Clearing the FPC Pipes

OIL & GAS

Six years ago the U.S. Supreme Court gave the Federal Power Commission new authority that the regulatory agency did not want. The court ruled, in connection with a rate case involving Phillips Petroleum Co., the biggest independent U.S. producer of natural gas, that FPC must set rates in intrastate as well as interstate natural-gas markets. The decision broadened the FPC's job to include setting rates for some 3,000 independent natural-gas producers (i.e., producers with wells but no interstate pipelines).

As a result, the independents flooded the FPC with requests for rate decisions and put in interim rates on their own. Consumer groups soon began to complain about skyrocketing interim rates. The harried FPC pleaded with Congress to take the unwanted job off its hands, but bills introduced in 1956 and 1958 died largely because Congressmen and the President were appalled by the extent of gas producers' lobbying.

Last week in a historic decision, FPC set up a new standard for rates. Previously it had set natural-gas rates on the basis of company costs, permitted a certain percentage of profit above them. Henceforth, natural-gas rates will be set on an area basis, with one maximum price for all producers. FPC published its first tables of maximum allowable gas rates in 23 geographical areas, explained that even if its staff were tripled it would take until A.D. 2043 to catch up with the backlog of rate requests under the old company-by-company time-consuming cost analysis. The new rules will turn the haggling back to the courts if independent producers want to contest area prices.

For Phillips, whose decision has been pending before the FPC for twelve years the agency used its old yardstick of costs for the last time. It awarded Phillips rate increases totaling $5,700,000 a year, based on an 11% profit-over-cost return; Phillips had requested an 18% return.

The FPC's new area-pricing system drew mixed reactions. It was promptly condemned by the Independent Petroleum Association of America as "unworkable." The association's lawyer said that the commission's standards are "without any legislative foundation" and will be "subject to change at any time, an unsure footing for long-range industry operation." But some gas producers who have been holding back expansion for fear of adverse individual cost-rate decisions, saw some virtue in the new system. It will open up the FPC pipeline of rate requests, thus will put more natural gas in the pipelines on the way to the consumer. Its biggest virtue is that in abandoning the cost-plus yardstick, the FPC's new rules will no longer subsidize the inefficient gas producer, penalize the most efficient.

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