ciate the very courteous treatment that has been afforded those of us who appear in behalf of this legislation, and I appreciate full well the great pressure under which every member of this committee has been working during the time that you have been considering these important bills.

Mr. Chairman, prefacing my short statement I would like permission, if I may, to put in the record at this point a joint statement of the American Petroleum Institute, the Independent Petroleum Association of America, and the Mid-Continent Gas and Oil Association, in favor of H. R. 2185. The statements are here on file somewhere. If not, I will bring them down.

The CHAIRMAN. If there is no objection, the request will be granted. (The joint statement is as follows:)

Statement of position in support of H. R. 2185, H. R. 2235, H. R. 2292 (Amending the Natural Gas Act of 1938) before the Committee on Interstate and Foreign Commerce, House of Representatives, United States Congress (80th Cong.). By American Petroleum Institute, William R. Boyd, President. Independent Petroleum Association of America, Russell B. Brown, General Counsel; MidContinent Oil & Gas Association, F. M. Porters, President.

May 1947, Washington, D. C.

I. INTRODUCTORY

This is a joint statement of the American Petroleum Institute, the Independent Petroleum Association of America and the Mid-Continent Oil & Gas Association. The American Petroleum Institute is a national association having a membership of approximately 5,000 reaching into every State of the Union. This membership includes producers of crude petroleum and natural gas, refiners of petroleum and its products, extractors of natural-gas gasoline, transporters of crude petroleum, its products and natural gas through pipe lines, owners of oil and gas royalties, land owners, and many others engaged in one or more branches of the oil and gas industry.

The Independent Petroleum Association of America is a national association with a membership of approximately 6,000 from every oil-and-gas-producing State of the Nation. Its membership includes independent producers of crude petroleum and natural gas, independent refiners of petroleum, independent transporters of crude petroleum or its products or natural gas through pipe lines, owners of oil or gas royalties, land owners, permit holders, drilling contractors, and independent distributors of petroleum products or natural gas.

The Mid-Continent Oil & Gas Association is a regional association in the midcontinent area. Its membership of approximately 3,000 represents and serves all branches of the oil and gas industry and related businesses, and in particular a majority of the oil and gas producers in the States of Kansas, Oklahoma, Texas, New Mexico, Arkansas, Louisiana, Mississippi, and Alabama in which area threefourths of the Nation's natural gas and over two-thirds of the Nation's crude petroleum is produced.

II. PURPOSE OF THIS STATEMENT

This statement is submitted for the purpose of concisely setting forth the reasons why these associations unqualifiedly are in support of H. R. 2185 (and the identical bills H. R. 2235, H. R. 2292), which amend the Natural Gas Act of 1938 in certain respects.

The causes for the necessity of amending the Natural Gas Act have arisen due to the fact that the Federal Power Commission, in its interpretation and administration of the act, has departed from the original intent of Congress as specifically declared in the act. As a result of this departure from Congressional intent, there has arisen "a widespread atmosphere of anxiety and uncertainty among State officials and the industries concerned." Thus, "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."1

1

Staff report of Federal Power Commission on sec. 1 (b) of the Natural Gas Act, p. 1, March 1947.

These are not complaints by industry of what it believes the situation to be but the words quoted are admissions of a staff report of the Federal Power Commission in discussing this problem. H. R. 2185 will remove the doubts, fears, and anxieties of industry and will conform the Natural Gas Act to what was the Congressional intent when it was initially enacted in 1938.

III. THE PURPOSE OF THE NATURAL GAS ACT OF 1938

The natural gas industry, from production to final consumption, is divided into three distinct and natural phases:

(1) The local production, gathering, and transportation and sale of gas. (2) The interstate trunk-line (pipe-line) transportation of the gas and the subsequent sale to local distributors for resale, and

(3) Local distribution to the ultimate consumers.

The first of the above-mentioned activities has historically and properly been left to local control and regulation. Likewise, the third of these activities has historically been treated as a public utility function and left to local regulation. Prior to the Natural Gas Act of 1938, the second of these activities-the interstate trunk-line (pipe-line) transportation of gas-was not subject to local regulation since it is interstate in character and thus could not be constitutionally subject to local control. It was the very purpose of the act to fill this gap in regulation. Although the Federal Power Commission was confined by the act to the regulation of this second phase the trunk-line (pipe-line) transportation of gas-the Commission improperly has extended its jurisdiction backward into production and gathering and forward into local distribution. The correction of these abuses is the principal purpose of H. R. 2185.

IV. BASIC ISSUE CLARIFICATION BY AMENDMENT OR BY ADMINISTRATIVE RULE The oil and gas industries feel, as the staff of the Commission admits, that there is need for "appropriate action to relieve the doubts and fears now prevailing.'

992

The need for correction, therefore, is not questioned even by the staff of the Commission. The problem is the method of correction. There are only two methods: (1) Amendment of the act by the Congress, or (2) a change in the administration of the act accomplished by the adoption of an administrative rule by the Federal Power Commission.

Subsequent to the introduction of H. R. 2185, the staff of the Commission suggested that the needed correction be accomplished by administrative rule rather than by amendatory legislation. The suggestion of the staff at this juncture is a strange one indeed in view of the fact that the Commission has had 9 years in which to take corrective administrative action. Not only has it had the opportunity during this time, but repeatedly it has been importuned so to act.

It is the position of the associations that the administrative rule method would not accomplish the objective because administrative rules are subject to whims and changes just as are the personnel who make them. If the administrative rule can be made today to meet this needed clarification, then it can also be taken away or modified tomorrow. In effect, the staff is proposing that the Commission's jurisdiction be defined and delimited by its own administrative rule. Such definition and jurisdictional limitation fall within the policy-making power of the legislative branch of the Government, and as such, shall not be delegated by congress to an administrative agency. If Congress does not exercise its prerogative in this regard, this Government deteriorates into one by man and not by law.

The Commission, of late (particularly since H. R. 2185 was introduced) has vigorously contended that this problem better can be solved by administrative action rather than amendatory legislation. The Commission's record, however, constitutes most convincving evidence in demonstrating the inadequacy of administrative relief. There are some 18,000 or 20,000 members of the producing branch of the oil and gas industries. In addition there are many land and royalty owners who have a definite economic interest in this question. The fears and anxieties which H. R. 2185 is designed to correct are widespread. The process of administrative action is too slow, uncertain and expensive to be of any usefulness. Since the issue was first presented in the Columbian case in 1940 the Commission

2 Supra, p. 40.

has done nothing to aleviate this general problem. Very recently, however, in fact since the first hearing before the committee in April and just 1 week before the final hearing beginning May 28, 1947, the Commission came forth with several decisions on this point. The Fin-Ker case, Docket G-352, which was initiated May 8, 1942, was finally decided by the Commission on May 22, 1947-1 week before the final hearing-thus the Commission took more than 5 years to dispose of one case. The Chicago Corporation case is another example. On December 15, 1944, the Commission instituted an investigation to determine whether that corporation is subject to Commission jurisdiction. Final decision in this case was rendered on May 28, 1947, 1 day before the final hearing closed-and then only after this specific case had been brought to the attention of the committee during the April hearing.

It is submitted that the record of the Commission clearly shows that this is not a problem to be efficaciously disposed of by administrative action. The fears, anxiety and confusion recognized to exist among the 18,000 or 20,000 producers, royalty owners, land owners and others cannot be effectively removed by slow, uncertain and expensive administrative action.

V. ENCROACHMENT BY THE COMMISSION INTO PRODUCTION AND GATHERING Although the act expressly provides that it "shall not apply to the production or gathering of natural gas", the record is replete with successful efforts of the Commission in encroaching into this forbidden field.

First: The Commission took jurisdiction over the producing properties and gathering facilities of an interstate trunkline (pipe line) transporter and subjected these properties and facilities to public utility regulation. Although these producing and gathering properties obviously have no semblance of a public utility, they are regulated as such by the Commission.*

Second: The Commission next took jurisdiction over the producing properties and facilities of an affiliate of a trunkline transporter and subjected them to public utility regulation."

Third: The Commission has more recently taken jurisdiction over the sale price of natural gas of a nonaffiliated producer and gatherer."

Thus, we here have a progressive series of steps taken by the Commission in extending its jurisdiction into the production and gathering phase of the industry despite the express prohibition in the act to the contrary. It is this improper extension of jurisdiction by the Commission that has given rise to the fears, uncertainties, anxieties and confusion on the part of producers and gatherers. They are apprehensive lest they also be controlled by the Commission and treated as a public utility. As a result, producers and gatherers are refusing to sell their gas to interstate transporters, thus depriving consumers of a needed supply of gas and the producers of the right to sell their product in a free market. The Interstate Natural Gas Company Case, referred to in third above, is now before the United States Supreme Court on appeal. Even though this case should be reversed and the Commission held to have no jurisdiction over the sale price of gas by this producer and gatherer, all of the uncertainties and confusions now confronting the industry would not be removed. The present act still would not contain a definition of what constitutes producing and gathering; the Commission necessarily, in each and every case, would be required to determine what constitutes production and gathering. The producers and gatherers would not know what their status is until each case is looked into separately and individually by the Commission, thus leaving all the fears, anxieties and uncertainties described above. H. R. 2185, however, expressly defines the activities of producing and gathering; under such definitions the producers and gatherers could act with certainty since their status would be determined by fixed law rather than left to whimsical administrative determinations.

The provision in the act which exempts production and gathering from the jurisdiction of the Commission is a total exemption and is not qualified or limited in any manner. It exempts the business of production and gathering. The proposal of the staff for a clarification by administrative rule treats the exemption as if it were partial and not a total exemption. The suggested admin

7

3 Natural Gas Act of 1938, Public Law No. 688, 75th Cong., sec. 1 (b).

4 Federal Power Commission v. Hope Natural Gas Company, 320 U. S. 589.

5 Colorado Interstate Gas Co. v. Federal Power Commission, 324 U. S. 581.

• Interstate Natural Gas Co. v. Federal Power Commission, 56 F. (2d) 949. Staff report, supra, p. 41.

istrative rule would exempt those who "only produce, gather or process natural gas"; it would not exempt the producing and gathering activities of interstate trunk-line companies. Under this proposed rule, the Commission would continue to apply to producing and gathering properties the public utility method of regulation based on persons as distinguished from activities. The Commission would thereby regulate a portion of the activity of producing and gathering, thus rigidly fixing by administrative fiat the economic common denominator of the industry to which the remainder of the industry although not regulated, would have to adjust itself.

When an interstate trunk-line company purchases gas from a producer, it is allowed as an operating expense the purchase price thereof, commonly referred to as the "field price". However, when it produces its own gas, it is not allowed as an operating expense the going field price for such gas, but the Commission includes these producing and gathering properties on a public utility basis. This results in the companies receiving a price for their gas which varies from the field price down to zero. Under this method of treatment by the Commission, the result is reached whereby different prices are allowed for the same product depending upon who owns it. This result is characterized by Justice Jackson of the United States Supreme Court as being "delirious", "fantastic" and "capricious". He also said that such a result "Does not make sense to me." H. R. 2185 would eliminate these absurd results by permitting the interstate trunk-line companies to receive the going field price for all gas, whether produced by them or purchased from other sources.

*

19

VI. ENCROACHMENT BY THE COMMISSION INTO DISTRIBUTION AND CONSERVATION The Natural Gas Act provides that the provisions thereof "shall not apply * to the local distribution of natural gas or to the facilities used for such distribution * By means of administrative interpretations, the Commission unlawfully has extended its jurisdiction into the local distribution of natural gas, a field from which it is expressly excluded. This has been accomplished by various means-the most repugnant being its assertion of authority over the end use of gas.

Under the end-use theory the Commission proposes to be the determining authority as to whether or not natural gas or other fuels shall be used." It would classify uses of natural gas as "superior" or "inferior" and decide what uses are superior or what uses are inferior. If the Commission is allowed to control the end use of natural gas, then it follows logically that the same authority should be established over the end use of all other energy resources, including coal, oil, water power, and electricity.

Aside from the fact that end-use regulation fundamentally is unsound and contrary to our basic concept of government, it has other objections. For example, it is an indirect means of controlling conservation and production activities admittedly reserved to the sovereign States. It is obvious that he who controls the use of gas at the end of the interstate pipe line will control it at the beginning. End use is thus a specious means whereby the Commission can extend its jurisdiction into forbidden fields.

It has been contended by competing fuel interests that end-use control is imperative because natural gas is a scarce product and should be reserved for uses that will contribute most to present and future generations. This argument, however, is fallacious. Gas reserves are at an all-time high. Each year for the past 25 years, more gas has been found than has been used; thus our known reserves have been materially increased from year to year. In addition, technological developments in the synthesis of gas from coal, together with the unknown potentialities of other energies such as atomic energy, may soon find our large reserves without market outlets.

*

The Natural Gas Act provides that the Commission has jurisdiction over "the sale * ** of natural gas for resale." This means the wholesale of gas by the pipe line to the local distributors. The act further provides that it "shall not apply to any other ** sale." This exclusion means that the Commission does not have jurisdiction over sales made by a pipe-line company directly to industrial or other users. Such sales are not sales "for resale." Yet the Commission has repeatedly extended its jurisdiction over such direct sales.

The proposed amendment to the Natural Gas Act expressly excludes the Commission from end-use control and precisely defines "local distribution" and "dis

8 Colorado Interstate Gas Co. v. Federal Power Commission et al., 324 U. S. 581. Natural Gas Act, supra, sec. 1 (b).

10 Boone-Iowa case.

tribution facilities,” which, together with other amendments, will prohibit the Commission from overstepping its proper jurisdiction into distribution activities or conservation activities.

VII. CONCLUSIONS

This statement does not attempt to review all of the arguments available in support of this measure. It does not discuss specifically all the amendments proposed in H. R. 2185. The discussion herein has been confined to a summary discussion of some of the amendments involving issues most directly affecting the producing branch of the oil and gas industries. The omission of discussion of other amendments is for the sake of brevity. The detailed arguments supporting the proposed amendments have been more fully presented to the committee by individual witnesses. The associations are strongly in favor of H. R. 2185 in its entirety. It respectfully is submitted that H. R. 2185 is the minimum necessary to correct the jurisdictional violations and administrative abuses practiced by the Commission.

Mr. RIZLEY. In closing the presentation in support of the proposed amendment to the Natural Gas Act, I want to call attention to the fact that the record shows that the proposed amendments are for the purpose of serving the best interests not only of a large industry but even more important the interests of the consumers who are looking more and more for the fuel supply.

In the eventual receipt by the consumer of natural gas three distinct functions have been employed: (1) That of producing the gas, gathering it and preparing it for transportation; (2) that of transporting gas from the points where the production, gathering and treating have been completed to the point at which gas is delivered into distribution lines for local distribution; (3) the local distribution of such gas to the ultimate consumer.

These functions are well illustrated on a chart which I have caused to be prepared and which I now request be received as a part of my evidence. The chart is attached to this brief statement that I have been reading from, and which I do not intend to read in full, but do want in the record.

The CHAIRMAN. The committee will receive the chart to which you refer, and consider it an exhibit in the case. Whether it can be actually incorporated in the printed hearings is very doubtful on account of restrictions in the Government Printing Office, and also the facilities are not such to do it.

Mr. RIZLEY. I appreciate that very much. If I can have it made a part of the record so it will be available to the committee if you desire to make use of it in executive session, I have attached to it a number of data and information, much of which was inquired about by members of the committee when witnesses were testifying in the beginning in this case, and that is one of the reasons that I want to get it into the record where it may be used by the committee.

The CHAIRMAN. The printed matter on the chart to which you have referred, of course, can be made a part of the hearings. I will ask you to confer with the clerk in the preparation of that portion of the record so that we may have as much as possible of that which you desire in the record at this point.

(The chart is inserted facing this page.)

EXPLANATION OF CHARTS

There are three distinct and separate functions employed in the providing of natural gas to ultimate consumers. These functions are: (1) Production and gathering, (2) transportation, (3) distribution.