is a policy matter and the Congress is the policy-making body under our form of government. Federal commissions or Federal bureaus may not make national policy. The "social" welfare of the users of gas is not a concern of the Federal Power Commission. The regulation of the transportation and sale of natural gas in interstate commerce "for resale for ultimate public consumption for domestic, commercial, industrial or any other use" is the sole and total extent of the powers delegated to the Commission by the Congress.

If natural gas transported and sold in interstate commerce is to be restricted or controlled for specified uses, then certainly such policy is a matter for the determination of the Congress. If and when Congress determines the advisability of such policy and satisfies itself as to the constitutional ability of the Federal Government to enforce such policy, the necessary machinery, by statutory action, must be set up for such purpose. We submit that to date no such policy has been adopted by the Congress and that no enforcement machinery has been created, either under the Natural Gas Act or any other Federal statute.

A great deal can be said with respect to the inadvisability of any such policy and the results to which it would inevitably lead. It would be as logical to contend that the Federal Government might prevent the movement or transportation of refrigeration or air-cooling facilities into the cooler climates of the United States while allowing transportation of such equipment into the warmer parts of the country, thus favoring one group of its citizens as against another group because of their geographical location.

Lead and zinc are produced in the State of Missouri. Lead and zinc are exhaustible natural resources. What would be the public's reaction to a national policy that prohibited interstate movement of lead and zinc from Missouri into other States except for specified or controlled uses? The same analogy may be readily drawn with respect to coal, oil, iron, copper or any other natural resource. If the uses of natural gas may be controlled or specified, then the theory may be as consistently extended to all articles of commerce. If the Federal Government possesses the power to impose specified uses of articles of commerce moving between the States, then it can destroy one area for the benefit of another. The social, economic and political aspects of such power are fearful to contemplate. The commerce clause of the Constitution was intended to protect and preserve the operation of all legitimate aspects of interstate commerce and not to prohibit it. The exercise of Federal authority under the commerce clause "in reverse" is to build an economic wall around the States and create thereby a divided nationalism. It would, at the same time, bring into play the power to nationalize all industry and destroy traditional private enterprise that has so admirably supplied the conveniences and necessities of the American people.

A national policy of regulating the use of natural gas, or any other natural resource or article of commerce, is to kill the incentive of the scientist, the inventor and the industrialist. The theory is entirely foreign to our form of government and amounts to a change of our constitutional form of government without the consent of the people. Stability in government has been the moving force that has made Americans the wealthiest and happiest people on earth. During our brief national history, France had three empires, three republics and since then Petain, DeGaulle and the present government-a total of nine different governments in a hundred years. Under such conditions, could it be expected that French businessmen could have built as great a country as we have under our Constitution?

The arbitrary determination that gas may not be transported into and used for industrial purposes because it competes with coal, or some other fuel that is produced in the area, results in the giving of a monopoly to one industry while denying the freedom of competitive enterprise to another. If such is to be the national policy, then it follows that the industry which is guaranteed a monopoly must pay the price of a regulated monopoly, the net result being that another industry is nationalized and the rights, freedoms, and liberties of the people have been proportionately reduced.

Free competition and the profit system are the best arbiters of efficiency and price.

III.

INVARIABLE FORMULA OF HISTORICAL DEPRECIATED COST FOR RATE-MAKING PURPOSES IS WRONG IN PRINCIPLE. LEADS TO DISCRIMINATION AND RESULTS IN REGULATING PRODUCTION AND GATHERING CONTRARY TO THE TERMS OF THE STATUTE

In the interest of continued exploration for new sources of oil and gas, and the further developments of known reserves of oil and gas, it is the position of our association that the application of the "restricted earning rule" by the Federal Power Commission to producing properties of interstate natural-gas companies, should be discontinued. The application of this rule which, in effect, limits the earning capacity of such producing properties to a fixed percentage based on the depreciated historical cost has placed the exploration and development phase of the natural-gas industry in jeopardy. It has depressed the price of gas produced from both natural gas fields and gas produced with and as an incident to oil production, and encouraged the waste of this valuable natural resource. This is true for the reason that if natural gas companies are limited to the "restricted earning rule" with respect to gas produced from their own properties, the natural and inevitable result is a tendency to lower the field price for gas purchased from independent producers to a comparable level in order to compensate for the loss thus sustained in connection with its own properties. As suggested by Mr. E. DeGolyer at the Houston hearing of the natural gas investigation of the Commission, "value so arbitrarily and unrealistically determined in the case of oil and gas properties could and do present the future ridiculous paradox of widely different values for apparently identical properties" (XXIII-3586). In pointing out the discrimination thus brought about by the application of the Commission's rule, the witness DeGolyer had this further comment (XXIII-3587):

"Surely the paradox of gas produced from a well at a price of less than 2 cents per thousand cubic feet while that from an offset well may sell for a price of 3 to 5 cents per thousand cubic feet cannot endure forever."

The formula adopted by the Commission, with respect to the producing properties of natural gas companies, for rate-making purposes, is obviously wrong in principle, leads to gross inequities, and results in burdening the activity of production and gathering with Federal regulation contrary to the intent of Congress and the terms of the Natural Gas Act. It is the legal obligation of the Commission to apply the act in such manner as not to impose controls upon production or gathering activities or the facilities used in connection therewith. The Commission has done this in connection with natural gas purchased from independent producers by allowing the purchase price of the gas as an expense of doing business. There is no reason why the same result may not be accomplished with respect to the producing properties of a natural-gas company. It is a specious argument for the Commission to say that the regulation of gathering and production is a necessary incident to the exercise of its proper legislative power to regulate interstate rates of natural-gas companies.

The evaluation of the many complex factors entering into the determination of the worth of an oil or gas property is, in the final analysis, a matter that is wholly within the judgment of the appraiser. The Commission could not adopt any hard and fast formula that would be infallible. The Congress long ago recognized this truth with regard to the valuation of oil and gas properties for income-tax purposes. Percentage depletion has been universally accepted simply because of the inability of the Congress, the administrative officials or the industry to devise any standard formula by which the value of producing oil and gas leases may be determined with any degree of exactness.

It is admitted by all that regulated rates for natural gas to be just and reasonable must produce results which will equal the cost of service, including a profitable and reasonable return on the property used. The problem has always been in determining what constitutes cost of service. Certainly, the major factors or elements of cost of service may be said to be a reasonable return on the property used and the cost or value to be placed on the supplies of gas received into the transportation facilities of the natural gas company.

The Commission's stated objective to regulate the transmission and sale of natural gas for resale so as to produce the lowest possible price to the consumer,

ignores the necessary element of profit for the producer if standards of service are to be maintained and exploration continued to insure backlogs of reserves. A high standard of service, backed up with adequate reserves of natural gas, can only be insured by a reasonable profit to both the producer and the transporter. A fair and reasonable profit to all contributors to the economic cycle of production, transportation, sale, and consumption, is equally important. Each is interdependent on the other, and no one segment of the cycle can profit at the expense of the others without eventual economic collapse.

It has properly been the prevailing practice of the Commission to include the full cost of gas purchased from nonaffiliated suppliers as an expense of doing business in establishing rates for natural-gas companies. A continuation of this policy by the Commission narrows the problem to gas supplied from producing properties of a natural-gas company or its affiliates or subsidiaries. In order that the producing properties of a natural-gas company may be put on a nondiscriminatory basis with the producing properties of an independent producer, gatherer, and seller of gas, it becomes necessary that we discard cost of service in favor of the value of service.

One of the most glaring examples of the discriminatory result of the application of the "restricted earning rule" by the Commission was brought to light by the following testimony of Mr. R. H. Hargrove at the closing hearing of the naturalgas investigation in Washington, D. C., July 22, 1946:

"The Federal Power Commission, in this case, included in the rate base of the Cities Service Gas Co. its producing properties in the Texas Panhandle field, the Hugoton field, and in the other fields in Kansas and Oklahoma on an historical cost basis. Where no bonus or consideration was paid for a lease, the Commission allowed no cost in the rate base for such lease. For example, 68,086 acres of leases in the Panhandle field, constituting a very valuable proven gas reserve, were put in the rate base at zero. The end result of this method of valuation allowed the company approximately 11.4 cents per M. c. f. for its gas reserves in the Oklahoma and Kansas fields, whereas, the allowances in the Panhandle field and the Hugoton field were a nominal fraction of a mill per M. c. f. of gas reserves."

We, therefore, urge upon the Commission in its regulation of rates and charges of a natural-gas company for the transportation and sale of natural gas, subject to its jurisdiction, that there shall be allowed to such natural-gas companies as an operating expense (a) the actual price paid for gas produced if the purchase is made by a natural-gas company from nonaffiliated producers and sellers; and (b) if the gas is produced by the natural-gas company or purchased from a subsidiary or an affiliate, the prevailing current market price in the field or fields where produced for natural gas of comparable quality, volume, and pressure delivered under similar conditions, if such market price exists in the field, or if there is no prevailing current market price for such natural gas in the field where produced, then the fair and reasonable value of such gas, taking into consideration the prevailing current prices for gas of comparable quality, volume, and pressure delivered under similar conditions in the general vicinity and such other factors as may be pertinent. In the latter case, such value of the gas would be substituted for a calculated value of the gas based upon the producer's investment in and cost of the properties from which the gas is produced. There should also be allowed a reasonable compensation for gathering gas produced by a natural-gas company and delivered into its transmission facilities.

The value of a producing gas property cannot be measured by its depreciated historical cost. Originally, the property was wildcat. It may or may not have offered promising possibilities from a geological standpoint, but assuming that it was exceedingly attractive based on all known scientific data, it is as yet an axiom of the business of producing oil and gas that there is no sure way of determining whether a geological structure will produce oil or gas until it has been penetrated by the drill.

Exploration is a necessary phase of the production branch of the business.. It is the hazardous phase that calls for the expenditure of the greatest amount of venture capital. Exploration is becoming increasingly more hazardous and more expensive as drilling depths and the ratio of dry holes to producing wells continue to increase.

The application of the Commission's rule of restricted earnings of producing properties is tantamount to subjecting exploration and production to a utility status contrary to the intent of Congress and the terms of the statute. The risk and hazards inciden to exploration and production and the varying circumstances

and conditions under, which the business is conducted, are not amenable to utility regulation and the application of such theory is to stymie progress, create confusion, and develop discrimination between both the producers and the ultimate consumers of natural gas.

The impracticability of such a theory is suggested by Justice Jackson in his special concurring opinion in Colorado Interstate Company v. Commission (324 U. S. 581):

"To let rate-base figures, compiled on any of the conventional theories of ratemaking, govern a rate for natural gas seems to me little better than to draw figures out of a hat. These cases confirm and strengthen me in the view I stated in the Hope case that the entire rate-base method should be rejected in pricing natural gas, though it might be used to determine transportation costs. These cases vividly demonstrate the delirious results produced by the rate-base method. These orders in some instances result in three different prices for gas from the same well. The regulated company is a part owner, an unregulated company is a part owner, and the landowner has a royalty share of the production from certain wells. The regulated company buys all of the gas for its interstate business. It is allowed to pay as operating expenses an unregulated contract price for its co-owner's share and a different unregulated contract price for the royalty owner's share, but for its own share it is allowed substantially less than either. Any method of rate-making by which an identical product from a single well, going to the same consumers, has three prices depending on who owns it does not make sense to me.

"These cases furnish another example of the capricious results of the rate-base method in this kind of case. The Commission has put five of the most important leaseholds, containing approximately 47,000 acres, in the rate base at $4,244.24, something under 10 cents per acre. Three such leases are put in the rate base at zero. This is because original cost was used, and these were bought before discovery of gas thereon. The company which took the high risk of wildcat exploration is thus allowed a return of 61⁄2 percent on nothing for the three leases and a return of less than $300 a year on the others. Their present market value is shown by testimony to be over 3 million dollars."

CONCLUSIONS AND RECOMMENDATIONS

We believe that the foregoing analysis of the Natural Gas Act and review of the legislative history in connection therewith lead to the following conclusions: 1. That it was the clear intent of the Congress that the "production or gathering" of natural gas should not be considered within the scope of the legislation and the Federal Power Commission is, therefore, not vested with jurisdiction to indirectly regulate such activities through regulating the sales of "producers or gatherers" of natural gas to natural-gas companies for transportation in interstate commerce.

2. That the regulation or control of the end use of gas as a condition precedent to the granting of certificates of convenience and necessity for the construction of interstate gas pipe lines by natural-gas companies is beyond the jurisdictional power of the Commission; is outside the scope of the statute as intended by the Congress; results in an unconstitutional discrimination as between citizens of different States; and is a usurpation of the exclusive power of the Congress to make national policy. In our opinion, such would be an unwise policy that would lead inevitably to a nationalization, not only of the gas industry but practically all articles of commerce, contrary to our traditional concept of free enterprise under the Constitution.

3. That the application of the Commission's so-called policy of restricted earnings for producing and gathering facilities, based on the depreciated historical cost of such properties, results in discouraging exploration and production; leads to gross discrimination as between producers and sellers in the same field and between fields; depresses the price of natural gas; denies natural-gas companies, subject to the jurisdiction of the Commission, a reasonable return on the value of their producing properties; impress the local activity of gathering and producing with a public utility status, and encourages waste of a valuable natural resource. We are fully cognizant that certain rulings of the Commission, subsequent to its holding in the Columbian Fuel Corp. case, supra, and certain decisions of the courts, particularly in Colorado Interstate Gas Co. v. F. P. C. and Canadian River Gas Company v. F. P. C. (324 U. S. 581); The People's Natural Gas Company v.

F. P. C. (127 F. (2d) 153 (App. D. C. 1942)); and Interstate Natural Gas Co. v. F. P. C. (U. S. Circuit Court of Appeals, 5th Circuit, No. 10701, August 3, 1946), not yet officially reported, are in conflict with the conclusions stated herein. We are convinced that such rulings and decisions were predicated on a misunderstanding of the intent and purpose of the Congress in passing the Natural Gas Act. By reason of this misunderstanding and the prevailing tendency of the Commission to extend its control to purely local activities through administrative and judicial processes, the Commission and the courts misconstrued and misapplied the act, with the resulting usurpation of authority expressly denied the Commission by the Congress.

The patent conflict between what Congress said the law meant when it was enacted and what the Commission and the courts now say it means, should be eliminated by clarifying legislation. The Commission has repeatedly asserted that it has and claims no jurisdiction over the activities of production or gathering, such as was contended for by its attorneys and as the court affirmed in the Interstate Natural Gas Co. case, supra. We, therefore, call upon the Commission to recommend necessary legislation to the Congress. In no other way must the damage be repaired, and the present Commission make good its disclaimer of such jurisdiction. Clarifying legislation is assuredly necessary to guarantee the States, the oil and gas industry, and the public against the exercise of such usurped powers by some future Commission. The Commission has a high duty in this regard.