The FPC's Dilemma

Cried Texas Governor Allan Shivers last week: "This is one of the greatest invasions of states' rights the courts have ever announced." What had alarmed him, along with oilmen and officials of other big gas-producing states, was the new gas decision of the U.S. Supreme Court (TIME, June 14). The Federal Power Commission, said the court, has authority to regulate natural-gas rates charged by "independent producers," i.e., those who gather gas within a state and then sell it to interstate pipeline companies.

The ruling came as a shock to the FPC. The commission itself had held in 1951 that it had no authority to regulate the price of gas at the wellhead. Now the FPC must exercise a power it does not want. Nevertheless, the commission, under Chairman Jerome Kuykendall, plans to reopen rate hearings immediately for the Phillips Petroleum Co., the big independent producer that carried the gas case to the Supreme Court, and try to set a rate pattern for other independents.

Floor & Ceiling. To regulate gas, the commission must stretch its . authority over 140 interstate pipeline companies to cover 2,300 more independent gas producers. This raises some thorny problems. Ordinarily, in setting rates for a public utility, the FPC examines the company's costs, investments, etc., then fixes a price that will bring a fair return, usually 6%.

With the independents, a new method may have to be worked out. Costs and investments vary widely, since some are lucky enough to hit a high average of producing wells, while others sink large sums into a big proportion of dry holes (the industry averages one producing well out of nine). The FPC may have to fix separate rates for each field or geographical area, or it may follow a precedent it set two months ago in fixing rates for pipeline companies that produce some of their own gas. At that time the FPC abandoned the investment formula for gas produced by pipeline companies and let the going market price be the standard (TIME, April 26). Under this system, the regulated price would be the same as the market price within a state.

Rates will be further complicated by the fact that natural-gas production is also regulated by state bodies, such as the Texas Railroad Commission. While the FPC must set a ceiling on rates, the state agencies set a floor under them, in the interest of encouraging exploration and development of new fields and avoiding waste through overproduction. If floor and ceiling collide, the conflict may have to be ironed out in the courts again.

Cancellations & Cutbacks. In their anger against the court, gasmen talked of a sharp cutback in new drilling and exploration, rather than take high risks with the expectation of getting only a 6% return. Some producers planned to avoid FPC regulation by diverting gas to uses within the states where it is produced. Many producers planned to cancel contracts with pipeline companies, in conformance with cancellation clauses that go into effect if FPC gets or exercises rate-setting powers.

In any case, if enough gas is diverted from pipelines, rates to gas consumers in the East and Midwest would go up, since transportation and handling costs, which account for up to 90% of the price of gas, go up sharply when pipelines are partly empty. Furthermore, if FPC pegs rates too low, exploration would be nipped and the total gas supply reduced, also boosting rates.

Congressmen from the Southwest last week talked about a new law that would take the Government out of the gas-regulating business, such as the Kerr natural-gas bill, which was vetoed by Harry Truman in 1950. The chances of getting such a law through this session are slim, since legislators from gas-consuming states would oppose it in an election year. But oil-and-gas men think that consumers may feel differently if there are gas shortages.

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