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NO. 498

HIGHLIGHTS

FOSTER ASSOCIATES REPORT

CONTENTS

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for week ended

September 30, 1965

FPC Grants 30-Day Extension for Filing Rate Reductions to Base AreaRates Prescribed in Permian Basin Decision; Producers Renew Motions

for Stay.................................................·············Developments in the Hugoton-Anadarko and Texas Gulf Coast Area Rate

ProceedingsDevelopments in the South Louisiana Area Rate Proceeding ................

FPC Orders Hearing on Tennessee Gas Transmission Proposal to Construct$32 Million in New Facilities to Attach Company-Owned OffshoreLouisiana Gas Reserves.........

FPC Grants Northern Natural Gas Temporary Authority to Build Pipelineto Attach Delaware Basin Reserves

FPC Proposes Changes in Annual Report Forms for Pipeline Companies ......FPC Eliminates ODtional 30-Day Delay Provision for Filing of Annual

Reports by Natural Gas Companies

Prehearing Conference Set on Remanded Pipeline Applications to SupplyAdditional Gas to St. Louis Area. .....................................

FPC Approves Present Rate Design of Midwestern Gas Transmission andNatural Gas Pipeline Co. of America ...................................

Recent Developments in Producer Rate and Certificate Proceedings ........FPC Suspends $1.7 Million Gas Transportation Rate Increase Proposed

by Florida Gas Transmission for 30 Days.... ...........................

CURRENT I. P. CERTIFICATE APPLICATIONS APP.

pags

FOSTER ASSOCIATES REPORT is published weekly by Fosger Associaies, Inc,, a consulping iwmspecializing in the regulapory problems 04 riagural gas producers and opher industrios.

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© Foster Associates, Inc, - 1965Tulsa, Okla.

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September 30, 1965 REPORT NO. 498 - pl

FPC Grants 30-Day Extension for Filing Rate Reductions to Base Area Rates

Prescribed in Permian Basin Decision; Producers Renew Motions for Stay

On 9/28/65 the FPC granted a 30-day extension, to 11/15/65, for compliancewith ordering paragraph (E) of its Permian Basin Opinion. That paragraphrequired the filing of rate reductions to applicable base area rates prescribed

therein within 45 days after the effective date (9/1/65) of the Opinion. Anextension of time was found appropriate "in view of the pending applications

for rehearing" of the Permian decision.

*******

On 9/27/65 a group of major producers renewed a previous motion of 3/19/65 forstay of the FPC's Permian Basin Opinion No. 468 or, alternatively, requestedrehearing of the FPC's order of 8/26/65 denying stay. (See REPORT NO. 493,pp2-3.) In support, the producers stated that the 8/26/65 order denying stayclearly implied that the matter would be further considered by the Commissionwhtn ruling on petitions for rehearing of Opinion 468. Furthermore, theproducers said, the 8/26/65 order appeared to turn on the fact that no actionwas required on or before the 9/1/65 "effective" date of the Opinion. However,"such rationale is no longer applicable" since the 9/1/65 date has now passedand pr xlucers are now "well on the way" towards the deadline prescribed for

the filing of rate schedule supplements to reflect the applicable base arearates.

If compdlled to file reductions to applicable base area rates and if theserates are later revised upward or set aside by the courts, the producers con-

tinued, they will be exposed to "irreparable injury" through the risk of non-recoupment of the difference between the base area rates and any higher justand reasonable rates subsequently determined. However, they added, if theFPC's Opinion is affirmed on appeal, a stay will cause no injury to pipelinepurchasers and their customers since any sums collected subsequent to 9/1/65in excess of the ultimately determined just and reasonable rates will have tobe refunded with interest.

In connection with the Commission's ordering paragraphs concerning qualityadjustments, the producers pointed to El Paso's application for clarificationof Opinion 468 stating that the quality price differential requirementstherein were "too vague and indefinite to permit of the ir application by ElPaso." Thus, the producers concluded, the contemplated agreements betweensellers and purchasers as to the cort of processing sub-quality-standard gascannot be reached so that any price reductions to reflect quality deviationswould further expose the respondents to the danger of irreparable injury.A similar risk, they added, would ensue from the obligation to report refundamounts which are impossible of ascertainment.

*******

Several other producers have filed joinders in the above motion or essentiallysimilar motions during the course of the past two weeks.

September 30, 1965 REPORT NO. 498 - p2

Developments in the Hugoton-Anadarko and Texas Gulf Coast Area Rate Proceedings

A. Data Matters

In the course of the past week several formal data requests were filed in theHugoton-Anadarko and Texas Gulf Coast area proceedings pursuant to directives

of the Examiners Kane and Taylor during the initial hearing sessions on 9/14and 9/15/65. The producer requests related to information deemed necessaryin light of the FPC's Permian Basin decision. One AGD request was tied to aHunt request for cost data for Texas Gulf Coast leases from which only intra-

state sales are made. (See REPORT NO. 496, pp4-5.) Briefly, the variousrequests were as follows:

(1) A request by Phillips Petroleum Co. that all purchasers of gas in theHugoton-Anadarko and Texas Gulf Coast areas be required to submit data onactual delivery conditions of each purchase made from a producer in these twoareas during the year 1962. Such data should show as a minimum: name of

seller, type of gas, point of delivery, volumes purchased during 1962, actualdelivery pressure, actual Btu content, hydrogen sulphide and total sulphur

content, water content, carbon dioxide con tent, whether and by whom the gas is

processed after delivery to the purchaser, and the nature of the processingperformed by the purchaser. Phillips also requested that the Staff be

directed to make available -- for consideration with data on actual deliveryconditions -- copies of rate schedule analyses of contract price and deliveryprovisions, together with any related summaries or computer tapes. Therequested data, Phillips contended, was relevant and necessary to these pro-

ceedings for two reasons: first, to permit determination of the extent towhich deliveries in the Hugoton-Anadarko and Texas Gulf Coast areas meet any

pipeline quality standards which may be prescribed; and second, to permitdetermination of the impact of any prescribed ceiling prices, assuming the

establishment of quality standards and price differentials for deviations fromthose standards. While both producers and pipelines oppose the promulgationof quality standards and price adjustments, Phillips stressed, the Commission'sPermian Basin Opinion made clear that such matters would become an issue in

these proceedings. Phillips further contended that, as a practical matter,the requested information could be supplied only by the purchasers since they,not the sellers, generally perform all of the measuring, billing and relatedfunctions. It was also suggested that informal conferences be held to workout the details of the data to be collected, the method of reporting, and anyother related questions.

(2) A request by Shell Oil Co. that those producer-respondents who filed anAll-Areas Questionnaire and reported oil-only lease production be required tocomplete an additional questionnaire setting forth total liquid production,including salt water, on oil-only leases. Shell argued that if Opinion 468is deemed to require the use of gas production volumes (including reinjectedgas not sold and various inerts requiring removal by processing) in calculatingthe unit cost of gas and the use of a unit cost so calculated as a "leg" indetermining relative cost ratios, then "consistency and logic demand" thattotal liquid production volumes also be used in determining the unit cost for

oil which forms the other "leg" of the relative cost ratio. In this connec-tion, Shell noted that substantial quantities of water which are not sold andrequire removal are produced on oil-only leases but are not reflected in theAll-Areas Questionnaire data. Thus, it asserted, without the inclusion ofsuch liquids from the total production volumes for oil-only leases, a


distortion in the relative cost method will result. Shell further contended

that the Commission did not directly decide the question of whe ther to useproduction volumes or sales volumes in calculating the historical cost of

flowing gas for the reason that no party attempted to use sales volumes.

Therefore, it stated, this issue is still "open" in the instant proceedings.

(3) A request by the AGD group for intrastate revenue data, as well as intra-state sales contracts, applicable to production from any leases for whichintrastate cost information might be submitted in response to a Hunt request.The AGD contended that the validity of any allocation of joint costs to inter-state and intrastate gas production, respectively, could only be tested by analternative allocation based on relative sales value of the respective

categories. It is a "fundamental accounting principle," the AGD continued,

more,prtheerdistributorsqadded,aantmeaningfulnaINyi Iflcost datassegrergatedby intrastate and interstate leases requires a determination of whether theintrastate contracts at issue are short-term, whether they dedicate gas fromspedific leases and whether intrastate gas is commingled with interstate gas

and segregated for delivery at points beyond the lease.

On 9/23/65 the Hunt Interests filed a petition for rehearing of the FPC'sorder of 8/27/65 denying an appeal from the Examiner' refusal of Hunt'srequest for additional 1962 cost and production data for those leases of All-Areas Questionnaire respondents whereon all wells were drilled after 1954 and

all production during 1962 was at a depth of 10,000 feet or more. The FPC

denied the appeal on the grounds, among others, that any use of the requesteddata would require complicated cost separations and property classifications

based on judgment, that the data would not provide a complete representationof deep well costs, and that Hunt's claim of greater costs for deep wellsthan for shallow wells-- even if it could be proved -- was meaningless absentadditional information as to the comparative costs per Mcf of reserves added

for deep and shallow wells. (See REPORT NO. 494, pplO-11.) In their petition

for rehearing, the Hunts stressed that, in the face of evidence showing thatfuture reserves must come from deeper reservoirs, "it is only logical to take

into consideration the separate cost of deeper reserves in fixing a price forthe future." Moreover, they said, contrary to FPC's belief, use of therequested data -- to develop separate cost of service studies for deep andfor shallow properties -- would not require additional complicated cost

separations and property classifications because such separations and classi-fications have already been made. As to the FPC's view that a finding thatdeep wells cost more than shallow wells would be meaningless unless reservesadded by deep wells were also known, the Hunts pointed out that Opinion 468relied on test year production -- not reserves added -- to determine thecost of flowing gas.

On 9/23/65 a copy of a Hunt letter requesting cost, revenue and volumetricdata for gas cycling leases (defined as leases attached to cycling plants inwhich non-associated gas had been processed in the year 1962 and from whichall or a portion of such gas had been returned to the lease for reinjectionpurposes) was copied into the record. The request is directed to All-AreasQuestionnaire respondents in the Texas Gulf Coast proceeding and seeksseparate information for Districts 2, 3 and 4 and the Continental U.S.Examiner Taylor granted Hunt's request with respect to the Texas Gulf Coastproceeding on 9/15. Examiner Kane denied the request with respect to theHugoton-Anadarko proceeding. (See REPORT NO. 496, pp6-8.)

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September 30, 1965

B. Hearing Developments

REPORT NO. 498 - p4

Cross-examination of direct testimony of producer witnesses for the Phillipsand Humble groups is presently in progress.

Witness C. H. Hinton was cross-examined on 9/17/65 with respect to his directtestimony in the joint record on sales contract provisions and the national

R/P ratio. (See REPORT NO. 482, App. pp9-14.) Staff Counsel Dietrich movedto strike, for lack of volumetric support, a portion of Mr. Hinton's testimonyto the effect that reserves presently unconnected to any market are in the

order of two to three times annual production and that this had the effect of

reducing the current national R/P ratio of 18.2-to-1 based on all provenreserves to 15 or 16-to-1. The motion to strike followed an attempt byCounsel Dietrich to pinpoint the location of the unconnected reserves. The

Examiners denied the motion. At a later point Staff Counsel sought to elicitthe volume of proven reserves in the Hugoton-Anadarko and Texas Gulf Coast

areas awaiting market connection. Mr. Hinton estimated approximately 250 to500 MMcf in the Hugoton-Anadarko area and about 2 to 3 million Mcf in the TexasGulf Coast.

Another line of interrogation by Staff Counsel related to Mr. Hinton's 6- to7-year deliverability estimate for connected reserves. Among other things,the witness was asked to identify specific interstate pipeline companies withonly 6 to 7 years deliverability. At the Examiners' direction, overrulingproducer protests, Mr. Hinton named the following pipeline company purchasers

in the Hugoton-Anadarko area whose Form 15 reports showed estimated gassupply deficiencies in 1964: Lone Star Gas Co., Natural Gas Pipeline Co.-bfAmerica, and Panhandle Eastern Pipe Line Co. Other companies were "very closeto even, " he added. Based on Form 15 reports, the witness said the totalestimated deficiency for all interstate pipelines taking gas from the Hugoton-

Anadarko area was 246,700 MMcf in 1964, rising to 406,650 MMcf by 1970 and2,325,082 MMcf by 1983. With respect to pipelines purchasing in the TexasGulf Coast area with indicated gas supply deficiencies in 1964, the witness

named Texas Eastern, Trunkline, and Florida Gas Transmission. Asked by

Examiner Kane as to the significance of the deficiencies, Mr. Hinton respondedthat if net production continues to increase and development of new reserves

proceeds in accordance with the trends over the past 10 years, a "very seriouscondition" may well result -- namely, a total supply deficiency for interstatepipelines of over one billion cubic feet of gas per day by 1969 or 1970.

Still other questions were directed by Staff Counsel to Mr. Hinton's statementthat producers compete among themselves to sell gas to pipeline purchasers.On cross-examination, Mr. Hinton indicated that the situation has now shifted

principally to one of competition between the pipelines rather than producersdue to lack of supply. Asked by Examiner Taylor whether producers are nowengaged in effective competition, the ,witness replied: "We are governed byarea· guideline rates, and there is really not much trading to be done. It isthe pipeline company that can take the gas, get it connected the fastest andtake the greatest quantity. That is about all there is left to trade on."

Witness Sherman H. Clark was cross-examined on 9/22, 9/23 and 9/24/65 on hisprojections of U.S. demand for gas and his analysis of the elasticity of gasdemand. (See REPORT NO. 482, App. pp3-7.) AGD Counsel Mann directed alengthy series of questions designed to elicit the extent to which the witnesshad considered the effect of an increase in gas price on sales of gas to


steam-electric plants. Mr. Clark made clear that his demand projections werebased on the assumption of essentially constant relati*e prices of competingfuels. He further made clear that, in his view, an increase in the field

price of gas would not necessarily be passed on to consumers on a straight Mcfbasis because of possible counterbalancing economies in transmission and

distribution. In the steam-electric market, Mr. Clark particularly doubtedwhether any field price increase would be passed on because interruptible gas"must be priced to sell." Thus, he conceded, to the extent that any suchincrease is flowed through to consumers at all, it would be borne by residentialcommercial and firm industrial customers. Responding to further questionsrespecting his projection of steam-electric plant gas use in 1975 at 4.3 trillioncubic feet, more than twice the actual use of 2.1 trillion cubic feet in 1963,

Mr. Clark explained that the projection assumed a gradual growth rate encom-passing both an increase in total requirements and displacement of competitive

fuels in some regions. In arriving at the 4.3 trillion cubic foot estimate,he added, no consideration had been given to such factors as proximity of loadto market, state or local regulatory policies or tax structures.

Counsel Mann also probed into the reasons behind Mr. Clark's projection oftotal U.S. net production in 1970 at 19.7 trillion cubic feet, over 4% higherthan his 1970 projection of 18.9 trillion cubic feet in AR61-1, AR61-2 and theso-called Pemex case. Mr. Clark said that SRI had decided upon an upwardrevision in the pro jection based on review of most recent trends . It was also

brought out that the bulk of the upward adjustment was in the "Other Industrial"and "Other Outlets" (primarily field use) categories.

A final series of questions by Mr. Mann related to the effect of technologicalbreakthroughs, imports of natural gas and imports of LNG on the level of

domestic gas demand. Mr. Clark took the position that there would be nosignificant technological developments on any front which would have a signi-ficant effect on gas demand -- although he conceded error in his predictionin AR61-1 that the development of "integral trains" for the transportation ofcoal would be slow in coming. Nevertheless, he added, despite this misjudg-ment, the actual use of coal has been just about as projected in AR61-1. Withreference to his projection of net gas imports.in 1970 at the same level (0.8trillion cubic feet) in both AR61-2 and the instant proceeding, the witnessexplained that nothing had occurred since preparation of his South Louisianatestimony to suggest the need for any alteration of this projection. He alsopointed out that additional import volumes of some 400 billion cubic feet peryear will have to be certificated within the next few years in order to achievethe 1970 projection of 0.8 trillion cubic feet, and "to assume any more thanthat could get through for certification .. . would be quite optimistic."As to imports of liquefied natural gas as a potential source of supply,Mr. Clark did not foresee sufficient technological progress by 1975 to bringthe delivered price to a level competitive with the delivered price ofdomestically-produced natural gas.

Staff Counsel Dietrich questioned the relevancy of Mr. Clark's presentationin light of Opinion 468 which, according to producer applications forrehearing, ignored virtually all economic evidence in the Permian Basin pro-ceeding. Counsel McClain replied that Mr. Clark's demand forecasts wererelevant to the question of the price required to bring forth a future supplyadequate to meet projected requirements. He also asserted that Opinion 468has not yet been through the courts so that it is far too early to evaluatewhat type of evidence will ultimately be considered relevant in future cases.


Counsel Dietrich declined to move to strike on the grounds of irrelevancy but,in the alleged interest of shortening cross-examination, sought to determinewhether the producers intended to make any use of Mr. Clark's presentationother than as "general background economic information." The Examiner s tookthe position that they could not prejudge at this juncture what evidencewould be considered relevant in the decisional process.

Cross-examination of witness Roger L. Conkling on unit cost trends of distribu-

tor and pipeline companies began on 9/29 and was still in progress on 10/1/65.At the outset of this cross-examination, Counsel Roger Nichols for theCalifornia Distributor Group renewed a previous motion to strike

Mr. Conkling' s tes timony on the ground that the "economy of scale" and Otherarguments stressed by the witness were given no weight whatsoever by theCommission in Opinion 468. Rather, he said, the Commission made clear inthe Permian decision that it relied on costs and no other factors. AGD

Counsel joined in the motion for the reason that the ability of distributorsand consumers to absorb a "few pennies more" had nothing to do with thedetermination of just and reasonable'prices: The Examiners denied the motionsto strike on grounds of irrelevancy as premature.

Developments in the South Louisiana Area Rate Proceeding

Hearings will reconvene on 10/4/65 in the South Louisiana Area Rate Proceeding(AR61-2 et al.) for the introduction df supplemental evidence by the Ameradaproducer group (as permitted under the Examiner's rulings of 9/8) and for cross-examination of the Amerada group' s time-lag study sponsored by witnesses Autenand Davis. No hearings were held this past week.

For the week beginning 10/11, cross-examination has been scheduled for fourproducer rebuttal witnesses previously deferred: Foster, Keene, Porter, andReid -- in that order. The following week, Staff witnesses McCarrick andShaffner and AGD witness Frazier are tentatively scheduled for cross-examination.A revised rate design exhibit of witness Frazier, reflecting changes in theStaff's rate schedule listing, was recently received into evidence by theExaminer over objections of the Amerada group.

On 10/11/65 there will be a discussion of briefing procedures. The Examinerhas suggested the submission of "preliminary memoranda" shortly after theclose of the hearings in order to "smoke out" the basic positions to be takenby parties in briefs. He further suggested the possibility of memorandadirected to issues believed to have been disposed of by the Commission in thePermian Basin Opinion. An opportunity for answering memoranda would also beprovided.

As indicated in REPORT NO. 497, ppll-12, hearings during the week of 9/21 wereprimarily devoted to "clarifying" examination of the Staff's statement ofposition on rate design. As set forth by Counsel Lozner, the Staff nowrecommends ceiling prices of 18.25¢ for new gas well gas (and residue gasderived therefrom) and 18.004 for all other (or "flowing") gas. The suggestedcutoff date between new and flowing gas was 1/1/61. The recommended ceilings,which would be reduced 1.5¢ for gas not subject to Louisiana state taxes, werebased on cost calculations similar to those employed by the Commission in thePermian Opinion -- namely, a nationwide cost determination for new non-associated gas and an area historical cost of service for South Louisiana gaswell gas production in the test year 1960. Both Staff cost calculations


included a 12% rate of return as in the Permian Basin Opinion; the Staff made

clear, however, that it considered this level of return to be "in excess ofthe upper limit of the range of reasonableness." The Staff fur ther recommends,among other things, a minimum rate of 13.5¢ (12.0¢ for gas not subject tostate tax), the establishment of quality standards and price adjustmentsapplicable only to contracts dated after the Commission's decision in theinstint proceeding, a 2-1/2 year moratorium on rate increase filings, calcula-tion of refunds and treatment of small producers as prescribed by the

Commission in Opinion 468, and consideration in a subsequent proceeding of thepossibility of "special treatment" for offshore sales delivered and sold by

producers at onshote points.

Other parties also set forth brief statements of rate design position on 9/21.Counsel Holtzinger announced that the AGD planned no modification of itsprevious rate recommendations in these proceedings, i.e., (a) a 19¢ ceiling

including tax for new gas well gas of "gold standard" quality, (b) an 189ceiling including tax for older, flowing gas, (c) the date of the Commissiondecision in this proceeding as the cutoff date between old and new gas, (d)reduction of all South Louisiana rates to the above levels or to the last

firm rate, whichever is higher, but not below 14.25¢, and (e) deduction of1.5¢ from the recommended ceilings where state taxes do.not apply. CounselHoltzinger added, however, that if (as in Opinion 468) an earlier cutoff datethan the date of the FPC's decision is employed, then the AGD reserved theright to recommend a lower ceiling for flowing gas. Counsel fur ther stated

that the AGD would probably subscribe to Staff's recommendations with respectto small producers, refunds, and moratorium.

Philadephia Electric also plans no change in its previously submitted ratedesign recommendations (namely, flat rates of 17.00 for all new gas well gasunder contracts executed after 12/31/60, and 16.04 for all other gas).

Counsel Goldberg declined to state a poaition on behalf of the MunicipalIntervener Group pending further study of the Staff's rate design statement.The Examiner directed Counsel to set forth the group's position at the 10/4hearing session or as soon thereafter as possible.

Counsel Penn indicated that the Amerada Group adhered to its basic single pricerate approach outlined by witness Foster, although added that some individualrespondents in the group may later decide to take a somewhat different position.

During discussion of the Staff's statement of position, producer counselprimarily sought to obtain clarification of the under lying rationale. CounselLozner was asked, for example, what consideration the Staff had given to non-cost considerations mentioned in Opinion 468 in arriving at its recommendedrate ceilings, whether the Staff had determined the average unit revenuerealization for flowing gas under the 18.0¢ recommended ceiling, whetherthe Staff had looked only to the cost-revenue balance for South Louisiana orhad also considered the problem of a national cost-revenue balance, what was

the Staff's current thinking on the discounted cash flow approach (mentionedas a subject for further study in Opinion 468), on what evidence did theStaff rely to support its conclusion that costs have not increased since the1960 test year and hence that imposition of a 2-1/2 year moratorium on rateincrease filings was appropriate, what study had been made as to the impactof the recommended ceilings on small producers, what did the Staff contemplateby "possible special treatment" for producers who themselves transport gas

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produced offshore to onshore delivery points, etc. The Examiner declined to

require the Staff to reply to questions of this nature on the ground that thepurpose of clarification was to remove uncertainties as to the Staff's recom-mendations rather than to serve as a vehicle for probing the Staff's rationale.Such matters, he indicated, should be left to argument in briefs. In supportof this ruling, the Examiner relied heavily on the FPC's order of 8/26/65precluding further rate design testimony in this proceeding. Producer counselvigorously objected to the Staff's failure to present a witness in support ofits rate design recommendations. The denial of opportunity to cross-examine

an adverse position taken by an adverse party was stated to constitute adenial of "full and fair hearing."

A single exception to the Examiner's ruling refusing to permit additionalevidence related to cost array analysis. Counsel Tell for the Amerada groupargued that the Staff's cost array exhibit now in the record was based on

the Staff's cost computations underlying its original rate recommendations sothat there was no way to determine what percentage of flowing gas volumeswould recover their cost plus a fair return under the Staff's new recommenda-

tions. The Examiner directed the Staff to prepare and distribute by 10/15/65new cost array evidence based on the costs supporting its revised recommenda-tions. Interrogation of this evidence, as in the case of previously submitted

cost array studies, will be limited to the mechanics involved.

The discussion, however, did clarify the following aspects of the Staff'sposition:

(1) With regard to definition of the cutoff point between new and old gas, theStaff supported use of the "contract date" (i.e., the date appearing on theface of the contract) as opposed to the date the contract was "executed" or"entered into." Several producer counsel pointed out that the "contract date"and "date entered into" do not necessarily coincide. In the case of salesfrom new or added acreage covered by ratification or adoption agreements, theStaff would use the date appearing on the face of these agreements.

(2) With respect :to delivery point as a quality factor, the Staff wouldsubject wellhead deliveries to downward price adj9stments. The Staff alsomade clear that its recommended ceilings were applicable to sales to pipelinesonly and were not applicable to sales by one producer to a second producerfor resale to a pipeline.

(3) With respect to minimum rates, the Staff indicated that filings to therecommended minimum rate levels should be made and would become effective in

accordance with the requirements of Section 4 of the Natural Gas Act.

(4) As to whether refunds should be required of amounts collected beyond thelast firm rate where that rate is at a level higher than the area ceiling, theStaff reserved the right to argue that the entire rate -- as opposed to onlythat portion above the last firm rate -- was subject to review in a Section 4(e)proceeding.

(5) With respect to a savings clause procedure permitting individual companypetitions for special relief, the Staff takes no position at this time.

(6) With respect to theinstitution of a show cause proceeding to deal withunconsolidated dockets after a Commission decision, the Staff makes no recom-mendation at the present time but does not reject the possibility.


There was also considerable discussion of a request by the Amerada group forrecall of Staff witnesses Shaffner, Bombino and Bass for supplemental interroga-tion. During previous cross-examination of witnesses Shaffner and Bombino,

questioning on several topics had been deferred pending submission of the

Staff's final rate design recommendations and the Examiner had assured theproducers of an opportunity for further cross-examination at that time. TheAmerada group sought recall of Dr. Shaffner in order to probe conceptualproblems arising from the application to a net investment rate base of apercentage rate of return recommendation derived by reference to totalcapitalization. It was also argued that the level of return was still verymuch of an issue in this case in view of the Staff's position that a 12% rateof return, despite its adoption in Opinion 468, was "in excess of the upper

limit of the range of reasonableness." The Examiner expressed the opinionthat further interrogation of Dr. Shaffner would largely degenerate into argu-ments over the interpretation of what the Commission did or did not do in itsPermian decision and that such interrogation would serve no useful purpose.He agreed, however, to permit specific questions to be put to Dr. Shaffner,and he will then rule on a question-by-question basis. In this connection he

made clear that he would not allow questions of an argumentative nature.

The Examiner denied the request to recall witnesses Bombino and Bass for the

purpose of further interrogation on cost policy questions and allocationprocedures, respectively. With respect to witness Bombino, the Examiner

conceded his previous assurances to producers of an opportunity for additional

interrogation upon submission of the Staff's final rate design recommendationsbut said the situation had been "drastically and significantly changed" as aresult of two subsequent developments -- name ly, the Commission's PermianOpinion and its 8/26/65 order that matters involving rate design should notbe the subject of further evidentiary presentation. Counsel Tell and others

argued that the producers were the "victim of entrapment" and had been

unfairly subjected to a "change in the rules of the game in midstream."Producer counsel also objected to the present tendency to mechanically applythe Opinion 468 procedures to this case without full development of the

problems involved. As to witness Bass, the Examiner took the position that

the proposed interrogation would be argumentative in nature and would involvequestions that could be better developed on brief. He refused to certify hisrulings to the Commission.

FPC Orders Hearing on Tennessee Gas Transmission Proposal to Construct $32 Millionin New Facilities to Attach Company-Owned Offshore Louisiana Gas Reserves

On 9/24/65 the FPC ordered a formal hear ing on an application by TennesseeGas Transmission Co. (CP65-356) to construct and operate some $32 million offacilities in order to connect an estimated 811 billion cubic feet of company-owned reserves in offshore Louisiana. A prehearing conference was scheduledfor 10/12/65. The Commission also granted intervention to five utilitycustomers of Tennessee and to Red Snapper Pipe Line Co., which intends toconstruct a pipeline system close to that proposed by Tennessee. A notice ofintervention has also been filed by the New York Public Service Comri,irsion.

Specifically, Tennessee proposes to construct about 157 miles of 12-inch to26-inch pipeline (with a design capacity of about 245,000 Mcf/d) and onshoredehydration, separation, and liquid storage facilities. These facilities,Tennessee stated, would enable the connection of company-owned gas reserveswhich will provide additional flexibility to its system supply. The company's


reserves are located in Vermilion Blocks 191, 245 and 250 Fields, Block 61 inthe South Marsh Island Block 66 Field, and Blocks 78 and 79 in the South MarshIsland Block 79 Field. Proven reserves underlying only about 4,232 of thetotal 25,568 acres involved have been estimated at 484 billion cubic feet and

probable additional reserves underlying the same acreage at about 327 billioncubic feet. (See REPORT NOS. 478, p16; 480, p7.)

In the instant order, the Commission noted that Tennessee's customers seekinginterven,tibn all expressed concern regarding the probable impact on theirrates if the pipeline is permitted to spend in excess of $32 million toattach the offshore reserves which, they alleged, have already cost Tennesseeabout $1.5 million for field measurement facilities and $73.3 million forproduction lease facilities. These customers, the Commission continued, also

contended that it is impossible to evaluate the cost impact of Tennessee'sproposal on the basis of the data included in its application and that a

hearing is needed to develop the facts. Red Snapper's petition to intervenestated that it had recently completed engineering studies and would shortlyfile an application regarding a proposed offshore pipeline which would be inclose proximity to the reserves to be attached by Tennessee.

FPC Grants Northern Natural Gas Temporary Authority to Build Pipeline to AttachDelaware Basin Reserves

On 9/27/65 the FPC granted temporary authorization to Northern Natural Gas Co.(CP65-1) to construct and operate 42 miles of pipeline, at an estimated cost

. of $3.3 million, in order to attach more than one trillion cub ic feet of gasin the Coyanosa Field (Delaware Basin), Pecos County, Texas. Commissioner

Black dissented without separate statement.

The instant application is one of three Northern proposals involved in Phase IIof the consolidated Northern Natural certificate proceeding (CP65-1 et al.).Northern's other applications seek authorization to connect supplies in theGomez Field of the Delaware Basin (CP65-338) and to build a 365-mile supplyline from the Delaware Basin to the Oklahoma Panhandle (CP65-91). Phase II

also involves a proposal of Natural Gas Pipeline Co. of America to build a

supply line to the Permian Basin and a series of competitive applications of

Transwestern Pipeline Co. seeking to provide Permian Basin and Delaware Basin

gas to Natural and Northern by exchange. Hearings in Phase II are scheduledto commence on 10/5/65. Hearings have been concluded and a decision alreadyissued in Phase I of the consolidated proceedings which concerned certain

interim exchange arrangements entered into by Natural and Transwestern toenable increased deliveries to Natural's customers this coming winter andall of Natural's expansion proposal except for the controverted Permian Basinline.

Previously, on 7/20/65, the FPC denied a request by Northern for temporaryauthorization of its applications to attach supplies from the Coyanosa andGomez fields and for severance of all of its proposals (plus Transwestern'srelated competitive applications) from the consolidated proceeding. At thattime the Commission stated, among other things, that no emergency or adverseeffect on Northern's customers had been shown and that severance of the

Northern and Transwestern applications would prolong the hearings to thedetriment of all parties because of the related issues involved in Transwestern'scompetitive proposals to Natural's proposed Permian Basin line. Subsequently,

.


on 8/3/65, Northern filed a second request for temporary authorization offacilities to connect the Coyanosa Field supply in order to prevent drainageas the result of the commencement of takes in late July by El Paso in the samefield. (See REPORT NOS. 485, pp7-9; 487, pp7-10; 488, pp7-8; 491, pll.)

The FPC letter-order of 9/27/65 granting temporary authorization stated thatthis action was without prejudice to final determination of the consolidatedproceeding. The temporary authorization was conditioned to require that ifthe FPC ' s decision in Phase II should fail to result in permanent certification

of facilities built by Northern under the temporary authorization, the costof such facilities would be excluded from Northern's rate base.

FPC Proposes Changes in Annual Report Forms for Pipeline Companies

On 9/20/65 the FPC issued a notice proposing several changes in the annualreport forms (Form 2 and Form 2-A) prescribed for natural gas pipeline com-panies (R-283).

With respect to Form 2 reports for Class A and B pipelines, the proposed

changes include:

(1) Addition of two new schedules:

Contingent Gas Purchase Payments (showing payments to producers which aresubject to refund). The FPC said this information would enable it toreadily verify any refunds ordered in area rate proceedings, settlementof individual producer rate cases and groups of cases, and in thedisposition of rate matters in certificate proceedings.

Unauthorized Overrun Penalties and Waiver of Penalities (showing volumes

of unauthorized overrun gas, and the dollar amount of penalties charged

or waived, the period for which the waiver was granted and why, name ofcustomer, and rate schedule information, for certain specified periods).

(2) Deletion of five schedules -- namely, Special Funds; Special Accounts;Notes Receivable; Accounts Receivable; and Income from Merchandising, Jobbingand Contract Work.

(3) Modification of 14 schedules. One proposed modification would requiremore comprehensive reporting of pipeline system accidents and failures.Another proposed revision, in the "Gas Account - Natural Gas" schedule, isdesigned to provide more detail to facilitate the preparation of an annualnational natural gas balance which "will enable the Commission to determinefor each year the amount of natural gas sold in interstate commerce and theextent of Commission jurisdiction over such sales."

With respect to Form 2-A for Class C and D pipelines, the FPC proposesa schedule on pipeline system accidents and failures and to revise oneexisting schedule.

to add

The Commission indicated that most of the proposed changes had been suggestedby industry representatives.


FPC Eliminates Optional 30-Day Delay Provision for Filing of Annual Reports byNatural Gas Companies

On 9/29/65 the FPC issued Order No. 305 (R-285) eliminating an optional provi-sion in its regulations which permitted electric utilities, licensees andnatural gas pipeline companies to delay the filing of their annual reports tothe FPC for 30 days provided they submitted certain summary information by theindicated deadline. The change is effective 10/29/65.

The change in rules will affect 270 Class A and B electric and natural gas com-panies (those with annual operating revenues of $1,000,000 or more). The com-panies must now file their complete reports by the last day of the third monthafter the close of the calendar year or other established fiscal year. Pre-

viously, companies which had filed certain summary schedules within the three-

month period could, without further FPC authorization, file their completereports 30 days later.

The FPC noted that 71% of the 270 reporting companies filed their complete

reports for 1964 before the beginning of the optional period. Thus, it stated,"in view of the recent advances in the art of keeping records through the useof electronic techniques, there appears to be no reason why the other 29% can-

not do likewise without undue hardship." The FPC added that its rules stillprovide that extensions may be granted for cause.

Prehearing Conference Set on Remanded Pipeline Applications to Supply AdditionalGas to St. Louis Area

On 9/16/65 Examiner Martin E. Rendelman issued notice that a prehearing confer-ence would be convened on 10/19/65 on the joint proposals of Natural GasPipeline Co. of America (CP61-339, CP62-243 and CP63-99) and Mississippi RiverTransmission Corp. (CP62-242) and the competing proposal of Panhandle EasternPipe Line Co. (CP63-106) to supply additional gas to the St. Louis area.These proposals were remanded to the Examiner in FPC Opinion 474 of 9/9/65which denied the application of Oklahoma Illinois Gas Pipeline Co. (CP62-260)to build a $62 million pipeline from northwestern and southeastern Oklahoma,designed primarily to serve industrial users in the St. Louis area, on thegrounds, among others, that the project would be too expensive and would havean adverse effect on area retail consumers. While neither the Panhandle nor

the Mississippi-Natural applications could be granted on the present record,the Commission said, either "would be basically appropriate" insofar as costor size are concerned "if additionally supported in further hearings." TheCommission indicated that the parties would be free to revise their plans soas to best serve the interest of St. Louis consumers. (See REPORT NO. 496,App. pp12-19.)

Natural's present application seeks authorization to construct some $10.5million in facilities in order to increase sales to Mississippi RiverTransmission Corp. by 65,000 Mcf/d. Mississippi has not proposed any additionalconstruction in connection with this project. Panhandle' s current applicationseeks to increase the capacity of its Howell Storage Field and to constructcertain fadilities, at an estimated total cost of $6 million, in order to makefirm deliveries of 65,800( Mcf/d to whatever customers in the St. Louis areaare determined by the Commission to need additional gas.

The Examiner's notice stated that the matters to be discussed at the 10/19/65

prehearing conference would include the proper parties to participate in furtherhearings, the dates for filing testimony and commencement of hearings and anyother pertinent matters.


FPC Approves Present Rate Design of Midwestern Gas Transmission and Natural Gas

Pipeline Co. of America

On 9/28/65 the FPC issued Opinion No. 477 (signed by Commissioner Bagge andadopted unanimously) disposing of rate design issues pending in connectionwith Section 5(a) investigations of Midwestern Gas Transmission Co. (RP61-19,RP62-7) and Natural Gas Pipeline Co. of America (RP63-6). The Commiss ion

approved the present level of demand and commodity charges for both Midwesternand Natural -- specifically, with respect to contract demand service, $3.94demand and 24.92¢ (14.73 psia) for Midwestern's Northern System, $3.03 demandand 22.00¢ (14.73 psia) for Midwestern's Southern System, and $2.28 demand and20.60¢ (14.65 psia) commodity for Natural. In so doing, it overruled con-tentions of the Coal Interests that the pipelines' commodity charges were toolow (i.e., below the price of coal) and hence gave gas an unfair advantagein competitive fuels markets.

The issues here involved stem from investigations instituted into the justnessand reasonableness of Midwestern's Northern and Southern System rates pursuantto provisions in FPC opinions originally certificating these Systems some sixyears ago. Subsequently, the Commission consolidated the two Midwestern rateinvestigations with a rate design question left for further consideration inconnection with a settlement approved for Natural on 10/25/62. At that time,the Commission approved a 20.64 commodity charge for Natural in order not to

give Natural an unfair advantage in Indiana and Illinois markets where it

competes with Midwestern but reserved the right to review this charge at thetime it considered Midwest:ern's rate design. Last October, on 10/13/64, theFPC issued Opinion No. 444 on cost of service issues involved in the deter-mination of Midwestern's rates. Reductions of $1.8 million and $1.9 million

were ordered for Midwestern's Northern System and Southern System respectively-- or together only somewhat more than half of the total reduction recommendedby Examiner Zwerdling in an initial decision dated April 1964. In this

decision the Examiner deferred consideration of rate design questions in theinterest of bringing the cost of service issues before the Commission as soon

as possible. The FPC later ordered waiver of the intermediate decision pro-cedure on the rate design aspect of this case due to the involvement of

Examiner Zwerdling in other matters. (See REPORT NOS. 476, p13; 460, p15;457, p14; 448, pp18-19; 424, pp9-10.)

The Commission stated that the principal conflict in the rate design phase of

this proceeding related to the efforts of the Coal Interests to secure a

higher commodity rate for Midwestern (Southern System) in order to displaceinterruptible sales of gas for boiler fuel and other industrial uses by thepipeline's distributor customers in the Chicago area. Specifically, Coalalleged that the Southern System commodity rate had been designed to under-price and hence supplant coal in industrial markets and recommended thatMidwestern be required to substitute a one-part rate of 33.5¢. As for Natural,Coal claimed that whatever rate is "good" for one company is "good" for theother. Coal's position was opposed by both pipelines, distributor customersof Midwestern's Southern System and the FPC Staff. All stressed the importanceof the industrial sales to the distributors involved for valley-filling purposesand that any increase in the pipelines' commodity rates would drive thedistributors out of this market because of the present close competitivebalance between gas and coal. The FPC agreed that the price balance betweencoal and natural gas in Chicago industrial markets is "indeed precarious" andthat gas sales could be diverted almost entirely to coal with the slightest


increase in the gas commodi ty component. However, it declared, "whileCoal Interests may have standing to participate in proceedings an ratedesign, the mere fact that a particular rate may result in the loss 6fto them does not in itself make the rate invalid."

the

market

With respect to Midwestern, the Commission held that the company's existingrates were not unjust, unreasonable, unduly discriminatory or preferential.Never theless, it added, this finding should not be construed as a "long-term"approval of Midwestern's rate structure. "The contribution toward Midwestern'sfixed charges from the commodity component is barely more than marginal and isfar from completely satisfactory. We expect that in the future Midwestern willbe able to reflect reductions in costs or increased revenues in improved con-

tributions of its commodity charge to the operation of the Southern System.With this in mind, we shall continue to review the changes in Midwestern'scosts and revenues reported to us<.."

With respect to Natural, the FPC found no evidence to support a change in ratedesign at this time. Natural's commodity charge, it noted, contributed a"substantial amount," approximately 6¢/Mcf, toward the coverage of fixed costs.The Commission also reviewed the fact that Natural's commodity rate hadpreviously been fixed to maintain a competitive balance with Midwestern andreiterated its determination to continue this balance if possible.

In addition, the FPC called attention to previous decisions recognizing the"infirmities" in the Atlantic-Seaboard rate design formula and indicatingreadiness to make "substantial adjus tments" to this formula, particularlywhen "necessary to meet competitive circumstances." In this connection theCommission noted that the current rates approved for Midwestern represented a

5% deviation to demand from straight Atlantic-Seaboard costing in the case ofthe Northern System and a 13% deviation to demand in the case of the SouthernSystem. With respect to Natural, the approved rates constitute a 25% deviationto demand.

Recent Developments in Producer Rate and Certificate Proceedings

On 9/10/65 the FPC rejected filings tendered by Pan American Petroleum Corp.and the Southland Royalty Co. on 8/13/65 and 8/20/65, respectively, for rateincreases in excess of the ceiling levels prescribed for Permian Basin salesin Opinion No. 468. Pan American proposed a rate increase from 16.0¢ to20.5¢/Mcf for a sale of residue gas obtained from both gas well and oil wellgas to Transwestern Pipeline Co. under a contract dated 3/8/62. Southland'sproposed increase was from 15.6488¢ to 16.6584¢/Mcf for sales of gas well gasand low pressure flash gas to El Paso Natural Gas Co. under a contract dated

3/16/52. The area ceilings established in Opinion No. 468 for the Texasportion of the Permian Basin are 16.5¢ for new gas well gas (covered by con-

tracts executed after 12/31/60) and residue gas derived therefrom, and 14.5¢for all other gas. The above filings were rejected by the FPC for the samereasons set forth in its order of 8/26/65 rejecting a proposed increase to20.5¢ tendered by Socony Mobil Gas Co. for Permian Basin sales. In that order

the FPC declared that its Section 5 determinations in the Permian Opinionwere applicable effective 9/1/65 to all Permian Basin sales of all producer-respondents in AR61-1, that the effect of its Section 5 determinations on non-

consolidated 4(e) proceedings was to create locked-in refund periods ending8/31/65, and that Opinion 468 imposed a moratorium effective 9/1/65 prohibitingany rate increase filings above the prescribed ceilings prior to 1/1/68. (SeeREPORT NO. 493, pp7-8.)

.


On 9/23/65 the FPC rejected, for the same reasons noted above, a proposed rateincrease from 16.0 to 17.0¢ tendered by Perry R. Bass for sales of residue gasto El Paso Natural Gas Co. in the Permian Basin.

00000

On 9/29/65 Socony Mobil Oil Co. filed a motion for clarification of an FPC

order of 8/26/65 which rejected a proposed price increase from 16¢ to 20.5¢/Mcffor sales of residue gas produced from both gas well and oil well gas toTranswestern Pipeline Co. from the Permian Basin area of Texas under a 2/10/61contract. (See item above,) Socony said the 8/26/65 order indicated that asupplement embodying a 16.54/Mcf rate for new gas well gas (or residue derivedtherefrom) would be accepted for filing and made effective without suspensionunder Opinion 468. However, Socony continued, in the past such a filingwould have been suspended under the Commission' s "fractured rate" policy.Accordingly, Socony sought "clarification and expression by the Commission"that a supplement complying with the requirements of Opinion 468 is not

subject to the "fractured rate" policy and may be made effective withoutsuspension. At the same time Socony tendered a rate increase filing to 16.5¢

for its residue sales derived from gas well gas and asked that it be madeeffective without suspension as of 9/1/65, the same effective date proposed inconnection with its rejected filing of 20.54.

---00000---

On 9/15/65 Union Oil Co. of California (CI65-1351) submitted an offer ofsettlement in connection with a proposed sale to Texas Gas Transmission Corp.

from the North Fresh Water Bayou Field, Vermilion Parish, South Louisiana at

an initial contract rate of 20.625¢. Noting a statement of intervention bythe New York PSC respecting this proposed sale, Union said it had been advised

informally that New York would not oppose issuance of certificate provided

that any increased tax reimbursement which Texas Gas might become obligatedto pay under the contract be limited to 50% in lieu of 75% during the first

five years after initial delivery. Union indicated that it would be willingto accept a certificate so conditioned.

00000

On 10/8/65 a further prehearing conference will be held in the T. L. James &Co., Inc. et al. proceeding (Gy16492 et al.) involving a conflict over theinterpretation of tax reimbursement provisions in a number of Louisiana con-

tracts. The conflict stems from ,actions of the Louisiana Legislature in sus-pending collection of a 24 gas gathering tax and increasing the gas severancetax by an equal amount, both effective 12/1/58. Thereafter, notices of ratechange filed by several Louisiana producers to reflect the state tax revisionswere protested by the pipeline purchasers. According to the FPC's order of7/22/65 instituting this proceeding, the sole question is whether the increasein the Louisiana severance tax is a substitute for the invalidated gatheringtax. (See REPORT NO. 488, ppl-2.)

An initial prehearing conference was held in this proceeding on 9/8/65. Atthat time the Staff distributed a document setting forth 19 different typesof contractual tax reimbursement clauses in the rate schedules here at issue.

Some of the rate schedules, for example, contain the following provision:"Buyer agrees to pay or reimburse seller in full for the present gather ingtax and any renewal or extension thereof or any similar tax which may belevied upon the gas." As to this provision, the question is whether theincreased severance tax is a "similar" tax or a substitute for the

.


invalidated gathering tax. Examiner Frazee expressed the view that there wasno need for oral testimony on interpretation of the tax clauses and suggestedthat the parties work out a stipulation specifying the controversy and their

respective positions. Some of the producers said they might wish to sponsorwitnesses as to the intent of the Louisiana Legislature in passing the tax

changes. At the next prehearing conference on 10/8 the parties are to presentstipulations along the line suggested by the Examiner if possible. Briefing

dates will then be set. If the parties are unable to stipulate and definitely

desire to offer oral testimony, dates will instead be set for that purpose.

On 9/27/64 Austral Oil Co. requested the FPC to sever its docket from the aboveproceeding and to defer action thereon pending the outcome of an actionrecently instituted by Austral in the Civil District Court for Ofleans Parish,

Louisiana. Deferral of Commission action on this matter, Austral argued,would be consistent with its deferral of,consideration of suspended New MexicoEmergency School Tax reimbursement increases pending the conclusion of lisiga-tion in the state courts. (See REPORT NO. 488, pp15-16.)

00000

On 9/23/65 a prehearing conference was held in the Cities Service Gas Co. etal. consolidated proceeding (CP65-140 et al.) involving six applications aimedat relieving "underproduction" in the Kansas Hugoton Field. The applicationsdirectly or indirectly relate to accumulated allowables, assigned by the KansasCorporation Commission, exceeding deliveries from Hugoton Field wells supplyinggas to Cities Service Gas. (See REPORT NO. 494, pll.)

The prehearing conference was devoted principally to (1) introduction intothe record of direct evidence of Cities Service Gas, El Paso Natural Gas Co.,Northern Natural Gas Co., Sinclair Oil & Gas Co. (adopted by Texaco Inc.),and Ashland Oil & Refining Co.; and (2) setting of procedural dates. Duringthe course of the conference, Examiner Allen C. Lande stated that in lieu of

statements of position at this time, he would prefer that each counsel, prior

to calling his witness, explain to the Examiner "why he is offering theexhibits that he has and what is his purpose and what is in his opinion the

salient most important issue, what is he for and what is he against."

Pursuant to an agreement among the parties, the Examiner directed thatanswering testimony be filed by 10/30/65, rebuttal and FPC Staff testimonyby 11/27/65, and intervener testimony by 12/3/65. The hearing is scheduledto commence on 12/14/65.

00000

A further prehearing conference is to be convened on 10/1/65 in the AmeradaPetroleum Corp. et al. consolidated show cause proceeding (G-16117 et al.)involving locked-in period favored-nation rate increases for sales to El PasoNatural Gas Co. related to spiral escalation increases for Phillips PetroleumCo. sales to El Paso. (See REPORT NO. 486, p5.)

00000

At the request of Pan American Petroleum Corp., a conference is to be held on10/19/65 to attempt settlement of all its pending rate-and certificate matters(G-9279 et al.).

00000

Hearings were concluded on 9/29/65 on the applications of Pacific GasTransmission Co. (CP65-213 et al.) to import an additional 200,000 Mcf/d of


Canadian gas by 11/1/67 for ultimate delivery to Pacific Gas & Electric Co. atthe Northern California border. Further coverage of these hearings will appearin a subsequent REPORT.

00000

As of the date of this REPORT, hearings are in progress in the Hugoton-Anadarko (AR64-1) and Texas Gulf Coast (AR64-2) Area Rate Proceedings.

00000

Hearings are to reconvene on 10/4/65 in the South Louisiana Area RateProceeding (AR61-2).

FPC Suspends $1.7 Million Gas Transportation Rate Increase Proposed by Florida GasTransmission for 30 Days

On 9/30/65 the FPC suspended for 30 days (until 11/1/65) a proposed transporta-tion rate increase by Florida Gas Transmission Co. (RP66-4) amounting to about$1.7 million annually, on the ground that such increase "has not been shown tobe justified, and may be unjust, unreasonable, unduly discriminatory, prefer-ential, or otherwise unlawful." In so doing, the Commission granted the com-pany's request for a 30-day suspendion -- rather than the five-month statutorymaximum -- for the reason, among others, that Florida Gas would be "irreparablyharmed" for the suspension period if it should sustain its burden of provingthe lawfulness of its proposed increase. Commissioner Ross dissented to theshortened suspension period.

In its application, Florida Gas proposes to increase its currently effectivetransportation rates T-1 and T-2 applicable to gas transported for FloridaPower Corp. and Florida Power & Light, respectively. The former rate wouldbe increased from 14.5 to 17.9¢/MMBtu and the latter from 18.5 to 21.9¢/MMBtu.

The two electric utilities purchase their gas supplies transported by FloridaGas directly from Sun Oil Co. in Texas and Louisiana. Florida Gas stated that

the proposed increases were necessary to recover increased costs related to

the services involved, including in particular a federal income tax liabilityof $1,665,000 (or 96% of the total proposed increase). Florida Gas explainedthat its present rates, established by virtue of a rate settlement approved bythe FPC in 1962 (RP61-3 et al.), did not include an allowance for federal

income taxes. Since that time, it continued, the consolidated operating taxlos's carry forwards of its parent and the subsidiary companies have beenexhausted, and the consolidated group is now in a tax-paying position.

In requesting a shortened suspension period, Florida Gas stated that since the

rate increase is applicable directly to only two ultimate users and Sun isrequired to absorb more than 80% of the rate increase, the shortened suspensionperiod would be a more reasonable balance of equities. Florida Gas would be

permitted to collect its additional costs through the proposed increased rates,while the utilities and Sun would be protected through the refund provision

provided in the suspension order. Sun objected to any shortening of thestatutory suspension period, contending that Florida Gas had not proved itwill have to pay any income taxes or that an allowance for such taxes is

required. In ordering a 30-day suspension period, the Commission agreed thatFlorida Gas would be "irreparably harmed" for the period of suspension if itshould sustain its burden of proving the lawfulness of its proposed rates,whereas Sun or Florida Power are sufficiently protected by Florida Gas'obligations as to refunds and interest in the event their contentions should


prevail. While a refund obligation is admittedly not complete protection toultimate consumers, the Commission said, this case is not usual in that thereare no ultimate consumers of gas involved and Sun will bear about 82% of theproposed increase. However, the Commission added, Sun will also be thebeneficiary of the refunds that may result from this proceeding. CommissionerRoss, dissenting, stated that the Commission's reasons for departing from thelong standing policy of suspending for five months rate increase filings thatappear to be unjust or unreasonable were not convincing. While Florida Gasmay be irreparably harmed if it should sustain its proposed rates, he said,"this much is true in every case and hardly constitutes a basis for grantingFlorida Gas special treatment."

The Commission's instant order made no reference to a motion filed on 9/10/65

by Sun to consolidate the instant rate proceeding with a certificate applica-tion of Florida Gas (CP65-393) for authority to construct about $93 millionin new facilities for the purpose of transporting 100,000 MMBtu/d during1967 and 200,000 MMBtu/d thereafter to Florida Power & Light Co. for use in tenof its steam<electric generating plants. This gas would be purchaseddirectly from Pan American Petroleum Co. and Austral Oil Co. in South Louisiana.(See REPORT NO. 489, pp16-17.) Sun argued that the rate increase proposed byFlorida Gas was apparently occasioned by the cost of the proposed expansionand hence that this expansion would be subsidized almost entirely by Sun.Answers in opposition to consolidation of the above rate and certificatematters have been filed by both Florida Gas and the FPC Staff. The latternoted that the cost of the proposed expansion is not reflected in the costof service date submitted by Florida Gas in justification of its rate increase.

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FOSTER ASSOCIATES REPORT...9 # 1 1 '21 21 151#L 0500 30#F 1 Ct bul 1© *11 NO. 498 HIGHLIGHTS FOSTER...

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Transcript of FOSTER ASSOCIATES REPORT...9 # 1 1 '21 21 151#L 0500 30#F 1 Ct bul 1© *11 NO. 498 HIGHLIGHTS FOSTER...