Mr. BUDDRUS. Well, sir, that happens to be your opinion of whether I am rational or not. I do not want to get into that. Mr. CROSSER. I was looking for your reasons. Mr. BUDDRUS. It certainly is not irrational, if I have any reason at all. Mr. CROSSER. Perhaps my choice of words was not a happy one. Mr. BUDDRUS. I said the public interest is involved in the transportation end of this business, and that is why it should be regulated. Mr. CROSSER. The public interest is involved in the production end of it too, is it not? Mr. BUDDRUS. Certainly, there is. Mr. CROSSER. That is all. The CHAIRMAN. Any further questions? (No response.) The CHAIRMAN. I would like to say to the witness the fact that the committee used as much time as it did in questioning you should be taken as a compliment to you. Mr. BUDDRUS. Thank you, sir. (The following was presented for the record:) Hon. CHARLES A. WOLVERTON, PANHANDLE EASTERN PIPE LINE CO., Chairman, Interstate and Foreign Commerce Committee, House of Representatives, Washington, D. C. DEAR MR. CHAIRMAN: In accord with your desire to have full and free discussion of the issues involved in proposed amendments to the Natural Gas Act I am writing to clarify certain points in my testimony before your honorable committee. Since appearing before your committee I have had an opportunity to review my testimony and consider more carefully the questions propounded by yourself and other members of the committee. There was considerable emphasis on questions relating to the attitude of pipe lines on regulation as common carriers, the divorcement of producing wells from pipe-line ownership, State statutes relating to proration and so-called price rigging as a means of pipe-line companies securing a greater allowance for their own gas going into pipe lines. I would like to deal with these questions in the above order. It is only necessary to consider carefully the nature of natural gas to realize that gas pipe lines do not belong in the category of common carriers, such as oil pipe lines, railroads, trucking lines, and other common carriers. Natural gas must be on tap for consumers when wanted, despite the fact that it cannot be stored except where underground facilities are available. The flow must be continuously available, like water, yet it is more difficult to handle. Changing weather conditions, sometimes very quickly, up the demands for gas tremendously. This necessitates adjustments at the point of flow into the pipe line if domestic consumers are to be properly served. Operating as a common carrier, the gas pipe line would have to serve shippers on a first-come, first-served basis. There would be no adequate means of balancing the supply or maintaining existing high standards of service. Discrimination between consuming customers would be inevitable. The suggestion of divorcing production from pipe-line ownership deserves particular attention. It should not be forgotten that the installation of large interstate pipe lines created the market for natural gas to be delivered to the distant consuming areas. The record will show that, prior to the advent of the pipe lines, natural gas in the field had very little value. The network of pipe lines serving the field has brought active competition, and in turn, better prices for the producers. At the same time, as the demands for gas to supply distant markets increase, it is essential that the pipe-line companies have the ability to maintain reasonable bargaining position for the gas they must purchase to supply those demands. To achieve that purpose and to insure an adequate supply of gas for their customers over the long pull pipe-line companies should have substantial reserves under their own operation and ownership. Under the proration systems in the gas-producing States, so-called nominations are required from all who propose to take gas from a field. This embraces inter state and intrastate pipe lines, purchasers of gas for use in the manufacture of carbon black, and users of natural gas for any and all purposes. After all nominations are secured the total quantity or demand is prorated among all producing wells. There is a prescribed formula under which each well is allowed to produce a part of the total demand in a relationship of the content under lease to the content of all leases. Proration is particularly important with regards to wells under contract to a pipe line. Production is permitted only up to allocation regardless of the contract. This gives a favorable position to the producer not under contract. His price must be paid or the pipe line may not be able to secure sufficient gas for its customers. It often happens that purchasers of gas are in short supply due to the aggregate prorations of controlled or contract wells being below the total nominations. This means a good market for the producer with gas for sale. When the question was raised as regards price rigging or the extent to which producers of gas might be at the mercy of pipe lines, there was suggested the possibility of pipe lines endeavoring to secure a higher allowance for their own gas than was warranted. Discussion developed as to what regulation was needed. I assumed that it was meant, "what regulation was needed beyond that provided in the pending legislation" and said, "none." My reason is that section 5 makes it impossible for pipe-line companies to manipulate the amount allowed for their own production through high payment for purchased gas. The Commission can allow as an operating expense only the market price existing in the field. The provisions of the bill are very definite in making sure that the market price is determined by competitive conditions. In fact, the Commission is not bound by prices in any particular field. Careful study of section 5 of the Rizley bill will make it readily apparent that the Federal Power Commission has ample authority to prevent pipe lines, owning producing wells, from rigging or manipulating prices to the company's advantage. I am enclosing reproduced copies of this letter which can be furnished other members of your committee, if you think desirable. I would like to express to your honorable committee my appreciation, not only for the opportunity to be heard during the hearings, but also for this occasion to clarify important points in connection with the Rizley bill. Sincerely yours, E. BUDDRUS, President. The CHAIRMAN. We will call Mr. Allen as the next witness. STATEMENT OF THOMAS H. ALLEN, PRESIDENT, MEMPHIS LIGHT, GAS, AND WATER DIVISION OF THE CITY OF MEMPHIS, TENN. Mr. ALLEN. We appear before this committee of the Congress in the interest of the people of Memphis and Shelby County, Tenn. The people of Memphis own the gas-distribution system in Memphis and Shelby County, Tenn. The Memphis Light, Gas, and Water Division, which is a branch of the city government, operates the utility to supply gas for any and all purposes for which gas is used as a fuel throughout the city and county. The citizens of Memphis are largely dependent upon natural gas as a source of fuel for domestic, commercial, and industrial purposes, and it is the function of this municipally owned utility to provide an adequate supply of gas for these or any other purposes both now and for the future and to safeguard the rights and properties of the people we serve. Our purpose here is to state our position relative to the proposed amendments to the Natural Gas Act, approved June 21, 1938. as amended, as they may affect the welfare of this community. Memphis Light, Gas, and Water division obtains its entire supply of natural gas by purchase from the Memphis Natural Gas Co., a pipeline company that delivers gas to the division's system over a transmission line extending from the Lisbon gas field in Louisiana to the Guthrie station in the Monroe, La., gas fields, and from Guthrie sta tion to the Memphis city gate station on Brooks Avenue, south of the city limits of Memphis, and at isolated points of delivery within Shelby County, Tenn., along their lines. The Memphis Natural Gas Co.'s line extends beyond Memphis to Jackson, Tenn., and to other points in west Tennessee. While Memphis Nautral Gas Co. serves other customers, Memphis is the principal customer, consuming approximately 75 percent of the company's total sales for resale, and, therefore, provides their largest market. Memphis Natural Gas Co., in turn, secures gas from the following companies: From the Monroe, La., field: United Gas Pipe Line Co., Southwest Gas Producing Co., Interstate Natural Gas Co., Hope Producing Co., United Carbon Co., Southern Carbon Co. From the Lisbon, La., field: United Gas Pipe Line Co., Southwest Gas Producing Co. Memphis Light, Gas, and Water division has an established gas business with large investments in the distribution system and stand-by plant, and the people of Memphis and Shelby County have invested large sums in domestic appliances and in commercial and industrial equipment for the use of gas for all the many purposes for which gas is suitable. This division is, therefore, interested not only in serving all the present needs of the community, but is equally interested in a continuity of operation over a long period of time. We are, therefore, vitally concerned, along with others, over the adequacy and the life of the sources of supply from which natural gas is obtained and in the adequacy, reliability, and business stability of the producing, gathering, and transmission systems that supply gas to this division. This division wishes to make it plain that it has no direct contact with the production and gathering of gas and that it does not gather facts and data bearing on production, conservation, waste, or other problems relating to the supply of gas at the source. This is not a function of this organization and we do not have the technical staff to deal with problems related to production and gathering, nor do we feel competent to speak with any authority as to the technical -aspects of these problems. However, we do have an interest in every aspect of the gas business that affects the discovery, development, production, gathering, transmission, and distribution of gas. Our interest would be identical with the interest of any community relying in large part on a supply of natural gas for its daily activities. Therefore, while the physical and technical aspects of production and gathering of gas at the source may be matters on which we cannot speak with authority, we do have a vital interest in the conservation measures for the prevention of waste, the efficient handling of the product all the way from the well to the consumer, and in all matters that affect the economies and commercial aspects of the over-all problem of finding the supplies and delivering gas to the burners of the citizens of this city and county. SOURCE OF SUPPLY The discovery and production of petroleum products, oil and gas, are so interrelated that regulation in one field of production is necessarily affected by the activities in the other field of production. Government, both State and Federal, should recognize the inherent diffi culty in dealing with these matters through separate agencies and should undertake to coordinate control by governmental regulatory agencies in a way that does not create unworkable conflicts one way or another and that avoids any discrimination that works to the advantage of one group of producers of one product and to the disadvantage of the others. Gas plays so important a part in the production of oil and oil wells provide so large a proportion of gas that it seems to us logical that all phases of the problem should be vested in one authority competent to deal with both. Therefore, all regulatory authority over discovery, production, and gathering should be given to either the States or the Federal Government and thus avoid the confusion inevitable when two cooks are at work on one pie. It seems to be an accepted fact that conditions under which petroleum products are produced in one locality are often quite different from the conditions in other localities. The problems of conservation and regulation, therefore, are seemingly properly local matters that can best be regulated by local authorities. The technical aspects of these problems are well understood and, therefore, we do not undertake to analyze these conditions in detail. We believe, therefore, that the regulation and control of production and gathering of petroleum products should be left to the various States where it now rests and that overlapping problems as between the States can be and should be solved by compacts. We, therefore, concur in the amendment to the Natural Gas Act, as proposed, which specifically limits the power granted the Federal Power Commission to the regulation of interstate trunk-line transmission systems and which surely was the original intention of the Natural Gas Act. The ultimate consumer is interested in knowing that the proven reserves allocated to his uses will provide a continuous supply of gas over a long period of time at reasonable and competitive prices. The distributing companies are further interested in knowing that the rate of discovery will keep pace with or exceed the rate of production to provide for the growth in population and the expanding activities of the people they serve, over a long period of time. Regulation, therefore, must recognize the necessity of an incentive to promote an eternal hunt for new reservoirs. It seems to us proper that regulation should recognize the risks involved in the search for new sources and that the basis of price fixing in the production and gathering phases of the business can reasonably and properly be on a much different theory than that established by regulating authorities for the more prosaic procedure of transporting and distributing the discovered product. But the ultimate consumer also has an interest in knowing that these incentives do not exceed economically sound values, that no community may have an advantage over any other community, that prices paid for discovery, production and gathering apply to all alike, and that no unnatural barriers be established by law in any State that prevents the free flow of a commodity in trade. These artificial barriers may take a great variety of forms. Restraints and controls applied by any State, whether for the benefit of the producers or the public, must be equitable as between producers and free of all discrimination as between citizens of the producing State and the people in the nonproducing States. It is reasonable to believe that the supply of gas is.so widely scattered over the Nation that an unnatural barrier of any character will in time break down under attack and the price of gas will find a competitive level as between various States that would be satisfactory to the Nation as a whole. It should be apparent that people in any community look to its utility to maintain a continuity in the service rendered and expect the utility to contract for long-term and adequate reserves. The distributing utilities, therefore, look to the transmission companies for this same guaranty, and if the transmission companies are to meet this obligation, they must find ways and means of procuring reserves to take care of present commitments and to guarantee service for a reasonable future period of time either by ownership of the reserves or by contracts for the reserves. The transmission company can best protect its commitments by ownership of the producing and gathering facilities. We believe the language of the amendment is sufficiently clear to insure an equitable allocation of costs as between producing and gathering facilities and transmission facilities. The allocation of costs must be equitably done. The regulation of production and gathering procedures and the determination of equitable field prices can be and must be wisely administered by the State authorities. If this over-all result is not realized, those who are hurt will be heard from. As between producers in any State and as between States, regulation within the States and the operation of the law of supply and demand has heretofore been sufficient protection to the consumers throughout the Nation depending upon natural gas as fuel. Should these factors fail to provide an economically reasonable price in the fields, it would then be time to consider the feasibility and legality of control through one Federal agency over production, conservation, and gathering of gas and oil and of regulating the rates at which these products are sold for interstate commerce. The future of gas as a fuel is dependent upon a continuing search for new reservoirs, the prevention of waste, and economically sound pricing. It will require wisdom and foresight to establish the balance between effort and compensation that will best serve the American Nation over the long years ahead. TRANSMISSION It is axiomatic that any product has little or no value without a market. The discovery of natural gas in the beginning of the industry was a disappointment to the driller and a financial loss to the investor. Transmission pipe lines have given value to what would otherwise be an almost worthless commodity by providing wide and extensive markets for gas. It is equally self-evident that transmission lines would never have been built to distribute gas over great distances and wide areas without year-round, large volume, stable loads to support the endeavor. The development of these markets immediately imposes an obligation on the part of the pipe-line company as well as the distributing companies to provide facilities in advance of actual needs to meet the development and growth in the markets served. The facilities provided must not only have ample capacity, they must be reliable and dependable. To have a large city that depends upon gas for its house heating and domestic needs lose its fuel supply on a cold day would be a serious tragedy. Interruptions to the supply of gas for commercial and industrial purposes are sometimes necessarily tolerated |