impossible for the Federal Power Commission to establish fair, equitable, and uniform standards for the allocation of end use unless all of the State regulatory commissions simultaneously agreed to adopt similar measures applying to utilities under their own jurisdiction. If the Federal Power Commission sought to control end use and the State regulatory commissions took no similar action, the effect would be that sales by pipe lines directly to industrial consumers would be subject to end use control, whereas, similar sales by gas distribution utilities would not. Such a situation would not only be unfair and discriminatory but would defeat the purpose of end use control. There is one more distinction between wartime and peacetime control that should be borne in mind. During the war, natural gas utilities were subjected to the control of the Office of War Utilities of the War Production Board. Concurrently the coal industry was controlled by the Solid Fuels Administration for War, the oil industry by the Petroleum Administration for War, and the railroads by the Office of Defense Transportation. The Nation as a whole was short of all of these fuels-gas, coal, and oil and the means to transport them. Consequently, the wartime agencies concerned with fuel supply and transportation, namely, Office of War Utilities, Solid Fuels Administration for War, Petroleum Administration for War, and Office of Defense Transportation worked together on all over-all problems in which they were jointly concerned. Take conservation, for example. When it was necessary to call on the general public to conserve fuel, all four Government agenies and the respective industries worked together to achieve general fuel conservation and joint appeals were sent to the public. Problems of determining the best fuel to be used by new war plants and Army and Navy installations were worked out after detailed consideration had been given to the availability and cost of gas, oil, and coal. Exactly the same procedure is followed by individual concerns in peacetime. This is because all three fuels are complementary and supplementary and consideration of which fuel best serves what purpose cannot be made without a knowledge of the interdependence of the three fuels. In fact, the allocation of our energy resources, if it ever becomes necessary, would have to include examination not only of coal, oil, and natural gas, but also hydroelectric power and possibly atomic energy; Allocation is only essential during periods of scarcity or in areas where a shortage exists. The allocation and rationing which were so widespread during the war were necessitated by wartime shortages of resources, materials, facilities, transportation, and manpower. Accordingly, I do not believe it necessary or desirable to establish controls over the end use of natural gas in peacetime. Fortunately for the people of the United States our total fuel resources are ample to meet our fuel requirements for many years to come without a comprehensive fuel rationing scheme and all the headaches that would go with it. There is today no over-all fuel shortage in the United States, and therefore there is no need for control of end use or for national conservation except in periods of temporary emergency as occurred last year during the coal strike. of ECONOMIC REASONS FOR PROPOSED AMENDMENTS TO THE Mr. GONZALEZ. The amendments to the Natural Gas Act proposed in H. R. 2185 and S. 734 are designed to keep regulation to the scope intended by Congress, which scope of regulation is related to the economic character of the natural-gas operations affected. The amendments should result, in the long run, in benefits to consumers, producers, and interstate transporters of natural gas. The specific amendments proposed should be viewed in the light of the economic character of the various phases of natural-gas operations. THREE PHASES OF NATURAL-GAS OPERATIONS There are three separate and distinct phases involved in supplying natural gas. The first phase involves exploration, development, production, and processing of natural gas so that it is suitable for use as a fuel. The second phase involves the transportation of such gas by large pipe lines in intrastate and interstate commerce. The third phase is the local distribution of gas to consumers. These three phases are quite distinct in character, even though several of them may sometimes be carried on by the same company or by affiliated companies. The basic activity requisite for all natural-gas operations is the development of production. In this branch of the business there is active and keen competition between many operators. There are thousands of fields and producers and over 400,000 wells producing oil and gas. A substantial part of the gas produced and used currently is from oil wells, and its production and conservation are inseparably related to oil production, which is controlled by State agencies. This part of the business involves unusual risks. These characteristics of natural-gas production are the basis for the important amendment proposed to section 1 (b) of the Natural Gas Act, as will be discussed later. The trunk-line transportation of gas for long distances, often in interstate commerce, involves large investments, affects many consumers, and has some monopolistic and public-utility aspects. Competition in this field cannot be depended upon to protect the public 5 because duplication of pipe-line facilities to an area might result in unnecessary investment and unusually high cost. The absence of competing lines, on the other hand, tends to place consumers at a disadvantage with respect to the purchase of gas. One of the principal reasons why legislation was sought to control the interstate transportation of gas for resale to the public was the belief that the disparity between the prices paid to producers and the prices charged by interstate pipe lines resulted in excessive profits. Such circumstances, among others, led to enactment of the Natural Gas Act of 1938 to regulate charges made by natural-gas companies engaged in trunkline transportation and sale for resale in interstate commerce. The history and language of the Natural Gas Act indicate that the act was intended to supplement and not to supplant local regulation pre ceding and following interstate commerce. The proposed amendments do not disturb Federal regulation in its proper sphere of inter state commerce. The distribution of gas for ultimate public consumption is generally subject to regulation by State and local agencies as a public utility. The Natural Gas Act does not apply to such local distribution, and the language is sufficiently clear that no changes are proposed regarding this phase of natural-gas operations. It may be noted with regard to distribution to the public that gas must compete with other fuels and forms of energy, such as coal, fuel oil, and electric power, although competition between companies in the sale of gas to domestic consumers is not generally practicable. The different character of these three phases of natural-gas operations was recognized by Congress when it passed the Natural Gas Act. And it was generally understood that the regulation of the act was designed to apply to the interstate transportation and sale for resale of natural gas. Among the evidence which Congress considered before it passed the act was a report by the Federal Trade Commission to the Seventieth Congress, in which the following statement was made about the economics of the industry: A most striking characteristic of the natural-gas industry as at present conducted is that it is strongly competitive, both in procurement of supply and in sale or disposal. It is highly competitive at both ends and in two of its three groups of functions * * The function of transmission or transportation of natural gas in bulk over the long distances commonly required to market any considerable volume of gas is, on the other hand, one of the least competitive situations to be found involving commodities or public-utility service (final report of the Federal Trade Commission to the Senate, 70th Cong., 1st sess., Doc. 92, pt. 84-A, p. 112). The character of the industry has continued to be as described by the Federal Trade Commission. BASIS OF AMENDMENTS Two other considerations should be kept in mind in analyzing the scope of Federal regulation over economic activities, such as those con trolled by the Natural Gas Act. These considerations are really basic premises of the American system of economics and government. They are as follows: 1. Competition is the best regulator of economic activity and should not be replaced by Government regulation unless and until competition cannot or does not function effectively to protect the public interest. 2. State and local regulation, to the extent that they can oper ate effectively within the field reserved to the States, are to be preferred to Federal regulation and should be given every oppor tunity to demonstrate their effectiveness. The proposed amendments to the Natural Gas Act are based on the economic character of the operations involved. They maintain Federal regulation in the field of interstate commerce with respect to the transportation and sale for resale of natural gas, but provide oppor tunity also for competition and local regulation to operate in the spheres where they can protect the public interest effectively. Three important matters on which the amendments serve to clarify the Natural Gas Act are as follows: 1. The distinction between (a) producing, gathering, processing, and related operations not subject to the act and (b) the activities subject to regulation under the act. 2. The method of dealing, for rate-making purposes, with production, gathering, processing, and related operations carried on by a natural-gas company subject to regulation under the act. 3. The question of jurisdiction by the Federal Power Commission with respect to the use of gas. Some of the reasons for these clarifying amendments are set forth in the following discussion: EXEMPTION OF PRODUCING AND RELATED OPERATIONS FROM FEDERAL REGULATION The Natural Gas Act states that its provision shall not apply "to the production or gathering of natural gas." The need for clarification of this point is generally accepted. In its report on the recent naturalgas investigation, the staff of the Federal Power Commission expresses this need as follows: It is evident from the testimony, indicating a widespread atmosphere of anxiety and uncertainty among State officials and the industries concerned, that this matter (section 1-b) is in need of further clarification. A continuance of the existing disturbed situation is certain to interfere with the effective performance in the public interest of the duties of both the Federal and State regulatory agencies in their respective spheres, and it will also affect adversely the interests and actions of oil and gas producers, land and royalty owners, and the transmission companies which purchase gas in the field. It may be expected also that unless this issue is clarified the results will be detrimental to those who consume natural gas and to the efforts of conservation authorities to prevent its waste (report of the Federal Power Commission staff on section 1(b) of the Natural Gas Act with reference to production and gathering, March 1947, p. 1). The staff of the Federal Power Commission proposes that the confusion regarding the meaning of "production and gathering" be removed by adoption of an administrative rule, on the ground that the language of the present act is sufficiently clear. Such a proposal would not provide the same protection to producers as an amendment by Congress, since the administrative rule could be changed. The uncertainty that exists among producers has been created by actions of the Commission and is not likely to be removed by other actions which are also subject to unpredictable change. An administrative rule will not provide sufficient assurance of a stable basis on which long-term operations and investments can be planned. Under the circumstances, the uncertainties which threaten effective operations in the industry should be removed by Congress to provide the assurance conducive to exploration, development, and conservation activities. The amendment in the bill under discussion proposes to make clear beyond doubt that the Federal Power Commission does not have authority to regulate the facilities or prices involved in production and gathering of natural gas by stating that the provisions of the act shall apply to the transportation and sale for resale of natural gas in interstate commerce, but shall not apply to any other transportation or sale of natural gas or to its transportation between the well or wells where produced and the paint of its delivery to or reception in the interstate trunk transmission facilities of a natural-gas company or to any sale thereof at or prior to such point of delivery or reception or to the producction or gathering of natural gas, or to the producing, gathering, treating, or processing facilities utilized or operations conducted in handling or preparing such gas for delivery or reception at such point. The definitions of the proposed amendment are consistent with the general understanding as to the meaning of production and gathering operations. The report of the Federal Power Commission staff on the natural gas investigation states that although difficult questions often arise as to the point of separation of gathering and transmission facilities, in general practice, a gathering system would be regarded as "extending to a point beyond the gasoline extraction plant and field compressor station, prior to receipt into the transmission system" (report of the Federal Power Commission staff on practices and problems in producing, gathering, and processing natural gas, March 1947, p. 84). While some questions of fact may arise even under the more explicit definitions proposed by the amendment, it is considered desirable for Congress to define the operations of production and gathering which are not subject to regulation by the Federal Power Commission as carefully as possible in order to avoid future complications and difficulties. There are several economic reasons why the amendment clarifying the meaning of "production and gathering" should be adopted, in addition to the reasons cited by the staff of the Federal Power Commission regarding the dangers of the existing disturbed situation. As previously stated, this phase of the natural-gas business is quite distinct from transportation and sale for resale in interstate commerce, which Congress sought to regulate by the Natural Gas Act. This part of the business involves unusual risks. These risks are indicated by the fact that about 85 percent of the exploratory wells drilled in recent years in the search for oil and gas have been dry holes, and that about 20 percent of the development wells drilled after fields are discovered also prove to be dry holes. In testimony before the Federal Power Commission, Richard McEntire, then chairman of the Kansas Corporation Commission, expressed the distinction between this business and public utilities by saying that the speculative functions of production and gathering are fundamentally different from transmission and are not comparable with the characteristics of a publicutility enterprise. Another reason for removing gathering and producing operations from regulation by the Federal Government is that such operations are closely related to the production and conservation of oil. Control of production and conservation of oil and gas is being exercised by State agencies in the principal producing States, and interference by the Federal Government in this field would lead to confusion and |