
13.5. L»uring the course of the hearing. Counsel for the New York Public
Service Commission pointed out that Texaco had not presented the evidence of
a policy witness and moved that its application be dismissed.
136. There was extensive argument on the record before the Administrative
Law Judge as to the necessity of requiring a policy witness for Texaco. For
example, Texaco argued that this proceeding should be decided upon broad
economic evidence, but that it would be a mistake to have the Order No. 455
optional procedures evolve into extended evidentiary showings from company
witnesses in every .-ingle application.
137. The Administrative Law Judge ruled that Texaco should supply a
Ijolicy witness. He was of the opinion that it was his responsibility under the
Commissi(ni's order of December 26, 1972, to make a full and complete record
on all factors bearing on maintenance of an adequate and reliable supply of
gas delivered at the lowest reasonable cost. He made the finding that the matter
was no longer a question of the Administrative Law Judge's determining whether
he should interfere with how the Applicant should try its case, but that the
record would not be complete absent a knowledgable official from Texaco. He
called upon Staff" Counsel to draft a svibpoena for his signature, but when
Texaco indicated that it would honor a request for a witness if the Commission
so ruled, no svibpoena was issued.
135. Though the Administrative Law Judge is to be commended for his
diligence, we find no need for a witness to speak to company policy. Texaco
offered those witnesses, and those exhibits, which it thought necessary to support
its application If this evidence is iusuflicient, our sanction is to deny certifica-
tion. Here, however, we find that a suflicient record has been made. Presentation
of a policy witness to speak to the specific matters mentioned in Judge Litt's
certification ^'^ v.ill add nothing to our deliberations. We grant Texaco's appeal.
The Commission further finds
(1) Applicants, Belco Petroleum Corporation, Texaco Inc., and Tenneco Oil
Company, are each engaged in the sale for resale of natural gas in interstate
commerce subject to the jurisdiction of the Commission and each is therefore,
vi xiip Aflministrative Law .Tudjre certified this question to us :
"Is it- upcessary and in the pulilie interest in the instant prnceedinar that a witness be
supplied by Texaco. Inc.. which is a party to one of the underlying contracts being eon-
stnied (Exhibit 14). who (a) has personal knowledge of that contract, and (b) has
hnowiedgp as to the pffpct of a grant of a certificate upon the snpply-price-demand-
relationship. capital formation for it and the industry, the consequences upon it and the
producing industry of a grant of a certificate, and whether a certificate which may ulti-
mately be issued to it in the proceeding will provide appropriate protection to the relevant
present and future public interest?"
Texaco offered evidence on these matters, and whether by witnesses In the company
employ or not. the offer of testimony by such witnesses is binding on Texaco. Additional
testimony would be cumulative at best, and we believe further delay in the disposition of
these applications is unwarranted.
806
a "natural-gas company" within the meaning of the Natural Gas Act as
heretofore found by the Commission.
(2) The sale of natural gas hereinbefore described, as more fully described
in the applications in this proceeding, will be made in interstate commerce
subject to the jurisdiction of the Commission ; and such sale by each Applicant,
together with the construction and operation of any facilities subject to the
jurisdiction of the Commission necessary therefor, is subject to the requirements
of Subsections (c) and (e) of Section 7 of the Natural Gas Act.
(3) Each Applicant is able and willing properly to do the acts and to perform
the service prop<jsed and to conform to the provisions of the Natural Gas Act
and the requirements, rules, and regulations of the Commission thereunder.
(4) The sale of natural gas by each Applicant is required by the public
convenience and necessity and certificates therefor should be issued as herein-
after ordered and conditioned.
(5) It is neces-sary and appropriate in carrying out the provisions of the
Natural Gas Act that the contracts submitted by each Applicant should be
acceiited for filing as its FPC gas rate schedule.
(t>) The rate for initial service proposed by each Applicant is just and reason-
able, based upon the costs of providing such service, and such rate is required
by the present and future public convenience and necessity.
(.7) The rate for initial service proposed by each Applicant is just and reason-
able, based upon non-cost factors as hereinabove discussed, and such rate is
required by the present and future convenience and necessity.
(8) The rate for initial service proposed by each Applicant is just and
reasonable, based upon the cost of providing such service, and based upon non-
cost factors as hereinabove discussed, and such rate is required by the present
and future public convenience and necessity.
(9) The annual escalations proposed by each Applicant are in the public
interest, and are required by the present and future public convenience and
necessity.
(10) Good cause exists for waiver of the intermediate decision as moved
by Tennessee Gas Pipeline Company, in that the contract between Belco and
Tennessee, originally terminable on April 1, 1973, will terminate on May 30,
1973, and in that immediate guidance from the Commission is necessary with
respect to the prosecution of more than twenty additional applications now
pending under Section 2.75 of our Regulations.
(11) There has been no adequate showing that the public interest would
be served by grant of Belco's Motion to Sever or APGA's Motion to Strike.
(12) Good cause does not exist for the ordering of further hearings to
receive additional evidence from Texaco Inc. in that such evidence would be
only cumulative of testimony already presented.
The Comini!<i<ion Orders
(fl) A certificate of public convenience and necessity is issued authorizing
Texaco Inc. to sell natural gas in interstate commerce to Tennessee at an initial
rate of 45.0<- per Mcf at 15.025 psia, subject to BTU adjustment, together with the
construction and operation of any facilities subject to the jurisdiction of the
Commission, necessary therefor, and authorizing fixed annual escalations, as
applied for. in the amount of 1</Mcf per year for twenty years, upon the terms
and conditions of this opinion and order and specifically limited to such sale
and facilities.
il) The contract dated October 6. 1972, is accepted for filing effective the
date of initial delivery under the autliorization granted herein. Texaco shall
advise the Commission of the date of initial delivery within 10 days thereof.
(c) A certificate of public convenience and necessity is issued authorizing
Tenneco Oil Company to sell natural gas in interstate commerce to Tennessee
at an initial rate of 45.0(/- per Mcf at 15.025 psia, subject to BTU adjustment,
together with the construction and operation of any facilities subject to the
jurisdiction of the Commission, necessary therefor, and authorizing fixed annual
escalatifins, as applied for. in the auKiunt of l<VMcf per year for twenty years,
upon the terms and conditions of this opinion and order specifically limited to
such sale and facilities.
(cl) The contract dated October 12. 1972. is accepted for filing effective the
dnte of initial delivery under the authorization granted herein. Tenneco shall
advise the Commission of the date of initial delivery within 10 days thereof.
((?) A certificate of public convenience and necessity is issued authorizing
Belco Petroleum Corporation to sell natural gas in interstate commerce to
807
Tennessee at an initial date of 45.0^ per Mcf at 15.025 psia, subject to BTU
adjustment, together with the construction and operation of any facilities
subject to the jurisdiction of the Commission, necessary therefor, and author-
izing tixed annual escalations, as applied for, in the amount of 1.5(f/Mcf per
year for ten years, upon the terms and conditions of this opinion and order
and specifically limited to such sale and facilities.
(f ) The contract dated June 8, 1972, is accepted for filing effective the date of
initial delivery under the authorization granted herein. Belco shall advise the
Commission of the date of initial delivery within 10 days thereof.
(g) The certificates granted in paragraphs (A), (C) and (E) above are not
transferable and shall be effective only so long as Applicants continue the acts
or operations hereby authorized in accordance with the provisions of the Nat-
ural Gas Act and the applicable rules, regulations, and orders of the Commission.
(h) The certificate granted in paragraph (E) above is expressly conditioned
as follows :
1. For a period of ten years, Belco will invest in exploration and development in
the Southern Louisiana Area, as defined in Section 154.103 (k) of our Regulations,
all amounts Belco receives under the certificate herein issued in excess of 20e/Mcf.
2. Such exiienditure will be in addition to Belco's present five-year average of
$2 million per year for exploration and development in Southern Louisiana.
3. At least $12 million of such funds shall be expended by Belco in the offshore
federal domain, and all natural gas found as a i-esult thereof sliall be dedicated
to the interstate market; but it is provided that such $12 million offshore ex-
penditure may be credited with onshore exploration and development expendi-
tures if gas is found through such onshore activities and sold by Belco in inter-
state commerce.
4. Ninety days after the close of Belco's fiscal year, Belco shall report an-
nually to the Commission concerning expenditures made hereunder during the
previous fiscal year, providing suflacient information, under oath, to permit
Commission review for compliance with the conditions imposed in this paragraph
(H).
5. If at the end of ten years after commencement of deliveries under the cer-
tificate issiied in paragraph (E) above Belco has not spent a total of $32 million
in exploration and development in the Southern Louisiana Area (including $12
million in the federal domain offshore subject to the proviso set forth above),
Belco will refund such funds as are unspent to Tennessee, for flow-through by
Tennessee to its jurisdictional customers.
6. The ten year period for Belco's expenditures as herein set forth may be
extended for causes force majeure, or for operational or mechanical difficulties
beyond Belco's control.
(f) Belco's Motion to Sever, and APGA's Motion to Strike are overruled;
Tennessee's Motion for Waiver of the intermediate decision is granted ; Texaco's
appeal from the Administrative Law Judge's order requiring production of a
witness is granted : Belco's request for pregranted abandonment is denied ; any
and all other not herein .specifically granted is denied.
{}) Pursuant to Section 2.75 (m) of our Regulations acceptance of these
certificates shall constitute waiver by each Applicant of: (1) all rights to seek
future rate increases under Section 4 of the Natural Gas Act with respect to the
contract submitted, other than price escalations, if any. as certificated by the
Commission; and (2) all rights to contingent adjustment of flowing gas rates
as provided by the Commission in area rate decisions heretofore decided, for
flowing gas which each seller Applicant produces in the same geographical pricing
area as the pricing area of the production covered by the application made under
this Section.
(A-) If any provision of this opinion and order, or the application of such pro-
vision to any person or circumstance, shall be held invalid, the remainder of this
opinion and order, and the application of such provision to persons or circum-
stances other than those as to which it is held invalid, shall not be affected
thereby.
By the Commission. Chairman Nassikas dissenting in part and concurring in
part filed a separate statement appended hereto.
Kenneth F. Plumb, Secretary.
808
Appendix A
WITNESS ENGEL
[Estimated nationwide cost of finding and producing nonassociated gas)
7.83
9.18
2.88
1.63
.57
3.12
2.36
.69
5.08
3.10
6.17
3.10
14.30
10.44 ....
.67
(3.89)
.20
.90
(3.89)
.20
23.43
4.13 ....
29.96
5."7i'
Cost components Current low Current high
Successful well costs 4.62 4.99
Recompletions and deeper drilling .20 .20
Lease acquisitions ___ 1. 97 2. 86
Other production facilities 1.04 1. 13
Subtotal
Dry hole expense
Other exploration.
Exploration overhead..
Subtotal.
Production operating expense
Return at 15 percent and 10.5 years..
Return at 15 percent and 9 years
Return on working capital.
Net liquid credit •
Regulatory expense...
Subtotal
Royalty at 15 percent
Royalty at 16 percent
Total at 14.65 lb/in 2 a... 27. 56 35. 67
Total at 15.025 lb/in ! a 28.27 35.58
Appendix B
WITNESS SHERWIN
[Estimated range of cost of nonassociated gas]
Cents per thousand cubic feet
at 14.65 Ib/in2a
1. Successful wells...
2. Recompletions and deeper drilling...
3. Lease acquisitions
4. Other production facilities
5. Dry holes
6. Geological, geophysical, and other exploration
7. Exploration overhead
8. Production operating expenses..
9. Return at 15 percent (11 years).
10. Return on working capital ta 15 percent.
11. Net liquid credit _
12. Regulatory expense
13. Subtotal
14. Royalty at 16 percent
15. Total 40.44 44.37
Low
High
5.02
5.70
.20
.20
3.71
4.00
1.35
1.53
3.22
3.66
2.25
2.25
.63
.63
3.10
3.10
16.80
18.69
1.09
1.16
(3. 60)
(3. 85)
.20
.20
33.97
37.27
6.47
7.10
809
Appendix C
Estimated cost using 1971 data :
Successful well costs 7. 20
Lease acquisition 3. 10
Other production facilities 1- 65
Subtotal -. 12.04
Dry hole expense 4. 51
Other exploratory expense 3. 60
Exploration overhead 1- 04
Subtotal 9.15
Pi'oduction and operating expense 3. 10
Return on investment at 15 percent IS. 96
Return on working capital at 15 percent 1. 03
Net liquid credit (3. SO)
Regulatory expense . 20
Subtotal before royalty 40. 59
Royalty at 16 percent 7. 73
Total, at 14.73 psia (cents/Mcf) 48.32
Item, computation, and source Cost
Successful well costs: $27.64/ft. (1971 JAS) -i- 379 Mcf/ft. (1971 AGA-
AAPG) $7. 29
Lease acquisition: $7.29 (line 1) X .4257 (1971 L.A.C. -4- 1971 Cost of
Prod.) 3. 10
Other production facilities: $7.29 (line 1) X .226 (Opin. 598) 1.65
Subtotal — 12. 04
Dry hole expense: $1.5.33/ft. (1971 JAS) -^ 379 Mcf/ft 4. -jI
Other exploration: $.3.10 (line 2) X 1.1619 (1971 Other Explor. -r- 1971
L.A.C.) 3. 60
Exploration overhead: [$4.51 (line 5) + .3.60 (line 6)] X .1279 (1971 Ex.
Overhead s- 1971 Dry Hole + 1971 Other Ex.) 1. 04
Subtotal 9. 15
Production expense: Opinion 598 3.10
Return @ 15%, 10 years 18.96
[.$12.04 (Line 4) X 10.5 X 15]
$1.54=9.15 (Line 8X ¥8X1.336 (Opin. 598)
$0.65=3.10 (Line 9 xVsX 1.689 (Opin. 598)
$4.65=3.10 (Line 2) X 1.5 (Opin. 598)
Return on working capital: [$1.54 (line 11)4-0.05 (line 12) -f 4.65 (line
13) ] X0.15 1. 03
Liquid credit: Opinion 598 —3.89
Regulatory expense: Opinion 598 .20
Subtotal 40. 59
Royalty at 16%: [$40.59 (line 17) -^(1— .16)] -40.59 7.73
Total @ 14.73 psia 48.32
Total @ 15.025 psia 49. 29
810
Appendix D
Determination of return component at 45 cents mcf at 15.025 psia {1911 test year
costs)
Assumed sales price Mcf (45^ @ 15.025=44.120 @ 14.73 psia) 44. 12
Less cost factors:
Successful well costs ($27.64-4-379) 7.29
L,ease acquisition (7.29X0.4257) 3.10
Other production facilities (7.29x0.226) 1.65
Dry hole expense ($15.83-4-379) 4.51
Other exploration (3.10X1.1619) 3.60
Exploration overhead (4.51-1-3.60X0.1279) 1.04
Production expense 3. 10
Regulatory expense . 20
Subtotal of costs 24. 49
Royalty (16 percent of 44.12 cents) 7. 06
Liquid credit —3. 89
Total dediietions 27. 66
Return component 16. 46
Return on working capital (i/^oX16.46) .82
[Ratio of return on invested capital to return on working capital
-19:11]
Return on invested capital (i%oXl6.46) 1.5.64
Rate of return on working capital (.82=6.84X rate of return) (percent). 12.0
Rate of return on invested capital (15.64=12.04xl0.5Xrate of return
(percent) 12. 4
Appendix E
Determination of retiirn component at //5 cents/Mcf at 15.025 psia {staff cost
estimate of 38 cents/Mcf)
Cents
Assumed sales price : (45 cents Mcf at 15.025=43.89 cents Mcf at 14.65
psia) 43. 89
Less cost factors at 14.65 psia :
a. Successful well costs 4.99
b. Recompletions and deeper drilling . 20
c. Lease acquisition costs 4.00
d. Other production facilities 1. 13
e. Dry hole expense 3. 66
f. Other exploration 2.36
g. Exploratory overhead .69
h. Production expense 3. 10
i. Regulatory expense . 20
Subtotal 20. 33
.1. Royalty (16 percent of 43.89 cents) 7. 02
k. Liquid credit 3. 89
Total deductions 23. 46
Return component 20. 43
Working capital component (yi5X20.43) TRatio of return on invested
capital to return on working capital —14:1] 1.36
Invested capital component (1^15X20.43) 19.07
Rate of return on working capital (1.36=7.77Xrate of return) (percent)- 17.5
[7.77=6.00 (Item CXI.5) +1.12 [6.71 (e+f-fg) ] X Vs X1.336 + .65 (hxVs
X 1.689)]
Rate of return on invested capital (19.07=10.32— y^X. 2X10.5 X rate of
return) (percent) 17. 8
[10.32=Item a-FItem b-[-Item c-t-Item d]
811
Texaco's Witness Schantz presented an analysis of energy prices in tlie market
area served by Tennessee (Tr. 2:13(>-l>4: 166-72; Ex. 5, 6). Tliis study compared
1972 fourth quarter prices of substitutable forms of energy in 16 key metropolitan
areas (or states) served by Tennessee or its resale cu.stt)niers.* The sectors of
this market examined by Mr. Schantz were residential house heating use ; total
residential use ; commercial use ; industrial use ; main line industrial sales by
interstate pipelines in states included in Tennessee's market area ; and energy
costs reported by electric utilities.** For each sector, composite price differentials
were calculated! weighted by relevant volumes, between the price of gas and the
price of relevant substitutable energy forms (Tr. 2:146). These differentials
were first derived for various "submarket systems" which Mr. Schantz defined
as the market of a pipeline purchaser from Tennessee or the market of a dis-
tributor purchasing directly from Tennessee (Tr. 2:147-48). Finally, the price
differentials, after a further volumetric weighting process, were determined
for the entire Tennessee market (Tr. 2:148-50). Through this analysis, it was
determined that, as of the fourth' quarter of 1972, the retail price of gas in the
Tennessee market area was 43 cents per MMBtu below substitutable energy
sources for the combined residential and commercial sectors. 26 cents per MMBtu
below the residential, commercial and firm industrial sectors, and 48 cents per
MMBtu below the total gas market (Tr. 2 :150) .
Belco Petroleum Corporation, Agent, et al. Docket Nos. CI73-293, et al.
(Issued May 30, 1973)
Nassikas. Chairman, diftsentiiig in part and concurring in part :
Our April 11, 1973 order directed the Administrative Law Judge to transfer
the record in these proceedings to the Commission and we stated therein
(mimeo. at 6) :
'Tf the record as it stands is sufficient, we will then be able to issue a timely
final decision. On the other hand, we will remand the record if further evidence
is necessary for a proper determination of the issues in this proceeding."
After examination of the record certified to us and perusal of the briefs
filed in this proceeding, I would remand the case for an initial decision by
the Presiding Judge concerning the justness and reasonableness of the proposed
45^ per Mcf contract rate and for additional cost evidence relevant to the
proposed rate.
Since the Xatural decision,^ this Commission has been required under the
Natural Gas Act to prescribe just and reasoualile rates on the basis of costs.
Applying this mandate to the applications in this proceeding and based upon
the record evidence therein, I would find that a 35^ per :\Icf price would be
just and reasonable in this case. Accordingly, I dissent from the allowance of
a 45^ rate ^ unsupported by credible cost evidence.
1 concur in principle with the majority's finding's concerning workable com-
petition, to the extent that the issue is germane to resolution of the three appli-
cations before us. Much of the evidentiary presentation concerning market
.structure is directed at whether or not regulation of producers should continue.
However, the Natural Gas Act, as interpreted by the Supreme Court, resolves
that proposition and national market structure is irrelevant to this adjudicatory
proceeding. On the other hand, inasmuch as the issue of workal)le competition
has escalated beyond all proportions in this proceeding, the issue should be
addressed.
I
The staff's So^* per Mew cost-based rate recommendation is, in my judgment,
the most i»ersuasive and credible evidence upon which to prescribe just and
* Ex. .'>. Sell. 2 spts forth the 16 kpy metropolitan areas for states) served hy Tennessee
or its resale customers in 1971 which represent the dominant markets with respect to
Tennessee's sales for resale. Part A of Sch. 2 sets forth Tennessee's sales to the 7 other
pipeline suppliers for resale to distributors. Part B of Sch. 2 sets for Tennessee's sales to
the 10 dominant distributors for resale to consumers. The sales set forth in Parts A and B
represent 1,046.9 billion cubic feet or 83.9% of total transmission sales for resale by Tennes-
see in 1971. SeeTr. 2 : 137.
** Tr. 2 : 14:^. ; F:x. .5. Sch. 11 (residual house heatinp) : Tr. 2 : 144 : Ex. .^ Sch. 12 (total
residential use) ; Tr. 2 : 144^5; Ex. 5. Sch. 13 (commercial use) ; Tr. 2 : 145; Ex. 5, Sch.
14 (industrial use) ; Tr. 2: 145; Ex. 5, Sch. 15 (main line industrial sales by interstate
pipelines in states included in Tennessee's market area) ; Tr. 2 : 146 ; Ex. 5, Sch. 16
(energy costs reported bv electric utilities).
^F.P.C. V. National Gas Pipeline Co., 315 U.S. 575 (1942).
2 Addinjr escalations, the averajre rate for the Texaco and Tenneco contract would be
55^ per Mcf f l(f per Mcf per year for twenty years) and 52.5^ per Mcf for the Belco contract
(1.5^ per Mef for ten years).
812
reasonable rates. However, I would remand for the Presiding Judge to render
a decision after receiving further cost evidence in support of the proposed rate.
As an appellate body, we are at a disadvantage in assigning probative weight
to conflicting testimony, whereas the Presiding Judge is in a better position to
judge the credibility and demeanor of those witnesses as a basis for his initial
findings. This is particularly so when this is the first major contested proceeding
under Section 2.75 and involved some 3,000 pages of transcript and 32 exhibits.
After an initial decision, the Commission, in its appellate function, could review
those findings in a considered judicial atmosphere, rather than issue a decision
under time constraints imposed by the applicants.
The staff presentation was based upon the current nationwide cost of non-
associated gas and utilized the costing methodology just recently reaffirmed
by the Fifth Circuit* and used by the Commission in its area rate opinions. I
decline to add 10(5 to the 35^ cost-based price on the basis of "speculative
quantification of non-cost elements."
Placid, supra, at 42. The evidence does not justify a zone of "reasonable
deviation" from costs of this magnitude.*
The majority, on the other hand, by adjustments made to staff's cost presenta-
tion (which adjustments are not supported by substantial evidence), in lieu
of direct quantification of non-cost elements, attains an end result of "costs in
the range of 38-48 cents per Mcf." However, the predicate for achieving this
end-result is utilization of a 1971 test-year approach for which no support can
be found in the record before us. The majority uses a single year's actual
productivity figure, i.e. 1971, which assumption infiates other cost components.
It is diflacult for me to ignore the evidence of expert witnesses in this case, and
in prior area rate cases, advocating use of average productivity over a certain
timeframe which conclusions have been judicially affirmed." These contracts
are for long-term sales and should not be judged by the arbitrary selection of
a particular year's results. Many of the actual production investment costs, e.g.
lease acquisition, geological and geophysical, exploratory overhead, may have
beon incurred prior to 1971.
In the Commission's previous decisions involving estimated "productivity"
(e.g.. Opinion 468, Permian I: Opinion 546, Southern Louisiana I; Opinion 598,
Soiithern Louisiana II, and subsequent area rate decisions), the calculation
Mas made by averaging the relationship over an extended period of years
between annual additions to non-associated gas reserves and annual successfiil
gas well footage drilled. In the instant majority opinion, however, this well
established procedure is rejected in favor of a so-called "test year" approach
which calculates "productivity" by dividing the reserves added in the single
year 1971 by the footage drilled in that year. This major departure from the
well established procedure is sufficient in itself to account for the entire difference
between the majority's cost estimate of 48^ per Mcf and the much lower range
of estimates l>y the staff.
The majority's "test year" productivity calculation violates the elementary
standards of reasonableness for a cost study that is intended as a point of
depnrture in determining a proper rate level. The existence of a time lag between
drilling and reported proved reserves is universally recognized. The results of
the wells drilled in 1971 will be reflected for the most part in reserves added in
subsequent years ; conversely, the reserves reported as added in 1971 largely
reflect the drilling in previous years. To allow for this time lag, the Commission
has always resorted to long-term averaging and has consistently refused to
use a productivity estimate based on a single year's data, even though it accepted
the "test year" approach for other cost components.
The majority's productivity calculation also ignores the fact that reported
reserve additions in 1971 are underestimated because, as explained by the A.G.A.
Reserves Committee, "some reserves resulting from drilling on acreage leased
s Plar-id Oil Co.,et nl.v. F.P.G.,ApTnie.l97S. ,.„..,
* 111 Placid. .1 reasonable deviation in costs of 4 to 5^ was affirmed (Slip Op. at 40). In
Texas Onlf Coast, Opinion No. 59.5. we found ttie zone of reasonableness to be in the 4i
rnnse (raimeo. para. 93). The latter opinion, referred to by Dr. Wilson in this case stated :
"We shall try to avoid confusion incident to an effort to quantify 'non-cost' elements of
'cost', !)s far as possible. Once 'non-cost' elements are quantified for practical purposes
-their differentiation from 'costs' is semantic only." (Mimeo. para. 10), and we did not
attempt "qnnntification of non-cost f.Tcts. hut rnfher have attempted to define cost in eco-
nomic terms to include such considerations as the incentive necessary to elicit additional
supplies of natural sas, competitive consequences upon the industry, and the need for ade-
quate capital to finance further exploration and development." (Mimeo. para. 92)
° Either straight average or movintr averages for a period of years have been used In
every prior producer area rate case since Permian I. E.j?. 34 FPC at 197, 379.
813
in the December 1970 Federal Lease Sale in Offshore South Louisiana are not
included because the A.G.A. Reserves Committee did not have sufficient data
upon which it could base an estimate of proved reserves as of December 31,
1971."*
This underestimate is compounded by another major shortcoming of the
majority's one-year calculation. Starting in 1966 the A.G.A. Reserves Committee
has reported "revisions" as a separate component of each year's reserve addi-
tions. These "revisions" apply to estimated reserve additions in previous years,
but they are reported as an adjustment of the current year's reserve additions.'^
During 1966-1968 the "revisions" ranged between 3.5 billion and 4.S billion
per year added to proved non-associated gas reserves. During the following
years, 1969-1971, however, the "revisions" were minus quantities. In 1971. the
majority's "test year," the reported reserve additions were reduced by 1.1 billion
Mcf because of negative "revisions." * This reduction has little if any direct
relationship to the productivity of drilling in 1971. Omitting the "revisions"
from the 1971 calculations raises the productivity to 501 Mcf,* compared with
379 Mcf used by the majority.
A practicable method of handling the statistical lag problem and also the
problem of statistical revisions, which are positive in some years, and negative
in others, is to calculate the avei'age relationship between footage drilled and
reserves added over a sufficiently long period to match drilling effort with
drilling results, as was done in staff's 35^ cost estimates.
Docket Nos. CI73-293. et al.
The majority's cost findings, i.e. 48(;f per Mcf, is based on nationwide data and
■equates to a national cost for gas-well gas. The parties to this proceeding litigated
the case on the basis of national averages. However, if we are to utilize the
^'supply project'' concept (endorsed here for the first time by the majority), we
should not look to national averages. We should either obtain evidence as to (1)
actual unit costs in the South Louisiana area (much like a 1971 flowing gas study,
as was done for 1969 in Docket No. AR69-1) or (2) individual project costs, i.e.
actual unit costs of the three producer-applicants.^" Furthermore, if this project
is to be compared to LXG and SNG projects, as proposed by the majority, appli-
cable principles of the two cases decided by the Commission (Opinion No. 622
and Opinion No. 637) would compel Tennessee to pay for gas based on actual
costs " and the 45^ gas should be incrementally priced and such gas volumes
should be exempt from curtailment.
In our most recent area rate opinions, we found a 15 percent rate of return to
be reasonable. Staff's 35(^ recommendation is so premised. However, at 45^^ per
Mcf, the producers will be receiving a 27.5 percent rate of return, as testified to
by Dr. Wilson."^
Opinion No. 598 (issued .July 15. 1971) prescribed a 264 per Mcf rate for new
gas for South Louisiana. The major producers, including Tenneco and Texaco,
agreed that the 26<;' rate would "provide incentive for the exploration for and
development of gas reserves in the Southern Louisiana area." ^ Opinion No. 598
" See footnote f to Table I. Reserves of Crude Oil, Natural Gns Liquids, and Natural Gas
in the United States and Canada and United States Productive Capacity as of Decemher 31,
1971, American Gas Association. American Petroleum Institute, and Canadian Petroleum
Association, pasre 114, Identical footnotes appear in Tables II-VI.
■ Ibid., paee 104.
« Table VIII. ibid., page 121.
» Using successful gas well footage as reported in World Oil, rather than AAPG.
1" As for this latter suggestion, this would not mean a return to individual producer
regulation, inasmuch as Section 2.7.5 is an optional, rather than the primary, method for
producer rate regulation.
" As we indicated in Opinion Nos. 622 and 622-A, actual costs do not necessarily equate
to "lowest reasonable cost."
'-Using Appendix E, based on 45(J and using all the cost assumptions of the maioritv,
adjusting only for the depletion period indicated in this record (Belco, 16 vears ; Texaco
and Tenneco, 11 .vearsK rather than using 10. .5 years (para. 71 and Aopendix D), the
actual rate of return would approximate 24%, rather than 17.8%.
"Opinion No. .598 (mimeo. para. 106) called particular attention to Section 11 of the
settlement proposal, which stated :
"Each producer individually represents to the Commission that the ceiling prices and
other provisions contained herein provide incentive for the exploration for and develop-
™'"'^t "f gas reserves in the Southern Louisiana area. In view of the nature of producing
and findinff hydrocarbons, it is unrealistic to expect producing companies to guarantee
that the ceiling prices and other provisions contained herein will elicit a specific supply of
gas : however, it is believed that the ceiling prices and other provisions contained herein
wiu make funds available to the producing industry and create a regulatory atmosphere
■nnicn siiould provide an incentive for a substantial increase in exploratory and develop-
mental activities and make a major contribution to bringing forth additional supplies of
gas from^the Southern Louisiana area to meet the demands of all consumers supplied by
814
was afBrmed in full less than two months ago as to the new gas rate. That settle-
ment also contained a moratorium, agreed to by the major producers, including
Tenneco and Texaco, on increased rate filings, above the just and reasonable rates
prescribed by Opinion No. 598 for a period of five years, terminating on October
1. 1977. The moratoria provisions were sustained in full bv the court in Placid
(Slip Op. at 56).
Based upon the evidence in this record, I cannot reconcile a 450 per Mcf price
in 1973 with a 2G<}: price in 1971. which latter rate was aflirmed on the basis
of cost evidence through 1969. The majority asserts that cost evidence through
1971 supiwrts a 73 percent increase in the price to 450. However, the Fifth Cir-
cuit " held that :
"The 26«'/Mcf rate for gas delivered under a post October 1. 1968 contract
which FPC adopted in Op : 598 clearly falls within the range of cost estimates
which the evidence discloses. Accordingly, FPC properly declined to make what
would be a necessarily speculative quantification of non-cost, elements. The
rates for so-called 'new' gas are sustained."
Staff witness Engel estimated costs ranging from 28.270 per Mcf to 36..58^ per
Mcf, depending upon the productivity figure, and representing about a 4=4 range,
upward or downward from the average cost computation. Engel's presentation
was an update of his evidence in Opinion No. 598 to which the Commission made
certain adjustments. Beginning from Opinion No. 598 findings, and updating
through 1971 " that judicially affirmed costing methodology results in a cost
estimate of 32.60^ per Mcf, or about 150 or 40 percent less than what the
majority's 480 rate purportedly derived after Opinion No. 598 adjustments. My
finding of a So^* just and reasonable rate is squarely based upon the cost prin-
ciples affirmed in Placid. The majority's approval of 450 is derived from a cost
methodology which in efiect quantifies speculative non-cost elements rejected by
Placid.
II
Almost one-half of the gas reserves contracted for in these proceedings in-
volved Tenneco and Tennessee, a parent and its affiliate." The contract prices
entered into by Tennessee with Belco and Texaco do not create a presumption
that arms-length bargaining existed in the contract price with Tennessee's par-
ent. The record does not present the clear preponderance of the evidence re-
quii-ed to support the justness and reasonableness of any parent-affiliate trans-
action.^' The 45*;^ price found to be "just and reasonable"' by the majority
could hardly be disallowed in a future Tennessee rate ca.se, so that the increase
is in fact being passed on to the pipeline customers.
The majority indicates that this 45<' gas is the lowest cost supply source pres-
ently available to Tennessee. Inasmuch as this gas supply is located in the federal
domain, subject to the jurisdiction of the Federal I'ower Commission, there is
no "potential diversion" to intrastate purchasers.
In determining the public interest, it is appropriate to measure the impact of
these rates upon Tennessee's consumers. Based upon tlie three contracts at 45^
plus escalations, gross revenues will approximate $31.5 million to Belco, §67.4
million to Tenneco, and $28.9 million to Texaco. If these same volumes were dedi-
cated under the provisions of Opinion No. 598. assuming automatic escalations
and allowing fen* the benefit of contingent escalations, gross revenues would be
$16.2 million for Belco, $33.3 million for Tenneco and $17.0 million for Texaco.
In other words, consumers will be generating revenues above area rates for these
three producers aggregating more than $61 million ( Belco, $15.3 million ; Ten-
neco, $34.1 million; Texaco, $11.9 million). While producers are not compelled
to commit to the interstate market at area rates, it is e(iually true that regula-
tion does not permit prescription of rates at unreasonalile levels proposed by pro-
ducers. Otherwise, the regiilatory process would be relegated to the position of
sanctifying producer-controlled price levels, rather than the just and reasonable
" Flncid, supra. Slip Op. at 41-42.
1'^ Average diirhig the period 1040-1971. See Opinion No. oOS (mimeo. paras. IIR, 121).
18 Tenneco and Texaco are also .ioint owners of the leases underlying their respective sales
contracts with Tennessee (Exhihit .32, Schedule 2-A). Tenneco, which obtained the four
blocks in the December 1.5. 1970 lease sale, subsequently sold a 25 percent interest to
Texaco in Blocks 255 and 272 East Cameron (Serial Registers. OOS-G-204n and 2047)
and a 50 percent interest to Texaco in Blocks 254 and 271 East ("ameron (Serial Retristers,
OCS-G-2039 and 2046). See Exhibit C of Item B and Tr. 384 incorporating by reference
those Serial Registers.
i"C/. Western Distrihutina Co. v. P.R.C. of Kansas. 285 U.S. 119 (1932) ; Florida Ga»
Transmission Co. v. F.P.C., 362 F. 2d 331 (5th Cir 1966).
815
levels, directed by the Congress in the Natural Gas Act as interpreted by the
courts.
Belco has agreed to reinvest all amounts received under its contract al)ove the
area rate in future exploration and development in the South Louisiana area.
These excess amounts are estimated to be $1.2 million per year over and above
the average $2 million annual expenditure by Belco. See Opinion Xo. 649. George
Mitchell, February 21. 1973, and Opinion No. 626, Panhandle. September 20. 1972.
This type of condition could well offset some of the cost evidentiary deficiencies
in support of a 45(!' rate ; however, Tenneco and Texaco have not proposed such
reinvestment and, in fact, resist such conditions.
Ill
There are numerous applications pending lief ore us under our optional certifi-
cation procedure at 3.")<;^ per Mcf, and numerous others ranging from 35 to 45c per
Mcf, and some higher. Irrespective of the majority's disclaimer to the contrary,
the approval of these three applications today may well trigger escalations in
such applications, establish a "minimum" floor from which all future applica-
tions under optional pricing will depart, set the scenario for a new national gas
rate at a minimum of 45 cents per Mcf, and seriously impair our presently effec-
tive area rate structure.
The majority attemiits to buttress their position by referring to regulatory lag
in setting industry-wide regulations as a justification for approval of these
optional certificate applications. There is no substance to such a contention on
the eve of R-389-B, which, if adopted, contemplates annual rate reviews, indus-
try-wide, and would prescribe rates on the basis of the most recent up-dated cost
evidence.
The Commission is prechided by the Natural Gas Act from setting just and
reasonable rates for natural gas producers either solely upon the basis of a
negotiated contract price or the commodity value of natural gas. The Natural
Gas Act, as interpreted by the courts, compels the prescription of rates on the
basis of costs.^* However desirable it might be to utilize market forces, independ-
ent of cost considerations, to determine rates, the Congress has not authorized
this kind of regulation. To the contrary, the Congress has directed the Federal
Power Commission to determine just and reasonable rates for producers on the
basis of costs. Until Natural Gas Act is amended, the Commission cannot pre-
scribe rates based on market determinations of commodity value, isolated from
applicable cost considerations.
IV
Staff witness Dr. John Wilson presented extensive evidence, both through
testimony and exhibits, concerning industry structure and its impact upon
market conditions and the prices of alternate fuels, supplemental gas sources and
other contract prices. The staff, and particularly Dr. Wilson, assumed an active
role through direct evidentiary presentation and cross-examination of other
witnessses, in representing the public interest in this proceeding. Such a role
Is required for we cannot rely upon counsel for private interests, whether through
compromise or in advisory proceedings, to represent the public interest. The
public interest should be sponsored by staff, independently of the claims of private
litigants.
The Majority's observation in paragraphs 26, 27 and 28 that Dr. John Wilson's
"mode of presentation" was unfair is not well taien. (Also see paras. 51, 53-55).
Dr. Wilson's testimony and exhibits were fairly presented and there was a "fair
opportunity to be heard on those issues." The Administrative law Judge granted
a fair opportunity for cross examination as well as giving the producers the op-
portunity to sponsor a rebuttal witness (Dr. Sherwin) and to present Exhibit 37
in response to material in Exhilnt 33.
In my opinion, the Majority's criticism is unsupported by the record of the
proceedings in this case. In any event, the Majority agrees that Dr. Wilson's
testimony is not "prejudicial to the applicants, nor does it require further re-
buttal." Tf the Majority is concerned about the fairness of the proceedings relat-
ing to Dr. Wilson's testimony, they should have adopted my recommendation to
remand this proceeding to the Administrative Law Judge for further hearing.
After all. Dr. Wilson's testimony is relevant to the Majority's decision to depart
from traditional cost concepts in prescribing a 45-cent rate — even if irrelevant
to mv determination of a cost based rate of 35 cents.
^"F PC V. Hope Natural Gas Co., .320 U.S. 591, 611 (1944) ; F.P.C. v. Natural Gas
Pipeline Co., 315 U.S. 575 (1942) ; City of Chicago v F.P.C, 458 F. 2d 731, 750 (D.C. Cir.
1971), (prt denipfl. 405 U.S. 1074 (1972) ; City of Detroit v. F.P.C, 230 F. 2d 810 (D.C. Cir.
1955), cert, denied, 352 U.S. 829 (1956).
816
Regardless of the fact that I am not persuaded by Dr. Wilson's testimony that
the gas industry is anticompetitive, I defend his right and the right of the
professional staff of this Commission to testify freely and independently in regu-
latory proceedings without being subjected to collateral attack by the Commission
for expressing views antithetical to our own.
There is no question that the parties to this proceeding have had a fair trial
and the Administrative Law Judge has diligently protected the interests of all
parties.
Much of Dr. Wilson's evidence concerning market structure is irrelevant to the
precise applications of the case at bar. For instance, those portions of Dr. Wilson's
testimony, e.g. joint ventures in exploration and development in the global search
for hydrocarbons, leasing practices prescribed by the Department of the Interior,
are not germane to the issues in this proceeding, even if relevant to competitive
structure of the industry generally.
Wilson's Exhibit 33 indicated that the eight largest producers accounted for
almost 64 percent of the 1969 new contract volumes in South Louisiana. The
factual predicate, however, was untested. Concentration ratios are normally
computed on the basis of sales or production data, and additionally, in this in-
dustry, consideration might also be given to the ownership of reserves. Consid-
eration should also be given to the gas available for sale from old gas contracts
which represents a source of supply as those contracts expire.
Nor was the premise adequately tested that South Louisiana represents a rele-
vant geographic market or that natural gas, to the exclusion of consideration of
interfuel substitutability. is a relevant product market. Nor did Wilson comment
on any concentration ratios on the buying side of the industry, for even assuming
an oligopoly structure among sellers, in a bilateral oligopoly, "the scales are fairly
strongly tipped in favor of the buyers" — recognizing that in times of shortage
the scales may be tipped the other way.^ These considerations among others,
were not tested, and should have been, at the hearing below. However, Wilson's
evidence because of these infirmities, and the rebuttal evidence presented, does
not represent substantial evidence upon which the Commission may find that
there is an absence of workable competition. On the contrary, Wilson affirmatively
testified that there was no factual evidence of any conspiracy or anticompetitive
conduct on the part of gas producers.^"
Witness Sherwin, accepting the factual predicate of Exhibit 33. concluded that
the market structure is sufficiently competitive (Tr. 2675-77), and further noted
the differences in prices among the several producing areas in relation to points
of consumption (Tr. 2810-14). Witness Joe Foster testified that there is marked
competition both in obtaining and selling gas reserves (Tr. 2935-36) and that
those portions of Exhibit 33 concerning joint ventures are largely irrelevant to
competitive considerations (Tr. 2950-56). Witness Rhoads Foster, referring to
his testimony in Docket No. AR70-1, likewise found effective competition in the
gas producing industry (Tr. 217-18). That witness found workable competition,
based on studies performed by other economists (Tr. 228-36).
Whether or not there is woi'kable competition may be relevant to the con-
tinued regulation of producers under the Natural Gas Act. The determination of
this issue is beyond the scope of this proceeding ; in fact, the Commission since
Phillips^ has been compelled to regulate producers as natural gas companies.
In this regard. Commission policies have been directed at encouraging competi-
tion, whether it be placing pipeline production on a parity with independent pro-
ducers ^^ and advance payments by pipelines ^ or exempting small producers from
price ceilings.-*
In summary, the evidence concerning workable competition is irrelevant to a
finding of the justness and reasonalileness of the rates proposed by the three pro-
ducers in this case, particularly where, as here. I would affirm a 35(' cost-based
rate from this record. To the extent staff assumed the burden of showing an
absence of workable competition, they have failed ; substantial evidence does not
support the position urged by staff.
John N. Nassikas, Chairman.
"J. Bain, Price Theory, ?.94-96 (1066) : J. McKie, Tin Cans and Tin Plate (1959)
2« E.p. Tr. 20.S9, "* « * i have no factxial information that would indicate the industry
has conspired or in any other way contrived a shortage * * *."
2^ PhiUipx Prfroleiim Co. v. Wixoonxin. .347 U.S. 072 (19.54)
(197^f^ o-^ CMcago v. F.P.C., 458 F. 2d 731 (D.C. Cir. 1971), cert, denied, 405 U.S. 1074
23 P.S.C. for N.Y. V. F.P.C., 467 F. 2d 361 (D.C. Cir. 1972).
De^eSeTltmlSti^ro^nlo'r^^r^fiL'iri^SS ^'^"" ' ^•''•^•' ^°- ''-''''' ^•^^ ^'^••
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