Permian Basin Area Rate Cases
390 U.S. 747 (1968)

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U.S. Supreme Court

Permian Basin Area Rate Cases, 390 U.S. 747 (1968)

Permian Basin Area Rate Cases

Argued December 5-7, 1967

Decided May 1, 1968*

390 U.S. 747


Following this Court's decision in Phillips Petroleum Co. v. Wisconsin,347 U. S. 672, holding that independent producers are "natural gas compan[ies]" within the meaning of § 2(6) of the Natural Gas Act, the Federal Power Commission (FPC) struggled under a heavy administrative burden in attempting to determine whether producers' rates were just and reasonable under §§ 4(a) and 5(a) by examining each producer's cost of service. In 1960, the FPC announced that it would begin a series of proceedings under § 5(a) in which it would determine maximum producers' rates for each major producing area. A Statement of General Policy was issued by the FPC, asserting its authority to determine and require application throughout a producing area of maximum rates for producers' interstate sales, tentatively designating certain areas as producing units for rate regulation (three of which areas were consolidated for this proceeding), and providing two series of area guideline prices, for initial filings and for increased rates. This first area proceeding was initiated in 1960, and in 1965, the FPC issued its decision, devising for the Permian Basin area a rate structure with two area maximum prices, one for natural gas produced from gas wells and dedicated to interstate commerce after January 1, 1961, and the other, and lower, price for all other natural gas produced in the area. The FPC found that price

Page 390 U. S. 748

could be an incentive for exploration and production of new gas well gas, while supplies of associated and dissolved gas and previously committed reserves of gas well gas were relatively unresponsive to price variations. The FPC aid not use prevailing field prices in calculating rates, but utilized composite cost data from published sources and from producers' cost questionnaires, establishing the national costs in 1960 of finding and producing gas well gas, and, for all other gas, deriving the just and reasonable rate from historical costs of gas well gas produced in the Permian Basin in 1960, with a local and historical emphasis. The uncertainties of joint cost allocation made it difficult to compute the cost of gas produced in association with oil, but the FPC found that the costs of such gas were less than those incurred in producing flowing gas well gas. Each maximum rate includes a return to the producer of 12% on average production investment based on the FPC's two series of cost computations. A system of quality and Btu adjustments was provided for. The following rates were determined: 16.5

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