An analysis of dual regulation of electric utility and natural gas industries

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Content AN ANALYSIS OP DUAL REGULATION OF
ELECTRIC UTILITY AND NATURAL GAS INDUSTRIES
A Dissertation
Presented to
the Faculty of the Graduate School
University of Southern California
In Partial Fulfillment
of the Requirements for the Degree
Doctor of Philosophy
by
Kenneth G. Clare
June 1950
UMI Number: DP23239
All rights reserved
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This dissertation, w ritte n by
KENNE TH _ _ GUI LFORD_CLARE........
under the guidance of h .l.s~ F a cu lty Committee
on Studies, and approved by a ll its members, has
been presented to and accepted by the C o uncil
on Graduate Study and Research, in p a rtia l f u l
fillm e n t of requirements fo r the degree of
D O C T O R O F P H I L O S O P H Y
' Dean
Date June„.;l£50.......
Committee on Studies
, £ . c . -(Ok....
Chairman
TABLE OF CONTENTS
CHAPTER PAGE
I. INTRODUCTION...................... 1
The problem.............. . . .......... 1
Statement of the problem ............. 1
Importance of the study....... 5
History and present status of the
problems ................ 7
Organization and sources ............... 15
Preview of organization . ........... 15
Source of d a t a ............ 16
II. STATUTORY POWERS OF THE COMMISSIONS ..... 19
Authority of the Federal Power
Commission ........ ........... 19
Powers derived from the Federal Power
A c t................ 20
1. Control of water power develop
ment .......... 20
2. Control of public utilities . . . 27
Powers derived from the Natural Gas
Ac t..................... 33
Authority of the state commissions . . . 38
The gap in regulatory powers... 42
Summary.......................... 45
III. FEDERAL POWER COMMISSION JURISDICTION UNDER
THE FEDERAL POWER ACT . ............... 47
ill
CHAPTER PAGE
Regulation of water power development . . 47
Navigable waters as a test of Federal
jurisdiction................ 48
Exercise of particular powers ........ 58
Regulation of electric public
utilities.............................. 81
The meaning of ”interstate
commerce” ................ 82
Exercise of particular powers ......... 94
Summary............ 107
IV. FEDERAL POWER COMMISSION UNDER THE
NATURAL GAS A C T ....................... . 110
General jurisdiction under the
Natural Gas A c t ....................... 110
Interstate commerce distinguished from
production and gathering ...... Ill
Interstate commerce distinguished from
local distribution ........ 121
Jurisdiction over particular subjects . . 127
Extension and abandonment of service . 128
Exportation of natural gas ........ 137
Rate control ................ 139
Accounting control ........ ..... 144
Summary.............. 147
iv
CHAP'TER PAGE
V. ECONOMIC CONDITIONS AND TRENDS
AFFECTING JURISDICTION..................... 149
The electric utility industry .............. 15©
Electric energy supply centers .... 150
Markets for electric energy ...... 155
Size and scope of utility companies . . 162
Interconnection of transmission
lines......................... 169
Natural gas industry....................... 174
Natural gas supply centers ...... 174
Markets for natural gas... ............ 177
Size and scope of company operations . 181
Interconnection of pipe lines............ 191
Summary ....................... 192
Conclusion........................... . 194
VI. IMPLICATIONS OF DUAL REGULATION OF THE
ELECTRIC UTILITY INDUSTRY ............ 195
Control of water power development . . • 196
Legal and economic criteria of
jurisdiction........................... 196
Utilization and conservation of water
power resources......................... 199
Proposed changes in jurisdiction . . . 208
Control of public utilities ....... 215
V
CHAPTER PAGE
Realization of economies of scale * . . 216
Realization of the economies of
interconnection . . . . . . . . . . . 221
Realization of integration under
holding company regulation ............ 231
Ability to control rates ....... 240
Abilityuto regulate accounts ............ 247
Proposed changes in jurisdiction .. . . 253
Summary . . . ............................ 257
Conclusion.............................. 258
VII. IMPLICATIONS OF DUAL REGULATION OF THE
NATURAL GAS INDUSTRY . . ...... .. 261
Effects of federal and state regulation . 262
Provision of adequate service ............ 262
Ability to control rates ....... 269
Regulation of production and
gathering activities ........ 286
Conservation of natural g a s.............. 297
Regulation of accounts and other
matters.................................. 317
Proposed changes in jurisdiction .... 319
Proposals relating to Issuance of
certificates........................... 320
Proposals relating to producers
and gatherers........................... 323
vi
CHAPTER PAGE
Miscellaneous proposals ................... 331
Summary.................................. 334
Conclusion.............................. 336
VIII. SUMMARY AND CONCLUSIONS................... 339
Summary . . . ' ................... 339
Conclusions.............................. 349
Recommendations............................ 353
BIBLIOGRAPHY............................. 355
LIST OP TABLES
TABLE PAGE
I. Electric Energy Production by Electric
Utilities, 1946 .............................. 152
II. Energy Source of Electric Utility Production
by Geographic Divisions, 1947 ............... 154
III. Electric Energy Generated and Consumed in
Certain Selected Regions, 1940 156
IV. Interstate Transfer of Electricity in Order
of Magnitude, 1932 ................... . . 160
V. Consumption of Electric Energy as Per Cent
of Production in Certain Selected
States, 1940 161
VI. Net Natural Gas Production, 1946 ...... 175
VII. Natural Gas Sales of Utilities, by
States, 1947 178
VIII. Comparison of Certain State Average Bills
for Residential Electric Service, 1949 . . 243
IX. Income Available for Common Stock as a Per
centage of Common Stock and Surplus of Oil
and Gas Companies Selling Large Volumes of
Natural Gas in Interstate Commerce, 1948 . 291
CHAPTER I
INTRODUCTION
I. THE PROBLEM
Statement of the problem. Expansion of Federal Power
Commission jurisdiction during recent years has greatly
strengthened the role of the federal government in the regu
lation of electric utility and natural gas industries.
State commissions, meanwhile, have continued to perform im
portant regulatory tasks. It seems timely to inquire how
successfully this dual system of regulation has functioned.
In the continuing search for means of improving regulation,
it may be helpful to consider whether the jurisdiction exer
cised by the commissions at the two levels of government and
approved by the courts effectively promotes industrial effi
ciency and the public Interest.
It is the purpose of this study to evaluate dual com
mission jurisdiction over electric utility and natural gas
industries in terms of economic objectives. An attempt is
made to determine whether particular controls employed by
state commissions should be modified or transferred to fed
eral jurisdiction. Likewise in the analysis of various fed
eral controls, the object is to determine whether they
should be reformed in certain respects or shifted to state
jurisdiction. Inasmuch as many subjects of regulation
represent both state and federal control, the crux of the
problem is to find a proper balance of powers between com
missions of the two levels or to conclude that dual regula
tion is not feasible.
Except for the control of water power development be
gun in 1920, Federal Power Commission regulation dates from
1935 when jurisdiction was conferred relative to electric
utilities. In 1938 authority to regulate natural gss com
panies was granted the Commission. This legislation was
prompted by the combined effect of a recognized need for
regulation of interstate activities of these industries and
the inability of the states to regulate such matters due to
constitutional limitations. With the passage of these acts
the stage was set for dual regulation in which the Federal
Power Commission and the various state commissions shared
responsibility for the appointed task.
As the Federal Power Commission asserted its claim to
jurisdiction, opposition from state commissions developed in
some Instances. More frequently, companies seeking to avoid
regulation posed jurisdictional issues in cases before the
Commission and the courts. Such issues have been resolved
by the courts through the application of legal tests con
tained In the Constitution, statutes, and prior court rul
ings. Judgments of the court are, of course, conditioned to
some degree by the nature of economic conditions and trends.
3
The obscurity of law-maker Intent underlying consti
tutional and statutory provisions is a source of much con
fusion and uncertainty in the administration of laws by
Commissions and in the adjudication of jurisdictional cases
by the courts. Legal phrasing is not sufficiently explicit
to permit ready and certain application of powers to many
actual problems. There is a somewhat indefinite latitude of
meaning within which interpretation is exercised in order
to find a specific meaning pertinent to a particular case.
Since interpretations vary even among the most competent
authorities, the semantic problem in determining the prop
er application of powers is inherent in dual regulation.
A more important and basic problem relating to the
regulatory partnership of state and federal commission is
that of distributing authority between them in a manner
which conforms to the dictates of economic conditions.
Among the more important economic factors to be considered
are the geographical distribution of supply centers and
market areas for electric energy and natural gas, the size
of operating units, and the Interconnection of facilities
of individual companies. Tendencies toward Increasing in
terstate sales and transmission of electricity and natural
gas at the same time has given greater effect to legal re
straints on state regulation and provided arguments for ex
tension of federal regulation.
4
Legislators do not always give sufficient weight to
economic considerations due to ignorance of such factors or
the temptation to indulge in political compromise. The
courts also evidence these shortcomings and, in addition,
give great weight to judicial precedent. Commissions are
more likely to recognize the nature of industrial character
istics and consumer needs, but their functions are restrict
ed by legislators and jurists. For this reason the potenti
alities of a sound system of regulation may not be fully
realized.
While commission administrators are generally well
informed with respect to regulatory problems, curbs on their
powers are necessary to prevent injustice and confusion,
lot only are members of commissions subject to error in
their judgment of the justice or injustice of certain acts
of companies, but they are also subject to the temptation of
overextending regulatory authority delegated to them. As a
consequence of the latter tendency, state and federal regu
lation may overlap with resulting duplication in require
ments. Also, inordinately detailed and burdensome regula
tion may Interfere with efficient production and distribu
tion of electricity and gas. Failure to integrate 3tate and
federal regulation may cause disharmony and inefficiency.
For instance, in the regulation of electricity and natural
gas rates, reductions of wholesale rates ordered by the
Federal Power Commission in many Instances have not been im
mediately followed by reductions in related distributors1
rates. Such problems constitute the heart of this investi
gation.
Importance of the study. Failure of responsible of
ficials to define the jurisdiction of commissions in a man
ner which is conducive to efficient and effective regulation
is likely to have an adverse influence on consumer and pro
ducer interests. Unless the scope of state and federal reg
ulation is closely related to the nature of prevailing eco
nomic conditions, consumers may not reveive maximum service
benefits at lowest possible cost. Producers may not be
stimulated to efficiently provide such service unless suffi
cient incentives prevail. The raison df etre of the elec
tric utility and natural gas Industries as well as a system
of regulation is to aid in the realization of consumer
wants. A study of the legal-economic problem of jurisdic
tion may throw some light on shortcomings in regulation.
While experiences in the regulation of transportation
have been extremely helpful In this newer field, many of the
problems are unique and solutions for them cannot be bor
rowed from other sources. Although the federal government
has seen sufficient reason for virtually displacing state
regulation of railroads, no such action has been taken thus
6
far witherespect to the electric power and natural gss In
dustries .
The present system of regulation relating to these
industries reflects a lack of certainty regarding the degree
of control which the states' and the federal government s
should exercise. Pears have been expressed by supporters of
strong state regulation that federal control is encroaching
upon the proper province of the states. Opposing'this view
are those who insist that so long as current economic trends
toward increasing interstate transmission and sale of elec
tricity and gas continue, the federal government should as
sume greater responsibility in regulation. Arguments on
this general issue are not uncommon; but what is needed is
a comprehensive evaluation of the prevailing system of dual
regulation.
Historically, an increasing number of Industries have
been brought within the definition of a public utility or
subjected to strict government control. Dual regulation by
state and federal agencies is exercised with respect to most
of them in some degree. Thus the problem of determining
proper jurisdiction of state and federal authorities is one
of general importance. Since there has been a trend toward
increasing economic regulation and no signs of a change in
that direction are indicated, the problem does not appear to
be one of mere temporary significance.
7
IX. HISTORY AND PRESENT STATUS OF THE PROBLEM
The general problem of integrating regulatory poli
cies and practices of state and federal agencies has been a
matter of concern since the beginning of the federal system
of government in the United States. Separation of subjects
of national interest from those of a local character has
occasioned many controversies during the evolution of Amer
ican government. The particular problem of determining
proper state and gefieral jurisdiction with respect to elec
tric utility and natural gas industries should be regarded
as one facet of this broader issue.
Prior to the passage of the Federal Power Act and
the Natural Gas Act, the states were free to regulate these
industries within the limitations imposed by the Federal
Constitution and the courts. The enactment of federal leg
islation was prompted in part by the inability of the states
to regulate increasing interstate activities. Underlying
the Inability of the states to control interstate operations
was the trend toward increasing size of business units and
the interconnection movement. Technological or engineering
advances greatly stimulated the expansion of companies.
Likewise, development of managerial ability and management
techniques resulted In greater efficiency. In general,
economies of large scale operations provided inducements to
increase the size of facilities and thu3 to widen the area
of operations.
Interconnection of transmission lines both in the
electric utility and natural gas industries further aug
mented interstate movement. As a result of this trend,
sales at wholesale in interstate commerce increased and the
powers of the states were insufficient to permit regulation
of such transactions. It would seem that the forces of en
gineering, economics, and law conspired to limit the ability
of the states to regulate these industries.
The legal restraints upon state authority to regulate
electric utility and natural gas companies stem from the
Federal Constitution, which confers upon the federal govern
ment power to regulate interstate commerce. The courts have
interpreted the commerce clause many times in attempts to
give it meaning for particular circumstances. A heavy re
sponsibility has been carried by the Supreme Court of the
United States in determining the jurisdiction of state and
federal agencies as governed by the commerce clause.
Prior to the entrance of the Federal Power Commission
into the regulation of public utilities and natural gas com
panies, the Supreme Court rendered several important deci
sions concerning state authority to regulate rates and serv
ice of companies engaged in Interstate commerce. The high
court held in the Landon Case of 1919 that gas distributed
9
to consumers was not part of interstate commerce even though,
it was purchased from an interstate pipe line company.^
State regulation was considered to be proper since distribu
tion of gas to ultimate consumers represented local business
and was only an incidental burden on interstate commerce.
The Pennsylvania Case of 1920 introduced a new issue
2
for the Supreme Court to decide. In this case the Pennsyl
vania Gas Company transmitted gas from Pennsylvania into New
York and there distributed the gas to consumers. The New
York Public Service Commission proceeded to regulate rates
charged by the company to consumers in New York. The com
pany contested this action and the court ruled that while
Congress could regulate sales to consumers under these cir
cumstances the business was local in character. Conse
quently the court held that until Congress entered the field
imposing federal regulation, nothing prohibited control by
the state.
The criterion employed by the court in the Landon
Case for determining the limit to state jurisdiction was not
applied in the Pennsylvania case. In the first of these,
the local character of business began where gas pressure in
the pipe lines was reduced. In the second case, local
1 Public Utilities Commission v. Landon, 249 U. S.
236 (191977
2 Pennsylvania Gas Company v. Public Service Commis
sion, 252 U. S. 23 (19W7.
10
distribution was a part of interstate commerce. The contra
diction in principles indicates the lack of certainty as to
the proper test to apply in jurisdictional determinations.
The Supreme Court was again confronted, in 1924, with
a jurisdictional question involving regulation of the gas
3
industry. In contrast to the Landon and Pennsylvania cjs
cases, this case was concerned primarily with jurisdiction
over rates for gas sold at wholesale to distributing com
panies. The court did not regard this type of transaction
as local in character, since numerous cities in different
states were affected. The national interest was said to be
paramount and of such importance that only federal regula
tion could prevail. This so-called Kansas rule wa3 applied
in a subsequent case even though the selling company deliv
ered gas to the distributor at the state line so that
transportation by the latter was wholly intrastate.4
The Attleboro decision rendered by the Supreme Court
in 1927 shifted the scene from the regulation of the gas in-
5
dustry to control of the electric utility industry. It Is
important to note, however, that the jurisdictional problems
3 Missouri ex rel Barrett v. Kansas Natural Gas Co.,
265 TJ. S. 298 (192^7.
4 Peoples Natural Gas Co. v. Pennsylvania Public Ser
vice Commission, 270 U. S. 550 (192617
5 Public Utilities Commission of Rhode Island v.
Attleboro~~3tieim an^’ ElectricHgo'~57g"T> .~gr-g5~TI9S7 )T
11
were generally similar in the two industries. The circum
stances of this case differed significantly from those of
any of the previously decided gas cases. A Rhode Island
company sold electricity to a distributor in Massachusetts,
and the Public Utility Commission of Rhode Island attempted
to regulate the rates of these transactions. In denying the
right of Rhode Island to regulate such rates, the court
stated that a direct burden upon interstate commerce was in
volved and that therefore neither the forwarding state nor
the receiving state could exercise authority. Federal ju
risdiction was exclusive.
Justice Brandeis, in a vigorous dissent, was im
pressed by the local character of the business rather than
the fact that a small amount of electricity moved across the
state line. The majority, however, sought to formulate a
principle or rule of general applicability.
Throughout the opinions of the Supreme Court, there
is expression of the belief that local business should be
locally controlled and that activities seriously affecting
many persons in two or more states should fall within the
authority of the national government to regulate. While the
principle finds support in the Federal Constitution and the
American concept of democratic government, the practical
problem of classifying specific business activities has
proved very troublesome. Presumably, the basic economic
12
issue underlying the legal problems is whether in the regu
lation of a given subject the public interest would be
better served by federal regulation or by state control.
Determination of the issues is further complicated by
the fact that no subject of regulation exists in isolation.
When a wholesale rate for gas or electricity is modified, a
chain reaction follows which ultimately impinges upon the
consumer. Thus the state commissions sought to control
wholesale rates of interstate companies selling electricity
or gas to local distributors. In recent years the question
has arisen as to the feasibility of Federal Power Commission
control of production and gathering activities as a means of
preventing excessive charges for natural gas delivered to
companies under federal jurisdiction.
With the advent of Federal Power Commission regula
tion of electric utility and natural gas companies, the gap
in regulation caused by the Attleboro decision was closed.
The states watched the extension of federal jurisdiction, at
times with apprehension, at other times with approval, but
seldom with indifference. As the Federal Power Commission
broadened its jurisdiction, the relationships between fed
eral and state regulation became more important.
Efforts of the Federal Power Commission to project
its authority into the doubtful areas of regulation were
notably successful. Undoubtedly the political climate
13
favored a stronger influence of the federal agency in this
field, since the "New Deal" generally moved in the direction
of increasing centralization of governmental authority. Re
versals of Commission orders by the Supreme Court were very
infrequent. Judging from the decisions rendered by the high
court, the Commission did not experience serious difficulty
in convincing the justices of the validity of federal juris
diction in the various circumstances involved.
In the light of these developments, the question may
be asked whether federal control has proceeded too far.
Perhaps it has not been extended far enough. Does the cur
rent distribution of regulatory authority between federal
and state commissions provide the ideal basis for regulation
of electric utility and natural gas industries? If there is
reason to believe that it is not ideal, what modifications
are needed? Would complete federal control be superior to
dual regulation? These are some of the questions to which
this study is directed.
Three notable investigations have been made within
the general field of inquiry for this study. One of these
is the work of Hugh Langdon Elsbree entitled Interstate
Transmission of Electric Power, published in 1931.® It con
tains an analysis of the difficulties Involved in state
6 Hugh Langdon Elsbree, Interstate Transmission of
Electric Power (Cambridge: Harvard university Press, 1^31).
14
regulation of an industry which had expanded to interstate
proportions in some of its operations. Because this book
was written before enactment of the Federal Power Act, there
was no federal regulation of interstate transmission and
sale of electricity to consider. Obviously, the problem of
jurisdiction became more complex with the development of
dual regulation after 1935 and the increase in interstate
activities of utility companies.
The relationship of the Federal Power Commission to
the state utility commissions was the subject of a study by
7
Robert D. Baum, published in 1942. The author surveyed the
regulatory experience of the Federal Power Commission in an
effort to discover the various administrative and jurisdic
tional relations with the state commissions. Considerable
attention was devoted to cooperation between the federal
Commission and the state commissions. This publication did
not attempt to evaluate the economic validity of prevailing
jurisdiction except in an incidental way. Furthermore, this
book was written prior to the development of certain impor
tant controversial issues, especially in the regulation of
the gas industry.
The Twentieth Century Fund, in 1948, published a v>
7 Robert D. Baum, T.he Federal Power Commission and
State Utility Regulation (Washington, D. C.l AmericariUoun-
cil on Public Affairs, 1942).
15
voluminous work on the development of government policy with
8
respect to the electric power industry. While it earries
a publication date of 1948, nearly all of the data was gath
ered prior to 1942. While much information in this volume
is closely related to the present investigation, there is no
more than a general treatment of jurisdictional questions.
A survey of previous studies in the field therefore
reveals no adequate investigation of the particular problem
represented in this report.
III. ORGANIZATXOH AND SOURCES
Preview of organization. The general outline of this
report may be briefly considered.
The first major aspect of the investigation is f
treated in Chapter II, which is concerned with the basic
powers conferred upon the commissions. State and federal
statutory powers are analyzed in order to determine what
particular authority has been granted to these agencies.
The reasons which prompted the legislation are also consid
ered.
Development of jurisdiction under the statutes during
the years since 1935 is traced in Chapters III and IV. In
asmuch as state jurisdiction had been fairly well established
8 twentieth Century Fund, Electric Power and Govern
ment Policy (New York: Twentieth Century Fund, T948K
16
at that time, primary attention is centered on the extension
of federal jurisdiction over electric utility and natural
gas industries.
In Chapter V pertinent economic conditions and trends
are analyzed. Emphasis is placed upon those economic char
acteristics of the industries which have a particularly im
portant relationship to the size and scope of company opera
tions .
The heart of the study is included in Ghapters VI and
VII. The first of these chapters contains an evaluation of
dual regulation of the electric utility industry. Certain
economic and legal effects of prevailing jurisdiction are
considered. Proposals for redefinition of commission powers
are presented and evaluated. A similar treatment is made of
regulation of the natural gas industry.
The final chapter presents a general summary of major
findings along with personal conclusions of the writer.
Source of data. Since the problem investigated
transcends the two fields of economics and law, a wide range
of sources of information had to be selected. Both govern
mental and private publications were extensively used.
Particularly useful among the government publications
were the reports of the Federal Power Commission. Some of
the important works were the "Opinions and Decisions,”
17
MAnnual Reports," and various special reports such as the
"Reports of the Natural Gas Investigation," "Statistics of
the Natural Gas Industry," "Statistics of Electric Utilities
in the United States." A special report published by the
Federal Power Commission in 1948 presented the results of a
survey of state commission jurisdiction. The survey was
conducted jointly with the National Association of Railroad
and Utility Commissioners and provided the basis for an
authoritative detailed account of state commission jurisdic
tion and regulation.
The United States code was the basis for the study of
statutory powers. References to reports on hearings before
the Committees on Interstate and Foreign Commerce of the
Senate and House of Representatives, as well as the Congres
sional Record permitted analysis of objectives underlying
federal legislation and proposed amendments to federal laws.
Decisions of the courts were reviewed in the United
States Reports, Federal Reporter (Second Series), and other
reporting services. The Public Utilities Reports provided
a well organized source of commission and court decisions
and opinions.
Other valuable sources included the proceedings of
the National Association of Railroad and Publie Utilities
Commissioners, reports of the American Gas Association, re
ports of the Edison Electric Institute, and various
18
periodicals. Among the last, the more useful ones were Pub
lic Utilities Fortnightly, Journa1 of Land and Public Utll-
Economics, Electrical World, and Oil and Gas J ourna1.
CHAPTER II
STATUTORY POWERS OP THE COMMISSIONS
The entire structure of regulation is fundamentally
grounded upon the authority to regulate as expressed in the
federal and state constitutions and statutes. The nature
and extent of powers conferred upon the various commissions
largely determine the effectiveness of regulation. They in
dicate, in general, how closely state and federal control
may be integrated. The authority of a commission may be so
extensive as to overlap regulation by another agency, or so
inadequate as to leave a gap in regulation. In either in
stance basic authority is not conducive to efficient regula
tion.
I. AUTHORITY OP THE FEDERAL POWER COMMISSION
Federal powers to regulate electric utility and natu
ral gas industries are derived from two principal statutes
1
as amended, namely: the Federal Power Act of 1935, and the
2
Natural Gas Act of 1938. These powers were conferred upon
the Federal Power Commission, an administrative agency which
3
had been established by previous legislation.
1 4$ t. 838, Title II.
2 52 Stat. 833.
3 The Federal Power Commission was first created In
1920 under the Federal Water Power Act (41 Stat. 1062). It
was reorganized as an independent commission under an amend
ment of 1930 (46 Stat. 797).
20
Poxters derived from the Federal Power Act * Two Acts
of Congress actually provided the Federal Power Commission
with its basic authority to regulate private electric util
ity companies. The first of these was the Federal Water
Power Act of 1920 which was chiefly concerned with licensing
4
of projects on Interstate waters. Control over the trans
mission and sale of electricity in interstate commerce was
instituted by the Federal Power Act of 1935. The Act of
1920 was incorporated into the Federal Power Act in a some
what modified form as one of three parts. Thus after 1935
the basis for Commission authority with respect to electric
ity was the comprehensive Federal Power Act.
1. Control of water power development. Commission
powers contained in Part I of the Federal Power Act are es
sentially those conferred by Congress in the Federal Water
Power Act of 1920. This authority developed out of the con
servation movement, which was vigorously championed by such
figures as Theodore Roosevelt and Oifford Pinchot during the
5
first two decades of the century. Conservationists were
apprehensive about the waste and inadequate utilization of
water resources. In 1906 a law was enacted providing that
dam projects approved by Congress for power development on
4 Loc. clt.
5 Charles R. Van Hise, The Conservation of Natural
Resources (New York: The Macmillan Company, 1911 ) ~ l p. 7.
21
Interstate waters were not to be constructed until the pro
ject plans were further approved by the Secretary of War and
the Chief of Engineers, who might also attach conditions to
6
their approval. The amendment of 1910 stipulated that
broader aspects of comprehensive water-shed development had
7
to be considered in approving individual project plans.
The Federal Water Power Act further strengthened fed
eral control over the use of water resources. The step t :le
taken by Congress in 1920 was particularly important because
it provided not only for approval of plans for water power
development, but added such features as a formal licensing
system and regulation of rates and services of licensees.
Furthermore, the Act established the Federal Power Commis
sion as the responsible administrative agency in this field
of federal regulation.
From the standpoint of administrative powers, the
heart of Part I of the Federal Power Act is contained in the
section which authorized the Commission to issue licenses
8
for water power projects on interstate waters. Such licen
ses for water power projects are issued
. . . for the purpose of constructing, operating, and
maintaining dams, water conduits, reservoirs, power
6 34 Stat. 386.
7 36 Stat. 593.
8 Federal Power Act, 49 Stat. 838, Title II, Sec. 4 (e).
22
houses, transmission lines, or other project works nec
essary or convenient for the development and improvement
of navigation and for the development, transmission, and
utilization of power across, along, from or in any of
the streams or other bodies of water over which Congress
has jurisdiction . . . or upon any part of the public
lands and reservations of the United States, or for the
purpose of utilizing the surplus water or water power
from any Government dam. . .9
The scope of the Commission’s authority is obviously
very broad with respect to the types of projects licensed.
Inclusion of projects relating to navigation may be defended
on the ground that they affect the actual or potential pro
duction of hydroelectric power.
Fundamentally important in this connection is the un
derlying jurisdiction of Congress over ‘ ’streams or other
bodies of water.Some content of meaning is given this
term in the definition of navigable waters elsewhere in the
11
Act. Because of the far-reaching significance of this
definition, it has been the center of attention, if not of
12
controversy, on many occasions. Navigable waters are de
fined as
. . . those parts of streams or other bodies of water
over which Congress has jurisdiction under its authority
to regulate commerce with foreign nations and among the
several States, and which either in their actual or
9 Se c. 4 (c).
10 Sec. 4 (c).
11 Sec. 3(8).
12 Cf. Chapter IV.
23
improved condition notwithstanding interruptions between
the navigable parts of such streams or waters by fslls,
shallows, or rapids compelling land carriage, are used
or suitable for use for the transportation of persons or
property in interstate or foreign commerce, including
therein all such interrupting falls, shallows, or rap
ids, together with sueh other parts of streams as shall
have been authorized by Congress for improvement by the
United States or shall have been recommended to Congress
for such improvement after.investigation under its au
thority; . . *13
This statement clearly reflects the commerce clause
of the Federal Constitution from which Congressional juris -
14
diction is derived. While the statutory provision appears
to be clear and explicit, many disputes have arisen relative
to the application of this standard in jurisdictional
15
cases.
Closely related to the issuance of licenses is the
issuance of preliminary permits. The Commission is empow
ered to issue such permits for the purpose of enabling ap
plicants for licenses to establish priority over other ap
plicants while securing the necessary data and preparing
X 0
plans to be submitted to the Commission. A maximum period
of three years is allowed for this preliminary investiga-
13 Sec. 3 (8).
14 ’ ’The Congress shall have Power . . . To regulate
Commerce among the several States . . .” U. S. Constitu
tion, Article I, Sec. 8.
15 Cf. Chapter IV.
16 Sec. 4 (f)
24
tion.17
*
Several provisions are made for conditions which must
18
be attached to each license. The most important of these
requires that every licensee abide by reasonable regulation
19
of rates, charges, and services. Such regulation is to be
performed by the state wherein the project is located. In
the event that the state concerned makes no provision for an
agency to regulate these matters, the Commission may under
take the task. Likewise, where two or more states are
unable to agree upon regulation of Interstate activities,
the Commission is empowered to exercise control.
This provision perhaps more than any other of Part I
reveals the intent of Congress that the states be protected
in their general position as regulators in the field. Con
gressional sanction is given to state regulation of inter
state activities of licensees as well as to intrastate oper
ations of licensees.
Other conditions required or permitted by the Act in
clude the right of the federal government to take over and
20
operate a project upon expiration of a license, the right
of the federal government to take possession of a licensed
17 SecT 5
18 Sections 6, 8, 10, 13, 17, 19.
19 Sec. 19.
20 Sec. 14.
25
21
project during an emergency, the right of the Commission
to require installation of certain facilities for the bene-
22
fit of navigation, and the right of the Commission to as
sess annual charges for the use of sites on interstate
23
waters. Miscellaneous additional conditions are set forth
in the Act.
Certain investigatory powers were conferred by Part I
which are of far-reaching importance. General authority to
investigate the utilization of water resources in the nation
is significant as a means of deriving recommendations with
24
respect to public policy. Studies were to include such
subjects as plant location, capacity of stations, develop
mental costs, and the relation of generating stations to
market locations. Investigations of other specific matters
25
are authorized in various sections of the Act.
The power to make cost determinations is necessary to
effective rate regulation. Whether rate control is per
formed by a state commission or by the Federal Power Commis
sion, some type of cost standard is essential to test the
reasonableness of rates and charges.
21 Sec. 16.
22 Sec. 12.
23 Sec. 17.
24 Sec. 7 (b).
25 Sections 4 (g), 14, 12.
26
Authority to determine the actual legitimate original
26
cost of a licensed project is granted to the Commission.
In order to implement this power, the companies concerned
are required by the Act to submit sworn statements showing
the original cost of their property. The companies must o
8Iso grant free access to the project and to their records.
Cost determinations would be greatly impaired if the
Commission had to rely upon the varying classifications of
accounts developed by each licensee. Consequently, Congress
conferred upon the Commission the power to prescribe a sys-
27
tem of uniform accounting for licensees. The Act further
authorizes the Commission to ascertain and determine rates
28
of depreciation for licensees.
Several provisions of the Act reveal in a forceful
manner the fact that state regulation is not to be ignored
or displaced. The Commission is specifically authorized to
29
cooperate with agencies of state governments. Preference
is to be given applications of states and municipalities for
30
permits or licenses. States are to be notified regarding
------- 2'S"5ec. ’”4 (b).
27 Sec. 301' (a).
28 Sec. 302.
29 Sec. 4 (c).
30 Sec. 7 (a).
27
31
applications for permits or licenses. Compliance with
32
state laws is required of license applicants. States*
rights to the use of water for irrigation or municipal or
33
other uses are protected. Thus great care was taken by
Congress in recognizing the interests of states in the con
trol of water resource development.
2. Control of public util ltles. Federal regulation
of electric utility companies engaged in interstate commerce
appeared in 1935 chiefly as a result of the limitation im
posed upon state authority by the Attleboro decision of
34
1927. Added impetus was given to the enactment of strin
gent federal laws at this time by the advent of the New
Deal. Looking behind this decision, one finds a tendency
toward increasing interstate movement of electricity. As a
result, it became increasingly difficult for the state to
35
control activities of large utility companies.
31"Sec. 4 (f).
32 Sec. 9 (b).
33 Sec. 27.
Public Utilities Commission v. Attleboro Steam and
Electric Company, 273 tJ. S. 85 (1927).
35 L. S. Ready, Chief Consultant for the Federal Power
Commission’s National Power Survey, stated in 1935 that more
power was transferred across state lines in 1933 than was
generated in the entire United States in 1913. Hearings of
the House Committee on Interstate and Foreign Commerce, on
HR 5423, 74th Congress,1st Session, p. 2367 A Fedors!
28
The first attempt to provide for federal regulation
of interstate sales was that made by Senator Couzens in
1930. A bill was drawn and introduced in the Senate, but
36
failed to pass. The bill was opposed by the National As
sociation of Railroad and Utilities Commissioners, an organ
ization representing state officials. Its general counsel
pointed out that the states feared a repetition of federal
37
dominance which developed in railroad regulation.
Framers of the Federal Power Act had an abundance of
data on the industry to consider, since the Federal Trade
Commission had conducted a comprehensive investigation of
utility corporations and reported its findings to the Con-
38
gress. The record clearly indicated the inadequacy of
state regulation and the need for federal control in inter
state activities.
Authority of the Commission to regulate electric
utilities engaged in interstate commerce is set forth in
Trade Commission report stated that two states in 1929 im
ported an amount exceeding the total kilowatt-hours consumed
in those states, there being, of course, some local genera
tion and some exports of energy. Federal Trade Commission,
Utility Corporations, 70th Congress, 1st Session, Senate
Document No. 92, Part 71-A, p. 7.
36 Senate bill 3869, 71st Congress, 2nd Sess., 1930.
37 Benton, John E., "Why the State Commissions Oppose
the Couzens Bill," Public Utility Fortnightly, 5:3, Jan. 1.
1930.
38 Federal Trade Commission, Utility Corporations,
70th Congress, 1st Session, Senate Document No. 92.
29
Part II of the Federal Power Act. This authority applies to
” . . . the transmission of electric energy in interstate
commerce and to the sale of electric energy at wholesale in
39
interstate commerce. . ." The term ’ ’sale of electric en
ergy at wholesale” is defined to mean ”a sale of electric
„40
energy to any person for resale. Clearly, Congress in
tended that federal regulation should supplement rather than
supercede state regulation.
Vitally Important among the powers conferred upon the
Federal Power Commission by Part II is that which relates to
public utility rates. The Commission is charged with the
responsibility of eliminating and preventing unjust and un-
41
reasonable rates and charges. Public utilities are re
quired to file new schedules with the Commission and to se-
42
cure its approval before putting the new rates into effeet.
The Commission is empowered to Investigate any proposed
schedule of rates upon complaint or upon Its own initiative,
43
and suspend those rates pending investigation.
Commission authority goes beyond mere approval and
investigation of rates. The Federal body may also determine
39 Sec. 201 (a).
40 Sec. 201 (d).
41 See. 205.
42 Sec. 205 (c).
43 Sec. 205 (e).
30
just and reasonable rates and fix them by order whenever it
finds, after investigation, that prevailing rates are un
just, unreasonable, unduly discriminatory, or preferen-
44
tial. This comprehensive regulatory power is the backbone
of Commission authority over electric utilities.
In order to implement rate control, the Commission
was empowered to determine the cost of production or trans-
45
mission of electric energy. The actual legitimate cost of
property of every public utility may be investigated and as
certained. Such utilities are required to submit to the
46
Commission a statement of original cost of its property.
Power to prescribe a uniform system of accounts permits the
procurement of complete data in a form which facilitates
47
analysis and comparison. Depreciation rates may be deter-
48
mined and fixed by order of the Commission.
The power to regulate the furnishing of adequate
service was also provided in the Act. Upon complaint of a
state commission, the federal body may investigate the ade
quacy of service and, if it is found to be substandard, the
44 Sec. 206 (a).
45 Sec. 208 (a).
46 Sec. 208 (b).
47 Sec. 301.
48 Sec. 302.
31
Commission must determine the adequate service to he ren-
49
dered and fix it by order. Limitations on Commission au
thority are, however, imposed by a clause forbidding an or
der which would have the effect of impairing the company’s
ability to render adequate service to its customers. For
Instance, an order compelling enlargement of generating fa
cilities might have the effect of shifting working capital
to investment in plant.
Ho public utility is permitted to dispose of any ma
jor facilities or enter into a merger or consolidation or to
acquire securities of other public utilities without first
50
obtaining the approval of the Commission. Likewise no se
curities are to be Issued by a public utility without prior
51
approval of the Commission. Any issuance of securities or
assumption of liability must be preceded by authorization
from the Commission, except that federal control is not to ^
apply where the states regulate security issues.
In conformity with the trend toward increasing inter
connection of facilities by utility companies, the Commis
sion was granted authority to regulate such arrangements.
Under the Act, the Commission was empowered to promote and
encourage voluntary interconnection and coordination within
4§ Sec'.'"207.
50 Sec. 203 (a).
51 See. 204.
32
52
regions to be established by the Commission. Furthermore,
interconnections could be ordered by the federal 8gency if,
upon complaint, an investigation revealed such action to be
53
necessary or appropriate. During an emergency the Commis
sion was empowered to order interconnections either upon its
own motion or upon complaint and after proper investiga*
54
tion. Authority was also given the Commission to approve
55
exportation of energy to a foreign country.
Broad powers of investigation were conferred upon the
Commission to assist it in carrying out the objectives of
the Act and to serve as a basis for recommending further
56
legislation in this field.
Great care was taken by the framers of the Federal
Power Act to insure that state regulation of public utili
ties would not be compromised or neglected. The Commission
was specifically authorized to cooperate with state commls-
57
3ions through conferences and by other means. Moreover,
the federal agency may refer matters to properly constituted
52 Bee. 202 (a).
53 Sec. 202 (b).
54 Sec. 202 (c).
55 Sec. 202 (d).
56 Sec. 307 (a).
57 Sec. 209 (b).
33
58
joint boards composed of members from interested states.
Complaints by state commissions relating to various matters
59
are specifically permitted. The Commission is directed to
notify interested states of certain actions taken and to glv
give reasonable opportunity for state officials to present
60
their views. Finally, in the definition of federal juris
diction, attempts were made to protect the jurisdiction of
the states and to confine federal regulation to that area
61
wherein the states had no constitutional authority to act.
Powers derived from the Natural Gas Act. The powers
conferred upon the Federal Power Commission by the Natural
Gas Act bear some resemblance to those derived from Part II
of the Federal Power Act. This fact is largely attributed
to the similarity in the nature of the problems and the ex
tent of federal jurisdiction deemed necessary to cope with
the problems in the two fields.
The essential problem with respect to both industries
during the period following the Attleboro decision of 1927
was the need for a system of regulation which could cope
with interstate industrial operations. The Attleboro
58 Sec. 209 (a).
59 Sec. 306.
60 Sec. 302 (b).
61 Sec. 201 (b).
34
decision disabled the states in the regulation of interstate
natural gas movements as much as in the control of inter
state transmission of electricity. The Natural Gas Act of
1938 was intended to close the gap caused by that decision.
After referring to the effect of the court’s action upon
state regulation, the House Committee which considered and
recommended the Natural Gas Bill in 1938 stated, ”The basic
purpose of the present legislation is to occupy this field
in which the Supreme Court has held that the States may not
sot."62
The Natural Gas Act was made applicable
. . . to the transportation of natural gas in interstate
commerce, to the sale in interstate commerce of natural
gas for resale for ultimate public consumption for do
mestic, commercial, industrial, or any other use, and to
natural-gas companies engaged in such transportation or
sale. . .63
A ”natural-gas company” was defined as ” ... a person en
gaged in the transportation of natural gas in interstate
commerce, or the sale in interstate commerce of such gas for
. ,,64
resale.
Among the principal powers of the Commission based
upon the Natural Gas Act is that relating to rate regulation
Report of the House Committee on Interstate and
Foreign Commerce on the Natural Gas BTTl, 75th Congress, 1st
Session, Report No. 709, p. 2.
63 52 Stat. 833, Sec. 1 (b).
64.Sec. 2 (c).
35
of natural gas companies. The Commission is empowered to
65
require filing of all rate schedules. It may also suspend
66
any new schedule pending investigation. Such investiga
tions may be initiated either upon complaint or upon the
Commission’s own motion. Furthermore, the Commission is re
quired, upon its own motion or upon complaint, to determine
the proper rates whenever prevailing rates are found to be
unjust, unreasonable, unduly discriminatory, or preferen-
6V
tial. No increase in rates may be ordered, however, un
less the company itself files a schedule Including such pro
posed rates.
In order to Implement its power to control rates, the
Commission is authorized to investigate and determine the
68
cost of property for purposes of rate making. Natural gas
companies are required to file statements showing inventory
69
of all of their property along with the original cost.
The Commission is further authorized to investigate and de
termine the cost of production or transportation of natural
gas by a natural ga3 company in cases where the Commission
66 Sec. 4 (c).
66 Sec. 4 (e).
67 Sec. 5 (a).
68 Sec. 6 (a ).
69 Sec. 6 (b).
36
70
has no authority to establish a rate. This provision was
apparently inserted as a means of enabling the Commission to
71
aid the states in their rate-making functions.
The power to control rates was further supported by a
grant of authority to prescribe a uniform system of accounts
72
and reports. Company property and records were to be ac-
73
cessible to the Commission for inspection. The federal
agency was also authorized to require proper depreciation
accounting and, if found necessary, might determine and fix
74
by order adequate depreciation rates.
With respect to service extensions, the Commission
was empowered to order extensions and interconnections, pro
vided no undue burden would be imposed upon the company con-
75
cerned. Also, no service could be abandoned except with
76
permission and approval of the Commission. Authority was
70 Sec. 5 (b).
71 "This subsection applies only to cases involving
transportation of natural gas in interstate commerce and
will greatly aid State commissions in their rate-making pro
ceedings .” Report of the House Committee on Interstate and
Foreign Commerce on the Natural Oas Bill7 75th Congress, 1st
Session, Report No. 709, p. 6.
72 Sec. 8 (a).
73 Sec. 8 (b).
74 Sec. 9.
75 Sec. 7 (a).
76 Sec. 7 (b)
37
granted to issue certificates of convenience and necessity
77
for construction or extension of facilities. Furthermore,
export and import of natural gas was made subject to control
78
by the Commission.
Broad powers of investigation were conferred upon the
Commission by the Act. Subjects may be specific problems
arising in the course of regulation, or more general matters
relative to which the Commission may obtain information as a
79
basis for recommending further legislation to Congress.
The relationship between federal and state regulation
was an issue of vital concern to the framers of the Natural
Gas Act. This fact is evidenced in the several provisions
of the Act which are directed toward securing close harmony
between the Federal Power Commission and state commissions.
As in the Federal Power Act, there is a provision authoriz
ing the Commission to cooperate in various ways with the
80
state commissions. In addition, the federal Commission
77 An amendment of 1942 (52 Stat. 824), broadened the
Commission's powers over the Issuance of certificates. The
original section restricted the Commission's authority to
issue a certificate to an applicant proposing to serve an
area already served by another company. The amendment pro
vided authority to issue certificates relative to any pro
posed extension.
78 Sec. 3.
79 Sec. 14.
80 Sec. 17 (b)
38
may refer matters to joint boards composed of members from
81
the states affected. Furthermore, the Act frequently re
fers to the states in connection with specific subjects of
regulation. For instance, states are permitted to request
certain cost investigations, to make complaints, and to in-
82
tervene in hearings before the Commission. Great care was
taken to insure that the Commission would not overstep into
state fields of regulation but confine its regulation to in
terstate operations which the states could not reach due to
83
constitutional limitations.
II. AUTHORITY OF THE STATE COMMISSIONS
State regulation of electric utility and gas com
panies antedates federal regulation of the industries. The
extent of regulation has differed greatly, however, from one
state to another. Indeed, seven states had no commission
regulations of gas and electric utilities whatever as late
as 1948.84
51 "Sec. ” 17 (a).
82 Sec. 15 (a).
83 Sec. 1 (b).
84 Delaware, Florida, lowa, Minnesota, Mississippi,
Nebraska, and South Dakota. Texas had a commission regulat
ing gas utilities but not electric utilities. Federal Power
Commission, State Commission Jurisdiction and Regulation of
Electric and Gas Utilities (Washington, D. C.: Government
Printing Office, 1948), p. 2.
39
The powers possessed by the various state commissions
are derived from their respective state statutes. A survey
of state commission authority was completed in 1948 by the
Federal Power Commission in cooperation with the National
Association of Railroad and Utility Commissioners. A report
based upon this survey provides an authentic account of r ,
3tate commission jurisdiction with respect to electric and
85
ga3 utilities.
The nature and extent of regulatory powers over gas
and electric utilities are very similar. They may therefore
be appropriately considered together.
As indicated, the great majority of states have pro
vided for commission regulation of utilities. While the ab
sence of commission regulation does not mean complete lack
of control over rates and service, regulation by an adminis
trative agency or commission has been regarded as the more
efficient means of control. It is important to note, how
ever, that the presence of a state commission does not in
dicate that powers over rates and service are complete.
All commissions established to regulate gas and
Q5 Loc . “ cit. One difficulty experienced in making
this survey stemmed from the interpretation of statutes.
Certain commissions exercised only those powers expressly
granted by statutes, while others went beyond this by ef
fecting regulation based upon liberal interpretation of sta
tutes. Since the Federal Power Commission investigation and
report was based upon Information submitted by state commis
sions, some statutory interpretation was unavoidable.
40
86
electric utilities had authority to regulate rates. Sta
tutes generally specified that rates were to be just and
reasonable. Each of the commissions had power to initiate
rate investigations, to require prior authorization of rate
87
changes, and to suspend proposed rate changes. Only 26 of
these commissions, however, could order temporary rates
pending investigation.
Determination of a rate base underlies the problem of
determining just and reasonable rates. Some of the states
specified the method of determining the rate base, while
others employed such general terms as "fair value" to guide
08
rate-making authorities. The Commissions report stated,
"The commissions in 20 states reported a method of rate base
determination more specific than that embodied in ’fair
89
value* or ’all elements of value considered’ concepts."
The problems of depreciation methods and depreciation
rates were also subjects of statutory powers. Forty of the
commissions had power to prescribe the depreciation method,
90
but only 37 were empowered to prescribe depreciation rates.
86 Federal Power Commission, _op. cit., p. 2.
87 p. 4.
88 Ibid., pp. 6-7.
89 Ibid., p. 9.
90 Loc. cit.
41
All state commissions with power to regulate rates of
electric and gas utilities had power to establish service
91
standards and safety standards. Only 33 commissions had
authority, however, to authorize or require interconnections
92
of facilities of gas or electric utilities.
A considerable number of states did not authorize
their commissions to require certificates of convenience and
necessity. Only 30 commissions could issue such certifi
cates for initiating service, 22 for constructing major
93
property additions, and 38 for discontinuing service.
Even fewer commissions could regulate exports of electricity
and gas or authorize hydroelectric development, the number
94
being 11 in the former and 12 in the latter.
All state commissions having power to regulate elec
tric and gas utilities had power to prescribe a uniform sys
tem of accounts, and to require filing of an annual account-
95
ing report.
The authority granted state commissions with respect
to financial "and corporate regulation fall3 far short of
completeness or uniformity. Nevertheless, a majority of the
91 Ibid., p. 4.
92 boo* cit.
93 Ibid., p. 24.
94 Ibid., p. 25.
95 Ibid., p. 4.
42
State commissions had the power to
• . • regulate or control mergers and consolidations (35
States), 3sle of facilities (34 States), issuance of se
curities (33 States), purchase of facilities (31 States),
transactions with affiliates (29 States), purchase of
securities of other utilities (26 States), to partici
pate in reorganization proceedings (25 States), and to
require competitive bidding on security issues (23
Sta tes).96
It is apparent that a majority of the states have es
tablished commissions and granted them powers sufficient to
perform a creditable service of regulation. let commissions
with powers to control both electric and gas utilities are
lacking in eight states. Furthermore, a significant number
of commissions were not granted certain powers considered to
be very useful and effective in protecting the public In
terest .
III. THE GAP IN REGULATORY POWERS
Since a few states have no commission and many state
commissions lack certain specific powers, some of which are
particularly vital to effective regulation; and since the
Federal Power Commission is restricted to regulation in in
terstate commerce, there is a gap in regulation. Integra
tion of state and federal regulation is incomplete.
Statutory powers of the Federal Power Commission are
quite complete with respect to interstate transmission and
96 Ibid., p. 6.
43
sale at wholesale of electricity and natural gas . The states,
however, are not apparently capable of doing as adequate a
job in the intrastate field. Although an evaluation of the
success of regulation should be based upon the effects, of
regulation itself rather than upon the authority to regu
late, it can be stated with certainty that regulatory powers
have a strong determining influence upon the success of reg
ulation.
There is no doubt that effective regulation is im
paired by the short reach of state commission authority in
many jurisdictions, utility companies sometimes seek to
evade regulation of any kind by asserting that they are sub
ject to neither state nor<.federal control. For instance, in
the Panhandle Eastern Pipe Line Co. case of 1948, the com
pany contended that the Federal Power Commission had no au
thority to regulate sales to industrial consumers under the
Natural Gas Act, but that the states were also without au-
97
thorlty, since these sales were in interstate commerce.
The Supreme Court decided that the states were competent to
regulate such sales. The closing words of Justice Rutledge
in the majority opinion were, "The attractive gap which ap
pellant has envisioned in the coordinate schemes of regula-
98
tion is a mirage.1 '
Panhandle Eastern Pipe Line Co. v. The Public
Service Commission oT Indiana, et al., 332 U. S. 495 (1947).
98 Loc. cit.
4 4
Any insufficiency of state commission powers does
not, of course, reveal the full width of the gap between
state and federal regulation. The powers conferred upon an
administrative agency merely indicate what may be done. The
exercise of authority may actually be less than the powers
themselves suggest.
It is one thing to point out the existence of a gap
between federal and state regulatory powers, but quite an
other matter to suggest the proper means to remedy this sit
uation if the effects of state regulation are much less than
desired. The void created by the Attleboro decision of 1927
forbidding state regulation of interstate electricity sales
was narrowed in 1935 by the expansion of Federal Power Com
mission authority. This move was a relatively simple solu
tion compared to that which is required for the problem of
legislating relative to intrastate utility operations which
lie beyond effective state control. Assuming that the pub
lic interest is not adequately protected in some states due
to lack of a commission form of regulation or inadequate
99
statutory powers, the problem of inducing certain legis
latures to take needed action is apparently a diffieult
matter.
99 The effects of dual regulation are considered in
Chapters VI and VII.
IV. SUMMARY
45
The authority conferred upon the Federal Power Com
mission by the Federal Power Act relates to water power con
trol and public utility control. Broad authority was
granted over power development on interstate waters, the
Commission being charged with the responsibility of issuing
licenses for approved projects. Control of rates and serv
ices of licensees by state commissions was explicitly per
mitted. Regulation of these matters by the Federal Power
Commission is required only in case "adequate” state regu
lation is lacking. "Commission control over "public utili
ties” is more elaborate and complete, but authority does not
extend beyond transmission of energy in interstate commerce
and sale of energy in interstate commerce for resale.
Powers conferred upon the Commission by the Natural
Gas Act bear some similarity to those In the Federal Power
Act. While broad scope of jurisdiction is granted by the
Natural Gas Act, authority does not extend to production and
gathering activities nor to local distribution of gas. Con
trol is limited to certain Interstate operations of natural
gas companies. Regulation of rates and approval of exten
sions of service are among the principal powers over "nat
ural gas companies."
State commissions have been established in the great
majority of states with authority to regulate electric and
46
gas utilities, but the extent of the powers granted these
agencies varies greatly. Forty-one states provide for com
mission control of rates, but the degree of control in each
case is not the same. With regard to most other aspects of
regulation, there is much less similarity of powers and con
trol .
The failure of many states to provide nadequaten com
mission control over certain intrastate matters suggests
that dual regulation of the electric utility and natural gas
industries falls short of sufficiency for full protection of
the public interest. Whether, as a matter of fact, the in
terest of the consumer has been adequately protected or not
in all states is a problem to be considered in later chap
ters .
CHAPTER III
FEDERAL.POWER COMMISSION JURISDICTION
UNDER THE FEDERAL POWER ACT
The actual jurisdiction exercised by a commission is
cast in a broader mold than merely that of statutory provi
sions. The judgment of commission members enters at the
point where statutory powers are applied to concrete cases.
Some degree of interpretation is inevitable as words and
phrases are translated into specific action. Phrthermore,
the courts may be called upon to determine the proper mean
ing and application of law.
An inquiry into the extent of jurisdiction or scope
of regulation by the Federal Power Commission and the state
commissions underlies the problem of determining the eco
nomic feasibility of prevailing dual regulation. Emphasis
is placed upon the jurisdictional development of the Federal
Power Commission during recent years because of its dynamic
character as compared with state regulation.
I. REGULATION OF WATER POWER DEVELOPMENT
The commissions of several states and the Federal
Power Commission have been charged with certain responsi
bilities in connection with the conservation and utilization
of water resources for power development. Since most
streams having significant hydroelectric power potential
flow across state lines, the role of the Federal Government
is paramount.
As indicated previously,^- only a fourth of the states
had, in 1948, commissions with power to authorize hydroelec
tric projects. Eight additional states empowered other
agencies to exercise some degree of control in this field.
It is clearly evident that a substantial majority of the
states did not provide for authorization of such projects.
Navigable waters as a_ test of Federal jurisdiction.
Fundamentally, there are two statutory bases for Federal
Power Commission jurisdiction under Part I of the Federal
Power Act. Regulatory power Is conferred with respect to
developments on navigable waters of the United States. With
respect to the first of these, there is seldom any jurisdic
tional question. The determination of jurisdiction on the
basis of what constitutes "navigable waters" within the
meaning of the Act has been more difficult and uncertain.
The basic problem of jurisdiction under Part I is centered
on this issue.
2
The scope of Federal Power Commission jurisdiction
relative to water power resources was broadly set forth in
1 Cf. pT 41.
2 The term "jurisdiction" may be clarified by the
words of an outstanding authority in administrative law in
the public utility field: "Jurisdiction of a governmental
agency over an industry may be briefly defined as the power
49
3
the statutes. Through commission and court interpretation,
jurisdiction of the federal agency was, of course, made more
• t
explicit. What jurisdictional claims are constitutionally
valid'is for the courts ultimately to determine. Not all
claims to jurisdiction are, however, submitted to the courts
for constitutional test. Until its assertion of authority
is ruled out by the united States Supreme Court, the Commis
sion may exercise that authority.
The extension of Federal Power Commission authority
over water power development was facilitated by the wide
latitude of federal power over interstate commerce provided
in the Federal Constitution. Moreover, the Federal Power
Act defines "navigable waters” with such breadth that juris
diction could be extended with relative ease. When one con
siders such phrases of this definition as "either in their
natural or improved condition notwithstanding interruptions"
and "used or suitable for use for the transportation of
which that agency may exercise over that industry under ap
plicable law. In the case of a federal agency, such power
is determined by the extent of the grants which have been
made to it by Congress, acting within the limits of the Fed
eral Constitution. In the case of a state agency such power
is determined primarily by the grants which have been made
to it by state law, statutory or constitutional, but such
grants may be limited in their effect by the Federal Consti
tution or by federal legislation under the Constitution."
John E. Benton, "Jurisdiction of the Federal Power Commis
sion and of State Agencies," The George Washington Law Re
view, 14:53-80, December, 1945.
3 Cf. p. 22.
50
persons or property,1 ' an impression is gained of the wide
jurisdictional claims that the Commission might assert.
The first important test of the definition of "navi
gable waters” took place shortly after the Federal Water
Power legislation was enacted. A federal court upheld the
Federal Power Commission’s license requirement and thus the
4
constitutionality of a major part of the Act. The Circuit
Court of Appeals stated:
Ever since plbbons v. Ogden . . . it has been uniformly
held that the power of Congress under the commerce
clause comprehends navigation within the limits of
every state, so far as navigation improvement is in any
manner connected with commerce, whether interstate or
foreign. The control of power is a mere incident to
that of navigation.h
While it was possible in the early twenties to cite
several precedent decisions in support of the view that nav
igation was commerce, another problem proved more difficult.
If the basis for regulation of water power development was
navigability, the question arose as to what constituted
4 Alabama Power Co. v. Gulf Power Co., et al., 283 F.
2d 606 (1922) I SeverelTmportant cases on navigaTole waters
and interstate commerce preceded thi3 one. In the famous
Gibbons v. Ogden, 9 Wheat 1 (1824), navigation was declared
to be commerce. Similarly, in The Genesee Chief, 12 How.
443 (1852), the Supreme Court said that navigable waters
could be highways of interstate and foreign commerce. A
classic definition of navigability was presented by Justice
Field in The Daniel Ball, 10 Wall., 557 (1871). Congres
sional authority was said to reach non-navigable tributaries
of navigable streams in United States v. Rio Grande Dam and
Irrigation Co., 174 U. S. 690 (189$).
5 Loc. cit.
51
navigability of a stream. Where a stream was currently used
for transportation, there was little doubt, in cases, how
ever, where a stream was not currently used for transporta
tion, the jurisdiction of the Federal Power Commission was
not certain, particularly if the stream was not suitable for
navigation at the time the Commission had the case under
study.
This issue came before the Supreme Court in 1920 in a
case which involved an Act of 1899 rather than the Federal
6
Water Power Act. The stream in question had been used for
navigation many years earlier, but fell into disuse partly
due to change in the course of trade or methods of naviga
tion and partly due to artificial obstruction in the stream.
Despite the long period of disuse and the condition of the
river, the court said:
. . . a hundred years is a brief space in the life of a
nation; improvements in the methods of water transports-
tuition, or increased cost, in other methods of transporta
tion, may restore the usefulness of this stream; since
it is a natural interstate highway, it is within the „
power of Congress to improve it at the public expense.
6 Economy Light and Power Company v. United States,
256 U. S. 113 (1920).
h 7 Loc. cit. In the famous Daniel Ball case, the high
court said, "Those streams must be regarded as public navi
gable rivers in law which are navigable in fact. And they
are navigable in fact when they are used, or are susceptible
of being used, in their ordinary condition, as highways for
commerce, over which trade and travel are or may be conducted
in the customary modes of trade and travel on water.” Be
cause of the use of such phrases as "ordinary condition” and
"customary modes” the rule was somewhat narrower than that
announced in the Economy case.
52
Observing the Supreme Court’s broad interpretation of
"navigability,” the Federal Power Commission proceeded to
extend its jurisdiction over certain minor streams. The
first important test of the Commission’s authority to extend
its jurisdiction over a stream of doubtful navigability was
8
found in the Mew River case. The Commission asserted
jurisdiction on the basis of a finding that a project on the
New River would affect the water volume of a navigable river
9
into which it flowed. The Supreme Court sustained the
Commission’s jurisdiction, but did so on another basis,
namely, the capability of the stream’s improvement for
navigation: "The power of Congress over commerce is not to
be hampered because of the necessity for reasonable improve
ments to make an interstate waterway available for traffic.”^0
The Court admitted, however, that there were limits to the
extent of improvement that should be allowed. According to
the majority opinion, the feasibility of improvements was
conditioned by changes in population density, engineering
practices, and the arrival of new industries. The feasi
bility of improvements has been considered by the courts on
S United States v. Appalachian Electric Power Com-
pany, 311 U. S. 377 (1940).
9 Re Appalachian Electric Power Company, 1 F. P. C. 3
(1931).
10 United States v. Appalachlan Electric Power Com
pany, loc. cit.
53
other occasions.^
Although the Supreme Court did not support the Com
mission’s position to the effect that a non-navigable tribu
tary of a navigable stream was within its jurisdiction, the
issue had been before the courts in previous cases. The
high court ruled in 1899 that federal jurisdiction was prop-
12
erly extended to such a tributary. In 1939 a district
court held that the Federal Power Commission had jurisdic
tion to issue a license for a project on a ”non-navigable
immediate tributary to a navigable river that tends to af
fect the volume of water naturally coming into the navigable
„13
stream from the tributary. This lower court decision was
not appealed, which suggests that the opinion was well
founded in law.
A Circuit Court of Appeals had a similar issue to
14
consider in the Georgia Power Company case of 1945. This
case involved the Commission’s jurisdiction over a non-nav-l-
gable portion of a navigable stream. The Georgia Power Com-
11 Pennsylvania Water and Power Company v. Federal
Power Commission, 123 F. 2d 155 (1941), certiorari denied
315 U. S. 806 (1942).
12 United States v. Rio Grande Dam and Irrigation Co.,
174 U. S. 696 (1899~JT ™
13 Grand River Dam Authority v. Going et si., 29 F.
Supp. 316 (1939).
14 Georgia Power Company v. Federal Power Commission,
152 F. 2d 908 (19457^
54
pany filed a declaration of Intention to construct a power
project on the Oconee River. Although the stream was found
to be non-navigable, the proposed dam would have affected
the volume of the navigable river into which it flows to an
extent that would interfere with Interstate commerce. The
authority of the Commission was upheld by the Court.
Another issue relating to the extension of Commission
authority over navigable waters relates to the commercial
evidence necessary to support a claim of jurisdiction. It
might be supposed that such evidence would be simply a mat
ter of proof of transportation of freight or passenger by
vessel. Actually, however, less substantial evidence has
been effectively Introduced.
Log driving and rafting was the only evidence of com
merce necessary to support a finding of navigability in the
15
Wisconsin Public Service Corporation case of 1945. The
Commission had previously made It known that there was no
necessity for a showing that vessels of any kind had navi-
16
gated a stream. The assertion of jurisdiction solely upon
17
the basis of the floating of logs was something new. The
Wisconsin Public Service Corporation, et a 1♦, v.
Federal Power Commission. 147 F. 2d 743 (1945).
16 Re Wisconsin-Mlchigan Power Company. 3 F. P. C.
449, (194377
17 The claim was made that the federal government had
an interest in the whole journey of the logs.
55
decision seemed to allow the wedge of federal control to
penetrate a little deeper.
Following the principle of the Wisconsin Public Serv
ice Corporation case, the Commission in 1949 decided that a
certain portion of the Sacandaga River, a tributary of the
18
Hudson River, was navigable water of the united States.
The decision was based solely on the fact that logs had been
floated on the stream from 1851 to 1926. The chairman of
the Commission was unable to agree with the majority regard
ing navigability in the upper reaches of the stream.
Chairman Smith declared in his dissent that
There must be a limit beyond which the doctrine
of ’ ’legal navigability” cannot be stretched; it seems to
me that that limit has been exceeded here. . . I cannot
i cl'believe that it is necessary or desirable, or that Con
gress Intended, that all streams— however tiny, rocky,
precipitous, and unimportant in fact--be deemed ’ ’navi
gable" if in their natural or improved state they were
or can be used merely to float logs which either did in
the past or might in the future enter into interstate
commerce .19
Commissioner Olds took direct issue with the Chairman
18 Federal Power Commission Release Ho. 4235, Docket
No. DI-177, Opinion No. 172, April 20, 1949.
19 Hoc. cit. In two subsequent jurisdictional cases,
Chairman Smith refused to go along with the majority find
ing of navigability. In one of these (Re Dairyland Power
Cooperative, Federal Power Commission Release No. 45l7, Nov.
23, 1949), the circumstances were similar to the Wisconsin
case. In the other, the Chairman merely referred to an
’ ’unnecessarily broad” finding of navigability (Re Central
New York Power Corporation, Federal Power Commission Release
loT l5l8, Nov. £5, 1949).
56
regarding the proper use of floating logs as a criterion for
20
determining navigability within the meaning of the Act.
Since the logs represented valuable property, he could see
no reason for disallowing the standard. Olds also differed
with the Chairman as to the use of the adjective "tiny” and
' ’unimportant” in describing the Sacandaga River. It was
pointed out that the stream contributed a large volume of
water to the Hudson River.
A Commission decision rendered in 1949 is of signl-
21
ficance relative to policy under Part I of the Act. It
was found that a series of four projects proposed for con
struction on a small stream would not affect interstate com
merce. No federal jurisdiction was therefore asserted. It
was carefully pointed out, however, that further development
of the watershed, within which the small stream was located
might change the material facts upon which the finding was
made. Consequently, the projects might In some subsequent
period be found to affect interstate commerce and thus li
censes might be required.
The majority of the Commission has evidently Inclined
toward a very liberal interpretation of constitutional and
statutory provisions relating to jurisdiction over navigable
20 Lbc.""cit.
21 Federal Power Commission Release No. 4416, Re Nan-
tahala Power and Light Company, September 13, 1949.
57
waters. The courts have likewise favored broad construction
of such provisions. Despite these successful attempts to
apply a yardstick implementing the extension of federal con
trol, the Commission has not asserted jurisdiction in a
large number of cases which have come before it. The extent
to which this has been true was revealed by a former princi
pal attorney for the Commission looking at the record for r.h
the period prior to December, 1945:
The record of the Commission may be an indication
of the difficulty of establishing federal jurisdiction
over power plants, for out of the 171 declarations of In
Intention filed under Section 23, seeking advance deter
mination of federal jurisdiction over proposed power
plants located on ostensibly non-navigable streams, the
Commission found in 82 instances that it had no juris
diction and the states were left in complete control.
Furthermore, these 82 cases go even farther than mere
findings of non-navigability because in each case the
Commission also found that the proposed construction
would not affect lower navigable capacity or the inter
ests of commerce thereon.22
The effect of a project on navigability does not have to be
very substantial, apparently, nor is there any necessity
that actual or current commerce be affected. The Federal
Power Commission stated in its 1948 annual report that dur
ing the 28 years since the passage of the Federal Water Pow
er Act, 183 declarations of intention had been filed and in
only 65 of these cases had the Commission taken jurisdic-
22 Willard W. Gatchell, "Jurisdictional Problems un
der the Water Power Act of 1920," George Washington Lsw Re
view, 14:42952, December, 1945.
58
*.* 23
tion.
While there were many oases in which the Commission
did not find that it had jurisdiction, it has been argued
that federal authority has been asserted in an undue number
24
of instances. There is no doubt that extension of Commis
sion jurisdiction over certain streams was possible only be
cause of the elasticity of the law. Whether the extension
was unwarranted or not can best be evaluated in terms of
. 25
economic consequences.
Exercise of particular powers. The importance or
character of regulation cannot be gauged adequately by ref
erence to statutory powers alone. It is necessary to in
quire into the experience of administrative agencies. The
extent to which these powers have been exercised and the de
cisions pertaining thereto rendered by the courts reveal the
real nature and importance of federal or state regulation.
Many factors condition the exercise of commission
authority. Among these are the size of its staff, the num
ber of its personnel, the funds made available for regula
tion, how specific or general the statutes are phrased, etc.
25 Annual Report of the Federal Power Commission,
1948 (Washington, D. CT: Government Printing Office), p. 38.
24 Of. p. 80.
25 Cf. Chapter VI.
59
Implementation of statutory powers necessitates the applica
tion of some degree of judgment by the commission as to what
the legislators intended the limit to regulatory powers to
be. Some provisions of the Acts are so specific that the
latitude for discretion is very narrow, while in other in
stances it is quite broad.
The exercise of state commission powers is beyond the
scope of this study, but the extent of their authority as
presented in the previous chapter Indicates how far they can
go generally in the regulation of electric and gas utili
ties. The activities of the Federal Power Commission are
considered in detail because of the Commission’s elaborate
powers and the dynamic character of federal regulation.
The principal function of the Federal Power Commis
sion under Part I of the Federal Power Act is the issuance
of preliminary permits and licenses. This work began in
1920 under the original act to control water power develop
ment. Issuance of licenses increased steadily and by 1948
the hydroelectric generating capacity under federal license
represented about 41$ of total hydroelectric generating ca
pacity of the United States exclusive of federal installs-
26
tion. Due to the unprecedented demand for electric energy
following World War II, expansion of productive capacity was
Annua- ! Report of the Federal Power Commiss ion,
1948, op. cit., p” 32.
60
greatly stimulated. At the close of the 1948 fiscal year
there were on file with the Commission pending applications
involving generating capacity equal to about 60$ of the ac
tual installed capacity of all projects then under 11-
27
cense. No decline in filings wes anticipated for a period
of several years.
In the exercise of its licensing powers several is
sues have arisen. One of these has involved the provision
of the Federal Water Power Act stipulating that the Commis
sion notify any state or municipality of the receipt of an
28
application for a preliminary permit. In a case in 1932,
the Commission contended that the Act did not require noti
fication. A district court upheld the Commission’s view,
stating that the provision for notice was primarily for the
benefit of the Commission in gathering data useful for de-
29
termining whether to grant a license. It refused to chal
lenge the Commission’s judgment regarding the sufficiency of
notice. In another case of the following year, the Commis
sion stated that notification of states and municipalities
67 Ibid., p. 34.
28 Section 4 (f).
State of Missouri ex rel and to use of Camden
County, Mo., et al. v. Union Electric Light & Power Com
pany , et al., 42 F. 2d 692 (1930).
61
30
was a matter of courtesy rather than obligation.
As a matter of regular practice, the Commission has
notified interested governors and state agencies as well as
county and city officials regarding receipt of applica-
31
tions. Furthermore, comments on the applications have
been solicited from these agencies and officials. In March,
1948, however, the Commission discontinued notification pro
cedure in connection with applications which involved small
32
proposed installations. The reason for this change, ac
cording to the Commission, was that the state commissions
were not interested in applications pertaining to power
plants with installed capacity of 100 horsepower or less,
transmission lines, and minor alterations to major projects.
Exceptions to the new policy were to be made where circum
stances indicated the desirability of notice.
Of greater importance than notification with regard
to permit applications is the section 9 (b) requirement that
applicants for licenses comply with state laws. In a case
decided in 1932, the Commission held that ” ... failure to
evidence State permission, though it may be fatal to the
granting of a license, is not necessarily a pertinent matter
30 Re Loup River Public Power District, 1 F. P. C.
628, (193317
31 Annua1 Report of the Federal Power Commission,
1948, op. clt., p. 112.
32 Loc. cit.
62
33
in connection with the issuance of a preliminary permit.”
Thus the Commission did not regard section 9 (b) as a limi
tation on its power to issue preliminary permits. The Com
mission has, however, on a number of occasions, denied li
censes where satisfactory evidence of compliance was not
■AA
presented by the applicant.
The issue of compliance with state laws was the sub
ject of a leading ease which came before the Commission, a
Circuit Court of Appeals, the Supreme Court, and then the
Commission again on remand. The First Iowa Hydro-Electric
Cooperative applied for a license to construct a power plant
35
on the Cedar River in Iowa. The State of Iowa intervened,
contending that the applicant had failed to comply with cer
tain Iowa laws. These laws provided that no dam could be
constructed in any stream for power purposes without a state
permit. Such a grant was not issued unless certain require
ments were to be met with respect to bed and banks and to
the appropriation, diversion, and U3e of water. The appli
cant contended that it would not be able to meet the
36 Re Bast Bay Municipal Utility District, 1 F. P. C.
12 (1932).
34 Re Gasconade River Power Company, 1 F. P. C. 424
(1937); Re Clarion River Power Company, I F. P. C. 357 (
(1937); Re Brpgd River Rower Company, 1 F. P. C. 363 (1937).
35 Re First Iowa Hydro-Electric Cooperative, 4 F. P.
C. 27 (19447.
63
diversion requirements end would thus be denied a state per
mit. The Federal Power Commission dismissed the case be
cause, in its judgment, the validity of the state law had to
be determined prior to the issuance of a federal license.
Dissatisfied with the Commission’s decision, the Co
operative brought the case before the Circuit Court of Ap-
r? /*
peals for the District of Columbia. The respondent at
tempted to convince the Court that the state law in question
was either inapplicable to the proceedings or unconstitu
tional, since the proposed project was to have been con
structed on interstate waters. For its part, the Commission
wa3 also interested in a te3t of the state law and argued
that the law was invalid because it conflicted with the Fed
eral Power Act and that the federal jurisdiction therefore
superceded that of the state.
The Circuit Court refused to pass upon the constitu
tionality of the state law. It was impressed by the fact
that Congress recognized the concurrent application of state
laws in this field of control over water power development.
The Court stated:
In recognizing and safeguarding the concurrent
interest of the states in hydroelectric developments, it
was not the purpose of Congress to require their consent
to the construction and operation of such projects, or
to give, to the states a veto power over them. The Fed
eral Power Act contemplates cooperative action toward a
36 P’ lrst Iowa Hydro-Electric Cooperative v. Federal
Power Commission^ 151F. &d’20 (1945T*
64
common beneficial end.37
The opinion is of interest because it reveals how a leading
group of jurists sought to prescribe a system of concurrent
powers and cooperation in the face of obvious conflicts The
Commission’s order was sustained, but not upon the basis of
an inapplicable or unconstitutional state law.
Dissatisfaction with the lower Court’s decision led
to an appeal to the Supreme Court which rendered its deci-
38
sion in 1946. The decision of the Circuit Court was re
versed and the case remanded to the Commission for further
proceedings in conformity with its decision. The Supreme
Court criticized the Commission for having dismissed the ap
plication of the Cooperative without passing on the validity
of Iowa laws:
The Commission would have been justified in fol
lowing its own interpretation of the Federal Power Act
and proceeding with the merits of the application with
out requiring the petitioner to submit evidence of its
compliance. . . which the Commission held to be Inappli
cable or to have been superceded by the Federal Power
Act.39
The Court observed that while the Commission sought to avoid
an arbitrary refusal of the permit, such a contention did
not meet the substance of the objection to the order.
37 Loc. cit.
38 First Iowa Hydro-Electric Gooperative v. Federal
Power Commission" 3§8 0. S . 152 (1946).
39 Loc. cit.
65
In contrast with the lower Court, the Supreme Court
did not believe that compliance with state laws was neces
sary with regard to a project on interstate waters. Accord
ing to the opinion of the Court, consent of the state is not
required. In remanding the case to the Commission, the
Court referred to the troublesome issue of dual control in
these significant words:
In the Federal Power Act there Is a separation of
those subjects which remain under the jurisdiction of
the states from those subjects which the Constitution
delegates to the United States snd over which the Con
gress vests the Federal Power Commission with authority
to act. TOsthe extent of this separation, the Act es
tablishes a dual system of control. This duality of con
control consists merely of the division of the common
enterprise between two co-operating agencies of Govern
ment, each with final authority In its own jurisdiction.
The duality does not require two agencies to share in
the final decision of the same issue. . . A dual final
authority, with a duplicate system of state permits and
federal licenses required for each project, would be un
workable. "Compliance with the requirements" of such a
duplicated system of licensing would be nearly as bad.
Conformity to both standards would be impossible in some
cases and probably difficult in most of them.^O
A dissenting opinion in the case defended the Commis
sion’s dismissal order on the basis that the State Supreme
Court of Iowa should first have determined the applicability
of the Iowa law before the Commission took action on the ap
plication .
The decision of the Supreme Court in the First Iowa
case had the effect of strengthening the semi-judicial power
40 Loc. cit.
66
of the Commission. It sanctioned a judicial function which
that agency was reluctant to assume. Where state and fed
eral laws were apparently in conflict, the Commission was
authorized by the Court to determine the applicability of
state laws and the necessity for compliance on the part of
the applicant.
Since the Supreme Court remanded the case to the Com
mission for further proceeding, it again came up for consid-
41
eration before the administrative body. The Commission
decided to issue a license to the applicant. The opinion
accompanying the order was chiefly concerned with conten
tions of the State of Iowa which had waged a fight against
the Cooperative from the very beginning. The Commission de
nied that the project would not meet safety standards or
that it was not economically feasible. Furthermore, the
Commission concluded:
It can hardly be gainsaid that a more general-and
con donstructive policy of water resource development in
Iowa than has been pursued heretofore would be of mater
ial advantage to the residents of that great State both
in the protection of valuable property along the water
courses and in the utilization of such water resources
for the common good. . . Since it is manifestly in the
public interest to make a more complete utilization of
the water resources available at this site, the appli
cant should be given the opportunity to go forward with
its license. Accordingly, an order will be entered.42
41 Re First Iowa Hydro-Electric Cooperative, 6 F. P.
C. 227 (1947).
42 Loc. cit.
67
Tlie First Iowa case has been discussed at consider
able length because it relates so intimately to the funda
mental problem of dual regulation. The opinion expressed by
the Commission, a Circuit Court of Appeals, and the Supreme
Court contained highly significant views on the workability
of regulation based, on the one hand, upon concurrent powers
and, on the other hand, exclusive jurisdiction. Clearly,
the Supreme Court strengthened the Federal Power Commis
sion1 s control under Part I of the Act by restricting the
application of the concurrent powers doctrine and prescrib
ing Commission determination of the application of state
laws where they are in apparent conflict with the Federal
Power Act.
The Commission is empowered by the Act to conduct in
vestigations for various purposes. One of these relates to
unlicensed projects which are regarded as being probably
subject to federal jurisdiction. In 1937 a long-range pro
gram of investigation was begun along this line, and many
43
cases arose with respect to federal control. Projects al
ready established but unlicensed came under scrutiny In ad
dition to proposed new projects. Because of the border-line
character of some of the cases that developed out of this
investigation, the problems were often great. As the
43 Annual Report of the Federal Power Commission,
1957 (Washington, D. C.: Gov't. Printing Office), p. 26.
68
Commission has stated,
It has been the experience of the Commission that
in the more important cases, such as that of the Alumi
num Company of America, the taking of testimony alone
occupied several weeks and required thousands of pages
of transcript and exhibits. It was indicated that there
was an ^estimated backlog of approximately 1,000 pro
jects of substantial size which should be investigated
In this connection.”44
Another type of investigation of great importance un
der Part I relates to determination of the actual legitimate
original cost of licensed projects. Because of the magni
tude of these Investigations, relatively few can be completed
each year. The cumulative totsl of such determinations on
June 30, 1948, was 80, which represented almost one-half of
45
the 161;major projects under license at that time. Of the
total costs claimed by the licensees for the 80 projects,
89^ was allowed by the Commission. In some cases, as much
as 35 or 40 per cent of the claimed cost was eliminated as a
result of Commission determination.
Closely related to the investigations of original
cost of licensee projects is the prescription of a uniform
system of accounts for licensees. In fact, cost studies are
fundamentally grounded upon financial data made available
through a standard system of accounts. Pursuant to section
44 Annual Report of the Federal Power Commission,
1946 (Washington, D. C.: Gov* t. Printing Office-}, p. 32.
45 Annual Report of the Federal Power Commission,
1948, op. cit., pp. 64-5.
69
301 (a) of Part III of the Federal Power Act, the Commission
adopted a uniform system of accounts in 1936 to take effect
on January 1, 1937. It is difficult to overemphasize the
importance of this step In view of its vital relationship to
the entire regulatory process.
Closely related to accounting regulation is a problem
of recent years concerning amortization reserves, under the
Federal Power Act, after a license has been in effect for 20
years, the licensee is required to set aside in an amortiza
tion reserve a certain portion of the project earnings In
i
excess of a specified rate of return on net investment. The
Commission is authorized either to require that the reserves
be held until the termination of the license or to direct
that they be applied from time to time in reduction of the
net investment. The amortization reserve period for ori
ginal licensees was reached in 1941, 20 years after the is
sue date of the first licenses. Preoccupation with other
matters during the war postponed most of the work in this
connection until the post-war period. At the end of 1948 a
total of 64 projects were to have been subject to the amor-
46
tization requirement.
The amortization reserve provision of a license was
46 Annua1 Report of the Federal Power Commission,
1948, op. cit ., p. 67.
70
47
tested before a Circuit Court of Appeals in 1947. The
company objected to an article in the license which was in
conformity with the requirements of section 10 (d). The
company had not obtained a license for a hydroelectric pro
ject in 1920, and the Commission not only issued such a li
cense at a later date but required that the net investment
upon which rates are based should be actual legitimate cost
less accrued depreciation as of the effective date of the
license. The company sought to have the starting base for
net investment begin with 1920 when the license should prop
erly have been issued. The Court, however, refused to allow
the company’s contention and upheld the Commission’s order.
Another case involving amortization reserves also was
concerned with rates charged by the licensee. it is an ex
cellent illustration of the disharmony that may grow out of
dual regulation. The licensee in question was the Niagara
Falls Power Company.
This case grew out of a Commission authorization to
divert, for power purposes, an additional amount of water to
48
that previously allowed from the Niagara River. The later
authorization was made as an emergency measure to expand
4:7 Re Metropolitan Edison Company, 6 F. P. C. 189
(1947); Metropolitan Edison Company v. Federal Power Commis-
sion, 169 F. 2d 719 (1947).
48 Re Niagara Falls Power Company, Licensee, 2 F. P.
C. 461 (1941).
71
generating capacity. Attached to the Commission's order was
a condition requiring that surplus profits resulting from
increased power sales be used to reduce project investment.
More specifically, it provided for accumulating amortization
reserves to be applied toward possible ultimate acquisition
by the United States government.
The Commission explained the need for its action in
the Niagara Falls case by saying:
Information filed by the company indicates that
after payment of the fees of New York State, and the
relatively small additional capital expenditures and
operating expenses incident to the additional diversion,
the company may and probably will derive net profits
therefrom in excess of #1,000,000 a year. . . we are
prescribing the necessary accounting to prevent such
excess revenues from being credited to the company's
surplus or distributed in d i v i d e n d s . 49
Since the New York Public Service Commission was a
competent commission within the meaning of the Act to regu
late rates of the licensee, the state agency proceeded to
Investigate the company's rates. On the basis of its find
ings, a substantial reduction in rates was ordered. The new
rates on the additional power ssles approximated cost of
production, thus permitting no accumulation of an amortiza
tion reserve. The company was in a position where com
pliance with both state and federal orders would have meant
a loss of approximately a million dollars a year. That is,
4§ hoc. clt.
72
if the rate reduction order applied to remaining revenues
after the surplus had been set aside in an amortization re
serve, the company would have incurred a loss approximately
equal to the reduction in rates. The company sought relief
from what it regarded as the most objectionable of the two
orders by bringing suit against the commissioners of the
State Public Service Commission.
The case came before the Supreme Court of the State
of Hew York in 1943, and the Court upheld the rate reduction
50
order of the Public Service Commission. With reference to
the anomalous order of the Federal Power Commission, the
Court said that while the Commission had the right to compel
amortization with surplus funds, such a surplus was contin
gent. It was observed that the federal order had the effect
of fixing a rate of return. If permitted to stand, such a
return would be binding upon the state agency in fixing the
rates to be charged to consumers. The question demanding an
answer was simply stated: Which order had precedence? The
Court reasoned that:
If the state agency fixes a fair rate for service
which results in no surplus over the rate of return
fixed by the federal commission, no obligation arises to
apply a "surplus" which does not come into being.51
50 'Niagara Falls Power Gompany v. Maltbie, et al., 41
N. Y. S. (2d) 424 (1943).
51 Loc. clt. Section 10 (e) of the Federal Power Act
provides that "... the licensee shall pay to the united
States reasonable annual charges in an amount to be fixed by
73
The general significance of this case was indicated
by the Public Service Commission which argued that the issue
involved could arise in other similar situations. The state
commission apprehensively pointed out that the power to fix
rates of licensees would pass to the Federal Power Commission
if state agencies, when calculating rates, had to fully rec
ognize amortization requirements .related to government pur
chases. In the opinion of the Court, Congress had suffi
cient power to bring about such a system of control, but the
Commission had not been delegated such authority under the
Federal Power Act.
The regulation of the rates charged by licensees is a
matter of primary importance with respect to water power
control. The Federal Power Commission is, of course, au
thorized to regulate rates of licensees only where a compe
tent state commission has not been established or, in the
case of two or more such commissions regulating interstate
rates of a licensee, where the state commissions are unable
to agree on pertinent matters of common concern.
the Commission for the purpose of reimbursing the United
States for the expropriation to the Government of excessive
profits until the respective States shall make provision for
preventing excessive profits or for the expropriation there
of to themselves, or until the period of amortization as
herein provided is reached, and in fixing such charges the
Commission shall seek to avoid increasing the price to the
consumers of power by such charges, snd any such charges may
be adjusted from time to time by the Commission as conditions
may require.”
74
A jurisdictional case of note in connection with, rate
regulation is that involving the Safe Harbor Water Power
Corporation. This company, a licensee, was interconnected
with other companies’ facilities so that the Safe Harbor
project was an integral part of a system serving areas in
Maryland, Pennsylvania, and the District of Columbia. The
Commission asserted jurisdiction over rates of the company
on the basis that the state commissions had no authority to
control rates for the sale of electric energy at wholesale
52
in interstate commerce. The Attleboro decision was cited
as authority for its contention that the states could not
regulate the wholesale contract rates. Thus interstate
wholesale rates were a subject for federal regulation and
authority for such control was provided in section 20 of
Part I. Thereupon it proceeded to determine the reasonable
ness of the licensee’s rates. The Commission pointed out
that its jurisdiction could have been defended on the basis
of its authority under section 201 of Part II, since sales
at wholesale in Interstate commerce were being transacted.
It chose to invoke section 20 of Part I instead because it
was felt that the rates in question could thereby be regu
lated without going through the process of building a Part
II case. A rate reduction order subsequently was issued.
5S Re Safe Harbor Water Power Corporation, Licensee,
2 P. P. C.T8S (191(577 ' ’
75
A review of the Commission’s order was obtained by
the utility company and the court set it aside, indicating
that the Pennsylvania Gas Company rule governed the case
53
rather than the Attleboro decision. Accordingly, the
court stated:
We conclude that it was the intention of Congress
to regulate hydroelectric power by state commissions us
ing the federal agency set up in Section 20 only where
the state commission did not or could not perform the
function expected of them .
Stating that the question of which rule to apply de
pended upon "circumstances,” the court pointed out that cir
cumstances in this case were more comparable to those in the
Pennsylvania Gas case than in the Attleboro situation. It
was observed that the operations of the company were essen
tially local in character.
While recognizing that Congress could not delegate
its power to regulate interstate commerce to a state, the
court said that Congress could, in effect, throw an inter
state shipment into intrastate commerce as it passed the
sta te line. The use to which the energy was put after it
crossed the line would then become a matter of local inter
est. Under these circumstances ” ... the consumption of
power is a local matter almost as if a package of power had
53 Safe Harbor Water Corporation v. Federal Power
Commission, 124 F. 2d 8(50 11941).
54 Loc. cit.
76
55
been delivered at the state line.” State jurisdiction was
all the more certain inasmuch as Congress had specifically
given permission for the exercise of state authority over
rates for interstate sales of licensees.
The court recognized that difficulties might arise in
regulation of energy generated in one 3tate and consumed in
another where the two states undertook to exercise rate con
trol within their respective jurisdictions. It was observed
that the energy movement "must be treated as an integrated
56
whole.” Appropriately, the admonition was given that
” . . . there must be cooperation and agreement between
these state authorities if there* is to be really effective
57
regulation. . ." Since the Commission had made no finding
that the states were unable to agree on matters of common
concern, the court could find no reason for denying state
jurisdiction. The Supreme Court refused to review the de
cision of the Circuit Court of Appeals, thus giving it 1m-
58
plied approval.
The question of Federal Power Commission jurisdiction
over the Safe Harbor Power Corporation again appeared in
55 Loc.~cit.
56 Loc. cit.
57 Loc. cit.
58 Federal Power Commission v. Safe Harbor Water
Power Corporation, certiorari denied, 316 U. S. £63 (1942)
77
59
1946. The Commission had received a request from certain
private interests and government officials in Maryland to
determine the reasonableness of wholesale rates for electric
energy sold in interstate commerce by the company. After
investigation, an order was issued by the Commission assert
ing jurisdiction under both section 20 of Part I and section
201 of Part II of the A©t.^ Thus it ruled that the company
was subject to federal jurisdiction both as a licensee and
as a "public utility."
In defending its right to regulate the company’s
rates under section 20, the Commission stated that the two
states concerned were unable to agree on regulatory matters
of common interest. This charge was based upon two conten
tions. First, it pointed out that the Public Service Com
mission of the State of Maryland had specifically requested
the Commission to determine reasonable rates to be charged
by the company. Second, it expressed the belief with ref
erence to rates then in effect that "if those rates continue
too high, inaction by the states involved, after reasonable
59" Re Safe Harbor Water Power Corporation, 5 F. P.OC.
221 (1946).
60 Commissioner Draper dissented from the majority
opinion, but agreed with the result. He contended that
since federal jurisdiction had failed in the former case by
reason of an omission of proof that the states were unable
to agree and that since the Commission could in this second
case remedy that defect, the assertion of authority by th©
Commission should have been based only on Part I.
78
opportunity, may show that they are unable to agree as cer-
£> *1
tainly as formal accouncement of the fact.'1 This latter
contention provides a test which could be far-reaching in
its effect, since the Commission could assert its jurisdic
tion over virtually any interstate rates of a licensee where
a finding could be made that the rates were unreasonable.
Federal jurisdiction under section 201 was claimed on
the basis of evidence which indicated that Safe Harboe owned
and operated facilities used for transmission of electric
energy in interstate commerce and for sale of electric ener
gy at wholesale in interstate commerce. In short, the com
pany allegedly fell within the statutory definition of a
"public utility."
Still another question that the Commission treated in
its opinion was whether Part II rate provisions by implica
tion repealed the Part I rate section. It concluded that
the states had no power to regulate interstate wholesale
rates of "licensee-public utilities" in conflict with Com
mission authority under Part II Irrespective whether states
were unable to agree or independently of that issue. Citing
the Attleboro decision as authority for exclusive jurisdic
tion under Part II, the Commission regarded this Part of the
Act as having superceded any conflicting authority of the
states under Part I.
61 Re Safe Harbor Water Power Corporation, loc. cit.
79
It is significant to note that the advisory counsel
for the National Association of Railroad and Utilities Com
missioners expressed his belief that ” . . . the rate-making
provisions of Part II, being absolutely inconsistent with
the rate-making provisions of section 20, by implication re-
62 —
pealed the earlier provisions.” inasmuch as this state
ment was made by a leading spokesman for the Association
which consists essentially of state officials, it suggests
that no attempt to resist extension of Federal Power Commis
sion jurisdiction would be successful in this connection.
The position of the Federal Power Commission regard
ing Safe Harbor was upheld by a united States Circuit Court
63
of Appeals in 1950. The Court found the company to be
both a licensee and a public utility within the meaning of
the Federal Power Act. Consequently, it believed the Com
mission could regulate the company’s rates under either sec
tion 20 or section 201. No inconsistency was found in the
rate provisions of Parts I and II. Significantly, the Court
sustained the Commission’s view that its jurisdiction under
section 20 was valid because of the failure of the two state
62 John”E. Benton, ”Jurisdiction of the Federal Power
Commission and State Agencies,” Qeorge Washington Law Re
view, 14:53-80, December, 1945.
63 Safe Harbor Water Power Corporation v. Federal
Power CommissTbn, 172 F. 2d 17S Cl950).
80
commissions to agree on rates of common interest.
There were expressions of dissatisfaction regarding
the attempt of the Federal Commission to undertake regula
tion in this instance. The 1947 Convention of the National
Association of Railroad and Utilities Commissioners approved
a committee report including the following statement:
It would seem logical to conclude that here is
another example of attempted federal encroachment upon
state jurisdiction, in the very teeth of the federal
act, which is reinforced by the decision of a Circuit
Court of Appeals, said decision having the implied ap
proval of the Supreme Court of the United States.64
The Safe Harbor decision was recalled in a case which
came before the Pennsylvania Public utilities Commission in
1948. The state commission sought to regulate intrastate
rates of the Safe Harbor Water Power Corporation. The com
pany, which made sales in both intrastate and interstate
commerce, contended that since the federal Power Commission
exercised jurisdiction over its rates and charges, the state
commission was without authority to do so. Indicating that
intrastate service was readily separable from interstate
service, the commissioners stated, ” ... the PPC cannot,
64 Report of the Special Committee on Regulatory Law,
Proceedings of the Fifty-Ninth Annua1 Convention of the Na
tional AssocTation of Railroad and Utilities Commlssioners
(Washington, D. C.,“1947), p. 408.
65 Pennsylvania Public Utility Commission v. Penn
sylvania Water and Power Company, et al., Pennsylvania Pub
lic tftillties Commission, 'September 2T7 1948, Commerce
Clearing House: Utilities Law Reporter--State, p. 15529.05.
0 0
by its mere assertion, oust our jurisdiction.” It main
tained that regulation of the company’s intrastate rates by
the Federal Power Commission would be unconstitutional.
II. REGULATION OF ELECTRIC PUBLIC UTILITIES
With the passage of the Federal Power Act in 1935, i:h
the Federal Power Commission assumed much broader authority
than that respecting water power deyelopment. It was not
intended that the extension of this agency’s powers would
intrude upon or displace state regulation. Essentially, the
federal powers were to be employed in the field where the
67
states were constitutionally unable to regulate. The con
ception of complementary dual regulation by state and feder
al commissions was the foundation upon which the new regula
tory system was based. Since state regulation had become
quite firmly established by 1935, the important definitions
of jurisdiction thereafter were largely occasioned by the
extension of Federal Power Commission jurisdiction.
It has been observed previously that the great major
ity of the state commissions exercised some degree of con-
68
trol over rates and services. The commissions of most
82
states had authority to prescribe a uniform system of ac
counts, to require certificates of convenience and neces
sity, and to regulate certain other matters. Inasmuch as
the states were permitted to regulate not only intrastate
matters but certain interstate situations as well, the prob
lem of delineating state and federal regulatory jurisdiction
became an important judicial task. Several jurisdictional
issues have been considered by both commissions and courts.
The meaning of "interstate commerce.1 1 Fundamental to
the exercise of any specific power of the Federal Power Com
mission, or of a state commission, is the meaning of the
term "interstate commerce." Superficially observed, its
meaning appears to be obvious and beyond dispute. Proof
that Its meaning has actually been quite obscure is evi
denced by the many troublesome attempts to classify speci
fic electricity movements into interstate and intrastate
categories of commerce.
While the term may be considered in e general sense,
the specific term to which attention is here directed is
that contained within the Federal Power Act and defined
therein. The definition, as such, conforms to a common
sense meaning but is qualified by other provisions of the
Act in such a way as to give it a rather special meaning.
Furthermore, the inadequacy of words themselves to provide
a full measure of clarity in any situation accounts for a
83
certain latitude-of interpretation.
Three cases which came before the Federal Power Com
mission and the United States Supreme Court resulted in im
portant decisions with respect to Commission jurisdiction in
the regulation of electric utilities. One of these is the
Hartford Electric Light Company case which developed out of
the refusal of this company to comply with accounting regu-
69
lation of the Commission. The essential question was
whether the Hartford Company, the facilities of which were
entirely within the state of Connecticut, was under the Com
mission^ jurisdiction because it sold energy which, to some
extent, left the state, or beyond federal regulation because
the facilities were used for generation of power and thus
exempt under the Act.
The principal facts involved were as follows: The
Hartford Company sold electric energy to the Connecticut
Power Uompany within the state of Connecticut. Part of this
energy was resold by Connecticut Power, a "public utility,"
to a distributing company in a neighboring state. Thus the
Hartford Company was selling energy at wholesale and some of
it eventually left the state. The Commission expressed no
intention of regulating rates. It sought only to control
the company's accounts.
6^ Re Hartford Electric Light Company, 2 F. P. C. 359
(1941).
84
The Commission * 3 position was succinctly stated in an
opinion accompanying its decision regarding the case:
Hartford is engaged in the sale of electric ener
gy at wholesale in interstate commerce. The mere fact
that outward bound energy passes on to the lines of
another company within Connecticut does not rob the en
tire transaction of its interstate character; this is
self-evident in the case of some of the electric energy
here involved which crosses the Massachusetts state line
almost instantaneously after it leaves Hartford.*70
Accordingly, the company was declared to be a public utility
and subject to federal regulation.
In accordance with formal procedure, the company pe
titioned a Circuit Court of Appeals for review of the Com
mission's order. This Court upheld the order and delivered
71
a significant opinion. Implied approval of the decision
was given by the Supreme Court in its refusal to review the
72
case.
The Circuit Court gave support to the Commission's
contentions by stating that the company did, in fact, own
and operate ” ... facilities used in the business of know-
73
ingly selling electric energy in interstate commerce.”
^6 L o c cit.
71 Hartford Electric Light Company v. Federal Power
Commission^ 131 F. 2d $53 Cl£42).
72 Hartford Electric Light Company v. Federal Power
Commission, certiorari denied, 319 U. S. 741 '(1943).
1 7 3 Hartford Electric Light Company v. Federal Power
Commission, 131 F. 2d 953 (1942).
Considerable emphasis was placed on the fact that the com
pany had knowledge of the out-of-state movement of the en
ergy it sold. The "facilities” which the Court stated were
the basis for affirming the order were not the generation
facilities, primarily, but the accounts, contracts, and
other records of the corporation. The Court agreed unani
mously on that particular point. Two of the three judges
went a step beyond this holding. They considered that an
\
alternative basis for upholding the order was the fact that
generation facilities were used as aids to wholesale sales
in interstate commerce.
The State of Connecticut and the National Association
of Railroad and Utilities Commissioners intervened in the
Hartford case to protest the attempt of the Commission to
extend its jurisdiction. The Association’s General Soli
citor filed 8 brief in the case before the Circuit Court
which was given specific attention in the Court’s opinion.
The Court sought to allay the apprehensions of the state of-
t
ficials by disclaiming that the decision would have the ef
fect of bringing all companies owning generating facilities
within federal jurisdiction:
There is no basis for the fear expressed in the
brief of amicus curiae that a decision sustaining the
Commission’s orders will involve grave encroachments
upon the jurisdiction of state regulatory authorities.74
74 Loc. cit.
86
Apparently, the declaration of the court in this regard was
not entirely convincing to certain state officials and
75
others.
The Hartford case is of interest because it repre
sents a successful extension of federal authority to include
accounts of a company which had regarded its facilities as
being concerned with intrastate commerce exclusively.
The second major case of recent years which involved
an extension of federal jurisdiction under the Federal Power
Act also centered in Connecticut, in contrast to the Hart
ford case, this one was concerned with facilities which the
company declared were used for distribution of electric en
ergy. The Commission, however, maintained that the facili
ties in question were used for the transmission of electric
ity which had originated, in part, in a neighboring state
and that the company was, therefore, a "public utility”
76
within the meaning of the Act.
The Connecticut Light and Power Company purchased
electricity from the Connecticut Power Company (a non-affil
iated corporation despite the similarity of names). Part of
75 Particularly strong criticism came from the Na
tional Association of Railroad and Utilities Commissioners
as expressed through its General Solicitor. Address by John
E. Benton, Proceedings of the Fifty-Fifth Annua1 Convention
National Association of Railroad and Utilities Com
missioners (Washington, D. C., 1945), pp. 25-6.
76 Re Connecticut Light and Power Company, 3 F. P. C.
132 (1942)1 “ --------------------
87
this energy was generated in Massachusetts. Therefore, a
portion of the electricity sold by Connecticut Light and
Power to Connecticut consumers had, in the physical sense,
moved in interstate commerce.
The company argued that the electric energy originat
ing in ano.ther state and entering into its system was not
transmitted by it but was distributed. Since distribution
facilities are exempt from Commission control, the company
could not, under the Act, be regulated as a "public util
ity."
The Commission denied that the facilities in question
were used for distribution of energy. It was impressed by
the fact that the energy did move in interstate commerce and
that Connecticut Light and Power carried electricity on its
lines at voltages considerably in excess of those custom
arily used in distribution. Thus, the Commission declared
that the company was engaged in the transmission of elec
tricity in interstate commerce. An order was issued accord
ingly, directing the submission of accounting information.
Unconvinced by the Commission’s argument, the company
petitioned a Circuit Court of Appeals for a review of the
order. The Court upheld the order and presented its reasons
77
in a forthright manner. Pointedly attacking the central
77 Connecticut Light and Power Company v. Federal
Power Commission, 141 F. 2d 14 (1944).
88
issue, the Court stated:
. . . whether or not the facilities by which petitioner
distributes energy from Massachusetts should be classi
fied as "local" is not relevant in this case. The sole
test of jurisdiction of the Commission over accounts is
whether these facilities, "local" or otherwise, are used
for the transmission of electric energy from a point in
one state to a point in another.*^8
Since there was no doubt that electricity did flow from the
state of Massachusetts, the Court reasoned, the company was
a "public utility."
It appears that the Cireuit Court in this case broke
with a strong legal tradition by refusing to accept the cus
tomary basis of separating intrastate and interstate com
merce. The Court vigorously contested what it called the
"legal-electric mythology" that a point could be selected in
the transmission of energy where interstate transmission
ends and intra3tate distribution begins. This position
' placed the Court in the midst of a legal controversy rela
tive to the criteria which should be applied in determining
jurisdictional limits.
On a writ of certiorari the Connecticut case went to
the Supreme Court for final adjudication. The high court
reversed the Circuit Court of Appeals and the cause was re-
79
manded to the Commission for further proceedings. That
Loc.""cit.
79 Connecticut Light and Power Company v. Federal
Power Commission, 3§4 U. S. 518 (1945).
89
the Supreme Court found the case a difficult one is indi
cated by the fact that only five justices signed the major
ity opinion, one concurred in the result only, and three
dissented.
The majority of the Court declared that the lower
court was wrong in refusing to apply the usual test in dis
tinguishing between transmission and distribution facili
ties. It insisted that the legal standard wqs valid and
applicable. The cleavage between the lower court and the-*
higher court majority is revealed in the statement of the
latter that:
It does not seem important whether out-of-state
energy gets into local distribution facilities. They
may carry no energy except extra-state energy and still
be exempt under the Act. The test is whether they are
local distribution facilities.80
The two courts could hardly have been farther apart on the
issue.
The dissenting opinion in this case is Important be
cause three justices signed it. They contended that the
Commission had acted within statutory limits and properly
assumed jurisdiction over the company. The determination
was considered to be a technical matter regarding which the
Commission was competent to exercise its judgment. The dis
senters were impressed by the fact that consumers could not
80 Loc. cit.
90
utilize energy at high voltage. As to the legal test, they
stated:
Clearly no opinion in this Court has purported to
decide at what precise point interstate transmission of
electrical energy ends and local distribution commences.
This seems to be a novel point insofar as legal prece
dent is concerned.81
When the Connecticut case again came before the Fed
eral Power Commission, as directed by the Supreme Court, the
Commission announced that since the company Intended to
sever all interstate connections, there would be no bases
for any current or continuing federal accounting jurisdic-
82
tion. Accordingly, as soon as such action took place, the
Commission was to terminate any jurisdiction over its ac
counts .
In its opinion the Commission was largely concerned
with the intent of Congress. The Commission regarded Con- '
gressional intent as being broader than the Supreme Court
would acknowledge. It was argued that while the Federal
Power Act sprang, in part, from the desire to close the gap
left by the Attleboro decision, there were indications that
Congress sought to accomplish more than that. Reference was
made to the revelations made by the Federal Trade Commis
sion's investigation of public utilities which pointed
81 Loc7~~cit.
82 Re Connecticut Light and Power Company, 6 F. P. C.
104 (1947).
91
directly to the need for uniform accounting regulation on a
cost basis. Attention was drawn also to several provisions
of the Act which evidenced an intent to do something more
than merely fill the wAttleboro gap" in the regulation of
interstate wholesale electric rates. Seeking to support the
proposition that it had concurrent jurisdiction of account
ing control, the Commission expressed the view that:
The language of the Act itself makes it clear
that Congress saw the division between Federal and State
jurisdiction mainly as one between governmental func
tions rather than between c o m p a n i e s . 8 3
The Connecticut Light and Power Company decision
marked one of the few defeats of the Federal Power Commis
sion in jurisdictional cases before the courts. In view of
the strong dissent of three Supreme Court justices and the
tenuous circumstances of the case, however, one could easily
exaggerate the importance of the case.
Another leading ease demonstrating the difficulties
involved in determining jurisdictional limits is that in
volving the Jersey Central Power and Light Company which
came before the Commission in 1939 and ultimately was de
cided by the Supreme Court in 1943. While the facts bear
some similarity to those of the Hartford case, two essential
differences existed, namely: (1) that the Jersey Central
company was only indirectly involved in the sale of
83 Loc. cit.
92
electricity at wholesale in interstate commerce, and (2)
that the energy moving across the state line was of very
small amount in the Jersey Central case.
The Jersey Central Light and Power Company owned and
operated facilities located entirely within the State of New
Jersey. These facilities were interconnected with those of
a second company which in turn were connected with facili
ties of a third company, the lines of which extended into
the State of New York. The principal reason for the inter
connection was to enable individual companies to meet unu
sual peak demand conditions by drawing upon others in the
system.
The Commission found Jersey Central to be a "public
utility" within the meaning of the Act by reason of its own
ership and operation of facilities for the transmission of
84
electric energy which ultimately left the state. It
denied the company’s contention that the electricity was of
such small amount that state regulation was permissible un
der the law.
The company petitioned a Circuit Court of Appeals for
a review of the Commission’s order and the order was af-
85
firmed. In doing so, the Court relied heavily on the
84 Re Jersey Central Power and Light Company, 2 P. P.
C. 541 (1939).
85 Jersey Central Power and Light Company v. Federal
Power Gomml'si 1 on, T'59 ""P' . '5TT53~TT9l^n------------ -------
93
Attleboro decision. Since some part of the electricity from
Jersey Central’s lines indirectly reached a company selling
energy at retail to New York consumers, the Court found the
former to be a public utility. The fact that the sale was
indirect did not make any difference. Furthermore, it
stated, "We do not think it is important that the electric
ity which was transmitted is designated as emergency, eco-
86
nomy-flow, incidental, or slop-over current."
The Jersey Central Light and Power Company appealed
the case to the Supreme Court which rendered a decision in
87
1943, upholding the Commission's order. It based its de
cision upon a finding that Jersey Central was "instrumental"
in moving energy to New York. The fact that the interstate
movement was small in amount, infrequent in occurrence, and
beyond the control of Jersey Central under the interconnec
tion arrangement, was declared to be immaterial.
A sharp dissent from the majority opinion was regis
tered by three justices. They attached great weight to the
fact that Jersey Central had no control over the disposition
of energy after it was received by the intermediate company.
Jersey Central's activities were, in the opinion of the dis
senters, exclusively within the jurisdiction of the State of
86 Loc~cit.
Jersey Central Power and Light Company v. Federal
Power Commission, 319 u. S. 61 (19437*
94
Few Jersey*
The three foregoing cases were considered at some
length because they focus attention upon the fundamental
issue in jurisdictional determinations— the proscription
of limits to interstate commerce. The study of border-line
cases provides a most satisfactory approach to the under
standing of principles and attitudes brought to bear on this
problem. It is clearly evident that a very liberal inter
pretation of the term ’ ’interstate commerce” was employed in
tile Hartford and Jersey Central cases, but that the limit of
elasticity was exceeded in the Connecticut case in the opin
ion of the Supreme Court.
Exercise of particular powers. Following a determi*
nation by the Federal Power Commission that certain activi
ties of a company fall within its general jurisdiction, the
task of regulation really begins. Specific powers granted i
to the Commission under the Act are put into effect. The
question then arises: To what extent should the Commission
control the affairs of those companies which are subject to
its authority?
Frequently the Commission has proceeded to regulate a
public utility company by first ordering it to conform to
88
its uniform system of accounts. Accounting control is the
§8^feoth the Hartford and Connecticut cases discussed
above were initiated by the Commission in its attempt to
control the accounts of the companies.
95
most fundamental of all regulatory activities, since it pro
vides basic data for the whole scheme of regulation. Thus
this initial step projects the Commission deeply into the
affairs of a company. The reaction has often been one of
opposition or reluctant compliance with the order.
The uniform system of accounts promulgated by the
Commission in 1936 applied to both licensees and public
89
utilities. This important step was taken to insure con
formity to sound accounting principles and to enable the
Commission to procure financial data in a standardized form.
All licensees and public utility companies were subject to
the order requiring accounts in accordance with the uniform
system.
Certain companies refused to comply with the Commis
sion’s order on the basis that they were not within its gen
eral jurisdiction. Notable among these firms were the Con
necticut Light and Power Company and the Hartford Electric
90
Light Company. Some situations were so clearly within the
jurisdiction of the Commission, however, that accounting
control was resisted by challenging Commission jurisdiction
on other grounds.
It has on occasion been charged that the Commission
89 Annual Report of the Federal Power Commission,
1937, o j d . cit., p. 5.
90 Supra, note 88.
96
had no authority to prescribe a system of accounts where a
state commission prescribed a form of accounts. The courts
have consistently held to what appears to be quite explicit
in the Act, namely, that states and the federal agency may
91
prescribe systems of accounts concurrently. The compa*
nies* contentions in this connection seem to be grounded on
a flimsy basis. The only plausible explanation for the po
sition taken seems to be that, in sheer desperation to avoid
regulation, a weak attack was better than none.
The Commission has taken the position that its power
to prescribe a system of accounts is unlimited or re
strained, if at all, only by the rule that action must not
92
be arbitrary or unreasonable. The high court has sus-
93
tained this position in very certain terms. The courts
are not inclined to venture into determination of the proper
form of accounts.
A fundamental principle of accounting applied by the
Commission has been the subject of dispute. It has been
91 NortEern States Power Company v. Federal Power
Commission^ 118 F. 2d 14l (1941); Alabama Power Company v.
Federal Power Commission, 128 F. 2d 280 (1942); Hartford
Electric Light Company v. Federal Power Commission, 131 F.
2d 953 (1941).
92 M Alabama Power Co., 2 F. P. C. 312 (1940). Re
Northwestern Electric Co♦, 2 F. P. C. 327 (1940).
93 Northwestern Electric Company v. Federal Power
Commission, 321 U. S. 119 (1944); Alabama Power Company v.
Federal Power Commission, 128 F. 2ci 289, certiorari denied,
317 U. S. 652 (1942).
97
argued that some value concept of accounting is more appro-
94
priate than a cost basis. In conformity with the specific
language of the Act, the Commission has consistently adhered
to the cost concept. The Commission’s position on this
point has been affirmed by the courts in at least two in-
95
stances. In both of these cases the courts said, in ef
fect, that the Commission had properly refused to permit
companies to use estimates of "value” in lieu of cost.
Yet another type of jurisdictional dispute has arisen
with respect to accounting regulation, namely, whether the
state commissions or the Federal Power Commission has au
thority to control the fundamental corporate books of ac
count. In an opinion of July 5, 1946, the Commission as-
96
serted that it had authority over these records. Accord
ing to the Commission, the companies could, however, keep
supplementary and memorandum accounts prescribed by the Com
mission "provided that the integrity of the uniform system
97
is not impaired." It was clearly stated that failure to
94 Re ut8h power and Light Co., 3 F. P. C. 532 (1943)
Re Western Colorado Power Co., 4 F.P. C. 44 (1944); Re Mon
tana Power Co., 4 P. P. C.“"^13 (1945).
95 Northwestern Electric Co. v. Federal Power Commis
sion, 321 U. S. llO (1944); California-Cregon~~Power Co. v.
Wderal Power Commission, 150 E. 2d 25 certiorari denied 326
U. S. 781 (194671
96 Re Northern States Power Co., 5 F. P. C. 158
(1946).
97 Loc'ic-cit.
98
reflect in the fundamental accounts, entries prescribed by
the Commission, was a violation. The principal case in
which this jurisdictional issue presented itself involved
the Arkansas Power and Light Company and the Arkansas De-
98
partment of Public Utilities. In this case the company
sought to have a District court declare that the state com
mission had exclusive jurisdiction over the basic books of
account. The case ultimately went to the United States Su
preme Court which held that the company had failed to ex-
99
haust its administrative remedies. The Commission had
successfully resisted an attempt to limit its jurisdiction.
Intimately related to the prescription of a uniform
system of accounts is the responsibility of determining the
original cost of public utilities. The Commission instituted
98 Arkansas Power and Light Company v. Federal Power
Commission^ 60 F. Supp. 909 (1945).
99 Federal Power Commission v. Arkansas Power and
Light Company, 330 U. S. 802 (1947). When the Court of Ap
peals for the District of Columbia had the case before it,
the importance of the issue was indicated as follows: ” .
. . a public utility cannot keep more than one set of ac
tual, official, corporate accounts. Neither can any other
corporation for that matter. There mu3t always be an offi
cial recording of figures to represent the actualities of
the business, to constitute the genuine record of steward
ship, the basis upon which representations are made as to
the real results of the utility*s operations and its true
financial condition in reports to stockholders and to the
public and in financial statements to be submitted to pros
pective investors or creditors. Merely to state this prop
osition is to demonstrate its soundness.” Arkansas Power
and Light Company v. Federal Power Commission, 156 F. 2d 0.
821 (1947).
99
this program on a large scale when, on May 1,1, 1937, it di
rected all licensees and public utilities to submit state
ments of original cost of their properties within a certain
\
length of time. With the return of these statements, the
Commission proceeded with its office review and field exam
inations of the data submitted. By the end of fiscal year
1948, the companies had filed 315 such cost statements, 86
of which 3till remained to be disposed of by the end of the
year.1^ It was expected that all of these remaining cases
102
could be disposed of in the fiscal year 1949. The magni
tude of the task is revealed in the Commission’s assertion
that by the end of 1949
. . the grand total of electric utility original cost
statements on file with the Commission should cover at
least 70 per cent of the recorded plant of all electric
utility companies operating in the United States.103
The real significance of the Federal Power Commis
sion’s accounting requirements and cost determinations is
found in the reclassifications of accounts ordered by the
Commission. To be more specific, many companies were
100 Annual Report of the Federal Power Commission,
1958 (Washington, D. C.: Government Printing Office, 1939),
p. 15.
Annua1 Report of the Federal Power Commission,
1948, op. cit., p. 68.
102 Filing of eighteen additional statements during
1949 was anticipated.
103 Annua 1 Report of the Federal Power Commission,
1948, loc. cit.
100
ordered to write off certain amounts from their asset ac
counts in order to reflect legitimate original cost. The
Commission's aims in this connection were well stated by a
Circuit Court of Appeals when it said:
The purpose of directing the ascertainment of
legitimate original cost was not merely to enable the
Commission to compile and require the recording of in
formative data. The aim was to eliminate the padding
from utility accounts. The provision has the broad pur
pose of protecting the public against the artificially
inflated investment costs on the basis of which utility
companies assert the right to a return.104
To June 30, 1948, the excess over original cost aggregated
$1,384,521,564.73, for which the Commission ordered disposi-
105
tion chiefly in the form of charges to earned surplus.
That the Commission’s reclassification work proceeded
relatively smoothly is indicated by the fact that to June 30,
1948, only 12 companies were made subject to formal proceed
ings and in 4 of these cases settlements were achieved with-
106
out the necessity of a formal opinion by the Commission.
The great majority of the 196 cases were settled through in
formal proceedings. Evidently this important work has been
successfully carried forward through the years.
Control of rates is an immediate concern of the
104 California-Oregon Power Co. v. Federal Power Com
mission, 150 F. 2d 25, certiorari denied, 326 U. S. 781
(1946).
105 Annua1 Report of the Federal Power Commission,
1948, op. cit.. p. '71".
106 Ibid., p. 73.
101
consumer and the essential function of a commission is to
1
protect his interests. The rates charged to consumers are
generally subject to regulation by state commissions. The
Federal Power Commission, however, has authority to regulate
interstate wholesale rates and thus may indirectly influence
local rates.
The Federal Power Act granted the Commission author
ity to require filing of rates, to suspend new schedules,
and to determine just and reasonable rates either upon com
plaint or upon its own motion. In accordance with the Act,
the Commission has issued many rate orders. Frequently,
rate reductions have been ordered as a result of a finding
107
that accounts require elimination of inflation.
Under the general heading of corporate regulation,
the activities of the Commission have also been important.
One of the tasks in this connection has been to approve is
suance of securities. Many applications for approval ap-
101
peared after 1935, but a record level was reached in 1948.
In explaining this volume of stock Issues, the Commission
noted the post-war industry expansion, the favorable money
107 iRe "Worthern States Power Company, 5 F. P. C. 158
(1946). The Commission reported an approximate annual re
duction of $800,000 as a result of an informal settlement
with another company. Annua1 Report of the Federal Power
Commission, 1948, op. cit., p. 79.
108 Annual Report of the Federal Power Commission,
1948, op. cit., p. 92.
102
market, and
. . . the increasing number of electric companies coming
under FPC jurisdiction as a result of integration pro
ceedings before the Securities and Exchange Commission
separating the operating utilities from holding company
control.1^9
In the fiscal year 1948 a total of 38 applications was ap
proved, and no public hearing was required for any one of
them. Although the Commission is prohibited from regulation
of security issues where a 3tate commission is properly es
tablished, the Commission has apparently regarded the regu
lation by most states as inadequate to oust the jurisdiction
of the Commission.
Approval of mergers and consolidations is another one
of the functions of the Commission. In the fiscal year
1947, 12 applications were approved, whereas in the follow-
111
ing year only 8 were approved. The Commission was of the
opinion that the peak in number of applications had been
reached in 1947. A large number of applications have been
109 LocT cit.
110 The Commission frequently declares in its reports
on security regulation that ’ ’Applicant is not operating in a
State under the laws of which its securities are regulated
by a State Commission within the meaning of section 204 (f)
of the Federal Power Act, and the proposed issuance of se
curities is, therefore, not exempt by virtue of that section
from the requirements of section 204 of the Act." Re Cali
fornia Electric Power Company, 6 F. P. C. 676 (1947T7 This
statement is a standard provision found in numerous cases.
H I Annual Report of the Federal Power Commission,
1948, op. cit., p. 94.
103
received from individuals seeking approval of interlocking
directorates. The number received in fiscal year 1948 was
112
48. Very few applications have been denied, but where
approval is granted a time limitation is imposed.
The Commission's authority with respect to the promo
tion and encouragement of interconnection and coordination
of electric systems ha3 become increasingly important.
Prior to World War II, the Commission established 48 power
113
supply districts as provided by the Act. Comprehensive
interconnection and coordination studies were completed for
23 of these, but they became out-of-date as a result of war
time expansions and integrations under the Public utility
114
Act of 1935. Following the war period, the Commission
indicated the importance of this work, but due to staff lim
itations its progress in this direction was slow. In 1948,
115
however, three comprehensive studies were initiated.
Certain modifications were made in the district boundaries
during the year also.
In its annual report for 1947, the Commission pointed
out the extent of the interconnection development in the
112 Ibid., p. 96.
113 Annual Report of the Federal Power Commission,
1947, op. cit., p. 53.
114 Loc. cit.
115 Annua1 Report of the Federal Power Commission,
1948, op. cit., p. 43.
104
nation. It revealed regional power pools of "enormous
size" had been created and that it encouraged such opera
tions. There were, at that writing, 1500 interconnections
between systems. Large power pools were operating in New
England, Pennsylvania-New Jersey, New York State, Southeast
ern States, Southwestern States, Central States, Pacific
Northwest, and Pacific Southwest. Many other pools of les
ser capacity were in operation. Taking a long-range view of
the trend, the Commission made the very significant state
ment that
. . . this development is expected ultimately to embrace
the entire United States in one gigantic power pool and
the existence of intrastate electric systems In the fu
ture probably will become as rare as intra3tate rail
roads are today.H7
The interconnection of facilities of two or more com
panies introduces the question of jurisdiction in many
cases. If the interconnected companies’ facilities are lo
cated entirely within a single state, federal jurisdiction
under Part II of the Act will not be asserted, provided no
electric energy is delivered at the state line. If any en
ergy -moves across a state boundary, the possibility of fed
eral jurisdiction arises. It is significant to note that
the three major cases already discussed, in which Commission
116 Annual Report of the Federal Power Commission,
1947, op. cit., p. 53.
117 Loc. cit.
105
jurisdiction under Part II was challenged, involved inter-
118
connections. Particularly important among these was the
Jersey Central case wherein the company contended that the
interconnection was merely for emergency circumstances. The
contention was denied by the Commission and the Supreme
Court. In view of the interconnection trend, it would seem
that the extension of federal jurisdiction Is inevitable un
der existing law.
The promotion of voluntary interconnection and coor
dination of facilities of individual companies operating in
adjacent areas has been of long-run significance, but other
related activities of the Commission have also been impor
tant. Emergency interconnections were emphasized during the
war period. Many temporary wartime interconnections were
authorized in order to effect certain operating economies or
to conserve critical materials by avoiding the installation
119
of additional generating capacity. it was specifically
1.18 Cf. pp. 83-94.
Annual Report of the Federal Power Commission,
1946, op. citV, p. 2l. Another type of emergency has occa
sionally arisen as a result of a coal strike. The Commis
sion has, at times, made recommendations relative to the
conservation of coal in these circumstances. For instance,
the Commission issued on May 7, 1946, a ' ’Recommendstion for
the maximum coordination of electric facilities in the in
terest of conserving coal, and recommendation for the cur
tailment of the use of electric energy in certain areas of
the united States. . .” with the provision that interconnec
tions occasioned by the emergency would not affect jurisdic
tional status. 5 F. P. C. 503 (1946).
106
provided, in accordance with the language of the Act, that a
company was not subject to Commission jurisdiction by reason
of such arrangements.
Following the war, the Commission undertook a review
of most of the wartime interconnections to determine the ad
visability of recommending that, in the public interest, t / v r ;
120
they be maintained permanently. This type of intercon
nection is described as a permanent connection for temporary
use. An interconnected company might draw upon reserve ca
pacity of the system during an emergency in which load ex
ceeds the maximum output of the company’s own facilities.
Between July 1, 1947, and June 30, 1948, a total of 18 ap
plications were filed by companies not previously subject to
Commission jurisdiction which were seeking authorization to
make emergency interconnections involving interstate move
ment of electric energy without thereby becoming subject to
121
the Commission's jurisdiction. After investigation, all
of these applications except one were approved and exemption
from federal jurisdiction was permitted.
The transmission of electric energy to foreign coun
tries has been another subject of Commission regulation.
Applications of electric utilities seeking permission to
120 LocT cit.
121 Annual Report of the Federal Power Commission,
1948, op. cit., pp. 45-44.
107
export electricity must be filed with the Commission. In
most instances authorization has been sought to interconnect
with a Mexican or Canadian utility rather than to deliver
122
and sell electricity to foreign consumers. Several ap
plications have been received each year and they usually
have been approved. The chief question concerning the Com
mission in these cases has been
. . . whether the energy proposed to be exported would
impair the sufficiency of electric supply within the
United States or would impede or tend to impede the co
ordination in the public interest of facilities subject
to the jurisdiction of the Commission.125
Much of the work of the Commission has been of an in
vestigatory character. In connection with each of the fore
going activities, some investigation is necessary. There
have been many other subjects for study, however. Among
these are power supply conditions, power markets, service
interruptions, electric rates, procedural changes, and other
matters.
III. SUMMARY
The jurisdiction of the Federal Power Commission under
122 Illustrative of interconnections with foreign com
pany facilities are the following: Re California Electric
Power Company, 6 F. P. C. 812 (1947); Re Puget Sound Power
and Light Company, 6 F. P. C. 340 (194TJ; and Re Interna -
tional Power Company, St. Croix Electric Company, and Cana
a n Cottons, Ltd., 6 F. P. C. 392 (1947).
123 Annual Report of the Federal Power Commission,
1946, op. cit., p. 25.
108
the Federal Power Act has "become very broad indeed. While
the Act itself confers extensive jurisdiction through its
express language, it is evident in the decisions of the'Com
mission and courts that the attempts to extend federal regu
lation through statutory Interpretation have been successful
much more frequently than they have failed.
In the control of water power resources, federal reg--
ulation has been particularly dominant. Through Commission
and court interpretation of the term "navigable waters" the
extension of federal control proceeded to encompass all but
the most minor and unimportant of streams. Yet the Act rec
ognizes state regulation with respeet to rates and services
of utilities under federal license. The importance of state
regulation as reflected in the rate control provision of
Part I may easily be exaggerated, however, since under Part
II licensees1 rates for interstate transmission and sale at
wholesale in interstate commerce are subject to Federal
Power Commission regulation. Nevertheless, regulation under
Part I provides an excellent illustration of dual control by
federal and state commissions.
The jurisdiction of the Federal Power Commission
under Part II of the Act has been widened through liberal
interpretation of the term "interstate commerce." A few
basic court decisions have given notable leverage in ex
panding the scope of federal regulation to include facilities
109
which are used for the transmission and sale at wholesale in
interstate commerce of very small quantities of electric
energy. The significance of this tendency is seen when con
sideration is given to the development of interconnection
arrangements and power pools. The Commission has also been
successful in extending its authority to various particular
subjects of regulation, such as accounts, rates, issuance of
securities, mergers, interconnections of facilities, and
other matters. In general, the Commission has proceeded to
broaden its activities within the limitations imposed by the
statute and court decisions. Furthermore, the legal barrier
itself has proved to be somewhat flexible and this has
served to facilitate extension of federal jurisdiction.
CHAPTER IV
FEDERAL POWER COMMISSION JURISDICTION
UNDER THE NATURAL GAS ACT
Due to the fact that regulation of electric utilities
preceded that of natural gas companies, the Commission was
benefited in the latter work by Its experience in adminis
tering the Federal Power Act. Many of the procedural and
substantive aspects of regulation are comparable under the
two laws. The dissimilarities are sufficiently important,
however, to warrant separate treatment of gas regulation.
The tremendous expansion of the natural gas industry,
particularly that following World War II, thrust upon the
Commission heavy responsibilities of regulation. A number
of jurisdictional problems were confronted. Certain cases
were undertaken with little excitement while others occa
sioned serious disputes with respect to jurisdiction. The
extension of Federal Power Commission authority under the
Natural Gas Act has been a matter of concern to many states,
some of which regard the federal activities with apprehen
sion, while others look with favor upon the Commission's
work. An evaluation of its effect should be preceded by
consideration of the limits to federal jurisdiction.
I. GENERAL JURISDICTION UNDER THE NATURAL GAS ACT
The definition of jurisdiction within which the
Ill
Federal Power Commission must confine its regulatory activi
ties has been at least as difficult under the Natural Gas
Act as under the Federal Power Act. The Commission has
struggled with statutory provisions in an effort to deter:* ; n
mine their meaning as related to many concrete cases. Not
infrequently the courts have been called upon to review
legal aspects of Commission action. The result is a rather
large number of administrative and judicial decisions with
respect to Federal Power Commission authority under the
Natural Gas Act.
In analyzing the general jurisdiction of the Commis
sion relative to natural gas, it is convenient to consider
separately two major problems. First is the distinction
between production and gathering activities, on the one
hand, and transportation or sale at wholesale in interstate
commerce, on the other hand. Second is the distinction be
tween transportation or sale at wholesale in interstate com
merce and local distribution. Since federal regulation is
legally excluded from production and gathering at the one o
end of natural gas movement, and distribution at the other
end, the jurisdictional problems have centered largely at
the points of functional separation.
Intersta te commerce distinguished from production and
gathering. The exemption of production and gathering acti
vities from federal regulation under the Natural Gas Act
112
necessitates some definition of the term in order to give it
proper effect. How broad or narrow an interpretation should
be given to the term is a question of basic importance in
this area of regulation.
The first major pronouncement of the Commission on
this jurisdictional matter came in 1940 when it considered
the case involving the Columbian Fuel Corporation.1 This
company was engaged in production and gathering of natural
gas but sold it to a company which transported it for dis
tribution in another state. The Commission pointedly
stated:
We conclude . . . that it was not the intention
of Congress to subject to regulation under the Natural
Gas Act all persons whose only sales of natural gas in
interstate commerce, as in this case, are made as an in
cident to and immediately upon completion of such per
son’s production and gathering of said natural gas and
who are not otherwise subject to the jurisdiction of
this Commission.^
In arriving at this conclusion, the Commission noted
that Congress intended to "close the gap" in regulation by
providing the Commission with authority to regulate com
panies whose "main function" was to transport natural gas
through interstate pipe lines and sell this gas to local
distributing companies. It frankly admitted that It chose
a narrow rather than a broad interpretation of Its juris
1 Re Columbian Fuel Corporation, 2 F. P. C. 200
(1940).
2 Loc. cit.
113
diction, Indicating that to do otherwise would lead into at
tempts to deal with complicated interrelationships between
the oil industry and the natural gas Industry. It was felt
that wider statutory authority, additional regulatory ma
chinery, and augmented funds would be necessary to effect
tively regulate producers and gatherers.
Significantly, the Commission did not close the door
completely to regulation of production and gathering activi
ties, for it pointed out that
Further experience with the administration of the
Natural Gas Act may reveal that the initial sales of
large quantities of natural gas which eventually flows
in Interstate commerce are by producing or gathering
companies which, through affiliation, field agreement,
or dominant position in the field able to maintain' an
unreasonable price despite the appearance of competi
tion. Under such circumstances the Commission will de
cide whether it can assume jurisdiction over arbitrary
field prices under the present Act or should report the
facts to Congress with recommendations for such broad
ening of the Act and provision of additional machinery
as may appear necessary to close this gap in effective
regulation of the natural-gas industry.3
While the opinion and order of the Commission in the
Columbian Fuel case indicates a reluctance to extend its
reach of authority, the decision was not unanimous. One
commissioner vigorously contended that the Commission was
disclaiming jurisdiction over rates which the states could
not regulate and thus left a hiatus in regulation:
I cannot help but feel that the majority opinion
3 Loc. cit.
114
leaves adequate and effective regulation, in the public
interest, of the sales of natural gas in interstate com
merce for resale, hoped for by consuming public and
deemed essential by a Congress desiring to fill the gap
in which the States may not act, suspended in limp and
lifeless form from the yardarm of inaction.4
Within the same year in which the important Columbian
Fuel case was decided, the Commission had before it the
Billings Gas Company case in which a company was engaged in
production and gathering of gas and, in addition, transmis-
g
sion of gas in interstate commerce. All of the company’s
facilities were located within the state of Montana and
while it produced and gathered gas within that state, none
of this gas was transported out of the state. The company
purchased gas at a state line and transported it through a
transmission pipe line to various cities where it was sold
to distributors. Because of its transmission function, the
company was declared to be a ”natural-gas company'' within
the meaning of the Act. The case was distinguished from the
Columbian Fuel case in that, in the latter situation, the
company was engaged exclusively in production and gathering
of gas.
The Columbian Fuel and Billings Gas Company cases in
volved the issue of direct regulation of production and
gathering operations, ^either of the Commission’s decisions
4 Loc. "cit.
5 Billings Gas Company, 2 F. P. C. 288 (1940).
115
was brought to the courts for review. A more complicated
problem relating to the production and gathering function
6
arose in a subsequent case. The issue presented was wheth
er production and gathering property could properly be con
sidered in determining the reasonableness of interstate
wholesale rates.T The Canadian River Gas Company produced,
gathered, and transported gas in interstate commerce which
was sold to Colorado Interstate Gas Company, for the most
part, the two companies being operated virtually as a single
enterprise. TThe Commission decided that such a considers-
l
tion was proper because of the complete integration of the
company*s operations:
The investigation of Canadian's production and
gathering property and operations is indispensable in
regulating Canadian's rates and charges for the sale of
natural gas in interstate commerce for resale and for
the transportation of natural gas in interstate com
merce
The Commission’s rate order based upon consideration
of the total operation was brought before a Circuit Court^of
Appeals for review which upheld the Commission's opinion on
this point.® It could find nothing in the Act which "ex
pressly or by fair implication" indicated that Gongress
6 Re Canadian River Gas Company, et al., 3 P. P. C.
32 (1942). -----
7 Loc. cit.
8 Colorado Interstate Gas Company v. Federal Power
Commission, et al., 14& P. £d §43 (1944).
116
9
prohibited this action of the Commission.
The lower court’s decision was appealed to the United
States Supreme Court which decided the case in 1945.^° It
upheld the Circuit Court of Appeal’s opinion on the particu
lar point here considered. The high court could find nothing
in the Act which precluded the Commission from reflecting
the production and gathering activities of a natural gas
company in the rate-base. It was stated that
Congress might have provided that producing or
gathering facilities be excluded from the rate base and
that an allowance be made in operating expenses for the
fair field price of the gas as a commodity. Some have
thought that to be the wiser course. But we search the
Act in vain for any such mandate.H
Referring to the Hope Hatural Gas Company case, the court
observed that since it was the result or impact of the rate
order that was controlling, it made no real difference which
method was used. The court did not maintain that the phrase
in section 1 (b) of the Act excluding production and gather
ing from federal jurisdiction had no effect, but indicated
that the provision referred to direct regulation:
Certainly that provision ^section 1 (b)J precludes
the Commission from any control over the activity of
producing or gathering natural gas. For example, It
makes plain that the Commission has no control over the
drilling and spacing of wells and the like. It may put
9 Loc . ~cit.
Colorado inters tate Gas Company v. Federal Power
Commission, 324 U. W, 581 (1945).
11 Loci cit.
117
other limitations on the Commission. We only decide
that it does not preclude the Commission from reflect
ing the production and gathering facilities of a natu
ral gas company in the rate base and determining the
expenses incident thereto for the purpose of determin
ing the reasonableness of rates subject to its juris
diction. 12
Justice Jackson filed a separate opinion in this
case. He thought the Hope Hatural Gas Company precedent was
controlling and therefore concurred. Yet he strenuously ob
jected to the thesis that "the end justifies the means? '--
that the result of the rate order and not the method of rate
13
making is what counts. Jackson reiterated his view that
the Hope decision provided no adequate guide or rule for the
commissions. He was also concerned with the secondary ef
fect that the Federal Power Commission^ rate order would
have on production of natural gas:
Farsighted gas-rate regulation will concern it
self with the present and future, rather than the past,
as the rate base formula does. It will take account of
conditions and trends at the source of the supply being
regulated. It will use price as a tool to bring goods
to market--to obtain for the public service the needed
amount of gas.14
While Jackson expressed a desire to reverse the ma
jority on principle but concurred, three other justices dis
sented from the majority opinion. They felt that the
12 Loc.
13 Loc.
14 Loc.
pit.
clt.
cit.
118
exclusion of production and gathering from regulatory au
thority was ”a command to the Commission not to regulate
15
that which is excluded.” The unregulated properties
should be segregated from the regulated and only the latter
considered in determining the rate-base. Where sale of gas
at the terminus of a gathering line was at ' ’arm's length,”
market rates were to be regarded as fair and properly re
flected in the expense accounts of a transmission line pur
chasing such gas. The minority did not suggest an answer,
however, for a situation in which a transaction was not at
"arm’s length.”
The Colorado Intersta te Gas Company case is of signi
ficance because it was the first case in which the issue of
Commission jurisdiction over production and gathering prop-
16
erties was squarely faced by the Supreme Court. While the
majority of the Court upheld the Commission's rate-order
based upon a rate-base including value of production and
gathering facilities, there was wide disagreement among the
justices regarding the issue. The division of the Court and
the conflicting views expressed by its members suggests that
the final rule had not been clearly established.
15 Loc.~~cit.
16 A similar position was taken by the same Supreme
Court majority in Panhandle Eastern Pipe Line Co. v. Fed
eral Power Commission, 324 U. S. 635 (1945).
119
Another case involving the issue of Commission juris
diction over production and gathering facilities was also of
outstanding importance. The Interstate Natural Gas Company,
Inc., claimed exemption for certain sales on the basis that,
although the company was a natural-gas company within the
meaning of the Act, designated sales were sales in the pro-
17
duetion and gathering of gas. Part of the gas sold at
wholesale originated in its own wells in Louisiana and was
delivered to the buyers within that state, but some gas ob
tained from Mississippi was comingled with the local gas
prior to such sales. The Commission denied that these sales
were exempt from federal control, stating that
It is clear from the evidence that as a practical
operating matter interstate does not consider its trans
portation lines as something separate from its field
lines. Interstate's pipe lines are operated as a unit.
Furthermore, the Commission commented thst the company,had
successfully contended in a federal court that over 99^ of
its total sales of gas, which included the sales In question
before the Commission, were sales In interstate commerce and
beyond the reach of a state commission.
On review of the Commission's rate order in this
case, a Circuit Court of Appeals held that the sales were
17 Re Interstate Natural Gas Company, inc., 3 F. P.
C. 417 (1943).
18 Loc. cit.
120
within the agency*3 jurisdiction and not properly regarded
19
as being in production and gathering. One of the three
judges, however, believed that gathering and transporting
were necessary incidents to the production of gas and thus
exempt. The Supreme Court affirmed the lower court’s de-
20
cision in 1947. Noting that the sales were at wholesale
in interstate commerce beyond a doubt, the high court said:
In denying the Federal Power Commission jurisdic
tion to regulate the production or gathering of natural
gas, it was not the purpose of Congress to free com
panies such as petitioner from effective public control.
The purpose of that restriction was, rather, to preserve
in the States powers of regulation in areas in which the
States are constitutionally competent to act.2- * -
No evidence was presented to the effect that Federal Power
Commission regulation conflicted with regulation of produc
tion and gathering by a state commission.
The Commission has denied that it has extended its
authority over production and gathering activities. It de
clared in~1947:
19 Interstate Natural Gas Company v. Federal Power
Commission, 3 3 1 U. S. 6 8 2 ( 1 9 W T .
2 0 Interstate Natural Gas Company v. Federal Power
Commi33 ionli 156 F. S’ d 949 (1946 }.
21 Loc. clt. In a somewhat similar case, a "natural-
gas company** claimed exemption on the basis that certain
sales represented gas not produced by itself but purchased
from another company which was subsequently sold at the ter
minus of gathering lines. The Commission and the Circuit
Court of Appeals reviewing the Commission's order denied the
exemption. People’s Natural Gas Co. v. Federal Power Com
mission, 127 P. 2d 153 (1942); certiorari denied,316 U. S.
7 0 0 (1642).
121
The Commission has no desire to extend its juris
diction over the independent producer and gatherer or
otherwise invade what are properly regarded as the func
tions of the conservation authorities of the States.
Further, the cases decided by the Commission do not re
veal a single instance wherein we have sought to extend
our jurisdiction*in an unwarranted manner into those
fields--so that any charge that we have or interided to
invade such fields is wholly unfounded.28
There have been a number of instances in which the Commis-
23
sion has specifically disclaimed jurisdiction.
It is evident from the foregoing cases that the Fed
eral Power Commission exercises an important influence over
the production and gathering activities of natural gas com
panies. While there is no direct federal regulation of
these operations, the value of properties used for these
purposes is included in the rate-base when reasonable inter-
24
state wholesale rates are determined.
Interstate commerce distinguished from local distri
bution. Since the jurisdiction of the Federal Power Commis
sion lies between production and gathering, on the one side,
and local distribution, on the other side, it becomes neces
sary to define the limits of federal jurisdiction at both
22 Re Fin-Ker Oil and Gas Producing Company, 6 F. P.
C. 92 (1947J♦
23 Re Repollo Oil Company, 2 F. P. C. 1004 (1941); Re
Sinclair Prairie Oil Company, 2 P. P. C. 1009 (1941); Re
Fln-Ker~Oil and Gas Producing Company, 6 F. P. C. 92 (1^47).
24 Cf. p. 141.
122
ends of the transmission line. The problem of distinguish
ing interstate and intrastate jurisdiction near the final
marketing phase of natural gas business is quite similar to
that in the electric utility field.
A leading case in which the jurisdictional question
was considered involved the East Ohio Gas Company. The Fed
eral Power Commission asserted jurisdiction over this com-
25
pany in 1939. During that year several Ohio cities re
quested the Commission to determine the reasonableness of
rates charged by Hope Natural Gas Company for gas delivered
at the state line to East Ohio Gas Company. The cities
thought that the Public Utility Commission of Ohio would be
aided thereby in determining the reasonableness of intra
state or local rates.
On its own motion, the Federal Power Commission went
a step farther and declared the East Ohio Gas Company to be
a ”natural-gas company" within the meaning of the Natural
Gas Act. The basis for this decision was a finding that
East Ohio was engaged in transportation of natural gas in
interstate commerce since gas moved through the transmission
lines of Hope and East Ohio as "a continuous stream of in-
26
terstate commerce to city gates." The Company contended
25 Re East Ohio Ga3 Company, 1 F. P. C. 586 (1939).
26 Loc. Cit.
123
that all of its facilities and activities were confined
within the state of Ohio. It insisted that it was engaged
in local distribution of natural gas and that its transpor
tation operations were wholly within the state and incident
to such local distribution. It was further contended by
East Ohio that it owned the gas purchased at the state line
and was thus not performing a common carrier function. Ihe
Commission stated that the Act applied to transportation of
natural gas in interstate commerce regardless of sales
27
transactions or ownership of the gas.
The East Ohio Gas Company on three subsequent occa
sions sought to have the Commission disclaim jurisdiction
over its facilities, but the Commission refused to change
28
its position. In 1947 it treated the case at length in
29
order to dispose of the question once and for all. It re
iterated that the East Ohio Gas Company was not outside fed
eral jurisdiction when there was a continuous uninterrupted
27 The Commission cited as authority for its asser
tion of jurisdiction a Supreme Court decision involving this
same company but concerned with taxation. In defining as
interstate commerce movement of gasnpurchased from Hope Nat
ural Gas Company and transported within Ohio by the East
Ohio Gas Company, the Court said, "The mere fact that the
title or custody of the gas passes while it is en route from
State to State is not determinative of the question where
interstate commerce ends." East Ohio Gas Company v. Tax
Commission, 283 U. S. 465 (1931).
28 Re East Ohio Gss Company, 4 P. P. C. 15 (1943);
4 F. P. C.~?9TTT9WT T. C. 639 (1945).
29 ES. %ast Ohio Gas Company, 6 P. P. C. 176 (1947)
124
flow of gas across a state line through high pressure pipe
lines. The company contended that regulation by the Federal
Power Commission partially duplicated what was characterized
as complete regulation by the State of Ohio. The Commission
countered by stating that the State of Ohio had no authority
over interstate commerce.
The East Ohio Gas Company again sought relief in the
courts. There it was at first successful as the Circuit
30
Court of Appeals struck down the Commission's order. On
appeal by the Commission to the Supreme Court, however, the
#
31
lower court was reversed. Like so many of the jurisdic
tional cases, it was decided by a small majority. It stated
that the company's high pressure lines were used for trans
mission and were not properly regarded as part of a distri
bution system:
We are wholly unpersuaded that Congress intended
to treat trunk lines like East Ohio's as though they
were mere integrated facilities of the numerous commun
ity supply systems which they serve.32
With respect to alleged conflict of state and federal regu
lation, the Court said the Act did not abolish all overlap
ping.
30 East Ohio Gas Company v. Federal Power Commission,
173 F. 2d 429 (1949).
31 Federal Power Commission v. East Ohio Gas Company,
18 U. S. L. f. (1950).
32 Loc. cit.
125
The dissenting opinion of two justices is of great
interest in this case. Noting that many state agencies and
officials had sided with the utility, the minority said this
array of opponents to the Commission suggested the unusual
Importance of the case. It stated that
The anxiety which this program stirs among other
states besides Ohio, which opposed the Commission Is
explained by its magnitude. The Power Commission in its
petition notes forty-three pending cases in which it
takes this same position vis-a-vis state regulation.33
The dissenters criticized the majority for employing a mech
anist iclformula of pressure change as a basis for jurisdic
tional determin8tion--a basis which was said to be immateri
al in a recent case decided by the same court. The minority
regarded the assertion of federal jurisdiction as "an en
trapment of the state agencies that supported this Act under
the representation that it would not deprive them of powers
.,34
but would only make their powers more effective."
In another case, the Commission asserted jurisdiction
over extension of facilities despite the fact that they were
not only located entirely within the State of New York, but
35
were within the metropolitan area of New York City. A
55 Federal Power Commission v. East Ohio Gas Company,
loc. cit.
54 Loc. cit. The "recent case” to which reference is
made is Interstate Natural Gas Company v. Federal Power Com-
mi3sion, 156 F. 2d 94§ (194677
55 Federal Power Commission Release No. 4484, October
51, 1949; No. 4491, November 4, 1949.
126
majority held that the three companies jointly undertaking
construction of 38 miles of pipeline were natural gas com
panies within the meaning of the Act, since gas would be re
ceived from a long-distance Texas-to-New York line and would
be transported uninterruptedly to their distribution system.
It was the same basis for jurisdiction employed in the East
Ohio Gas Company case, namely, the physical interstate move
ment of gas. One Commissioner dissented in this case,
claiming that to assume jurisdiction simply upon the basis
of out-of-state origin of the gas was unwarranted. He felt
that the State of New York had both constitutional and sta
tutory authority to regulate the entire operations of these
companies. The ruling of the Commission in this case re
veals another extension of federal control beyond its appar
ent limits.
The authority of the Federal Power Commission to
regulate transportation and sale at wholesale in interstate
36
commerce has been upheld by the Supreme Court. It has
also held that where a company’s operations were not exclu
sively interstate, a state could exercise concurrent
36 PeopTe’s Natural Gas Company *v. Federal Power Com
mission, 3l6 U.S. 70C (1942); Public Utilities Commission
of Ohio v. United Fuel Gas Company, 517 U. S. ?56 (1945);
Central States Electric Company v. City of Muscatine, Iowa,
324 U. S. 138 (1945); Colorado-Wyomlng Gas Company v. Fed
eral Power Commission, 3^4 U. S. 6&6 yl§4g).
127
37
authority over intrastate activities of the company.
Moreover, the high court has sanctioned federal jurisdiction
over matters which, although not strictly a part of inter
state commerce, so materially affect interstate commerce as
30
to be properly included under federal authority.
The jurisdictional problem relating to interstate
transmission and local distribution , of natural gas has been
similar to that in the electric utility field. As a result,
the courts have not found it so difficult to uncover judi
cial precedents for particular cases as they arise. With
respect to interstate transmission and production and gath
ering operations, the jurisdictional problem has been some
what unique. Accordingly, the courts have had to develop a
body of law particularly applicable to this phase of federal
regulation.
II. JURISDICTION OVER PARTICULAR SUBJECTS
The general jurisdiction of the Federal Power Commis
sion constitutes the foundation for federal regulation, but
5^ Memphis Natural Gas Company v. McCanless, 329 U.
S. 670 (1946); Arkansas Louisiana Gas Company v. Department
of Public Utilities, et al., 304 U. S. 61 (1938).
Illinois Natural Gas Company v. Central Illinois
Public Service Company, et al., 314 U. S. 498 (1^42}. Ac
cording to the court, extension of proposed facilities was
so intimately associated with interstate operations and
would so affect the volume of gas moving into the 3tate
that Congress had authority rather than the state with res
pect to such an extension.
128
there is need for analysis of the scope of its authority
with respect to various particular subjects set forth in
the Natural Gas Act. Here the Commission and the courts
have attempted to determine the meaning of the Act as it
has been applied to actual problems.
Extension and abandonment of service. The authority
of the Commission to regulate the extension of facilities by
natural gas companies subject to its jurisdiction and their
physical connection with distributing companies has been up-
39
held by the Supreme Court. The issuance of certificates
of convenience and necessity for such extensions is an im
portant phase of the Commission’s work as witnessed by the
fact that during a recent 12-month period the Commission
considered 109 applications for authorization to build new
4Q
facilities involving 9,042 miles of pipe line.
Primarily, the task of the Commission under section 7
is to authorize requests for approval to construct new pipe
line facilities. It also has authority, however, to direct
by order the extension of facilities subject to certain pre
scribed limitations. In 1943 the Commission included in a
certificate for construction of pipe line facilities a
Illinois Na tural Gas Company v. Central Illinois
Public Service CompsTny, 5l4 XT. S. 496 (1942J.
40 Annua1 Report of the Federal Power Commission,
1948 (Washington, D. C.: Government Printingoffice), p. 55.
129
condition indicating that section 7 (a) relating to manda
tory interconnection might be invoked upon proper applies -
41
tion. In the following year such an action was considered
42
with respect to another company. Here a distributing com
pany outside federal jurisdiction requested the Commission
to order an interstate company to establish a connection
with Its own facilities. In refusing the request, the Com
mission stated:
Although we are cognizant of our broad authority
under section 7 (a) of the Natural Gas Act, it Is our
desire to achieve ! Ja wise accommodation between the
needs of central control and the lively maintenance of
local institutions.'’ Therefore, in exercising our dis
cretion under such section, we look with disfavor upon
an interpretation susceptible of implying coercive ac
tion on our part, especially in the absence of appro;--
pv priate state or local authority.43
The chairman of the Federal Power Commission dis
sented from the majority decision, indicating that the ap
plication should be treated on its merits. He favored is
suance of the order conditional on the approval of each of
the several cities served by the distributing company. In
a subsequent rehearing of the case, it was observed that all
4 1 Re Cities’ Service Transportation and Chemical
Company, 3 F."TT“S7 5 9 8 ( 1 9 4 3 T I
4 2 Re Wisconsin Southern Gas Company, 4 F. P. C. 1 8 8
( 1 9 4 4 ) .
43 Loo. cit. Quoted section in Commission’s state
ment is from Palmer v. Massachusetts, 3 0 8 U. S. 7 9 ( 1 9 3 9 ) .
130
cities concerned did approve and that the Natural Gas Pipe
Line Company had indicated its willingness to make the pro
posed interconnection "if directed to do so" by the Commis-
44
sion. Such an order was issued. At the same time, it was
declared that the distributing company would become a natu
ral gas company under federal jurisdiction when it completed
construction of the transmission line to the state border
where it would receive gas originating in the southwest.
Incidentally, the Commission has increasingly tended to ex
ercise its authority to direct interconnections of eom-
45
panies .
Commission authorization of voluntary construction
may be treated in two stages, namely, before and after the
amendment of February 7, 1942. Prior to this enactment, the
Commission was not permitted to regulate extensions into
areas not already being served by a natural gas company. As
a result of this limitation on the Commission’s authority,
interstate pipe lines were, in a number of instances, con
structed without Authorization of the federal agency. The
Commission disclaimed jurisdiction in several cases despite
44 Re Wisconsin Southern Ga3 Company, 4 F. P. C. 329
(1945).
45 In the latter half of 1949, three orders of this
sort were issued. Federal Power Commission Release No. 4320,
June 30, 1949; No. 4466, October 20, 1949; No. 4482, October
31, 1949.
131
46
a broad interpretation of the law.
The breadth of its interpretation of the statute’s
certificate provisions is revealed in a case which arose in
1939. According to the Commission’s opinion, communities
without existing facilities might nevertheless be within the
market of a natural gas company since
. . . the word ’ ’market” implied an area or territory of
undefined extent bearing some reasonable relation to ex
isting pipe lines and other facilities for the transpor
tation and sale of natural gas. The word "market” em
braced that territory within which a natural gas company
could economically render adequate service by reasonable
extensions of it3 facilities .**7
Since the Congress did not define the term "market,” the
Commission could rather safely develop its own broad defini-
48
tion. Nevertheless, its authority was notably limited.
The Commission regarded this limitation as unfortunate from
the public point of view, and supported the amendment passed
49
in 1942.
46 Among these cases are Re Montana-Dakota Utilities
Company, 2 P. Pi C. 766 (1940); Re Western Natura1 Gas Com
pany , 2 P. P. C. 910 (1941); Re Anchor Hocking Glass Corpor
ation, 2 P. P. C. 930 (1941). :
47 Re Kansas Pipe Line and Gas Company, et al., 2 F.
P. C. 2 9 (1 9 3 9 X *
48 The Supreme Court had occasion to consider the
certificate provisions of the Natural Gas Act in 1942. It
held that a state commission could not issue an extension
order where the Federal Power Commission had such authority.
Illinois Natural Gas Company v. Central Illinois Public
Service Company, 314 TH ST 49E3 (1942}.
49 Annua1 Report of the Federal Power Commission,
1946 (Washington, D. C.: Government Printing-Office), p. 9.
132
Whether a company should be given a monopoly over a
market or should share the market area with others has been
a difficult question for the Commission. In 1947 the Com
mission decided 3-2 that an established company should not
50
have a monopoly. It issued a certificate to a company
which would share the general market area. Two strong dis
sents were, however, filed. Slightly related to this case
was one in which the Commission issued a certificate to only
51
one of two applicants seeking to serve a given area. On
52
review, the court upheld the Commission's order.
Enactment of the 1942 amendment was followed by the
issuance of "grandfather” certificates authorizing continued
operation of facilities which were in bona fide operation at
53
the time the enactment became effective. In addition, the
Commission proceeded to issue certificates for all proposed
extensions of facilities to be used for interstate opera
tions. Obviously, the work load of the Commission was aug
mented, particularly since the industry was expanding so
50 Re Michigan-Wisconsin Pipe Line Company, 6 F. P.
C. 58 (19477.
51 Re Kentucky Natural Gas Corporation, 4 F. P. C.
1043 (194577
52 Kentucky Natural Gas Corporation v. Federal Power
Commission, 159 F. 2d"§15"(T§4777
53 Among these cases are Re Memphis Natural Gas Com
pany , 3 F. P. C. 812 (1942); Re Commercial Gas Pipeline Com
pany, 3 F. P. C. 821 (1942); Re flew York State Gas Corpora
tion, 3 F. P. C. 734 (1942).
133
54
rapidly in the several years following 1942.
A number of jurisdictional problems have arisen in
connection with the issuance of certificates of convenience
and necessity. One of these concerns the conservation of
gas under state law as related to the issuance of Federal
Power Commission certificates. In a case before the Commis
sion in 1944, a certificate was at first denied and later
granted to the Memphis Natural Gas Company while the Louisi
ana Department of Conservation and the Louisiana Public
55
Service Commission vigorously objected to its issuance.
It was contended by the latter that large supplies of ga3
would, under the proposal, be directed to inferior uses for
the high grade fuel. • While the Commission gave thi3 factor
consideration, it found the matter to be of insufficient
weight to deny the certificate. A Circuit Court of Appeals
agreed with the Commission and apparently the Supreme Court
was also in agreement.56
On another occasion, the wasteful use of natural gas
57
was a consideration of importance. It was held by the
54 Cf. ~p. 185.
55 Re ^emphi3 Natural Gas Company, 4 F. P. C. 197,
608 (1944)1----- ---------------------
56 Department of Conservation of Louisiana v. Federal
Power Commission, 148 F. &d 746 (l945"JT certiorari denied,
328TT. S1"7TrTT946).
57 Re Northern Natural Gas Company, 4 F. P. C. 1099
(1945).
134
Commission that a proposed pipe line to serve an electric
company for use as a boiler fuel was not in the public in
terest. It must be noted, however, that the Commission
found that there were adequate supplies of coal available
to the steam-generating station. Representatives of coal,
labor, and railroad interests were on hand to point out the
adequacy of the competing fuel supply. Ihe economic impact
of pipe line extensions on competing industries has been re
garded by the Commission as only one of several considera
tions to be taken into account in passing upon applications
38
for certificates.
In considering certificates for extension of facili
ties, the Commission has taken into account the effect that
additional sales to new customers resulting from the exten
sion would have on current customer needs. In one instance
the Commission denied an application to extend service to an
59
industrial consumer on the basis of this consideration.
While it acknowledged a lack of jurisdiction over direct
sales to industries under the Act, it claimed the right to
determine whether it was in the public interest to permit^
the company to operate its system in the manner proposed.
5B Re Hatural Gas Pipeline Company, 5 P. P. C. 85
(1946); Re Wisconsin Southern Gas Company, 4 F. P. C. 329
(1945).
59 Re Panhandle Eastern Pipe Line Company and Michi
gan Consolidated Gas Company, 5 P. P. 0. 43 (1946).
135
The Commission maintained that the company's capacity was
fixed by the Commission based upon representations made by
the company as to its customers and their service require
ments. Therefore, to extend service to a large industry
would be "violative of existing orders of the Commission and
,-,.60
against the public interest'.
Commission authorization of abandonment of service
has been a much less important problem than authorization of
extensions, since there have been relatively few cases in
volving discontinuance of operations. Most of the applica
tions seeking approval of abandonment have been disposed of
61
with little difficulty and usually approved. One case
stands out, however, as an exception to this general experi
ence, namely, that involving the Cabot Gas Corporation.
The application of the Cabot Gas Corporation, seeking
to abandon certain facilities on the ground of inadequate
62
gas reserves, was denied by the Commission. The line, ad
mittedly within federal jurisdiction, had been constructed
prior to the enactment of -the Natural Gas Act under authori
zation of a state commission. Reviewing the history of the
60 Loc. ~~cit.
61 Among these are _Re United Gas Pipe Line Company, 3
P. P. C. 741 (1942); Re Consolidated Gas Utilities Corpora -
tion, 3 F. P. C. 927 T1943]; Re Southern Natural Gas Com
pany, 4 P. P. C. 717 (1944).
62 Re Cabot Gas Corporation, 3 P. P. C. 75, 356, 582
(1943).
136
venture, it appeared to the Federal Power Commission that
the company had attempted to reap large profits within a
short period of time with little consideration of the de
pletion of reserves and long-range needs of its customers.
Ihe Commission also found that gas supplies were not so in
adequate that immediate abandonment was warranted.
In denying the application of Cabot Gas Corporation,
the Commission was particularly concerned about the lack of
conservation laws in the states. It was noted that much of
the gas sold by the company was used for low-grade fuel pur
poses. At the same time, according to the Commission, the
company knew that the supply of gas from their fields would
probably be exhausted within three or four years. Ihis view
was based upon the fact that none of the sales contracts for
gas exceeded a term of five years. It noted with regret an
. . . absence of any statutes or regulation limiting the
daily production, or allowable withdrawals from gas
wells, based upon the open flow of such wells; and the
absence of any statutes or regulations providing for the
orderly and rateable taking of gas from producing
wells.63
More orderly operations could have resulted in 8 larger to
tal amount of gas from the wells. Here is another important
relationship between state and federal regulation.
In another abandonment case, the Commission denied a
64
company application on different grounds. The company
63 hoc. cit.
64 Re Kentucky Natural Gas Co., 4 F. P. C. 702 (1944).
137
sought to abandon a line serving a distributing company
which had become in arrears on payments for gas purchased
from the transmission pipe line company. The Commission did
not regard this reason as sufficient basis for discontinu
ance of service, particularly since the distributor had re
cently improved its general.condition.
Exportation of natural gas. The Commission has also
exercised its authority to control the exportation of natu-
65
ral gas from the United States. There has been a general
disposition to approve applications for authorization of ex
ports. One proposal to export large quantities of natural
gas to Mexico reveals how conflicting interests of nations
as well as states may have to be considered by the Commis-
66
sion.
This case involved a company which sought to export
gas from Texas into Mexico for industrial purposes exclu
sively. The Commission denied the application for a certi
ficate. In doing so, a majority of its members said that in
view of current needs of the United States during the War,
65 Among the oases are Re Panhandle Eastern Pipe Line
Company, 5 F. P. C. 472 (1946); Re United Gas Pipe Line Com
pany, 5 F. P. C. 553 (1946); Re EX Paso Natural Gas Company,
(•HfT P. C. 1005 (1947).
66 Re Reynosa Pipe Line Company, 4 F. P. C. 283
(1945); 5 F. P. O. 13'0~1T94677
138
67
the exports did not seem sufficiently urgent. Further
more, it was noted that a more adequate showing was needed
that sufficient gas was not available within Mexico.
The State of Texas was very much concerned with this
proposed extension into Mexico. The Texas Commission pro
tested the approval of the application, stating that no ne
cessity existed for such exportation. Moreover, it feared
that a future shortage might develop for residential and in-
68
dustrial needs in Texas.
Two Commissioners dissented from the majority opinion,
one simply stating that it would be in the public interest
to approve the application, while the other elaborated some
what:
I feel that cooperation between the neighbor na
tions is an important consideration. There is no ques
tion but that the industries of Monterrey, proposed to
be served by the Reynosa project, are necessary to the
present and future economic interest of Mexico. Among
them is the only fully integrated steel plant in the
Republic.69
The majority did not, however, regard Mexico’s needs and the
67 In an earlier case involving exports from the
state of Texas, the Commission found that the export of gas
by the applicant did not impair its ability to render ade
quate service to its consumers in the State of Texas as had
been charged by the Texas Commission. Re United Gas Pipe
Line Company, 2 F. P. C. 775 (1940).
68 Re Reynosa Pipe Line Company, loc. cit.
69 Loc. cit.
139
"good neighbor" aspect as being sufficiently important.
After the end of the War, another attempt was made to
70
obtain Commission approval of this proposal. On the basis
of new evidence, the project was authorized in 1946. The
Texas Commission continued to protest that the application
was unwarranted, but the federal agency found that an ade
quate showing had been made that the interests of Texas
would not be seriously affected. Furthermore, it was shown
that inadequate supplies of fuel were available within
Mexico.
Rate control♦ A vitally important aspect of Federal
Power Commission regulation with respect to the natural gas
industry is the control of rates. The importance of its
work in this regard may be indicated by the fact that it
brought about rate reductions in several instances repre
senting in each case annual savings to gas purchasers of ap-
71
proximately a million dollars. Many smaller reductions
were, of course, realized through the activities of the Com
mission^ The reductions in rates have not always been
70 Re Reynosa Pipe Line Company, 5 F. P. C. 130
(1946).
i 71 Annua1 Report of the Federal Power Commission,
i946, op. cit.,pp. 55-6$ Annual Report of the Federal"Power
Commission, 1947 (Washington, D. C.: Government Printing
Office), pp. 66-7©; Annua1 Report of the Federal Power Com
mission, 1948, op. cit., pp. 79-81.
140
ordered by the Commission. In many instances they have been
made "voluntarily*' by the companies following informal con-
72
ference with the Commission.
The work of the federal body in connection with rates
may be illustrated by a particular case that arose during
73
the year following passage of the Natural Gas Act. The
Public Service Commission of the State of Missouri requested
the Commission to institute an investigation to determine
the reasonableness of rates charged by the Cities Service
Gas Company to several distributing companies. The state
commission had itself attempted to undertake this task, but
was unsuccessful due to the interstate character of this
company's business and its failure to voluntarily furnish
the data needed.
The Commission proceeded with the investigation by
ordering the company to show cause why it should not eli
minate certain differences in rates charged various distri
buting companies. Ultimately the Commission found "...
The present interstate wholesale rates subject to our juris
diction . . . yielded at least $5,499,665 in excess of the
74
reasonable cost of service in the test year 1941."
Loc»~cit.
73 Cities Service Gas Co., 2 P. P. C. 563 (1939).
74 Re Cities Service Gas Co., 3 P. P. C. 459 (1943).
141
Accordingly, a rate order was issued to accomplish a reduc-
7 5
tion of approximately this amount.
The determination of the reasonableness of wholesale
rates has involved the Commission in certain controversies,
one of the most serious of which has been the scope of its
jurisdiction in calculating the rate-base. The Commission
has considered it quite proper to include in the rate-base
a value representing the production and gathering properties
where this phase of the business is an integral part of to-
76
tal operations. The Supreme Court has upheld the author-
77
ity to use this method.
The production and gathering issue arose again in a
case ihvolvihg gas leases. An attempt by the Federal Power
Commission to prevent a natural gas company from transfer
ring certain gas leases to an affiliate was defeated in the
78
courts. Because of the inclusion of these leases in the
rate-base of the company, the Commission was concerned about
7 5 Another case which is very similar involved a com
plaint by the State of Arizona. Re El Paso Natural Gas Com* ;
pany, et al^, 3 F. P. C. 8 5 1 ( 1 9 4 ^ T . Cities have also eom-
plaine"3— of excessive wholesale rates for natural gas. Re
East Ohio Ga3 Company, 1 F. P. C. 5 8 6 ( 1 9 3 9 ) .
76 Re Canadian River Gas Company, et al., 3 F. P. C.
32 (1942).
77 Colorado Interstate Gas Company v. Federal Power
Commisslonl 324 U. TT» 581 (1945).
78 Federal Power Commission v. Panhandle Pipe Line
Company, 172 F. 2d 57 ( “l^49); 337 U . S. 498 (194977“
this disturbance. The Commission contended that the company
could not abandon such ^ ’facilities” subject to its jurisdic
tion without its approval. The Supreme Court regarded gas
leases as facilities used in production and gathering and to
grant jurisdiction ” . . . would invite expansion of power
79
into other phases of the forbidden area.” It was also as
serted that the Commission’s failure to use such an Impor
tant power for ten years indicated that the Commission did
not believe the power existed, and the court was unwilling
then to grant that power by interpretation.
Three dissenters maintained that ’ ’The court's judg
ment and opinion In this case go far toward scuttling the
80
Natural Gas Act.” The opinion was expressed that gas re
serves were indispensable to interstate gas service and lim
iting the Commission's jurisdiction In this matter left it
impotent to protect the public interest. The fears expressed
by the minority do not appear to be entirely warranted, how
ever, since a valuation of gas reserves of an affiliate can
be made according to the principle laid down in the Colorado
Interstate Gas Company case.
Where a company Is engaged in both interstate and in
trastate commerce, the Commission, in determining the rea
sonableness of interstate rates, must segregate regulated
143
and non-regulated business. Hie Supreme Court has made this
8X
point clear. The Court recognized that such a segregation
could not be a matter of mathematics and that the Commission
was correct in exercising its informed judgment in the mat
ter. It had been charged by the respondent that the Commis
sion was actually regulating industrial rates, contrary to
law, where earnings of the entire business in excess of 6^
per cent were allocated to interstate operations. The Su-
82
preme Court did not agree with this contention. It is
therefore clear that the Commission may take into considera
tion industrial rates when fixing rates for interstate
wholesale sales.
Another disputed issue in rate regulation has been
the authority of the Commission to regulate rates for nat
ural gas sold by an interstate pipe line to a distributor
for the latter’s own use. A majority of the Coxamission has
83
held that its jurisdiction does extend over such rates. A
staff examiner ruled that gas consumed in distributors’
electric generating plants should be deducted from the total
sold to the purchasing distributors. This ruling was
81 Panhandle Eastern Pipe Line Company v. Federal
Power Commission, 324 IT. S7 635 (1945).
82 Nor did it agree with a similar contention in (Co
lorado Interstate Gas Company v. Federal Power Commission,
32Ttr; g7”3sr (iS4^r -------------------------------
83 Federal Power Commission Release No. 4492, Novem
ber 1949.
144
reversed as a Commission majority stated:
We do not believe that in circumstances such as
appear here the Congress intended to exclude from regu
latory control gas which ultimately wight not be resold
by the distributing company purchaser.®4
Stating that the distributor's consumption of gas was inci
dental and uncertain, it did not believe that its rate regu
latory .authority should be made dependent upon the disposi
tion made of the gas by the local distributing company. The
Commission further said that its assertion did not mean that
it was attempting to exercise authority over direct sales by
a natural gas company.
The Chairman of the Commission dissented from the ma
jority opinion. In his view, the federal agency had no au
thority over the rates for sales of gas not resold. He
pointed out that while it could not be known at the time of
sale to the distributor how much gas would be consumed by it,
the buyer did measure the gas as consumed. Since the amount
not sold for resale could therefore be ascertained, no seri
ous practical difficulty was seen in excluding this portion
of total sales by the interstate lines. He felt that it wa3
immaterial that this determination was made subsequent to
actual delivery of gas to the distributor.
Accounting control. The regulation of accounts of
84 Loc.“cit.
145
natural gas companies lias been an appreciable part of the
Commission’s work load. This fact is indicated in the re
port that, by June 30, 1948, the Commission’s staff had com
pleted examination of original costs of 34 natural gas com-
85
panies. Up to that time 127 such companies had filed re
classification and original cost data as required. The cost
studies relating to the electric utility industry were begun
at an earlier date and these had precedence. The natural
gas investigations were scheduled to be stepped up as soon
as the electric studies neared completion. This latter work
86
was expected to be completed in the fiscal year of 1949.
The Commission prescribed a uniform system of ac-
87
counts for natural gas companies in 1940. Some opposition
88
by the gas industry was encountered at the outset. Never
theless, the number of court cases involving the regulation
of natural ga3 company accounts has been few as compared
with that of the electric utility industry, due probably to
the settlement of similar points of issue in the latter in
dustry. There has been one case, however, in which account-
85 Annual Report of the Federal Power Commission,
1948, op. clt., p. 75.
86 Ibid., p. 68.
87 Annua1 Report of the Federal Power Commission,
1940, op. clt., pT 19.
88 Re Uniform System of Accounts for Natura1 Gas Com
panies, 2 F. P. C. 675 (1940).
146
lng matters were treated at some length by the Commission
and the courts, namely, the East Ohio Gas Company case.
As has been indicated, the Commission on a number of
occasions asserted its claim of jurisdiction over the East
89
Ohio Gas Company. It sought to extend its control over
the company, specifically, by requiring that it revise its
accounts so as to conform to the uniform accounting system
of the federal agepcy. The Supreme Court upheld the Commis-
' 90
sion in this matter. A court majority sanctioned control
of the accounts by both state and federal commissions.
A minority court opinion in the East Ohio case high
lighted the conflict between state and federal accounting
regulation. Noting the contrasting theories of the state
commission of Ohio and the Federal Power Commission, the
dissenters stated that the company was either forced to vio
late the laws of Ohio by obeying the Federal Power Commis
sion, or to keep two sets of books. "This is a real con
flict in which experience shows state control will wither
91
and leave the federal rule in possession of the field."
There have, of course, been certain other subjects of
89 Cf. p. 122.
90 Federal Power Commission v. East Ohio Gas Company,
18 U. S. L."W. (1950).
91 hoc. cit.
147
regulation besides certificates of convenience and necessity
for extension or abandonment of facilities, rates charged by
natural gas companies, and the accounts of such companies.
For instance, the Commission has undertaken investigations
besides those related to reclassification of accounts and
92
rate control. The most important of these was the general
study of the natural gas industry instituted in 1944 which
was concerned with utilization and conservation of gas very
largely with a view to reconciling conflicting opinions on
broad questions of public policy. Other regulatory matters
of the Commission have included determination of deprecia
tion rates, collection and publication of statistics, and
other minor activities.
III. SUMMARY
The regulation of the natural gas industry by the
Federal Power Commission, although initiated three years
after the beginning of federal electric utility regulation,
soon became an important part of the agency's regulatory ac
tivities. The problem of ascertaining the limits to its ju
risdiction was at least as difficult with respect to gas as
to electricity. Since it3 jurisdiction was limited to that
phase of the industry between production and gathering, at
92 Annua- 1 Report of the Federal Power Commission,
1946, op. clt., pp. 66-707
148
one end, and local distribution on the other, the separation
of state and federal fields of regulation had to be made at
two points. Ho sharp distinction could be made, however, as
revealed by the fact that the Supreme Court has sanctioned
consideration of production and gathering by the Commission
in its rate cases. Furthermore, the high court has granted
federal jurisdiction over a company whose facilities were
entirely within one state and made no sales for resale.
That the Federal Power Commission has successfully
extended its jurisdiction considerably beyond the bounds in
dicated by a casual reading of the Natural Gas Act is
clearly evidenced in its own decisions and those of the
courts. Nevertheless, it cannot be said that there is a
crystalization of viewpoint on the jurisdictional issue,
since the record shows many instances of conflicting opin
ions within the federal administrative body and within the
Supreme Court.
CHAPTER V
ECONOMIC CONDITIONS AND TRENDS
AFFECTING JURISDICTION '
Regulation of the electric utility and natural gas
industries is properly conducted only if it contributes to
the realization of maximum economic gain. The fundamental
objective should be a low-cost, high quality service of
electricity and gas to consumers. In order to insure the
achievement of this purpose, it is essential that regulatory
authorities allow adequate incentives to promote successful
and progressive private industrial activities. It is also
necessary, for effective regulation to be realized, that the
requirements of government agencies not place such a burden
on industry that efficiency is impaired.
Since the people of the United States have a federal
system of government, the question has arisen as to which
governmental level can most effectively realize the objec
tives of regulation. The answer may be exclusive control by
state or federal agency, or it may be a system in which each
shares, in some measure, responsibility for the regulatory
task* The question, however, cannot be settled upon the
basis of legal considerstions alone. Very largely the regu
latory mechanism is shaped by the nature of economic condi
tions .
The system of regulation applicable to these
150
Industries is fundamentally conditioned by certain basic
economic factors, The geographic relationship between sup
ply and market centers has exercised an influence on the de
lineation of authority between state and federal agencies.
A tendency toward large-scale company operations and the rel
relative economies derived therefrom, as compared with small
undertakings, should also be considered in defining juris
dictional limits. Moreover, the interconnection of company
facilities has affected the character of regulation.
I. THE ELECTRIC UTILITY INDUSTRY
If the electric energy consumed within each state
were also generated within each state, it is safe to say no
federal authority over the industry would have been estab
lished. To some extent, however, such energy moves across
state lines. In accordance with the federal principle, the
national government became involved to protect national in
terests. Due, In part, to the location bf generating sta
tions and markets, the states have had to share, in some
measure, control over this industry which included both in
trastate and interstate operations of companies.
Electric energy supply centers. The location of
electric generating stations may first be considered. Pro
duction of power by electric utilities for the year 1946 is
151
shown in Table I. Regionally, the leading centers were in
the East Worth Central, Middle Atlantic, South Atlantic, and
Pacific states. Wo region accounted for less than 10,000
million kilowatt-hours nor more than 51,000 million of the
total 223,178 million kilowatt-hours.
In terms of states, Hew York ranked first in produc
tion with 22,892 million kilowatt-hours or 10.2%' of the
total national output. California, Pennsylvania, Ohio,
Illinois, and Michigan each accounted for sn amount exceed
ing 10,000 million kilowstt-hours. Only eight states repre
sented amounts less than 1,000 million. Obviously, supply
centers were widely dispersed, but some degree of concentra
tion was evident in more populous eastern and far western
states .
The dispersion of generating stations may be ex
plained to a considerable extent by the wide distribution of
energy resources throughout the country. The East North
Central and Middle Atlantic states have abundant coal re
serves to draw upon for generating electricity.^ In the Pa
cific, New England, and South Atlantic states, large quanti-
2
ties of power can be derived from hydroelectric resources.
1 U.S. Bureau of Mines, Minerals Yearbook, 1945
(Washington, D. G.: Government Printing Office), p. 856.
2 Annua 1 Report of the Federal Power Commission, 1948
(Washington, D. . C.: Government Printing Office), p. 52.
152
TABLE I
ELECTRIC ENERGY PRODUCTION BY ELECTRIC UTILITIES, 1946-*
(In millions of kilowatt-hours)
Division and State Amount Division and State Amount
New England 12,307 West Virginia 5,244
Mb Ine 1,371 North Carolina 5,677
New Hampshire 1,014 South Carolina 2,582
Vermont 759 Georgia 3,042
Massachusetts 4,888 Florida 2,669
Rhode Island 1,060 East South Central 16,486
Connecticut 3,215 Kentucky 2,381
Middle Atlantic 47,349 Tennessee 6,580
New York 22,892 Alabama 7,300
New Jersey 7,576 Mississippi 225
Pennsylvania 16,881 West South Central 13,069
East North Central 50,069 Arkansas 837
Ohio 13,976 Louis iana 2,884
Indiana 7,273 Oklahoma 2,009
Illinois 13,878 Texas 7,339
Michigan 10,058 Mountain 11,659
Wisconsin 4,884 Montana 2,466
West North Central 13,187 Idaho 1,335
Minnesota 2,941 Wyoming 316
Iowa 3,111 Colorado 1,168
Missouri 2,729 New Mexico 605
North Dakota 350 Arizona 2,824
South Dakota 321 Utah 457
Nebraska 1,393 Nevada 2,488
Kansas 2,344 Pacific 30,501
South Atlantic 28,551 Washington 9,039
Delaware 43 Oregon 4,149
Maryland 3,965 California 17,314
Dlst. of Columbia 1,942
Virginia 3,386 United States
223,178
■^Adapted from data assembled by the Bureau of Census
from Federal Power Commission records. U. S. Bureau of Cen-
sus, Statistical Abstract of the United States, 1948 (Wash
ington, D. C.: Government Printing Office), p. 496.
153
Large supplies of oil and natural gas are available in the
3
South Central states- Furthermore, an excellent system of
transportation facilitates movement of fuels within the
country. The presence or availibility of adequate energy
resources in so many parts of the country has favored con
struction of local generating stations.
Adaptation to the varying types of available energy
derivatives in different areas is indicated in Table II. It
will be observed that the densely populated Middle Atlantic
and East North Central regions not only account for large
total quantities of generated power, but an extremely large
proportion of their respective totals is represented by coal
as a basic energy source. In contrast to this situation is
the great predominance of hydro energy sources in the Paci
fic and Mountain states. Furthermore, the very outstanding
relative importance of gas is to be noted with respect to
the West South Central region. Fuel oil was not the leading
derivative in any region but ranked next to hydro in the Pa
cific region.
The general availability of energy resources with
which to produce electricity seems to be one major explana
tion for the wide dispersion of electric energy supply
sources. Every region and every state within each region
3 S, Bureau of Mines, op. cit., pp. 1056, 1161.
154
TABLE II
ENERGY SOURCE OP ELECTRIC UTILITY PRODUCTION
BY.GEOGRAPHIC DIVISIONS, 1947*
(Billions of Kilowatt-Hours)
REGION COAL HYDRO GAS OIL TOTAL
New England 7.9 3.5 - 2.0 13.4
Middle Atlantic 41.3 9.7 - 2.3 53.3
South Atlantic 19.6 8.3 1.2 3.2 32.3
East North Central 55.0 3.1 0.2 0.6 58.9
West North Central 7.0 2.6 3.7 1.7 15.0
West South Central 0.3 1.2 13.3 0.5 15.0
East South Central 5.0 12.4 1.2 - 18.6
Mounts in 1.0 10.3 1.0 0.6 12.9
Pacific - 27.4 2.4 6.0 35.8
*Adapted from data in Federal Power Commission Bulle
tin on Consumption of Fuel for Production of Electric Ener
gy, T§47 (Washington, D. C.: FederalsP&wer CommissionT*
p. 2.
155
accounts for a significant supply of electricity. In these
geographical areas the relative importance of particular
prime movers is related to the relative Importance of the
particular fuel and hydro resources that are present. The
distribution of natural resources therefore has Influenced
the pattern of electricity supply sources.
Markets for electric energy. Ihe widespread use of
electricity by the people of the United States in homes, c
commercial establishments, industrial plants, public build
ings, and streets suggests .that the markets for electric
energy are scattered about the country somewhat in conform
ity to the distribution of population. Since the density of
population varies greatly between different parts of the
country, a roughly similar pattern of consumption would be
expected.
The degree of geographic concentration In the demand
for electric energy is indicated in Table III. It will be
observed that in every state there was consumed a considera
ble quantity of electricity. Even the lightly populated
states of New Mexico and Nevada consumed 172 million and
218 million kilowatt-hours respectively. By far the heav
iest consumption was, of course, in the more heavily popu
lated and industrialized states of the northeast. More than
an eighth of total national consumption was represented by
156
TABLE III
ELECTRIC ENERGY GENERATED AND CONSUMED
IN CERTAIN SELECTED REGIONS, 1940*
(In Millions of Kilowatt-hours)
State Production Consumptl'
New England 8,581 8,597
Maine 929 949
New Hampshire 737 471
Vermont 561 332
Massachusetts 3,427 4,180
Rhode Island 817 681
Connecticut 2,110 1,984
Middle Atlantic 34,939 36,453
New York 17,557 18,357
New Jersey 4,846 4,458
Pennsylvania 12,536 13,620
East North Central 33,259 32,721
Ohio 9,252 9,425
Indiana 4,881 3,724
Illinois 9,240 9,799
Michigan 6,710 6,710
Wisconsin 3,176 3,063
Mountain 8,502 5,821
Montana 1,769 1,686
Idaho 1,175 952
Wyoming 183 148
Colorado 756 791
New Mexico 316 172
Arizona 1,401 791
Utah . 578 1,063
Nevada 2,324 , 218
Pacific 15,422 17,944
Washington 3,927 3,763
Oregon 1,739 1,610
California 9,756 12,571
*Data adapted from Eederal Power Commission Movement
Electric Energy across State Lines and International
Boundaries, 1940 (Washington, D» 0 ,: EecleralePdwer CommIs-
sion, 1941), p. 4.
157
the single state of New York. Approximately half of the
total was consumed in the Middle Atlantic and East North
Central regions. Only eight states were included in these
two regions. The evidence is clear that while every state
consumed a significant amount of electricity, the states
differed greatly as to the relative importance of energy
consumed in each.
During World War II and early post-war years the per
centage of energy consumed in the Northeastern ares declined
Although this district increased its power consumption by
more than 50 per cent between 1940 and 1947, four regions in
the south and west increased power consumption by more than
4
100 per cent. According to the Federal Power Commission,
nThe proportion of power consumed in the Northeastern States
declined from slightly less than one-third of the national
5
total in 1940 to about one-quarter of the total in 1947.”
The change reveals one effect of a relatively rapid economic
development in southern and western states during the period
The geographical relationship of production and mar
ket centers is indicated in Table III. The striking fact
evidenced in this data is, of course, that there is a close
similarity between the relative importance of various states
4 AnnuaT Report of the Federal Power Commission,
1948, op. cit., p. 5.
5 Loc. cit.
158
as producers and market centers. When comparison is made in
terms of state production and consumption of electricity, it
is apparent that the rank of the states is similar.
The similarity of rank of the various states as pro
ducers and consumers of electric energy suggests that the
electric utility industry is preponderantly intrastate in
character. It appears that the energy generated in each
state was sold and consumed within that state, except for a
slight excess of production or consumption. Such a conclu-
sion.may, however, be unsound since a state could export and
import balancing quantities of electricity yet maintain com
parable rank as a producer and market for power. Before a
conclusion can be drawn regarding the proportion of intra-
state movement of electricity, it is necessary to inquire
into the extent of interstate movement of energy.
Data of the Edison Electric Institute reveal the ex
tent of interstate movement of electricity for the year of
1932.6 The total amount of electricity available for dis
tribution was 77,001,000,000 kilowatt-hours, exclusive of
energy imported from Canada. Of this amount, 83.6 per cent
was generated and consumed within the same state. The re
maining 16.4 per cent was transferred across state lines.
6 Edison Electric Institute, "The Electric Light and
Power Industry in 1932," Statistical Bulletin No. 9 (New
York: Edison Institute, 1933), p. 9.
159
In 1931 the percentage transferred between states was 14.5
of the year's output. In 1928 the percentage was 10.7, and
in 1926 the amount was only 8.99 of the year’s total. These
four figures suggest a trend toward an increasing proportion
of generated power moving across state lines.
The states which accounted for most of the exports
and imports of electricity in 1940 are presented in Table
IV. With one outstanding exception caused by sale of Hoover
dam power generated in Nevada and sold in California, the
leading exporting and importing states are located in the
northeastern area. It is clearly evident that most inter
state transfers took place among the states which were the
outstanding producers and markets for electric energy.
The extent to which certain states depended upon out-
of-state electric energy is indicated in Table V. The
states of Delaware and Mississippi were very dependent upon
outside sources. On the other hand, some states had large
surpluses of energy for delivery to neighboring areas. Ne
vada, Alabama, and Arizona were able to export very large
quantities.
Detailed inquiry into the reasons for the differences
between states with respect to interstate transfers of elec
tricity is beyond the scope of this study. It is obvious,
of course, that greater density of population, industry, and
utility facilities in the northeastern states makes inter-
160
TABLE IV
INTERSTATE TRANSFER OF ELECTRICITY
IN ORDER OF MAGNITUDE, 1932*
Exporting Importing
State Millions of State Millions of
KiIowatt-Mrs. Kilowatt-hrs.
1. Nevada 2,995 1. California 3,079
2. Alabama 2,465 2. Pennsylvania 2,645
3. West Virginia 2,186 3. Illinois 2,158
4. Maryland 1,722 4. Tennessee 2,060
5. Indiana 1,646 5. Missouri 1,710
6. Illinois 1,600 6. Maryland 1,503
7. Pennsylvania 1,561 7. Ohio 1,186
8. Ohio 1,013 8. Massachusetts 1,183
9. Tennessee 909 9. New York 997
•
o
H
Virginia 855 10. Georgia 964
*Data adapted from Federal Power Commission, "Move- ,
ment of Electric Energy across State Lines and International
Boundaries, 1940" (Washington, UI (77: Federal Power Commis
sion, 194i), p. 4.
161
TABLE V
C ON SUMP TIO N OP ELECTRIC ENERGY
AS PER CENT OP PRODUCTION IN CERTAIN
SELECTED STATES, 1940*
STATE PER CENT
Delaware 1536.5
Mississippi 882.5
Arkansas 295.9
Missouri 196.4
Utah 184.0
Georgia 147.3
Tennessee 146.9
Nevada 9.4
New Mexico 54.3
Alabama 55.3
Arizona 56.5
Vermont 59.1
West Virginia 59.8
*Data adapted from Federal Power Commission, Movement
of Electric Energy across State Lines and International
Boundaries, 194U [ Washington'; D.“BTT" TeBeraT Power Commia-
sion, 1941), p. 4.
162
connection of systems more feasible than in other parts of
the country. The Edison Electric Institute advanced a par
tial explanation for this situation by pointing out that:
A large number of hydro electric plants are lo
cated on rivers which constitute 3tate boundaries or
else they are separated by state line3 from the power
markets for which they are built.7
Size and scope of utility companies. The possibility
of realizing certain operating economies by increasing the
scale of operations provides a strong incentive for a com
pany to expand its facilities. Both technological advances
and developments in the field of management have accounted
for greater efficiency in plant operation. Improvements in
the facilities used to generate, transmit, and distribute
electricity have been particularly strong influences con
tributing to enhanced efficiency of electric utility plants.
An illustration may be cited with respect to engi-
8
neering progress and its effect. The development of steam
condensers and high pressure boilers made possible a tech
nique called "superposition.” An additional steam turbine
is placed between existing turbines and a high pressure
7 National Electric Light Association, "Interstate
Transfer of Electric Power in 1928," Statistical Bulletin
No. 4 (New York: National Electric Light: Association,
1929), p. 2.
8 John George Glover and William Bouck Cornell, The
Development of American Industries (New York: Prentice-
Haii, inc.; mil';; p". 39xr.---------
163
steam generator. Steam under high pressure passes through
the new turbine on its way to the older units. Thus instal
lation of a 3600-rpm turbine and a high pressure steam gen
erator could, along with four 1920-vintage low pressure tur
bines, accomplish the following purposes; (1) increase
station capacity about 60 per cent; (2) improve fuel economy
about 40 per cent; and (3) protect capital investment in the
old turbines for a much longer period. The incentive to ex
pand generating capacity in view of these circumstances is
obviously strong. Increased output, however, must be mar
keted and a pronounced tendency is revealed to expand the
scope of operations beyond the confines of a local district.
Various studies have substantiated the proposition
that an increase in scale of electric utility production re
sults in lower unit costs. John Maurice Clark found that
electric utilities experienced particularly substantial eco
nomies with expansion in size, although the tendency was
9
characteristic to some degree, in many industries. An ex
cellent study of British experience also brought out the
10
economies of large-scale operation in this industry. A.
9 John Maurice Clark, Studies in the Economics of
Overhead Costs (Chicago; University o7 Chicago f*ress,~T923),
p. 320.
10 Ministry of Transport, Report of the Committee on
Electricity Distribution (London; His Majesty’s Stationery
Office, 1936), pp. 20-26.
164
E. Knowlton, associate editor of the Electrical World came
to a similar conclusion but observed that there was little
advantage to be gained from further increases in the scale
of the largest plants under existing conditions. A study
by Herschell F. Jones revealed somewhat similar findings,
namely, that the economies of increased scale were not with
out limit at a given time:
It would seem from this analysis that the largest
utilities and the largest generating plants of existing
utilities have all approached the size where optimum
costs are obtained.
He was quick to add, however, that technical innovations
could readily invalidate his conclusion.
Electric utilities are characterized by a high pro
portion of fixed costs to total costs of production. This
Is indicated by the fact that in the composite income ac
count for the bulk of privately owned electric utilities,
operating expenses normally represent less than half of
13
total operating revenue. In the face of a condition in
which overhead costs constitute such a large element of
r 11 A. E. Knowlton, "4th Steam Station Cost Survey,”
Electrical World. 112:1585-8, December 2, 1939; A. E. Knowl-
ton, "bth Steam Station Cost Survey,” Electrical World, 121:
1521-6, July 3, 1948.
12 Herschell F. Jones, "The Relation of Large Scale
Production to Certain Costs of Electric Utilities in the
United States," Journal of Land and Public Utility Economics,
18:36-42, February, 1942.
13 Federal Power Commission Release No. 4385, Aug.
24, 1949.
165
total costs, the need to maintain high load factors is of
vital importance. Within plant capacity, a reduction in
output tends to raise unit costs since the overhead coats
must be spread over fewer kilowatts produced. By fully
utilizing productive capacity, unit costs normally decline
to the lowest level attainable. To the economies so derived
may be added those due to the utilization of larger mechani
cal units, those due to the increased specialization of men
and machines, and those due to buying and selling in large
quantities.
The essential point toward which the foregoing dis
cussion leads is that there are certain forces inherent in
the electric utility industry that have caused a great ex
pansion in the size of operating units. To some extent this
tendency has prompted companies to vigorously develop new
markets; to some extent the demand for service has stimu
lated the firms to extend their reach. In any event, the
companies have expanded the scope of their operations and
consequently many utilities have constructed facilities
which extend across state boundaries. The jurisdictional
question has arisen as to whether the states could effec
tively control an Interstate company or whether this was a
subject for national regulatory authority.
Corporate integration of electric utility companies
represents another trend which has had a bearing upon the
166
basic problem of this study. Such integration has taken
place on two levels, namely: (l) the merger of operating
companies, and (2) the grouping of units under holding com
panies. While the merger of operating companies has usu
ally been accomplished in order to effect certain economies
in operation, integration of the holding company type was
not infrequently motivated by selfish and unethical objec-
14
tives with little or no resulting improved efficiency. It
was because of this inadequacy and many abuses of the hold
ing company that the Public Utility Act of 1935 was en-
15
acted. The Act foretold the doom of many holding compan
ies .
In general, the same incentives which have prompted
an increase in scale of production through plant expansion
have stimulated the merger of contiguous operating compan
ies. Anticipated economies from larger size units plus ad
ditional revenue expected to be derived from a larger under
taking have accounted to a considerable extent for the inte
gration movement.
14 The Federal Trade Commission declared in its sum
mary report to the Senate that n . . . write-ups hsve been
used to capitalize hoped-for and often realized earnings at
rates of return in excess of what might have been considered
as reasonable by public authority and to that extent have
influenced the maintenance, or establishment, of rates which
bring such higher rates of return.’ ' Summary report of the
Federal Trade Commission on Utility Corporations, Senate
Document 92, 70th Congress, 1st Sess., Part 72-A, p. 848.
15 Doc. cit.
167
Much the same motivation was behind the organization
of some holding companies. Others were not economically
justified. The Public Utility Act of 1935 attempted to de
fine the sort of holding company that should be permitted.
According to the Act, an integrated electric system includes
. . . one or more units of generating plants and/or
transmission lines and/or distribution facilities, whose
utility assets . . . are physically interconnected or
capable of interconnection and which under normal con
ditions may be economically operated as a single inter
connected and coordinated system confined in its opera
tions to a single area of region . . . not so large as
to impair . . . the advantages of localized management,
efficiency of operation, and the effectiveness of regu
lation. I®
This provision clearly indicates that there are certain ad
vantages inherent in an interconnected system which may be
organized under a holding company. Conversely, the Act ex
cludes those holding company organizations not meeting the
standard of an integrated electric system.
The development of large integrated operating systems
was not retarded by the Securities and Exchange Commission.
The Commission developed the so-called "one-area rule" on
the basis of the statutory provision defining an integrated
electric system. This principle or rule was first stated in
1941 in proceedings concerning the United Gas Improvement
17
Company. When the principle was applied in the famous
16 "Public Utility Act of 1935, 48 Stat. 881, Title I,
Section 11.
17 Re The United Gas Improvement Company, 9 S. E. C.
52 (1941).
168
North American Company case, a great controversy arose over
18
its validity. The Commission's position was sustained by
the United States Supreme Court in 1946 when that Court
stated:
Congress has concluded from the extensive studies
made prior to the passage of the Act that the economic
advantages of a holding company at the top of an uninte
grated, sprawling system are not commensurate with the
resulting economic disadvantages. The reasonableness of
that conclusion is one for Congress to determine.
There seems to be little doubt that system development has
not been restricted by the Securities and Exchange Commis
sion, except where operating units are so scattered that
interconnection is not feasible or other superior advantages
cannot be proved.
One direct result of Securities and Exchange Commis
sion activities in breaking up public utility systems is
that an increasing number of companies have come under Fed
eral Power Commission jurisdiction. Separation of operating
utilities from holding company control was followed by a
substantial number of applications for authorization to is
sue securities.2^
18 Re The North American Company, 11 S. E. C. 194
(1942).
19 North American Company v. Securities and Exchange
Commission" 66 S. Ct. 785 (1946).
20 Annual Report of the Federal Power Commission,
1948, op. cit., p~ 92.
169
Interconnection of transmission lines. Interconnec
tion of facilities of a utility company with those of anoth
er or of several others tends to broaden considerably the
area over which electricity moves from point of generation
to point of consumption. This subject is a pertinent matter
to discuss in relation to the central problem of jurisdic
tion because the interconnection movement has occasioned an
increasing flow of electricity in interstate commerce.
Prom the standpoint of a utility company, several
21
benefits may be realized through interconnection. Perhaps
the greatest advantage is the reduction in plant capacity
required for dependable operation. This saving would result
from a sharing of reserve capacities of an interconnected
system. A more economical generating station could be util
ized more fully while a low-efficiency station might be op
erated to a very limited extent or simply maintained as
stand-by facilities. Coordination of facilities permits
better diversity between peak loads within the system. Fur
thermore, increased reliability, flexibility, and greater
operating convenience generally result from interconnection.
Particularly well adapted to such an arrangement is
the situation in which interconnection can take place between
21 These benefits are well described in the following
publication: Twentieth Century Fund, Electric Power and
Government Policy (New York: Twentieth Century Eund, IS'48),
pp. 32-3.
170
companies differing markedly in tlie type of prime movers em
ployed. If, for Instance, one company generated most of its
power with hydroelectric plants while another generated the
bulk of its energy in a coal burning steam plant, intercon
nection of the two companies might permit substantial econo
mies. Under conditions of maximum stream flow, it would be
advisable for the system to rely heavily on hydroelectric
power and at other seasons to depend more upon steam#gener-
4
atlng plants. Without such a tie-in, potential hydro power
might be wasted during the period of maximum flow, while
large quantities of coal were being burned in nearby steam
sta tions.
The Federal Power Commission in 1940 regarded the
trend toward interconnection and coordination as highly sig-
22
nificant. It posed the question of expanding the size of
districts within which interconnection and coordination were
encouraged. A suggestion was also made that it might be
wise to work out the problems of integration of the whole
sale power supply function and the retail distribution func
tion. The Commission was particularly impressed with the
savings realizeable from interconnection and coordination of
hydro and steam plants. Low incremental investment cost and
increased generating capacity for peak loads with little
22 Annual Report of the Federal Power Commission,
1940 (Washington, -0.' C.: Government Printing Office, 1941),
p. 42.
171
added operating expense were seen as notable objectives that
could be realized.
The development of interconnection is rather inti
mately related to the trend toward increasing scale of pro
duction. The anticipated economies from plant expansion
have served to stimulate growth of generating capacity be
yond the size necessary to supply its market area. In order
to dispose of surplus power, arrangements are made tp trans
fer it to the lines of another company or companies.
Interconnection is also related to the geographic
distribution of energy resources. Certain areas are parti
cularly favored by abundant fuel or hydro resources and have
become focal points for large generating stations. If the
immediate vicinity contains limited market possibilities, it
may become necessary to dispose of the energy over lines of
neighboring utilities. To illustrate the complexity and
distance involved in intercompany arrangements, the chairman
of the Federal Power Commission told of a
. . . large Nebraska utility, which is tied in with the
public power districts in Nebraska, is interconnected
with Kansas, and through this interconnection tied in
with utilities in Oklahoma and Texas, including the
Southwestern Power Administration, which in turn were
connected with utilities in Arkansas, the Commonwealth
and Southern group of companies in five southwestern
states, the Tennessee Valley Authority, and certain
utilities in Ohio. At times all the properties in this
gigantic network were controlled as to frequency by a
172
generating unit in Ohio.^3
Great impetus to the growth of interconnected systems
or power pools was provided by World War II. The expansion
of industry in general and certain war industries in parti
cular created serious electric power supply problems. As a
means of effecting maximum utilization of generating capa
city, the industry and the Office of War Utilities combined
24
their efforts in the development of power pools.
The end of World War II did not occasion a reversal
in the interconnection trend, since the demand for power re-
25
mained high. Arrangements made between companies during
the wsr were frequently continued into post-war years. Many
of these were permanent connections for emergency use only.
In 1947 there were in existence about 1500 interconnections
26
between individual systems. Large regional power pools
were operating in New England, Pennsylvania, New Jersey, New
23 Nelson Lee Smith, "Rate Regulation by the Federal
Power Commission," American Economic Review, Papers and Pro
ceedings of the Fifty-Jiighth Meeting of the American Econom
ic Association, Volume XXXVX, No. 2, May, 1946.
Annua1 Report of the Federal Power Commission,
1947, (Washington,"‘3l>T C.: Government Printing Office) f p. 5
p. 53.
25 Peak load for the nation was 49.4 million kilo
watt-hours in 1947, 39.4 million in 1944, and 32.9 million
in 1941. During the period 1940 to 1948 load increased more
rapidly than generating capacity. Annual Report for the
Federal Power Commission, 1948, supra note“ ~27 pT ¥5T
26 Annua1 Report for the Federal Power Commission,
1947, op. c1t., p. 53.
173
York State, Southeastern States, Southwestern States, Cen
tral States, Pacific Northwest, and Pacific Southwest. In
addition, many smaller pools were in operation.
Viewing the interconnection trend in 1947, two en
gineering authorities on this subject stated:
Systems are now entering a stage in their devel
opment where added generating capacity will be located
at relatively greater distances from the utilization
areas. The economies of power transmission will there
fore be in the direction to encourage the development of
large generating stations for connection to well inte
grated systems so that the transmission may be accom
plished at high circuit loadings and load factors.^7
The Federal Power Commission indicated even greater
optimism in the same year when it referred to the creation
of enormous regional power pools:
This development is expected to embrace the en
tire United States in one gigantic power pool and the
existence of intrastate electric systems in the future
probably will become as rare as intrastate railroads
are today.28
This brief survey of economic conditions and trends
characterizing the electric utility industry has revealed
certain powerful influences affecting the extent of state
and federal jurisdiction. The distribution of generating
stations and markets for electricity, and the economies de-
27 3. B. Crary and I. B. Johnson, ”Long-Distanee a-c
Power Transmission Economics with Comparative Costs,” Gen
eral Electric Review, 50:32-40, July, 1947.
Annua1 Report for the Federal Power Commission,
1947, loc. clt.
174
rived from large-scale operations and interconnection of
facilities are fundamentally related to tlie delineation of
authority between federal and state commissions.
II. NATURAL GAS INDUSTRY
Certain economic conditions and trends concerning the
natural gas industry have had a determining influence on the
jurisdictional question in this field. Inherent character
istics of the industry relate in a fundamental way to the
division of regulatory responsibility between state and fed
eral agencies. The nature of these factors should be con
sidered in order to indicate their effect on regulation.
Natural gas supply centers. Production of natural
ga3 is geographically centered in relatively few areas of
the country. The states accounting for output of natural
gas are listed in Table VI. The state of Texas is the lead
ing source of natural gas by an overwhelming margin. Nearly
half of the total national production was supplied by this
single state. Other leading producing districts were in
neighboring states of the southwest--Oklahoma, Louisiana,
Kansas, and New Mexico--, the western state of California,
and the eastern states of West Virginia, Pennsylvania, Ken
tucky, and Ohio. The striking concentration of the supply
sources in the southwestern states is revealed in the fact
175
TABLE VI
NET NATURAL GAS PRODUCTION, 1946*
(In Millions of Cubic Feet)
State Amount8
Arkansas 52,195
California 532,462
Colorado 9,614
Illinois 33,500
Indiana 3,200
Kansas 206,532
Kentucky 95,000
Louisiana 607,932
Michigan 26,000
Mississippi 21,188
Montana 29,599
New Mexico 185,260
New York 7,000
Ohio 59,000
Oklahoma 655,908
Pennsylvania 78,000
Texas 2,097,238
West Virginia 205,000
Wyoming 33,545
Florida, Missouri, and Utah 4,443
Total 4,942,617
#Federal Power Commission, Report of Commissioner Le-
land Olds and Commissioner Claude L. Draper, 1948, Natural
Gas Investigation, Docket No. G-58T) (Washington, D. C.:
Government Printing Office, 1948), p. 18.
a Net production is at 19.65 psi pressure base.
176
that over three-fourths of the nation's supply in 1946 ori
ginated in the five states of Texas, Oklahoma, Louisiana,
Kansas, and New Mexico.
The concentration of natural gas production is ex
plained largely by the geographic distribution of natural
gas reserves. By far the most abundant known reserves are
those of Texas and neighboring states. According to esti
mates for 1946, over half of such reserves are those of
Texas and nearly 90 per cent were in 6 southwestern states.
The withdrawal of natural gas from reserves in east
ern states has occurred at such a rapid rate that there is
indication of increasing relative dependence upon gas from
29
the southwest. The ratio of reserves to net annual pro-
30
duction is much higher in the southwest than in the east.
Discoveries of additional reserves have been relatively more
31
important in the southwest also. Thus there is reason to
believe that future supplies of gas will be even more cen
tered geographically than in the past.
29 American Gas Association, Ga3 Facts, 1947 (New
York: American Gas Association, 1948}, p. 43.
)
30 Federal Power Commission, Report of Commissioner
Leland Olds and Commissioner Claude L. Draper, 1948, Natu
ral Gss Investigation, Docket No. G-380 (Washington, D. C.:
Government Printing Office, 1948), p. 18.
31 American Gas Association, Ga3 Facts, 1947, op.
cit., p. 16.
177
Market for natural gas. The low price, convenience,
and other advantages of natural gas have been responsible
for a rapid growth in the market for the product during re-
32
cent years. The markets are shown in Table VII. During
the year 1947 the West South Central region absorbed a third
of the total natural gas sold. The North Central and Paci
fic regions also figured importantly. Among the states,
Texas, California, Ohio, Louisiana, Pennsylvania, Kansas,
and Oklahoma accounted for purchases in excess of 100 bil
lion cubic feet each during 1947. No natural gas whatever
was marketed in 14 states.
It is apparent that the lightly populated West South
Central Region states constituted a large market for gas
despite relatively small density of population. The princi
pal reason for this fact is that substantial quantities are
used for inductrial purposes in the southwest. This parti
cular region represented purchases for industrial uses
33
equaling 74 per cent of total purchases in the region. In
no other region was the percentage purchased for industrial
32 It was authoritively stated in the natural gas in
vestigation of 1945-’46 that for the equivalent heating value
of a unit of gas the prices would be: gas, 2.6 cents; oil,
18.5 cents; and coal, 23.9 cents. Federal Power Commission,
Report of Commissioner Leland Olds and Commissioner Claude
L. Draper, supra note 3(57 P* 142.
33 American Gas Association, Gas Facts, 1947, op.
178
TABLE VII
NATURAL GAS SALES OF UTILITIES, BY STATES, 1947*
Division and State Millions of cubic feet
United States 2,515,251
Alabama 49,573
Arizona 24,545
Arkansas 77,249
California 360,914
Colorado 45,233
Florida/ 7,767
Georgia 41,258
Illinois'' 65,827
Indiana^ 34,093
Iowa 32,335
Kansas ' ' 140,103
Kentucky 23,105
Louis iana 197,494
'Maryland
Michigan'
3,164
79,377
Minnesota/ 33,418
Mississippi 39,234
Missouri' 63,832
Montana 28,243
Nebraska 41,001
New Mexico 24,756
New York' 21,441
North Dakota 2,784
Ohio 206,565
Oklahoma 130,808
Pennsylvania' 159,489
South Dakota7 8, 418
Tennessee 30,804
Texas 421,431
Utah 24,455
Virginia 2,837
West Virginia 73,051
Wisconsin t 265
Wyoming 17,173
*American Gas Association, 6a s Facts, 1647 (New York:
American Gas Association, 1948), p. 69 •
179
uses so large.
The location of market centers may next be related to
supply center locations. Tables VI and VII indicate that
the leading producing states were also prominent consuming
states. Texas ranked first as a producer and as a market.
States in the southwest, however, generally ranked lower as
market centers than as producing centers, while the opposite
was true with respect to states of the northeast. Califor
nia ranked high in both output and sales. A few states
along the eastern front of the Rocky Mountains figured to
some extent among producers and consumers of natural gas.
It is apparent that a large portion of the gas produced is
sold in leading producing states, but much of the gas is
sold, in northeastern states which are not able to supply
their total needs.
The markets for natural gas, it appears, are consid
erably more dispersed than the supply sources. A few states
contribute the bulk of natural gas output while sales are
more general. For instance, Texas, which accounted for 48
per cent of total production in 194£* represented only 18 per
cent of total sales. furthermore, the ten leading producing
states supplied 96 per cent of total output, but the ten
chief states in terms of sales accounted for only 75 per
cent of total sales.
Viewing the trends in production and sales, it is
180
evident that the marketing of natural gas has broadened con
siderably. As pipe lines have fanned out from the south
western states, the percentage of natural gas production
marketed out-of-state has increased. States with little or
no production of natural gas have come to rely on south
western gas.
Fortunately, recent data are available indicating the
extent of interstate transmission of natural gas.34 In 1946
a total of 1,128,226 million cubic feet of natural gas was
transported across state lines. This gas originated in 19
states and was destined for 33 states. Of the total inter
state transmission of natural gas, 437,011 million cubic
feet or 38.7 per cent originated in Texas. The gas from
Texas went to 26 states. Other states supplying large quan
tities to a number of states included Louisiana, Oklahoma,
West Virginia, Kansas, Kentucky, New Mexico, and Pennsylvijn-
vania .
The distribution of supply sources and markets for
natural gas may be contrasted with that for electricity. It
has been observed that electric energy is generated and sold
in every state. While certain more densely populated and
industrialized states account for relatively large propor
tions of energy, wide dispersion of generating stations and
54"Ibid., pp. 65-67.
181
sales outlets is clearly evident. In contrast to this situ
ation are the highly concentrated natural gas supply sources
and the market pattern for gas in which the sales are con
siderably less scattered than in the case of electricity.
Furthermore, whereas abundant electricity can be generated
in the northeastern states, the major source of natural gas
supply is located a long distance from the great population
centers of the country.
The relationship of the foregoing conditions and
trends to regulation is apparent. Since a large portion of
the natural gas produced moves through interstate pipe
lines, the activities of some companies have been regarded
as matters of national interest and regulated accordingly.
Regulation by both federal and state agencies has conse
quently developed. Federal responsibility has been impor
tant because of the large movements of gas in interstate
commerce.
Size and scope of company operations. The natural
gas industry is characterized by substantial economies of
large-scale company operations. As in the case of electric
utilities, the possibility of realizing these economies
serves as an incentive to expand the size of a plant and
increase the scope of operations. Apparently, the induce
ment to expand has been strong, since a relatively small
182
35
number of firms dominate the industry.
Certain technological developments have made possible
long distance transmission of natural gas and lower unit
costs. It was stated ifi4I946sthat
. . . the length of gas lines is no longer a technologi
cal problem, but solely one of economics. If the market
is big enough and the price right, lines can and will be
laid whatever distance is required to connect the source
of supply and the market.
It may be well to add, homf ever, that the remaining economic
problems are not unrelated to technology. The function of
technological innovation is not merely to make a particular
operation possible, but further to bring about such a degree
of perfection that the cost is brought to a minimum.
Such technical improvements as welded or seamless p
pipe capable of withstanding great pressure, improved en
gines for compressing gas in transmission, elaborate ditch
ing machines, and other technical contributions have fos
tered the growth of long-distance pipe lines. One authority
in public utility economics stated in 1936 that
Technological improvements have changed the natural gas
business from a local industry with little hope of ex-ss
pansion to an industry which agressively seeks distant
fuel markets.37
35 Cf. p. 185.
36 "Economics of Gas Lines," Oil and Gas Journal,
45:176-7, September 21, 1946.
37 Emory C. Troxel, "Long-Distance Natural Gas Pipe
Lines," Journal of Land and Public Utility Economics, 12:344-
354, November, 1§36.
183
Subsequent extension of pipe lines certainly testified to
the truth of that statement.
One of the most notable developments of the decade
38
following 1936 was the use of large diameter pipe. In
1937 approximately half of the natural gas pipe line was 12
inches or less in diameter, whereas in 1946 only 17 per cent
was of this small size. During the, same period the percent
age of 20 to 30 inch pipe increased from 30 per cent to 56
per cent of the total mileage of transmission pipe line.
Projected percentages for 1951 on the basis of construction
in the planning stage indicated that 92.5 per cent of total
mileage would be of the 20 to 30 inch size.
The significance of this trend toward larger diameter
pipe is seen when costs are considered. The volume capacity
of gas pipe lines increases more rapidly with Increased dia-
39
meter than the increased cost per mile of line. There
fore, the larger the line, the lower the unit cost at capa
city volume. An incentive to increase the diameter of pipe
exists generally so long as the anticipated volume of gas to
be moved through the line warrants the increase in size.
From a cost standpoint, volume and load factor are control
ling elements in any gas transmission line.
38 "Large Gas Lines Swamp Mills,” Oil and Gas Jour
nal, 47:115, June 3, 1948.
39 "Economics of Gas Lines,” loc. cit.
184
The great distances involved in transmitting gas from
the southwest to northeastern states necessitates large in
vestments in facilities. Consequently, the industry has
been characterized by relatively few companies. In 1947 the
total assets of the 114 natural gas companies subject to
Federal Power Commission jurisdiction was $>4,109,862,000.
Of that total, 44.4 per cent, or $1,828,300,000, was repre
sented by only 13 companies, each of which had assets valued
40
in excess of 100 million dollars.
Of the 114 companies subject to federal control, 19
41
had transmission lines exceeding 1,000 miles each. The
United Gas Pipe Line Company had the largest total mileage
with 6,222.8 miles of line. Additions to the country’s pipe
line mileage proceeded rapidly during the decade of the
1940’s. During the 1948 fiscal year, the Federal Power Com
mission authorized new construction involving 8,468 miles of
42
pipe line estimated to cost $520,000,000. During the
first six months of 1949 the Commission authorized natural
gas facilities estimated to cost $374,820,900 and involving
40 &tatTstics of Natural Gas Companies, 1947 (Wash
ington, D* C.: FederaX Power Commission, 1948), p. v.
41 Ibid., pp. 301-316.
42 Annual Report of the Federal Power Commission,
1948, op. clt., p. 56.
185
43
over 4,900 miles of pipe line. A marked trend in the ex
pansion of pipe line facilities was recognized by the Com
mission in 1948 when it stated that there was
. . . an increasingly distinct and constantly growing
pattern of big pipe line3 fanning out from the gas
fields in the heart of the continent to the larger cen
ters of population and industry in the North Central
States, the Middle Atlantic region, and the Pacific
Coast. There is every reason to believe that this trend
will continue . . . for several years to come.^4
One of the factors which make it economically feasi
ble to transmit natural gas from the southwest to the north
east is the operating efficiency derived from maintenance of
high load factors. Some of the long distance lines have
45
been kept near 100 per cent load factor. Because of the
seasonal aspect of demand for space heating, a problem arose
relative to utilization of transmission line capacity. Dur
ing the winter season all of the gas moved eastward could be
channeled directly into distribution systems, but in the
season of slack demand gas has been stored to some extent in
underground reservoirs. The use of underground storage has
been a factor of outstanding significance in relation to
43 federal Power Commission Release No. 4382, August
13, 1949.
44 Annua1 Report of the Federal Power Commission,
1948, op. cit., p. 55.
45 U. S. Bureau of Mines, Minerals Yearbook, 1945
(Washington, D. C.: Government Printing Office, 194777
p. 1162.
186
46
utilization of pipe line capacity. Obviously, minimum
costs of transmission are permitted by such efficient opera
tions .
There are, of course, other causes of large scale op
erations in the natural gas industry. Quantity discounts on
large purchases of gas, savings realized from large quantity
sales, specialization of machines and labor with consequent
increased efficiency, and other common sources of economies
are noteworthy in this connection. Special attention should
perhaps be directed to the influence of low interest rates
on growth of individual companies and the industry as a
whole. During the 1940’s prevailing interest rates were ex-
47
tremely low. Because of the importance of interest cost
in this capital-intensive industry, an appreciable saving
could be realized. Since labor expense is a relatively
small component of total cost of operation, the effect of
increased wage scales was small. Incidentally, the compe
titive position of-natural gas relative to coal greatly im-
48
proved as a result of these cost trends. This condition,
46 Federal Power Commission, Report of Commissioner
Leland Olds and Commissioner Claude L. Draper, op. cit.,
p p T T U S --------------------------------- '
47 Edison Electric Institute, Statlstical Bulletin,
1946, No. 14 (New York: Edison Electric Institute, 1947),
p. 13.
48 Federal Power Commission Report of Commissioner
Nelson L. Smith and Commissioner Harrington Wimberly, 1948,
Natural Gas Investigation, Docket No. G-580 (Washington,
D. C.: Government Printing Office), p. 339.
187
in turn, further stimulated the expansion of the natural gas
industry.
The overhead costs for natural gas companies engaged
in long-distance transmission represent a very large propor
tion of total cost of operations. This is indicated by cer
tain facts evidenced in the 1947 composite income account
for natural gas companies reporting to the Federal Power
49
Commission. During that year, 36.3 per cent of total op
erating revenues was expended for depreciation, taxes, in
terest on long-term debt, and dividends. On the basis of
net average investment, the rate of return was 6.4 per cent
in 1947. Since certain other cost items (e. g., mainten
ance, wages and salaries, insurance) represent fixed costs
to some degree, there is strong indication of a heavy weight
of overhead in the natural gas industry.
Because of the large proportion of fixed costs to
total costs, natural gas companies, like electric utilities,
must make strenuous efforts to maintain high load factors.
One of the means of achieving this condition has been des
cribed above in connection with long-distance lines. Every
pipe line, however, whether large or small, should be util
ized as fully as possible in order to spread the fixed costs
over a larger number of units of gas transmitted. During
49 Federal Power Commission, Statistics of Natural
Gas Companies, 1947, op. clt., p. viil.
188
the middle thirties most long-distance transmission lines
were being utilized at less than 50 per cent of their capa-
50
city, according to Troxel. The chief reason for this
rather low load factor was, of course, the seasonal fluc
tuation in demand for heating purposes. Promotional rates
for summer season and larger sales to industrial plants may
reduce seasonality of demand and thus raise load factors.
It can be seen that there are certain forces inherent
in the natural gas industry which have caused pipe line com
panies to expand their operations. As a result, the scope
of their activities have frequently extended beyond the con
fines of a particular state. National regulation has ap
peared as a means of effecting control over those subjects
which lie beyond the reach of any state.
Corporate integration and special legislation per
taining thereto has influenced the general pattern of regu
lation of natural gas companies and thus warrant some con
sideration. As in the case of the electric utility indus
try, holding companies were created partly to realize,cer^"3
tain managerial economies, but in many instances the primary
objective was to secure large incomes for a few indivi-
51
duals* Because of the abuses of corporate integration in
50 Troxel, loc. cit.
^ Summary of Federal Trade Commission Report on
Utility Corporations, op. cit., pp. 833-848.
189
' the natural gas Industry as revealed in Federal Trade Com
mission investigations, the Public Utility Holding Company
Act of 1935 was made applicable to both the natural gas and
electric utility industries.
The purposes of the Act with.reference to the natural
gas industry was to eliminate uneconomic corporate super
structures. The intent was not to forbid the technical eco
nomies of large-scale operations, but, on the contrary, to
encourage efficiency through reorganization on a sound eco
nomic basis. The core of the policy relative to this indus
try is found in the definition of a permissible integrated
gas system in the Act:
As applied to gas utility companies, a system
consisting of one or more gas utility companies which
are so located and related that substantial economies
may be effectuated by being operated as a single coor
dinated system confined in its operations to a single
area or region, in one or more States, not so large as
to impair (considering the state of the art and the area
or region affected) the advantages of localized manage
ment, efficient operation, and the effectiveness of reg
ulation: Provided, that gas from companies deriving
natural gas from a common source of supply may be deemed
to be included in a single area or region.52
As previously indicated, the one-area rule was developed
from this Act by the Securities and Exchange Commission in
53
t*16 United Gas Improvement Company case of 1941.
52 Public Utility Act of 1935, 48 Stat. 881, Title I,
Section 2 (a), 29 (b).
53 Cf. p. 167.
190
On© of the leading holding company cases relative to
the gas industry was that which involved the Lone Stah Gas
54
Corporation. In this case the corporation was forced to
divest itself of certain distribution properties which were
located, like the principal system, in the state of Texas.
Despite the proximity of the subsidiary to the parent com
pany, such holdings were not found conducive to efficient
operations. To the other extreme was the decision In the
55
case involving the Northern Natural Gas Company. Here an
interconnected system of natural gas production, transmis
sion, and distribution properties, which were spread through
six states, was allowed.
To the extent that the Securities and Exchange Com
mission has eliminated economically unsound corporate struc
tures, it has strengthened natural gas companies. Its acti
vities have thus helped to preserve the advantages of effi
ciently operated large undertakings. The realization of
this objective is of such importance that there should be
close contact between holding company regulation and the ac
tivities of the Federal Power Commission. Perhaps better
correlation could be achieved if the former were transferred
54 Re Lone Star Gas Corporation, 12 S. E. C. 286
(1942).
55 Re Northern Natural Gas Company, SEC Holding Com
pany Act ReTease No. 5657, March, 1945.
to the Federal Power Commission
191
Interconnection of pipe lines. The geographic loca
tion of supply sources and markets for natural gas suggests
that there might be relatively few companies engaged in
long-distance transmission to connect these districts. Such
is in fact the case, as a map of pipe line facilities read-
56
ily shows. These long lines serve the needs of a larger
number of smaller lines in the supply area and in the market
area. Obviously, the nature of this situation has occa
sioned widespread interconnection of facilities. To some
extent large companies maintain their own distribution sys
tems and thu3 sell to ultimate consumers. Sales are also
made to other transmitting companies and to distributors.
The extent to which natural gas companies subject to
federal jurisdiction are interconnected with other companies
is indicated in composite statistics of the Federal Power
57
Commission. In 1947 natural gas companies reporting to
the Commission produced only 677,105 million cubic feet of
natural gas, whereas they purchased 2,701,372 million cubic
feet. In terms of dollar figures, the gas purchased
56 Federal Power Commission, Report of Commissioner
Nelson Lee Smith and Commissioner Harrington Wimberly, Natu-
ral 6as investigation, Docket No. £-580 (Washington, D. C.:
Government Printing Office, 1948), p. 242.
Statistic3 of Natural Gas Companies, 1947, op.
clt., pp. v-vi.
192
amounted to $285,209,000, whereas expenses for natural gas
production were only $5,599,000. These figures reveal very
clearly the importance of interconnection at the point where
gas enters upon a transmitting company's lines.
At the other end of the transmitter's operations, it
is found that during 1947 total revenue from sales to ulti
mate consumers amounted to $452,964,000, while sales to
other gas utilities amounted to $327,749,000. It is evident
that the distribution phase of operations by natural gas
companies is of considerable importance. Nevertheless, over
40 per cent of total revenues were derived from sales to
other than ultimate consumers. Many interconnections are
necessary to permit these intercompany wholesale transac
tions .
The significance of extensive interconnection is that
such arrangements enable large-scale interstate movement of
gas and bring about complicated Interrelationships which
make it difficult for regulation by state agencies. Federal
regulation tends to be fostered as a result.
III. SUMMARY
The widespread availability of energy resources in
the United States has been responsible for considerable geo
graphic decentralization of the electric utility industry.
In addition, the economic limitations on long-distance
193
transmission of electric energy has tended to localize gen
erating stations near market centers. The states accounting
for large demand for electricity also account for large pro
duction of power. Nevertheless, there are certain forces
tending to broaden the scope of electricity movement. Par
ticularly important are (1) the incentive to realize lower
unit costs through Increase in the seale of operations; and
(2) the incentive to interconnect utility systems in order
to benefit from coordination and integration of facilities.
Under the Public Utility Act of 1935, important regulation
with respect to holding companies has had some effect in
fostering more economic corporate and technical integration.
The geographic concentration of natural gas supply
sources and the great distance of the chief sources from
major population centers has caused the natural gas industry
to assume a form notably different from that of the electric
utilities. Long-distance transmission pipe lines are res?
quired to supply many market areas. In contrast to electric
transmission lines, long-distance movement of natural gas
has proved to be highly successful. A relatively small num
ber of companies dominate the transmission phase of the in
dustry. Holding company regulation has tended to break up
corporate systems to some extent, but simplified corporate
organizations and technical integration have been encouraged.
*
IV. CONCLUSION
194
Hie economic characteristics of the electric utility
and natural gas industries suggest the need for certain form
forms of regulation. The decentralized nature of the elec
tric utility industry indicates that operations of particu
lar companies are largely intrastate in scope and thus with
in the jurisdiction of state authority. In contrast, long
distance movement of natural gas,,which i3 required to sup
ply leading market centers, generally constitutes interstate
commerce and therefore falls within the province of federal
regulatory authority. Yet to some degree both industries
are subject to dual regulation since certain functions, par
ticularly local distribution, lend themselves to state regu
lation, while the interstate aspects call for federal con
trol .
The Increasing trend toward development of larger op
erating units and the interconnection of systems ha3 exerted
V
a strong conditioning influence on the relative responsi
bility of state and federal agencies for regulation. With
the growth of population and industry generally, and im
provement of technology, the advantages of marketing both
electricity and natural gas over wider areas are enhanced.
Consequently, there is a tendency for more electricity and
gas to move across state lines, and the regulation of the
Federal Power Commission becomes increasingly important.
CHAPTER VI
IMPLICATIONS OP DUAL REGULATION
OP THE ELECTRIC UTILITY INDUSTRY
The problem of ascertaining the proper scope of ju
risdiction to be exercised by a commission is not, in the
broad sense, simply a matter of law. Vitally important are
the economic consequences of any particular definition of
jurisdiction. Regulatory commissions should be assigned
responsibilities which are consistent with the general pur
pose of all regulation, namely, the achievement of maximum
economic gain to those affected. These responsibilities
should be carried out with administrative efficiency and
dispatch.
Having sketched the background of commission juris
diction and the economic conditions and trends relating to
the electric utility industry, it is now appropriate to an
alyze some of the implications of the pattern of jurisdic
tion which has developed. Both in the control of water ;o
power development and in regulation of ''public utilities”
the Federal Power Commission has become a very important
factor. Whether dual regulation in which state commissions
and the Federal Commission sharing responsibilities has
proved to be effective, is the crucial question under con
sideration .
196
I. CONTROL OF WATER POWr ER DEVELOPMENT
It has been observed that the scope of federal con
trol over water power resources has become very extensive
in the sense that many streams, both large and small, have
been regarded as navigable or as affecting navigability of
a stream. Whether this broad jurisdiction of the Federal
Power Commission is defensible hinges upon considerations
other than merely the phrasing of legal language. It is r,e
»
necessary to observe what has been achieved by a system of
regulation in which almost complete control has been vested
in a federal agency, and to judge whether an alternative
system might prove more beneficial.
Legal and economic criteria of jurisdiction. Preced
ing chapters (II and III) suggest various criteria which may
be employed in determining the proper jurisdiction bf fed
eral and state commissions. These are of a legal character
and reside in the Constitution, statutes, and court prece
dents . In order to determine whether an agency can under
take certain regulation, it is necessary to discover what
statutory powers were granted, what the courts have regarded
as proper interpretation of the legislation, and whether the
statute and the regulation are consistent with the Constitu
tion.
Lawmakers and even judges find it necessary to
197
appraise the economic consequences of regulation. Legisla
tors have before them the task of gauging economic problems
and then providing for a regulatory system which will ef
fectively deal with them. Jurists have not been indiffer
ent to these problems, as evidenced by their liberal con
struction of the Constitution where such is deemed expedi
ent in order to sanction certain economic control. While
regulation springs fundamentally from a recognized need to
meet an economic problem, in the more immediate sense regu
lation is the child of law and judicial precedent.
With respect to water power development, the princi
pal legal criterion of jurisdiction is the definition of the
term "navigable waters"--a definition which has evolved
through a long series of judicial decisions. The wide lati
tude of jurisdiction permitted by this standard is founded
upon a broad statutory definition of the term, and also upon
the general scope of federal authority encompassed by the
commerce clause of the Constitution. Much has been added
to the meaning of the term "navigable waters" by the courts,^
and, as a result, the criterion has been quite flexible in
its application.
Whether this test of jurisdiction, as currently em
ployed, differs substantially from that which the lawmakers
had originally intended is an interesting legal question.
1 C£. CEapter III.
198
The Importance of the question may, however, be exaggerated.
When laws are enacted, they are drawn in terms of prevailing
economic conditions. As changes occur in such conditions,
the laws must be interpreted in a manner which will give
proper effect to them. Lawmakers, obviously, cannot con-?iv
celve what new problems will arise under the administration
of the statutes which they enact. Therefore, the laws are
made somewhat flexible. They must bend in order to meet new
situations. To ask whether an interpretation of a law goes
beyond what the legislators had intended is to pose a ques
tion that is unanswerable in many cases. One can sometimes
do little more than ascertain the reasonableness of the in
terpretation in terms of the degree of flexibility in the
law and the urgency of the problem involved.
To be more specific, when Congress enacted the Fed
eral Water Power Act of 1920, the legislators probably did
not realize how intensively water power resources would be
developed, and how important it would become that an indi
vidual project be related to the development of an entire
basin. As time passed, federal jurisdiction was asserted
over many minor streams because of the importance they
gained in the unfolding scheme of things. The law was
broadly phrased, and its elasticity permitted application
to many situations where regulation was needed.
If the objective of regulation is the achievement of
199
greater economic benefits than would result without it, then
the more important criterion for evaluating any system of
regulation must be the extent to which this goal has been
2
realized. In the field of water power control, it is ap
propriate to consider the economic utilization and conser
vation of water power resources. Since this is the funda
mental aim in this area of regulation, the prevailing system
of regulationsshould be judged in terms of it.
Utilization and conservation of water power resources.
During the early history of the United States when resources
seemed limitless, there was little concern about developing
water power in such a manner that sites would be utilized
most effectively. There was no apparent need to practice
conservation. As time passed, however, the more accessible
power sites were no longer available to new power develop
ers. Less advantageously located sites were then exploited.
The situation became more serious in the twentieth century
with the rapid growth in the demand for electricity.
As the pressure on water power resources increased,
2 The importance of this type of an evaluation has
been indicated in striking terms by the director of the
Council of State Governments: "The future of state govern
ment— like the future of the nation, of private business,
and of any other institution--will depend less on Itstcon-
stltutional and legal prerogatives than on what it can con
tribute to the general welfare." Frank Bane, "States Rights
and States Responsibilities," State Government, 18:48-9,
March, 1945.
200
It became more urgent to prevent waste and to assure a st
steady supply of low cost electric energy to an expanding
market. A long-run view was taken by some authorities who
were concerned about power supply for future generations as
3
well as for current needs. The Federal Water Power Act of
4'
1920 was designed essentially as a conservation measure.
Since the states were constitutionally unable to control
water power development on interstate waters, conservation
of this valuable resource was largely outside the legal
range of the states. Even within their scope of intrastate
waters, however, the states have failed to establish effec-
g
tive schemes of control.
The rapid development of water power resources under
the system of control in effect, more or less, since 1920,
tends to support the view that the system has functioned
satisfactorily. It has been reported that by the end of
3 Charles R. Van Hise, Conservation of Natural Re
sources in the United States (New York: The Macmillan Com
pany, 1911), pp. 118-161.
4 This fact is clearly revealed in the history of the
Act as discussed in a Federal Power Commission report.
Hearings before £ Subcommittee of the Committee on Inter
state and~Foreign Commerce on HR 2931 ?1 1 , House of "Represents -
tives, 80th Congress, 2nd " ’Session, pp. 337-8.
5 Only 12 state commissions had authority in 1948 to
authorize hydroelectric developments. Federal Power Commis-
sion, State Commission Jurisdiction and Regulation of Elec
tric and Gas Utilities (Washington, D. C.: Federal Power
Commission, 1948), p.25.
201
June, 1949, 644 federal licenses Involving 5,992,000 horse
power of generating capacity were in effect, and new appli-
6
cations for licenses were being filed at a record rate.
Referring to these data, the Federal Power Commission
stated:
This . . . figure represents about 42 per centoo'f
all the generating capacity installed in non-Federal hy
droelectric projects throughout the United States and is
the largest amount of capacity under Commission license
since the licensing program started with passage of the
Federal Water Power Act in 1920. The projects under li
cense . . . involve an estimated cost of approximately
$984,000,000.7
The use of these data as supporting evidence for the
success of the water power control scheme must be qualified
by the possibility that other factors may have accounted in
large part for these results. For Instance, it is conceiv
able that the demand for electricity was so grest during the
period that, despite reluctance of a private utility to ac
cept unattractive federal license terms, it would, neverthe
less, proceed to develop hydro resources under such a li
cense in order to meet that demand. In any event, it can be
stated that the regulatory system did not seriously impede
development of power sites.
Since regulation of water power exploitation is
6 Annual Report of the Federal Power Commission, 1949
(Washington, D. C.: Government Printing Office, 1950), p.
43.
7 Loc. cit.
202
largely a matter of federal control, it may be well to note
some of the economic considerations that enter into the
judgment of the Federal Power Commission when it deals with
cases of this type.
On one occasion the Commission found that an upstream
development on a non-nsvigable portion of an interstate
stream would "cause serious fluctuations" in the downstream
8
navigable portion located in another state. This latter
state was unable to do anything about the project which af
fected the interests of its people. The Commission regarded
the case as strikingly illustrative of situations which led
to federal licensing authority.
The importance of integrating various projects in a
river basin has been stressed by the Commission on several
occasions. For instance, the comment was made in connection
with an investigation of a jurisdictional question that
It is clear that the operation of the several
plants and facilities . . . indicate the essentiality
of each as part of a comprehensive plan of stream devel
opment and integrated operation. The relationship be
tween such plants and reservoirs is obvious and requires,
as we have previously held, that all elements be consid
ered as a whole.^
& He Carolina Aluminum Company, 1 F. P. C. 495 (1937).
9 Re Wisconsin-Michigan Power Company, 3 F. P. C. 449
(1943). A similar position was taken in Re Pacific G-as and
Electric Company, 2 F. P. C. 516 (1941). The Commission has
also emphasized the importance of the regional approach in
its annual reports. Annua1 Report of the Federal Power Com
mission, 1948 (Washington, D. 6.: Government Printing Of
fice, i9437Tp. 42.
203
In this particular case the Commission found that the fluc
tuations in stream flow occasioned by the operation of sev
eral projects was substantial. A survey and study revealed
that in the interest of more adequate utilization of the
stream, provision should be made for better regulated stream
flow through integration of the various units.
The wide range of factors entering into the judgment
of the Commission relative to economic feasibility of a pro
posed project is indicated in the following statement made
In connection with a jurisdictional case:
In considering the effects which a proposed
hydro-electric development may reasonably and normally
be expected to have on the Interests of interstate or
foreign commerce, it is necessary to take notice of the
relationship between reservoir storage capacity, the
hydraulic capacity of the power installation, the aver
age stream flow at the project site, the range of stream
flow necessary to provide requisite navigable depths for
boats of various drafts, reasonable methods of operation
normally and customarily followed In the conduct of a
public utility system, and the physical possibilities of
affecting the natural flow as a result of the existence
and operation of the project works.-*-0
The relative amount of attention given to these and other
factors varies with the circumstances of the case. Some
times very detailed study is made of market potentiali
ties. At other times the ability to finance proposed
10 Re Georgia Power Company, 4 F. P. C. 33 (1944).
11 Re Pacific Gas and Electric Company, 2 F. P. C.
300 (1940).
204
12
construction has been a determining factor. The breadth
and depth of investigation into these matters may be very
great.
The Commission has given consideration to private and
public interests of many types in arriving at decisions with
reference to economic feasibility of projects. It has rec
ognized the need for preserving recreational benefits for
13
the public. This fact indicates that the federal govern
ment has not ignored local Interests pertaining to recrea
tion. Sometimes the effect of a project on private parties
has been considered in order to determine whether a project
application should be denied or granted. In one case, fail
ure of an applicant to allow for an estimated $3,000,000 In
demnity to a property owner of land which would have been
submerged by water behind a proposed dam, was a principal
14
factor causing refusal of a license. On another occasion
the Commission had to weigh carefully the damages to farm
lands which would result from increased storage capacity of
R® First Iowa Hydro-Electric Cooperative, 6 P. P.
C. 227 (194*7); Re Clarion River Power Company, 1 P. P. C.
357 (1937).
13 Re Pacific Gas and Electric Company, loc. cit.; Re
First IowaTfydro-Electrlc Co operative,""loc. cit. The Fed
eral Power Act requires that the Commission give this factor
and "other benefieial public uses" consideration. Federal
Power Act, 48 Stat. 881, Title II, Section 10 (a).
14 Re Clarion River Power Company, 1 F. P. C. 357
(1937).
205
a larger reservoir and the benefits that would result from
15
increased generating capacity. It decided against the
farmers .
These illustrations of economic evaluations made by
the Federal Power Commission in the course of its work indi
cate that it is called upon to decide issues which a state
agency could not adequately resolve. Moreover, they reveal
the fact that local interests, both public and private, are
given consideration by the Federal Power Commission.
It might be argued that, legal barriers notwithstand
ing, the states could more effectively deal with the problem
of power development within their respective jurisdictions.
In opposition to this view stands the claim that a piecemeal
approach would not permit realization of the full potential
ities of a broad basin. Under federal control, water power
development of an entire river basin or watershed can be
treated regionally. Each proposed project within the region
can, accordingly, be appraised in terms of its relationship
to a general plan. Since a watershed almost without except
tion overlaps two or more states, control by individual
states is greatly handicapped.
A possible alternative to federal control is the in
terstate compact. While no attempt has yet been made to
15 Re Bellows Falls Hydro-Electric Corporation, 5 F.
P. C. 271 TT946T:
206
adopt this system for regulating private water power devel
opment on a region-wide basis, it is conceivable that such a
plan could be introduced. The fundamental weakness of such
■^0
a scheme is the possibility, if not the probability, that
the states concerned would reach an impasse regarding mat
ters of common interest. Any such system rests basically
upon the ability and willingness to compromise.
There 8re probably few who would deny that the feder
al government is better able to assure a healthy development
of water resources on major inland waterways. Criticism of
federal control has been directed chiefly toward assertion
of jurisdiction over minor streams. The opinion has often
been expressed that these latter streams are essentially
17
subjects of local concern. To prove this point, efforts
are usually made to minimize any national interest by
16 The difficulties of interstate cooperation are re
vealed in the Carolina Aluminum Company case. Cf. p. 202,
17 Testifying for the National Association of Rail
road and Utilities Commissioners in 1947, its General Soli
citor stated, ’ ’ Where a stream is comparatively minor, such
that it ha3 no real value as an artery of interstate com
merce, the national interest becomes secondary and the local
interest plainly predominates. . . Aside from the need to
regulate construction projects to the extent that they may
affect navigability downstream, there is really no national
interest in the use and development of such a stream. State
and local interest prevails and State and local policyyand
regulation should therefore control. This is true not only
as a matter of principle, but also because State regulation
is more effective where the local interest is dominant.”
Hearings before a Subcommittee of the Committee on Inter
state and Foreign Commerce, op. ci t., p"I 137.
207
attempting to show that navigation is virtually impossible
and that the effect upon downstream navigable waters is un
important. Thus, by reason of the legal criterion for de
termining jurisdiction, attention is focused on navigation
rather than on power development. While all major functions
of a stream should be considered in jurisdictional determi
nations, the distortion created by this legal test obscures
the main issue.
While the basis for resolving jurisdictional claims
has become a sort of legal expedient, the effect has been
conducive to the growth of federal control over water power
development. The national interest in individual streams of
very small volume appears to be negligible. The total ef
fect that several small streams may have on the volume of
downstream flow, however, may be considerable. Since the
production of power is intimately related to fluctuations
in water volume, coordination of generating units may en
hance generating capacity and promote utilization ocf the
best sites.
The Federal Power Commission has another distinct ad
vantage over state commissions in the regulation of water
power development: By reason of its broad national inter
ests, it can and does investigate current and prospective
power supply and market conditions for large areas. While
there is no reason why a state agency could not undertake
208
similar studies, one can hardly expect a state commission to
be greatly concerned about the interests of neighboring
states. The disinclination of state legislators to provide
the authority, funds, and personnel to engage in broad in
vestigatory activities is evidenced in the great majority
X8
of states. Evaluation of a proposal to construct a hydro
electric plant is clearly speculative unless it is based
upon the results of a regional study of the supply and mar
ket for power to be generated.
Proposed changes in jurisdiction. The extent of
controversy with respect to state and federal control of
water power development has not been quite so serious as
that with reference to ’ ’public utility" regulation. Never
theless, there have been certain proposals aimed at a modi
fication of existing jurisdictional limits in this field of
regula tion.
The National Association of Railroad and Utilities
Commissioners has, on several occasions, gone on record in
favor of restricting Federal Power Commission jurisdiction
18 Federal Power Commission, State Commission Juris -
diction and Regulation of Electric and Gas Utilities (Wash-
ington, D. C.: Federal Power Commission, 1§4§), ppT 14-30.
C. 0. Ruggle3, Aspects of the Qrganlzation, Functions and
Financing of Sta te Public Utility Commissions (Cambridge:
Harvard Graduate School of Business Administration, 1937),
pp. 57-69.
209
1 9
through amendment of Part I of the Federal Power Act. In
dustry spokesmen have also expressed their views in favor of
20
limiting federal authority over water power resources.
There has also been some attempt in Congress to limit federa
eral jurisdiction, but these efforts have failed.
Opposition to the broad authority of the Commission
under Part I was brought into focus when a Congressional
Committee held hearings in 1947 on a proposed amendment to
the Act. This proposal and the argument surrounding it cen
tered attention on certain controversial aspects of prevail-
21
ing jurisdiction.
The proposed amendment included a declaration of pol
icy to the effect that the interests and rights of the
states in water power control were to be recognized and that
19 The Association has frequently adopted resolutions
favoring restriction on federal jurisdiction over water pow
er. National Association of Railroad and Utilities Commis
sioners, Proceedings of the 60th Annua1 Convention, 1948, p.
36; Proceedings of the 59th Annual Convention, 1947, p. 192.
20 Industry representatives have generally presented
arguments similar to those of the National Association of
Railroad and Utilities Commissioners. Cf. p. 211. For
illustrations of typical Industry views, see those of the
Manufacturers Association of Connecticut, Inc., Associated
Industries of Rhode Island, Consolidated Water Power Com
pany, Northern States Power Company, Georgia Power Company,
and others. Hearings before a_ Subcommittee of the Committee
on Interstate and Foreign Commerce, op.cit., pp. 245, 301,
3U3, 3()S, 691.
21 Hearings before a_ Subcommittee of the Committee on
Interstate and Foreign Commerce, op. ci^., pp. 1-3.
210
Federal Power Commission jurisdiction was to be limited.
Specifically, the suggested amendment would have redefined
the term ’ ’navigable waters” to mean:
. . . those parts of streams or other bodies of water
over which Congress has jurisdiction under its author
ity to regulate commerce with foreign nations and among
the several states, and which at the time of the inquiry
are generally and commonly used for commerce of a sub
stantial character consisting of the transportation of
persons or property in interstate or foreign commerce,
or have a reasonable probability of being so used either
in their natural condition or by then proposed improve
ments, the estimated cost of which is reasonably commen
surate with the commercial benefits to be derived there
from, including therein ail interrupting falls, shallows,
or rapids, compelling land carriage, together with the
parts of any streams which have been authorized by Con
gress for improvement by the United States for the pur
pose of furthering navigation in interstate commerce
[italics not in the original).22
Such a redefinition obviously incorporates a more
strict application of a ’ ’navigation” criterion and would un
doubtedly have curtailed Commission jurisdiction severely,
as its proponents intended that it should. Other limita
tions, however, were included in the amendment to further
limit federal authority. No project would fall under Com
mission licensing unless it was constructed for the purpose
of selling electric energy at wholesale in interstate com
merce. Furthermore, any plant constructed under state au
thority prior to June 10, 1920, would be exempt from federal
control.
22 Loc. cit.
211
The arguments of industry groups in favor of amending
Part I of the Act were well summarized by an attorney who
had charge of the presentations of these groups in the hear-
23
ings. He emphasized the unfortunate consequences of the
recapture provisions by which the federal government may
take over licensed projects upon expiration of their li
censes. A dangerous sign of nationalization of the power
industry was seen. The other principal point of emphasis
was the superiority of state regulation and the desirability
of the states being free to develop water resources as they
wished.
In its analysis of the amendment, the Commission se
verely censured the attempt to provide so many exemptions
24
from federal licensing control. With respect to the pro
vision limiting its authority exclusively to interstate
wholesale transactions, the Commission significantly stated:
This amendment incorporates into Part I a public-
utility aspect of water-power control which has no re
lationship to the conservation purpose around which the
licensing provisions are centered.^5
Confusion of objectives was thus' seen by the Commis
sion to be a shortcoming of the proposal.
Among those testifying before the Committee in favor
£3 Hearings before _a Subcommittee of the Committee on
Intersta te and Foreign Commerce, op. cit., pp. 683-4.
24 Ibid., pp. 9-14.
25 Loc. cit.
212
of the amendment was the general Solicitor of the National
Association of Railroad and Utilities Commissioners. Speak
ing for the N. A. R. U. C., he indicated its unqualified
26
support of the bill. He charged that "It has apparently
been the aim of the Federal Power Commission, during the
past few years, to continuously enlarge its sphere of action
27
under Part I of the Federal act." He mentioned (1) the
broad interpretation of the term "navigable waters;" (2) as-
sertions of jurisdiction over non-navigable tributaries of
navigable streams; (3) retroactive application of the Act to
the period prior to 1920; (4) assertion of jurisdiction over
retail rates; and (5) attempted claims of jurisdiction over
small manufacturers using water to produce electric power
28
for their own use. While specific illustrations were not
indicated for each of these pointsJshe maintained that there
was strong evidence of unwarranted extension of federal au
thority.
Various state officials testified directly In support
of this amendment. Among them was the Chief Counsel of the
Wisconsin Public Service Commission. In view of the influ-
encial position of this commission, the views of its offi
cials are of particular Interest. This state commission
26 Ibid., p. 121.
27 Ibid., p. 122.
28 Ibid., p. 123.
213
representative said flatly:
Wisconsin desires a restoration to It of its
right to regulate snd control the use, level, and flow
of all of the flowing streams within its borders which
are neither actually nor practically potential arteries
of interstate commerce.29
He asserted that joint control by state and federal agencies
was unworkable. The statutory provision requiring complis-
ance of applicants to state laws was regarded as a farce,
since any state regulation, in this connection, "is not of
30
right but by grace and favor of a Federal agency."
The various arguments for and against the proposed
amendment to the Federal Power Act reveal great wordiness
31
and preoccupation with peripheral considerations. The es
sential problem was seldom squarely faced, namely: Which
level of government, or what balance of the two levels, can
most effectively promote the objectives of economic utiliza
tion and conservation of water power resources? The charges
made by those supporting strong state control against com
prehensive Federal Power Commission control are largely con
fined to the general evil of centralized political author
ity. While this is not an unimportant contention, one looks
29 Ibid., p. 188.
30 Ibid., p. 189.
31 This tendency is also revealed in discussions on
jurisdiction at conventions of the state officials1 Associa
tion. National Association of Railroad and Utilities Com
missioners, Proceedings of the 60th Annual Convention, 1948,
pp. 187-193.
214
almost in vain for specific suggestions as to how greater
state responsibility for water power control would permit
32
enhanced benefits to the public.
The states do have available ammunition to Insert in
the guns aimed at extensive federal control. Under state
control water resources may be developed in such a manner as
to give desired recognition or weight to such factors as
power needs, community water needs, scenic beauty, commer-
33
cial and sport fishing, etc. Local authorities are better
able to sense the relative importance of these objectives in
the minds of the citizens. Nearness to the persons and
32 A Wisconsin Public Service Commission official has
stated with reference to that state's comprehensive control
of water power development: "... almost all of the eco
nomically valuable power sites upon the flowing streams of
Wisconsin have been developed in such a way that the great
est amount of power derivable from each of those streams has
been obtained, consistent with the preservation of all pub
lic rights to the use of the waters of those flowing streams
for other purposes than the development of power." Ibid.,
p. 187. A review of the authority granted various state
commissions with respect to water power control indicates
that 36 states in 1948 did not even have power to authorize
hydroelectric developments. The Wisconsin case is therefore
certainly not representative. Federal Power Commission,
State Commlssion Jurisdiction and Regulation of Electric and
Gas Utilities, op. cit., p. 25.
33 Occasionally such a statement as the following is
made: "Those exercising top ^federal] authority are not in
a position to know local conditions, needs, and policies.
State and local authorities, on the other hand, are on the
ground, they know the picture, and they are responsible to
the people who have the primary concern in how such streams
are developed. . . where the local interest predominates,
national uniformity results in disregard of natural vari-
ences in State and local policy." Ibid., p. 137.
215
places affected by certain water resource development per
mits a more intelligent evaluation of the purposes that
might be served. Moreover, there is relatively little dif
ficulty involved in modifying prevailing regulation, either
substantively or procedurally.
While there are undoubted advantages in state regula
tion of water resources for power development and other pur
poses, the fact that the essential problem is one of more
than intrastate significance indicates that dominant author
ity should reside in a federal agency. Recognition may st'ii
still be given to local needs while at the same time there
is greater assurance that water power resources are utilized
most effectively in the public interest.
II. CONTROL OP PUBLIC UTILITIES
State commission regulation in most states antedates
that of the Federal Power Commission by many years. Yet the
latter has become a very important agency of control in a
short span of years. Thus both state and federal commis*
sions have heavy responsibilities with respect to public
utilities. Whether this dual system of control has proved
effective in serving the public interest is the vital ques
tion next considered. It seems appropriate to analyze cer
tain implications of current dual jurisdiction and proposals
that have been offered 'to modify the system in some fashion.
216
Since both state and federal commissions are engaged
in the regulation of electric utilities, this analysis takes
into account some of the more important effects of the sys
tem as a whole and attempts to trace them back to their par
ticular causes. Various criteria may be employed as instru
ments for evaluation. Among these are rates, service, ace
counts, mergers, security issues, and interconnection of ays
systems.
Realization of economies of scale. As a result of
increases in the scale of electric utility operations, nota
ble savings are generally realized. It has already been
pointed out that increases in size of fuel-burning generat
ing stations yield substantial savings although the economic
ies are not unlimited.5^ For an electric system as a whole,
average unit costs tend to decline with increases in scale
of systemicapacity. Among the reasons for this tendency are
lower average costs for fuel, equipment, supplies, construc
tion, and financing. Large organizations permit greater
specialization of equipment and subdivision of labor. Re
search may be undertaken by the large firm with consequent
benefits in various ways. Since larger systems may include
both hydro and fuel generating stations, certain economies
may be realizedias a result of maximum utilization of hydro
34 Cf. p. 164.
217
plants during periods of high water. In general, those
power production units which are most efficient can be em
ployed to the greatest extent while inefficient units can be
maintained as stand-by stations or operated to only a lim-
ited extent.
It is to be expected that many utility companies
would, of their own volition, attempt to realize these sav
ings. Obviously, it is to their advantage to increase sys
tem capacity in order to achieve this goal. There has been
a very definite trend in this direction, as indicated by the
fact that the average size of Class A and B electric utility
plant investment in 1939 was $36,850,000, in 1945 $45,000,000,
35
and in 1948 $56,370,000. The number of companies in these
two classes of utilities declined from 383 in 1939 to 315 in
1948.'“ ’ ^ Whatever the influence of regulation might have
been, there was a notable increase in average plant size
during this period of dual control.
Both federal and state commissions have, by certain
activities, aided this movement. For instance, the New York
Public Service Commission in 1948 approved a consolidation
55 Statistics of Electric Utilities, 1948 (Washing
ton, D. C.l Federal Power Commission, 1949), p. viij Sta-
tlstics of Electric Utilities, 1959 (Washington, D. C.:
Federal Power Commission, 1§40), p. ix.
36 Loc. cit.
218
of three operating companies into a single operating firm
serving a population of approximately 2,500,000 in a terri-
37
tory more than 300 miles long and up to 200 miles wide.
This approval was largely based upon anticipated savings
that were to be passed on to customers in the form of rate
reductions. Thirty-five state3commissions have power to ap-
38
prove mergers and consolidations, and in the great major
ity of cases state agencies approve proposals of this kind
brought before them.
The very nature of the problem suggests a certain de
gree of inability on the part of the state commission to ce
deal with mergers and consolidations, since many of the pro-
posals relate to interstate operations. The Federal Power
Commission, however, is able to act more effectively in this
area. Through its authority to regulate in this field, the
Commission has given effect to basic economic objectives.
For instance, in an Important case involving a merger of two
electric utility companies, the Commission stated:
. . . it must be presumed that the purpose of any regu
latory act is to assure the most adequate and economical
service by the companies subject to its provisions.39
57 Re Buffalo Niagara Electric Corporation, New 'York
Public Service Commission Case No. 115733, May 5, 1948.
38 Federal Power Commission, State Commission Juris
diction and Regula tion of Electric and Gas Utili ties, op. -
cit., p ."’26.
• 39 Re Northwestern Electric Company, et al., 5 F. P.
C. 312 (1946).
On this basis it approved the application. Elaborating
somewhat on the grounds for its decision, the regulatory
body said that
. . . the proposed consolidation and merger will not
tend to increase rates or jeopardize the prospects of
future rate reductions, will definitely tend to stre
strengthen applicants’ financial structure, will im
prove materially the position of investors, will not
result in detriment to consumers or investors or other
legitimate national interests, and will not run counter
to any established precept of law.^O
Thus in both positive and negative terms the objectives of
regulation were succinctly expressed.
The tendency of the Commission to approve proposed
41
mergers and consolidations has already been indicated.
These transactions may be grouped into two general cate
gories according to the physical relationships of the facil
ities involved. There are cases in which the systems of the
companies were interconnected at the time of application,
and others in which facilities were not interconnected. In
the latter type of situation the economies to be derived
are, of course, particularly important, since savings may
be realized from increased operating efficiency plus certain
savings based upon simplification of corporate structure.
This sort of merger has come before the Commission on
a number of occasions. Illustrative of the cases is one in
220
which transmission lines of the two companies involved in
tersected at several points and, at other places, were par-
42
allel; hut there was no interconnection whatever. The
Commission, in approving the proposed merger, stated that it
” . . . will tend to the advancement of integration of the
facilities involved, improvement of service, and a reduction
4 - ^
of rates, and will be consistent with the public interest.”
This phrase, or one similar to it, appears in a number of
44
the Commission’s orders.
Even where interconnection of systems had been in ef
fect, the Federal Commission has been impressed by the eco
nomic advantages that could be realized from the consumma
tion of a merger. In one instance it noted that a proposal
would
. . . tend to create a stronger operating utility com
pany with an Improved capitalization; with improved and
simplified operating conditions and services; and will
be consistent with the public interest.45
42 Re Granville Electric £o., 4 F. P. C. 550 (1944).
43 Loc. cit.
44 Re Otter Tail Power Company, 4 F. P. C. 699 (1 9 4 4 );
Re Californla Electric Power Company, 4 F. P. G. 601 (1 9 4 4 );
Re California-Oregon Power Company, 4 F. P. C. 1116 (1 9 4 5 );
Re Arkansas-Louisiana Electric Cooperative, Inc., et a'l., 6
F. P. C. 1037 (1947).
45 Re Indiana General Service Company, 4 F. P. C. 783
( 1 9 4 4 ) . Various other cases reveal similar judgment as to
the advantages realizable from proposed mergers. See Re
Connecticut Power Company, 6 F. P. C. 451 ( 1 9 4 7 ) ; Re Empire
District Electric Company, et al., 4 F. P. C. 665 T 1 9 4 4); Re
I)uke Power Company! O v P . “ I J . “ l3 6 (1 9 4 3 ).
221
Realization of the economies of Interconnection. In
dependent or affiliated operating companies may be intercon
nected with consequent benefits to the participating firms
and to the ultimate comsumers. Reference has been made to
the advantages realizable from this sort of intercompany ar-
46
rangement. Service may be improved by reason of the 2
availability of a larger amount of power to a firm. At the
same time less excess generating capacity need by carried by
47
individual firms, since reserves are shared. This situa
tion permits cost savings. Economies are also traceable to
the maximum utilization of the more efficient generating
station in an entire interconnected system. Particularly
fruitful is the combination of hydro and fuel generating
units in which the former is used to the limit of maximum
output during that portion of the year when reservoirs are
nearly filled.
While it is generally realized that the maximum eco
nomic distance for transmission of electricity is limited to
only a few hundred miles, there have been expressions to the
46 Cf. p. 169.
47 Nationally, the reserve margin has been reduced
because of interconnection of systems. The excess reserves
were 23.1$ in 1940, but in 1949 it appeared ” ... unlikely
that/future reserves of 20 per cent or more will be neces
sary under normal circumstances.” Annua1 Report of the Fed
eral Power Commission, 1949 (Washington, D. C.: Government
Printing Office, 1956), p. 9.
222
effect that not only broad regional pools of power might be
developed, but even a nation-wide power pool. The National
Resources Planning Board recommended in 1943 that
There, should be a unified national plan for elec
tric power supply. . . This national system or "grid1 1
would be designed initially on a regional basis, would
look toward operation on a national scale, and would be
authorized as a part of the implementation of a national
program for low-cost supply of power in the public in-
teres t.48
Although many would describe this view as visionary, such a
system would seem to suggest a/:gr owing relative importance
of Federal Power Commission regulation.
It has been observed that some of the outstanding ju
risdictional cases between federal and state commissions
have involved interconnected companies. In two of these
cases--Hartford Electric and Connecticut Light and Power--
the companies admitted withdrawing from a power pool or in
terconnection arrangement in order to avoid federal regula-
49
tion. One of these, the latter, was successful in its
48 National Resources Planning Board, Natlonal Re-
sources Division Report for 1943, Part I (Washington, 137 C.:
Government Printing Office, 1943), p. 51. The Federal Power
Commission has indicated a goal almost as spectacular. Cf.
p. 173.
49 Re Connecticut Light and Power Company, 3 F. P. C.
132 (1942); Hartford Electric Light Company v. Federal Power
Commission, 131 F. 2d §53 (1941)7 In the latter case the
court observed that the action was taken 1 1 . . . admittedly
. . . in the hope of escaping the Commission’s jurisdiction.”
h
223
attempt, while the other did not succeed. Evidence of other
instances in which utilities sought to avoid federal regula
tion are somewhat limited.
Testimony before a committee of the House of Repre
sentatives in 1947 indicated the extent of interconnection
of systems. It was stated by the Chief of the Transmission
Section of the Electrical Division of the Federal Power Com
mission that
. . . in spite of the fact that a few large companies
chose not to make interstate connections and thereby
avoid coming under Federal jurisdiction, practically
all of the large electric systems in this nation of
ours are now Interconnected to regional transmission
networks. . .50
An industry representative testified at the same
hearings that the tendency to avoid federal regulation was
51
much more serious. The Chief Engineer of Power Plants of
the Detroit Edison Company, one of the largest operating
utilities in the country, revealed the reluctance of his
firm to establish interconnections with out-of-state util
ities. He spoke at length about the great benefits that may
be had by electric utility companies and the consuming pub
lic if extensive interconnections were made. Then, referring
to Detroit Edison ties with other utilities prior to 1935
50 Hearings before a Subcommittee of the Committee on
Intersta te and Foreign Commerce, op. cit. , p. 654.
51 Ibid., p. 178.
224
he stated:
Some of these ties have existed before but have
been discontinued; others have never been made. The
reaon why we have the present situation issthe provi
sions of the Federal Power Act which, because of the
existence of such tie3, would force the utilities con
cerned to come completely under the Federal Power Act
even though their business was predominantly, intra
nstate . 52
The company official pointed specifically to the desirabil
ity of interconnection with a large Ohio utility and the
Hydro-Electric Commission of Ontario, but indicated that
these connections would not be established because of the
consequent federal control.
This avoidance of federal regulation was one of the
principal issues under discussion in the 1947 hearings. The
testimony of George P. Stelnmetz, Chief Engineer of the Wis
consin Public Service Commission was particularly directed
53
to this subject. He agreed with the comments of the De
troit Edison official as to the seriousness of the problem.
Reference was made to One of the largest electric utilities
in the state of Wisconsin, the Wisconsin Electric Power Com
pany, which prior to 1935 had an interconnection with the
Public Service Company of northern Illinois, but which broke
that tie in order to avoid federal control. A World War II
52 Loc. cit.
53 Ibid., p. 199.
225
emergency interconnection was established, but was broken
after the War for the same reason, i.e.,” . . .so that
neither company would become subject to the peacetime jurisr
54
diction of the Federal Power Commission.”
The Wisconsin Public Service Commission official be
lieved the problem to be of general importance as he said,
I am sure in my own mind that there are other
connections within the country which have been broken
and which economically should be maintained in order to
strengthen the power system of the country.55
He felt that the Federal Power Commission staff was "fully
C /»
aware of the hindrance of the Federal Power Act” otoiestab
lishing such interconnections.
While he regarded the failure to make economic inter
connections as the most serious consequence of dual regula
tion, the Wisconsin official also expressed the need
. . . to avoid duplication, overlapping, and unnecessary
expenditure of public Federal funds to go over.agiinoor
review the work which the state commissions are doing in
an, adequate manner.S'?
It was, his’ opinion that certain companies sought to avoid
54 Loc.~~cit.
55 Ibid., p. 200. At the same hearings an attorney
representing certain electric utilities stated that there
were several firms in New York that wanted to make intercon
nections but refused to do so because they did not want to
come within federal jurisdiction. Ibid., p. 268.
56 Ibid., p. 200.
57 Ibid., p. 199.
226
federal regulation because of the burden imposed by the nec
essity of conforming to many requirements of two agencies
with respect to accounting, reports, and, more particularly,
rates. While he recognized that the Federal Power Commiseio
sion had not been very active in regulating rates, the po
tentialities for doing so were considered tobbe great, as
indicated by the broad authority of the Commission over
rates.
Some indication of reluctance to make intersystem
sales is found in certain data relating to Class A and B
electric utilities. Despite the frequently discussed advan
tages of interconnections, the percentage of total kilowatt-
hours sales represented by sales for resale actually de-
CO
clined from 23.8$ in 1938 to 19.3$ in 1948. While inter
changes of power are not included in these data, their in
clusion would not affect the relationship significantly.
i
Part of the explanation for this lack of growth in intercom
pany sales is undoubtedly the merger and consolidation of
companies, since larger systems would absorb former whole-
58 StatTstics of Electric Utilities, 1948 (Washing
ton, D. C.l Federal Power Commission, T5¥9), p. xxiii. It
is significant that transmission expenses per kilowatt-hour
sold declined steadily from 0.30 mills in 1937 to 0.24 mills
in 1945 for all Class'A and B electric utilities. This
trend seems to indicate either an increase in efficiency of
transmission or that extension of transmission facilities
did not keep pace with power production. The latter explan-
tion is probably more accurate. Ibid., p. xviii.
227
sale transactions. On the other hand, there was probably a
considerable increase in Intrastate sales for resale. The
figures seem to indicate that sales at wholesale have not
increased sufficiently to permit full realization of the
economies and other benefits of intersystem transactions.
During recent years there have been substantial
amounts of electricity interchanged between utility com
panies. These movements represent emergency exchanges in
which settlement is usually made by balancing of physical
quantities, and thus no rate regulation is involved. In 1948
out-movements of this type amounted to approximately one-
59
fifth of total energy sold for resale. Under section 202
(d) of the Federal Power Act permanent interconnections may
be established for emergency use without the participating
firms becoming thereby subject to federal control, provided
prior authorization is obtained from the Federal Power Com
mission.
Leland Olds of the Commission stated in 1947 that
even where companies were ” . . . eschewing the operationnof
interstate ties, the interconnections are in place and can
be placed in operation without delay should an emergency re
quire. What constitutes an "emergency” within the
59 lb id., p. xxlii.
60 Hearings before a Subcommittee of the Committee on
Interstate and Foreign Commerce, op. cit., p. 47V~.
228
meaning of section 202 (d) is for the Commission to decide.
Curtailed coal supply due to a mine workers' strike,
62
equipment failures, or an unusual temporary load require-
63
ment have been indicated to come within the meaning of
"emergency" so as to permit exemption from federal control.
Accurate accounting of all movements must be made and re
ports submitted to the Commission. If a company appears to
be employing the interconnection facilities for more than
emergency purposes, the companies concerned may be subjected
to Part II regulation as public utilities.
It is noteworthy that none of the examples of avoid
ance of federal regulation cited above were located in
states with no state commission or with seriously inadequate
state regulation. Wisconsin, in fact, is generally regarded
as having one of the best systems in the nation. Also, the
commissions of Connecticut and Michigan are not very limited
with respect to statutory powers. Nevertheless, these util
ity companies sought to remain entirely within state juris
diction. Either the purpose is to avoid the burden of du
plicated requirements even in states with relatively high
61 Recommendation for the Maximum Coordination of
Electric Facilities in the Interest of*'Conserving Coal, 6 F.
P. C. 312 (1947).
62 Re Columbus and Southern Ohio Electric Company,
6 F. P. C . 1 0 M 1 M ) .
63 Loc. cit.
229
quality regulation, or the utility companies recognize im
portant actual or potential differences in the stringency of
regulation between that of the better state commissions and
that of the Federal Power Commission. The extent to which
companies in states with poor regulation have sought to
avoid federal control is not known, but it may be more ser
ious since there would be greater incentive for such avold-
64
ance.
With respect to direct authorization of interconnec
tions, the Commission has evidenced an interest in promoting
the advantages of integrated electric utility operations.
For instance, in authorizing an application for a permanent
interconnection to be used for emergencies only, the Commis
sion observed certain advantages which would accrue to both
companies.^ Such an arrangement, it was pointed out, would
result in insured safety and continuity of service while
permitting improved maintenance of facilities. Other cases
of a similar nature reflect the importance of these consid-
64 Viewing the maps of electric utility operating
systems in the United States, one is impressed by the manner
in which companies have largely or completely confined their
system facilities within individual states. It would seem
to be a remote coincidence that this geographic distribution
is in conformity with the dictates of the most economic sys
tem location. Many maps of operating systems are presented
in the following publication: Moody1s Public Utilities,
1949 (Mew York: Moody's Investors Service, 1949).
65 Re Columbus and Southern Ohio Electric Company, 6
F. P. C. 1064"(1947);
230
erations in the minds of the Commissioners.
The belief that substantial economic benefits may be
realized from an increase in the scale of operations and
through interconnection of systems is reflected in the an
nual reports of the Federal Power Commission. In the 1948
annual report, the comment was made in connection with mer
gers and consolidations that despite the relatively large
number of applications,
. . . There remain more than 700 small privately owned
electric companies in the country, most of which could
improve operations and service by integration with lar
ger systems.
The expressions favoring the growth of interconnection of
facilities have been particularly indicative as to the trend
68
which the industry should take. There is strong indica
tion that the Commission is seeking to promote development
of the electric utility industry along these lines.
State commissions may, of course, promote this same
development to some extent. Since, however, only 33 state
commissions had, in 1948, power to authorize interconnection
tions, intrastate regulation of this aspect of the industry
66 Re Texas Eastern Transmission Corporation, 6 F. P.
C. 1058 (lU¥7 j; Re Texas Electric OervTce Company, 6 F. P.
C. 859 (1947); Re The Connecticut Light and Power Company,
5 F. P. C. 7636 Cl94(3)~--------------
67 Annua1 Report of the Federal Power Commission,
1948, op. cit., p. 94.
68 Cf. p. 173.
231
69
was far from uniform. In view of the limited personnel
and funds made available to many states, it is probably that
even in those states where authority of this type has been
granted, regulation has not been fully effective. To the
extent that this situation prevails, dual regulation is
weak. Many potential interconnections of economic value
are undoubtedly consummated because of the recognized bene
fits to the participating firms. Yet it is desirable that
a regulating agency evaluate the relative need for various
connections and do what it can to insure that economic in
tersystem ties are established.
Realization of integration under holding company reg
ulation. The Securities and Exchange Commission has per
formed important functions relating to the promotion of in
tegrated electric utility systems. Section 11 of the Public
Utility Holding Company Act of 1935 requires that this Com
mission adhere to certain general standards of technical in-
70
tegration of facilities. Essentially, it was intended
that public utility holding Companies be confined to local
ized areas in which certain substantial economies would be
realized.
69 Federal Power Commission, State Commission Juris
diction and Regulation of Electric and Qas Utilities, op.
cit., p. 21.
70 Cf. p. 167.
232
Extensive investigations made by the Federal 'Trade
Commission, prior to the enactment of this law, revealed
that state regulation of public utilities was greatly handi-
71
capped by the. development of holding companies. Services
obtained by a local operating company from its parent com
pany involved payments which could not be adequately scru
tinized because of the fact that accounts and records fre
quently were outside the state of the operating company.
Introduction of federal regulation over holding com
panies and their subsidiaries did not mean substitution of
federal for state control, but rather the inauguration of a
system of dual regulation in which the Securities and Ex
change Commission undertook joint responsibilities with the
state agencies (and the Federal Power Commission). The Se
curities and Exchange Commission has been able to supervise
certain corporate and financial transactions outside the ef
fective range of the states. Moreover, in the process of
eliminating certain units from holding company systems and
facilitating healthy integration of operating properties,
the Commission has been able to achieve goals not within
reach of the states.
An excellent illustration of the effects of dual reg
ulation in this field Is seen in a case in which an intrs-
71 Federal Trade Commission, Utility Corporations,
70th Congress, 1st Session, Senate Document No. 92, Part
71-A, Chapter 12.
233
state operating company sought to merge with its parent
72
holding company. Actually, the intrastate character of
the subsidiary was undecided before the Federal Power Com
mission at the time the case was before the Securities and
Exchange Commission. Since the parent, Ohio Edison Company,
was a "public utility, . ' ”under the Federal Power Act, the sub
sidiary, Ohio Public Service Company, would, in the opinion
of the Securities and Exchange Commission, also become sub
ject to the Act. This contention was denied by counsel for
the parent firm on the basis that it was subject to the ju
risdiction of the Securities and Exchange Commission and
could not, under the law, be within the jurisdiction of the
73
other federal agency.
In this case the benefits anticipated by the merger
are indicative of the direction that the industry should
take. Prior to the merger, portions of the service area of
the one company were interspersed with portions of the serv
ice area of the other, and the principal transmission lines
of the two companies either paralleled or crossed each other
at numerous points. Vsfhile the two systems had been inter
connected in a few places, many possibilities for other
72 Securities and Exchange Commission Release No.
9771, March 30, 1950.
73 There seems to be no basis, in this case, for de
nying control over such matters as rates and interconnec
tions by the Federal Power Commission.
234
interconnections were observed. The president of Ohio Edi
son stated:
. . . due to the diversity in the time of maximum de
mands experienced in the individual systems and the
scheduling of maintenance work and the combining of re
serves, the generating capacity which would be necessary
by the end of 1953 under individual operation can be re
duced under common ownership by 120,000 kilowatts, which
would result in net annual savings of approximately
$1,155,000 by reason of reductions in net plant invest
ment of about $18,000,000.
Other indicated sources of saving were noted including pool
ing of transmission liJne facilities, coordination of gener
ating units so that most efficient units of both systems c
could be operated the greatest number of hours, and elimi
nation of taxes upon dividends paid by Ohio Public Service
Company.
One of the goals sought in breaking up uneconomic
holding company systems was the achievement of localized
75
management of operating utilities. It was felt that the
holding company exercised an undue influence over the finan
cial affairs of its subsidiaries. Inflated accounts, ex
cessive dividends, and nupstreamn loans were a few of.the
abuses of some holding company systems which generally had
an adverse effect upon the consumer by causing high rates
*74 Loer~cit. This statement was quoted directly by
the Cornrnis s'i'on .
75 This objective was clearly revealed in Re North
American Company, 11 S. E. C. 194 (1942).
235
76
for electricity. The state regulatory authorities were
handicapped in rate regulation by reason of the difficulties
associated with financial control. Perhaps even more impor
tant than this problem was the failure of the states to in
stitute regulation where there were opportunities to curtail
77
financial abuses. Even as late as 1948 there were serious
78
inadequacies in state regulation over these matters.
As a result of Securities and Exchange Commission
regulation localized management and localized control were
enhanced. This achievement has been well described by the
chairman of that Commission:
As long as the bulk of the electric utility in
dustry was subject to holding company control, the job
of improving the financial standards of-the industry was
shared by the state commissions, the SEC, and the FPC.
But as the statistics on compliance with:Section 11
show, the SEC is gradually dropping out of the picture.
X . Speaking in terms of electric utilities alone, 144
companies, with assets of f>4^ billion, have passed from
the jurisdiction of the SEC to local regulation. Thus,
the state commissions are rapidly assuming more and more
of the responsibility for most utility regulation.79
Certain unhealthy features of holding company systems
76 federal Trade Commission, loc. cit.
77 Loc. cit.
78 Of. Chapter II.
79 National Association of Railroad and Utilities
Commissioners, Proceedings of the 59th Annual Convention,
1947, p. 432.
236
RO
have been eliminated and state commissions have been per
mitted to realize the advantages of local management. There
is, however, no assurance that the states will actually un
dertake to carry out such responsibilities. Much depends
upon the willingness of state legislatures to enact the nec
essary statutes and provide adequate funds to enable commis
sions to discharge their duties. Dual regulation will have
proved feasible only if the states regulate effectively
within their proper sphere.
While holding companies have been shown to have evi
denced certain abuses of such seriousness as to call for re
duction in their size and scope if not their elimination,
this negative aspect should not obscure the benefits inher-
81
ent in this type of organization. They make it possible
for small•operating companies to secure capital at lower
cost than would otherwise be the case. Various services may
be provided such, as technical advise, purchasing, and re
search. Physical integration may be achieved with conse
quent economies of operation. Recognizing these desirable
5S these accomplishments are revealed in detail in
Hearings before the Securities Subcommittee of the Committee
on Interstate and Foreign Commerce on Study of Operations
Pursuant to the Public utility Act of 1935, 79th Congress,
2nd Session, January and February, 1946, pp. 847-1353.
8.1 The Federal Trade Commission recognized that cer
tain benefits were evidenced. Federal Trade Commission, loc
loc. cit.
237
features of holding company systems, Congress did not re
quire the complete abolition of this corporate device but
rather entrusted the Commission with the duty of evaluating
their economic or social usefulness and permitting their
continuance only if certain standards were met. Divested
operating companies become subject to other jurisdiction,
but any authorized holding company system continues to be
subject to theeSecurities and Exchange Commission.
An interesting case of conflicting regulation between
the New York Public Service Commission and the Securities
82
and Exchange Commission appeared in recent years. The
t
case involved a redistribution of stock of a subsidiary op
erating utility, King’s County Lighting Company, by a hold
ing company, Long Island Lighting Company. The latter had
been ordered by the Securities and Exchange Commission to
divest itself of this stock. The question related to the
proper basis for evaluating the value of the stock for pur
poses of redistribution. The state commission maintained
that it had jurisdiction because King’s County Lighting Com
pany was an intrastate operating company and its securities
were subject to state regulation. The Federal Commission
claimed that it had jurisdiction over a holding company sub
sidiary to the extent required to determine this issue.
82 Ee King’s County Lighting Company, 71 P. U. R. (N.
S. ) 363 (1W8~JT"^
238
As this case came before a federal district court,
the New York commission held to an "asset value" while the
Federal Commission insisted on a "potential earnings" base
for stock valuation. The latter claimed support for federal
jurisdiction in the First Iowa Hydroelectric Cooperative
case. The court held that the securities moved in Inter*tot
state commerce and thus federal control prevailed. It re
garded as "unworkable" and "chaotic" any system of regula
tion in which the holding company was subject to a federal
act and its wholly owned subsidiary exempt. The court was
particularly impressed with the jurisdictional clash:
There is here an irreconcilable conflict of pol
icy. The state is attempting to enforce a reeapitaliza-
i tion policy different in its conception from that em
ployed by the Federal agency. It is unfortunate that
there should be any controversy at all, but this is a
penalty we must pay for our Federalism. And when con
troversies like this arise, some one must yield. . .
Concurrent jurisdiction in the two agencies can produce
nothing but mischievous conflict.83
Aside from the delay, expense, and confusion occa
sioned by this litigation, there is an important result in
that the Court upheld the policy of the Securities and Ex
change Commission to value securities on a basis not gener
ally sanctioned by the public utility commissions, including
the Federal Power Commission. The New York commission
63 Loc. ' cit. ’ In another case a court hel-dlthat a
holding company dissolution plan need not comply with state
law. Re Commonwealth and Southern Corporation, 84 F. Supp.
809 (lW?9T.
239
sought to tie the value of securities to co3t, but the efa?
feet of the court decision was to sanction a potential earn
ings base. Use of the latter permits a certain degree of
latitude in judgment and capitalization might be signifi
cantly different than where a cost basis was employed.
Rot only have the divestment orders of the Securities
and Exchange Commission resulted in greater responsibilities
for the states, but also the Federal Power Commission has
had its duties increased. Divested operating companies, in
some Instances, have come within the definition of a "public
utility" under the Federal Power Act. Thus in its 1949 an
nual report the Federal Power Commission referred to the
. . . increasing number of electric companies coming
under PTC jurisdiction as a result of integration pro
ceedings before the Securities and Exchange Commission
separating the operating utilities from holding company
control.8^
The Activities of the Securities and Exchange Commis
sion relative to public utilities have complemented regula
tions by state commissions. Each level has operated within
a sphere adapted to its capabilities and limitations. The
federal agency has forced the divestment of numerous com
panies from their parent organizations and has facilitated
the development of corporate relationships which are eco
nomically sound. It has also fostered technical integration
-"'84 Annual Report of the Federal Power Commission,
1949 (Washington, D. C.: Government Printing Office" , 1950),
p7T2.
L ' .
240
through its policy of encouraging geographic grouping of
systems into somewhat confined areas.
Ability to control rates. One of the most fundamen
tal objectives of regulation is to assure that ultimate con
sumers of electricity are charged the lowest possible rates,
consistent with the provision of adequate service. Inasmuch
as such rates are subject to state commission or local con
trol, while interstate wholesale rates are under Federal
Power Commission jurisdiction, there is, obviously, a close
relationship between rate regulation at the two levels.
This relationship is of such importance that every effort
ought to be made to integrate them to the greatest practical
extent.
Relatively little work has been done by the Federal
Power Commission with respeet to rate regulation of electric
utilities, except.that of reviewing proposed new rates filed
85
by utility companies. Yet there have been a few formal
85 The Commission has been much more active in regu
lation of natural gas rates. Cf. Chapter VII. The chairman
of the Federal Power Commission attempted in 1946 to indi
cate the reason for this great difference. He said the much
greater gas rate reductions were largely a reflection of the
differences in the history, nature, and organization of the
two industries. Since the natural gas industry was more
predominantly interstate in character, there was more oppor
tunity for the Commission to take action on rate reductions.
Furthermore, since the prevalent practice in the electric
industry is for the transmitter also to distribute energy
rather than to sell it to a local ditributing company as in
the natural gas industry, the element of sale for resale was
241
86
pate cases of note.
It has been stated that the annual reductions up to
June, 1949, realized by the Federal Power Commission through
formal and informal proceedings was $7,000,000, representing
g ry
cumulative savings of §25,000,000 in power rates. In de
termining the reasonableness of rates, the Commission ha3
adhered to an Investment rate base and has waged a war a-
gainst use of some ’ ’fair value” method. It has thereby been
able to reduce the rate-base somewhat, although few substan-
88
tial rate reductions have resulted.
The trend of consumer rates for electricity during
the period of dual regulation of utility rates seems to sug
gest that the system has proved satisfactory. The National
Industrial Conference Board Index of consumer electricity
rates declined steadily from 110.4 In 1935 to 89.7 in 1947,
often lacking. Nelson Lee Smith, ’ ’Rate Regulation by the
Federal Power Commission,” Papers and Proceedings of the
58th Annual Meeting of the American Economic Association,
36:405-25,May, 1946.
86 Moline-Rock Island Manufacturing Company (Docket
No. I T 5517), Chicago District Electric Generating Company
(Docket No. I T 5500), Safe Harbor Water Power Corporation
(Docket No. I T 5914). Hearings of a _ Subcommittee of the
Committee on Interstate and Foreign Commerce, op. cit., pp.
637-8.
87 Annual Report of the Federal Power Commission,
1949 (Wa shington, D. 0.; Government Printing Office, T950),
p. 98.
88 As of June 30, 1947, only three formal rate cases
had resulted in rate reductions amounting in each instance
to more than §500,000 annually. Loc. cit.
242
89
with the 1939 average price as a base. The trend is par
ticularly significant, in view of the subs tantial rise in the
general level of prices during the same period. Too many
factors, however, lie behind these declining electricity
rates to warrant any hasty conclusion as to the success of
dual regulation.
A comparison of consumer expenditures for electricity
in certain states is presented in Table VIII.as a means of
indicating an effect of dual regulation. Comparing state
average bills for residential service as between states with
no state commission and states with commissions and with
similar geographic conditions, it.is shown that in every
case the average bill is higher in the state which has no
commission regulation. While the indication that the higher
rates are due to the absence of effective commission regula
tion may not be conclusive because of possible other impor
tant determinants, the lack of any exception is somewhat
persuasive that regulation was Ineffective In states lacking
commissions.
Ideally, a change in retail rates would simultane
ously occur with a change in wholesale rates. Inasmuch as a
large element of cost to the distributer relying on purchased
89 Robert A. Sayre, Consumer Prices, 1914-1948 (New
York: National Industrial Conference Board, Inc., IU48),
pp. 46-8.
243
TABLE VIII
COMPARISON OP CERTAIN STATE AVERAGE BILLS
FOR RESIDENTIAL ELECTRIC SERVICE, 1949*
State Having No Commission
State
Av.
Bill
State
Having Commission
Sta te
Av.
Bill
Minnesota $7.37 Wiscons in $6 .36
Iowa 7.49 Missouri 6.57
Delaware
H
C V J
•
C O
Maryland 6.86
Mississippi 6.91 Alabama 5.74
South Dakota 8.26 North Dakota 7.75
Note: Data based on 250 kilowatt-Lours of service in
cities of 2500 population or more. United States Average
bill in this year was $7.01. '
*Adapted from data in Federal Power Commission Re^f1
lease No. 4414, September 13, 1949.
244
power is the cost of the electricity delivered to it, there
is obvious justification for concurrent rate adjustments.
Actually, there is no assurance that local rates will be ad
justed in confomlty with a change in wholesale rates. Dis
tributing companies may do so voluntarily or may be directed
to do so by a state regulatory agency, but there is no cer
tainty as to the time when such a change will take place nore
the amount of the adjustment.
In its annual report for 1946 the Commission stated
with reference to its own accomplishments in bringing about
reductions in wholesale rates;
. . . through the direction of the Federal Courts and th
the cooperation of State commissions and distributing
companies almost all of such reductions have been passed
on to the ultimate users of gas and electricity.^^
No supporting data were presented, and thus no specific in
dication was given as to the extent of exceptions. Nor was
any statement made as to the timing of wholesale and retail
rate reductions.
Realizing the importance of the interrelationship be
tween ffederal and state regulation, Congress provided for
cooperation between the Federal Power Commission and state
commissions. The federal agency has likewise regarded this
matter as vital to effective regulation. It stated in 1948
Annual Report of the Federal Power Commission,
1946, op. cit., pi 50.
245
tha t
The Commission has long considered cooperation
with State regulatory agencies as one of the most impor
tant phases of all its regulatory activities and the
Commission's procedures reflect this attitude. 1
Reference was made to the cooperative procedure worked out
in collaboration with the National Association of Railroad
and Utilities Commissioners and made a part of the Commis
sion's rules of practice and procedure. Regarded as parti
cularly fundamental in this connection was
. . . the practice of keeping State Commissions cur
rently informed of all pertinent matters, with an openn
invitation to submit expressions of opinion, or to par
ticipate directly in proceedings before the Commis-
s ion.
With respect to rate regulation, the notification
given state commissions regarding impending formal rate
cases has been of relatively little importance because of
the small number of such cases that have arisen. In any
event, close collaboration would seem to be essential in
order that all facts and authoritative opinion be brought
to bear in an investigation and determination of reasonable
rates. Moreover, in order that local rates be properly ad
justed to reflect wholesale rate changes, state commissions,
obviously, must be fully informed of anticipated federal
91 Annua 1 Report of the Federal Power Commission,
1948, op. clt., p. 111.
92 Loc. cit.
246
rate orders and reductions made by utilities following in-
93
formal proceedings of the Commission.
*
It would seem that dual regulation of rates charged
by electric utility companies involves the vital and diffi
cult problem of harmonizing activities of both federal and
state commissions. While the Federal Power Commission has
aided state commissions in bringing rate reductions to ul
timate consumers, much depends upon the ability and initia
tive of the state agencies themselves in taking advantage of
94
opportunities to modify retail rates.
The ability of a state commission to regulate rates
is sometimes limited in one way or another. The responsi
bility for this situation does not always reside in the com
mission. A good illustration of this type of problem is
that seen in the case of the Connecticut Public Utilities «
Commission, which declared in its annual report for 1944:
The strongest argument presented by the advocates
of further concentration of power in the Federal Govern
ment as related to the utilities, is the alleged break
9 3 illustrative of cooperative procedure Is an in
stance in which a company voluntarily initiated a substan
tial reduction in its wholesale interstate rate. The Com
mission, upon receipt of the filing, submitted information
concerning the rate change to the state commission having
jurisdiction over the company’s distributor-customer. Na
tional Association of Railroad and Utilities Commissioners,
Proceedings of the 58th Annua1 Convention, 1949, p. 252.
94 This problem of interrelationships between state
and federal rate regulation is discussed in greater detail i
in connection with natural gas rates where the Federal Power
Commission has been more active. Cf. Chapter VII.
247
down of state regulation. . . The most effective answer
that can be given to these advocates is convincing evi
dence that state regulation can be effective.95
It went on to request more staff, larger appropriations, and
augmented powers to do a better job. Here was a healthy re
action, indeed, to the extension of federal control. It
cannot help but tend in the direction of better protection
of the consumers* economic interest.
Ability to regulate accounts. The prescription of a
system of uniform accounting is generally recognized as a
vital phase of regulation by a commission. Through the past
two decades much progress has been made in minimizing the
differences between accounting systems prescribed by various
96
state commissions and the Federal Power Commission. Such
a development is in the interest of sound regulation because
it facilitates comparisons of the costs and earnings of com
panies .
There is no assurance, however, that because two com
missions employ essentially the same system of accounts,
they will arrive at similar conclusions on the basis of
95 "Connecticut Commission Defends State Regulation,”
Electrical World, 122:85, December 23, 1944.
96 Hearings of a_ Subcommittee of the Committee on In
ters ta te and Foreign Commerce, op. cit., pp. 620-1. Pro
gress in the development of uniform accounting is well dis
cussed in these pages.
248
identical accounting data. This point is strikingly illus
trated in a dispute between the Federal Power Commission and
97
the Montana Public Service Commission. Attempting to co
operate on a reclassification study, the two Commissions ap
parently had very different views regarding interpretation
of accounts. The Federal Power Commission cogently pressure
sented the basic differences in viewpoint:
Careful comparison of the bpimion of the Montana
Commission and of this Commission's opinion in this mat
ter, makes it abundantly clear that, despite the simi
larity of the language of the Uniform System of Accounts
prescribed by the two Commissions, the respective inter
pretations of those systems and the philosophy underly
ing their application to the facts of the instant case
are widely divergent. . . our system of accounts is
rooted squarely in the cost concept. . .^8
It could not agree with the "values'1 developed by the Mon
tana Commission on the basis of other considerations in ad-
99
dition to cost.
This case is indicative of the mis impression that one
may get from a superficial observation of uniformity in ac
counting regulation. The Federal Power Act and regulation
by the'Federal Commission do not prevent state commissions
97 Re Montana Power Company, 4 F. P. C. 275 (1945).
98 Loc. cit.
99 Actually, there is considerable diversity in rate-
making formulas, and it is consequently probable that earn
ings in some instances are excessively high due to hidden
"values" in the rate base. Cf. p. 100.
249
from prescribing their individual accounting systems and in
terpreting accounting data as they choose. Such differ
ences, however, place a burden upon those companies subject
to both jurisdictions, since their accounting departments
must keep additional records. Perhaps a more significant
consequence is the impairment in the efficiency of regula
tion. Since comparative analysis is made more difficult,
decisions may be less consistent as between commissions us
ing different interpretations of accounting data. Regula
tion may be slower and more cumbersome by reason of diverse
findings and judgments.
The fundamental importance of accounting data to the
whole regulatory process is difficult to exaggerate. Unless
adequate data are obtainable in a form that facilitates an
alysis and use, the ends of regulation will not be suffi
ciently served.
The Chief Engineer of the Wisconsin Public Service
Commission testified before a House Committee in 1947 that
one of the principal reasons why some intrastate utilities
were reluctant to interconnect with out-of-state companies
100
was the fear of federal rate control. He indicated that
cleavage between the state commissions and the Federal Power
Commission "sometimes” developed in the interpretation of
100 Hearings before a _ Subcommittee of the Committee
on Interstate and Foreign Commerce, op. cit., p. 200.
250
3ccounts--especially differences of view as to what consti
tutes a write-up and what is legitimate, cost.
It has been argued that final and paramount jurisdic
tion over the accounts of a regulated industry should be
vested with state commissions This contention, advanced
by an official in charge of accounting control on the staff
of the ?/isconsin Public Service Commission, was based on the
assertion that state commissions had the greater responsi
bilities in regulation and that conflict between state and
federal authorities in accounting matters occurred due to
varying interpretation of accounts and dissimilar rules
based upon them. With respect to uniformity of accounting,
he stated that it was a matter of relativity, since complete
uniformity would mean a strait jacket system. He expressed
the view that where a utility was subject to the accounting
jurisdiction of two state commissions, "Ample opportunity
exists for an exchange of views designed to bring about har-
102
monious settlement of any differences." No similar opti
mism was indicated with respect to state-federal coopera
tion. Finally, he claimed for the states much of the credit
for the elimination of write-ups from utility accounts.
101 National Association of Railroad and Utilities
Commissioners, Proceedings of the 60th Annual Convention,
1948, p. 512-19.
102 Loc. cit.
251
In opposing these views, the Chief of the Bureau of
Accounts of the Federal Power Commission cited the record of
103
cooperation between the federal and state commissions.
He pointed to the great significance of comparative analysis
of accounting data made possible by the uniform system pre
scribed by the Federal Power Commission and many state com
missions. In his view, as a result of cooperative action,
. . . electric utility accounts today, beyond any perad-
venture of a doubt, are more accurate, more informative,
and in a more wholesome condition than at any time in
the history of the industry.1°4
While admitting that some conflict was unavoidable, he felt
that it had been negligible.
The success realized by the Federa.l Power Commission
in its task of reclassifying utility accounts tends to sup-
105
port the case for a uniform system. Since there is noth
ing to prevent state commissions from requiring certain ad
ditional information, such as data on service standards, it
is difficult to see what serious conflict may develop. Fur
thermore, the National Association of Railroad and Utilities
Commissioners has endorsed a system of accounts essentially
103 Ibid., pp. 519-531.
104 Loc. clt.
105 Viewed from the standpoint of the investor, the
financial condition of the electric utility industry was con
considerably improved after the reclassification of accounts.
Wall Street Journa1, January 23, 1947.
252
the same as that prescribed by the Federal Power Commission.
In the light of this similarity, there does not appear to be
any heavy cost burden on utility companies occasioned by the
overlapping requirements of state and federal agencies.
There is one problem which is worthy of special at
tention in connection with accounting control. Where a com
pany is subject to accounting control of both federal and
state commissions^ the question may arise in the mind of an
investor or other business interest as to which accounts
should be regarded as the proper basis for evaluating the
financial position of the utility. Those accounts recog
nized by law to be the fundamental books of account would
obviously carry more prestige and importance. It is fortu
nate that the Supreme Court has refused to give a higher
status to the accounts prescribed by the state commissions*
106
sions. The accounts prescribed by the Federal Power Com
mission are generally more complete and superior in other
respects to those kept according to the laws of some states.
The Chief of the Bureau of Accounts of the Federal Power
Commission has recommended that a company reflect in its
published financial statements the effect of the laws of
that agency which are more conservative In respect to
106 Federal Power Commission v. Arkansas Power and
Light Company, 330 U. S. 802 (1947).
253
107
capital surplus. Obviously, this policy would not en
tirely solve tiie problem, since it might obscure profita
bility of the firm.
Proposed changes in .jurisdiction. Various proposals
have been made to limit the jurisdiction of the Federal
Power Commission. These suggestions usually have been ori
ginated either by state officials or company representa
tives. The reasons for the proposals are, in general, quite
plain. State commissions seek to retain what authority they
have or to expand their powers. The electric utility repre
sentatives seek to weaken regulation where it will be to
their particular advantage. Since federal regulation has
generally been more strict, the industry tends to support
limitation on the powers of the Federal Power Commission.
A proposal to modify the Commission’s jurisdiction
was made in 1947 in the form of a bill introduced by Repre-
108
sentative William J. Miller of Connecticut. Extensive
hearings were held by a subcommittee of the Committee on In
terstate and Foreign Commerce of the House of Representa
tives. The bill was aimed at a modification of section 201
of the Federal Power Act. The lengthy proposed amendment
107 National Association of Railroad and Utilities
Commissioners, loc. cit.
108 Congressional Record, 80th Congress, 1st Session,
p. 3191.
254
would hsve circumscribed Commission authority in a very de
finite manner and confined its jurisdiction to a consider
ably smaller field than it currently occupied. The bill,
however, failed of enactment.
According to the proposed amendment, federal juris
diction could not be asserted over a distribution company
located entirely within one state but which received and
transmitted electric energy originating in another state.
Also, transmission of energy in interstate commerce was not
to include transmission within a state of electric energy
generated in the same state whieh is sold to a distributing
company for sale outside the state, unless this latter sale
Included a major part of the electricity purchased from the
generating company. furthermore, energy transmitted across
a state line for emergency purposes was not to be deemed
109
''transmission of electric energy in interstate commerce.”
Other provisions of lesser importance were included in the
bill.
Representatives of the National Association of Rail
road and Utilities Commissioners testified before a subcom
mittee in favor of the Miller bill.1^ Such action was a
logical step following the train of resolutions passed by
109 LocT cit.
110 Hearings before _a Subcommittee of the Committee
on Interstate and Foreign Commerce, op. cit., pp. 121-75.
255
that Association recommending curtailment of federal juris-
111
diction. Hie advisory counsel of the organization dis
cussed in detail the effect of the Jersey Central, Hartford,
and Connecticut cases. Pear was expressed that the Shreve
port principle applied in the railroad field might find ex-
112
press ion in the regulation of electric utilities. Conse
quently,, it was felt that the Federal Power Commission
should not only be prevented from further extending its
reach, but should be shorn of part of the jurisdiction al
ready claimed.
In commenting on the bill, the Chairman of the Fed
eral Power Commission asserted that Mthe proposed exemptions
113
would be a virtual repeal of the Act.*' A point by point
analysis was made, indicating many exemptions,and loop
holes. Significantly, he stated that nA check of available
data indicates that, as a result of the enactment of the
bill, at least three fourths of the companies now subject
111 National Association of Railroad and Utilities
Commissioners, Proceedings of the 55th Annual Convention,
1943, p. 232; Proceedings of the 56th Annual Convention,
1944, p. 189; Proceedings of the 58th Annual Convention,
1946, p. 226; Proceedings of the 59th Annual Convention,
1947, p. 205; Proceedings of the 6'0th Annua 1 Convention,
1948, p. 215.
112 The Supreme Court in the Shreveport case upheld
federal regulation of intrastate rates. Houston, East and
West Texas Railway Company v. United States, 243 U. S. 342
TTgT47_ --------------
113 Hearings before a_ Subcommittee of the Committee
on Interstate and Foreign Commerce, op. cit., p. 4.
256
,,114
to the Commission regulation would be excluded." Thus
the bill "... would recreate the no-man's land in utility
regulation which existed before the enactment of the Federal
_ „ . ,,115
Power Act. . .
Under current constitutional law there seems to be
little doubt that certain situations exempt under this bill
could not have been regulated by individual states. Either
some form of interstate compact for regional regulation is
required, or regulation by a national agency is necessary.
One of the difficulties associated with interstate compacts
is that the definition of a region forppurposes of public
utility regulation might be troublesome. Furthermore, be
cause of competitive interests of states, it is possible, if
not probable, that the states involved in such a regulatory
program would be unable to agree on certain matters of com
mon concern. A state in which a generating unit was located
might insist upon a high wholesale rate for power moving to
another state, while the latter would prefer a low rate.
The result might be a stalemate. Regulation of such a rate
by a federal agency, however, precludes an unresolved dis
pute between administrative officials.
114 Ibid., p. 5.
115 Loc. cit.
III. SUMMARY
257
The various effects of dual regulation of the elec
tric utility industry are of particular importance because,
through a consideration of them, one may discover a means
by which the public interest may be more effectively served.
In the control of water power development, dual regulation
is almost non-existent due to the great predominance of fed
eral control. The chief objective here is to achieve eco
nomic utilization and conservation of water power resources.
To accomplish these purposes, the Federal Power Commission
has promoted development with reference to broad regional
coordination and integration. Since watersheds usually ex
tend over two or more states, the Federal Commission is more
capable than state commissions of controlling such develop
ment. Efforts to delimit the agency's authority in this
field have failed.
In the regulation of public utilities, one of the
chief objectives should be the realization of advantages of
large-scale operations. Under dual regulation there has
been a definite trend toward larger systems. Inasmuch as
individual systems extend across state lines, the states are
handicapped in control over mergers and consolidations.
Promotion of interconnections between utility systems is
another Important aspect of regulation. While both federal
and state commissions have, in general, been active regard
ing this subject, there is some evidence that intrastate
utilities have been unwilling to establish or maintain in
terconnections with out-of-state companies because of the
desire to avoid federal regulation. Under the Holding Com
pany Act of 1935 the Securities and Exchange Commission has
assisted in bringing about more sound corporate organiza*
tion, localized utility management and regulation, some ad
ditional responsibilities for the Federal Power Commission,
and improved technical integration of systems. Rate regula
tion has been largely the responsibility of the state com
missions. Certain states have no commission regulation of
rates, and there are indications that rates in those states
are relatively high. Uniform systems of accounts prescribed
by the commissions are generally very similar, but conse
quential divergence in interpretations exist. No successful
attempt has been made to amend the Federal Power Act.
iv. COIV. CONCLUSION
The dominance of federal control over water power de
velopment is justified on the basis that streams generally
flow across state lines and that consequently individual
states could not successfully promote the most economic de
velopments of power resources, even if it were constitution
ally possible. Probability of disagreements between states
precludes successful regulation under interstate compacts.
259
The steady and substantial development of water power by
private electric utilities with evident regard for interred
lationships of power units indicates that the principal ob
jective of regulation has been achieved. In view of court
decisions permitting the Federal Power Commission to issue
a license where the licensee fails to comply with certain
state laws, there is particular need for the states to in
form the federal agency of local need relating to proposed
power projects.
Dual regulation is more feasible with respect to pub
lic utilities than in the field of water power development.
Frequently, electricity is generated and distributed locally,
thus involving no national interests of sufficient impor
tance to warrant federal control over such systems. Neither
is it feasible to burden a federal agency with the numerous
details Involved In regulation of local distribution of in
terstate companies. The interstate aspects of electric util
utility operations are, however, logically matters of na
tional interest legally and economically.
While the complementary relationship of federal and
state regulation, in general, has proved to be workable and
effective, there is evidence that the economic advantages of
interconnection have not been fully realized because of the
desire of certain electric utilities to avoid federal regu
lation. It appears that even within the jurisdictions of
260
the better state commissions, utility companies have sought
to escape the more stringent federal regulation. There is
need to strengthen state regulation in many jurisdictions,
and it appears particularly desirable that closer accord be
reached between federal and state commissions on basic prin
ciples of accounting interpretation and other rate-making
matters.
CHAPTER V I I
IMPLICATIONS OF DUAL REGULATION
OF THE NATURAL GAS INDUSTRY
In the regulation of the natural gas industry, cer
tain problems have arisen which, like in the case of elec
tric utility regulation, are a consequence of a dual system
of control. Each of these industries, however, has its own
peculiar characteristics which make its problems somewhat
unique. In the nature of things, the transmission of natur
al gas is largely a matter of interstate commerce, while
electricity does not generally move so extensively between
states. Because of the large amount of natural gas moving
in interstate commerce, many wholesale rates have been sub
ject to federal regulation while, at the same time, the
states have a vital role to play in local rate regulation.
Problems of integrating rate control at the two levels are
of major significance in this field..
Other problems associated with dual control of the
natural gas industry relate to realization of the benefits
of large-scale operation and interconnection of facilities,
conservation of natural gas, exploration for new gas fields
and efficient utilization of the product. Several attempts
have been made to modify federal legislation in order to
deal with these problems in some particular manner. State
agencies, meanwhile, have also tried to cope with the
262
difficulties by taking steps toward tighter controls, such
as establishing minimum field prices for gas.
I. EFFECTS OF FEDERAL AND STATE REGULATION
The recency of federal regulation and the rapid ex
pansion of the natural gas industry during the period fol
lowing 1938 occasioned many problems in the development of a
pattern of regulation. Some of the problems were amelio
rated by amendment of the Natural Gas Act. Questions re
mained unsettled, however, and a comprehensive investigation
was undertaken beginning in 1946. One of the most fundamen
tal questions considered in this study was the determination
of proper delineation of authority between federal and state
commissions with respect to certain important matters of
controversy* An analysis of certain problems associated
with dual control may lead to recommendations for achieving
greater effectiveness in regulation.
Provision of adequate service. In the regulation of
the natural gas industry, it is vitally important that there
be no obstacles in the path of industrial expansion. Wheth
er dual regulation has inhibited the growth of the industry
is a question that seems to be answered by the very rapid
growth which has In fact occurred since two levels of govern
ment became responsible for Its regulation in 1938. During
263
the period 1938 to 1947 the total mileage of natural gas
pipe line, including field, gathering, transmission, and
distribution gas mains, increased from 182,3)00 to 242,900
miles.^ During the same period total marketed production
of natural gas increased from 2,296 billion to 4,400 billion
2
cubic feet. With reference to certificates issued by the
Federal Power Commission for construction of new and addi
tional facilities, it was indicated in 1950 that authoriza
tions for the year ending June 30, 1949, -represented an es
timated cost of $566,203,000— the highest estimated cost of
3
any year since the passage of the Natural Gas Act. It was
further noted that ’ ’The current trend appears to be toward
applications involving more construction with corresponding
4
higher costs per application.”
Impressive as these data are, there may be, neverthe
less, some friction caused by dual regulation impeding, in
some degree, the expansion of the industry. It has been
1 American Gas Association, Gas Facts, 1947 (New
York: American Gas Association, 19487, p. 57.
2 Ibid., p. 101.
Annua 1 Report of the Federal Power Commission, 1949,
(Washington, D. 0. : Sovernmeni; Printing Office, 1950), p.
71. It was said in January, 1950, that "The 13 states not
now being served, with the exception of Nevada, will soon
have natural gas from pipelines now in the planning stage.”
"Utility Outlook and Review,” Public Utilities Fortnightly,
45:52, January 5, 1950.
4 Loe. cit.
264
charged by an independent public utility lawyer that a sig
nificant number of distribution companies have discontinued
interconnections with other distributors because of the fear
5
of being subjected to federal jurisdiction. Since demand
for gas has frequently been so great that shortages have oc
curred in some places, the sharing of reserve capacities
made possible by interchange of gas is particularly desir
able in order to assure continuity of service. It was indi
cated that several states have enacted legislation to force
gas interconnections between adjacent companies in order to
permits exchange of gas.
This attorney attempted to view the problem in the
light of the industry's growth when he stated:
The interstate transmission of natural gas is
growing by leaps and bounds. Sooner or later many now
isolated local gas distribution companies may at least
enter into emergency connections with adjacent utili
ties, thus becoming part of an intrastate network sub
ject to Federal jurisdiction. Such has been the compar
able experience in the electric utilities.6
Little hope was seen, however, of avoiding federal jurisdic
tion by relying on application of the _de minimis rule by the
Commission where gas exchanges were of small amount. There
fore,
5 Henry F. Lippett II, ”ls the FPC Encroaching on
Local Gas Regulation,” Public Utilities Fortnightly, 45:13-
25, January 5, 1950.
6 Loc. cit.
265
At the moment, perhaps the plans of local gas
distribution companies to sell their high-pre3sure f,stub
lines'* or turn over their resale customers to the cross
country pipe lines already under PPG jurisdiction may
afford a temporary palliative.”
If discontinuance of interconnections between distri
butors’ facilities is not followed by a new arrangement to
achieve the same purposes, the consumers' interest is ad
versely affected. Sharing of reserves to better assure con
tinuity of service and reduction in the cost of maintaining
excessive storage facilities are the principal benefits de
rived from interconnection. Where gas exchanges are termi
nated, these benefits can be realized only if the transmis
sion pipe line company serving both distribution companies
\
allocates available gas so as to accomplish the same pur
poses as under the cooperative arrangement previously in ef
fect. Whether this would result depends upon the various
contractual commitments of the transmitter, but there seems
to be no reason why it could not be achieved. In any case
there seems to be a problem here for both federal and ,state
commissions to seriously consider, namely: whether proper
allocations are made by interstate pipe line companies to
their various distributor-customers.
__ _One of the leading interstate pipe line companies,
Pahhandle Eastern Pipe Line Company, was faced with a
*7 Loc . c i t .
266
shortage of delivery capacity for several years following
8
1945.' The company was unable to deliver the amount of gas
for which it had contracted due to the fact that long-term
contracts had been made during the initial development per
iod on the assumption that new capacity would be added. It
was discovered, however, that shortages of materials held up
anticipated eonstrudtion and consequently the rapidly grow
ing demand could not be satisfied.
As a result of this situation, the Federal Power Com
mission prescribed service rules which required that certain
allocations of the limited supply be made among Panhandle
customers. The company had 52 utility customers and 26 in
dustrial customers located in six states, all of whom were
affected.
One of the effects of the emergency rules was to cur
tail deliveries to Michigan Consolidated Gas Company--the
distributor serving Detroit. It attempted to secure through
court proceedings the full amount of gas for which it had
9
contracted. The City of Detroit and the Michigan Public
Utilities Commission intervened and joined in the prayers
for relief. Appearing in opposition to these interests were
4-
O
& AnhuaT Report of the Federal Power Commission,
1948 (Washington" C. : Co vernmen t P r in 11 ng Off Ice, 1949),
pp. 85-8.
9 Michigan Consolidated Cas Company v. Panhandle
Eastern Pipe Line Company, et al., 173 F. 2d 784 (1949).
267
tiie Public Service Commission of Indiana, several Indiana
distributors, the Federal Power Commission, and others. The
court held that the matter was one calling for the expert
judgment of the Federal Power Commission and the complaint
was dismissed.
While the Panhandle case was the most important case
involving the prescription of emergency service rules, there
were a number of other cases of a similar nature.^ Essen
tially, the federal agency undertook to assure reasonable
and non-discriminatory allocations among the various custom
ers located in a number of states. The relative needs of
these customers were measured, and curtailments ordered ac
cordingly. Industrial loads were most drastically limited
because of the possibility of substituting alternative
fuels.11
Conflict between certain Michigan interests and the
interests of a group of other states reveals the need for
reconciliation by a national agency. It might appear that
allocation of supply between various customers within the
State of Michigan ought to have been a matter for the Public
Utilities Commission of that state to determine--a field in
10 Annua~l Report of the Federal Power Commission,
1948, op. clt., p. 85.
11 Extensive development of underground storage dur
ing summer months to take care of winter needs was another
important way in which the shortage probldm was attacked.
Loc. cit.
268
which the intrastate aspect of dual regulation would find
expression. The fact that the state commission is respon
sible for the service rendered by these distributing com
panies to ultimate consumers suggests the desirability of
state control of such allocations. Presumably the state
commission is best equipped to evaluate the relative needs
of the ultimate consumers of the state. Is it not, there
fore, the most competent agency to allocate a limited supply
of gas among local distribution companies which serve these
relative needs?
While the state commission may be more competent than
a federal agency to make this sort of an evaluation, there
is one notable difficulty that would likely develop. Since
only a federal agency can satisfactorily apportion the vol
ume of gas going to each of several states, the problem im
mediately arises as to the relative needs of the states.
Inevitably, an inquiry would have to be made into the par
ticular needs within each state, and thus overlapping regu
lation would result. Concurrent identical authority over
the same subject would be unworkable on the face of it. The
Federal Commission should not accept the estimated needs de
termined by a state commission, because it is almost inevi
table that there would be an overstatement as to its re
quirements .
The most practical and economically sound method was
269
that which was adopted. The Federal Power Commission soli
cited and received the assistance of the interested state
commissions and others as it investigated these problems.
It then issued its own orders with respect to allocation of
supply among the various customers, irrespective of state
boundaries, according to the relative urgency of demand.
While the type of problem revealed in the Panhandle
case may be discounted as representing an emergency situa
tion, there is reason to believe that 3ueh emergencies may
not be rare. Several other cases have arisen in recent
12
years involving similar circumstances. It is probable
that further difficulties of this nature will develop in the
future. Moreover, allocations of gas supplies may have to
be undertaken at some time, due to equipment breakdown or
interrupted service on certain pipe lines. Also, depleted
allocation of limited supplies between customers within var
ious states may become necessary.
Ability to control rates. One of the most important
objectives of natural gas regulation is to insure that the
lowest possible rates are charged users of the fuel, with
due regard for adequate return on invested capital to pro
mote expansion of facilities. Many actions of regulating
commissions have important effects upon consumer rates,
either directly or indirectly. Inasmuch as local rates are
270
outside the jurisdiction of the Federal Power Commission,
the agency's actions have only an indirect effect upon con
sumer outlay for gas. The influence of federal regulatory
activities has, however, been very Striking as indicated by
substantial reductions in wholesale rates ordered by the
Commission.13
The interrelationship of rate regulation by the Fed
eral Power Commission and the various state commissions is
of vital concern to the consumer of gas and to the public
generally. For commissions at the state level to ignore
federal rate activities would be particularly unfortunate.
The importance of this relationship is so great that there
is need for either close cooperation between the two levels
of commissions, or one single system of regulation with suf
ficient jurisdiction to regulate all rates.
Attention was focused on this problem in a rate case
14
coming before the Federal Power Commission in 1943. Lit
tle difficulty was experienced in persuading an interstate
pipe line to reduce its wholesale rates by approximately
15 Hearing3 before £ Subcommittee of the Committee on
Interstate and Foreign Comme'rce of the United States Senate
on S. 1498, 81st Congress, 1st Session, p. 21. The total
cumulative reduction in interstate resale rates for natural
gas was estimated by the Commission at $242,000,000 to Dec.
31, 1948.
14 Re Northern Natural Gas Company, 3 F. P. C. 377
(1943).
271
$2,287,000 annually. The Commission was concerned, however,
about the benefit that the consumer might realize as a re
sult of this action:
The Commission is mindful of the fact that the
ultimate purpose of its rate regulatory activities is
the assurance of reasonable rates for ultimate con
sumers .
It was observed that whether or not the consumers benefited
by adequate and timely rate reductions depended upon the
distributors themselves and the local regulatory authori
ties. Mention was made of one private distributor and one
public distributor which had indicated that reductions would
be promptly made In local rates. There were, however, 30
distributors affected by the wholesale rate reduction, and
they served 180 communities.
In order to encourage the passing on of these savings
to ultimate consumers, the Commission listed all the distri
butors which were affected and also the amount of the reduc
tion in revenue for the interstate company from sales to
each of them. This Information was attached to itso©3?der
. . . so that each distributor and each community may be
advised of the estimated reduction applicable to it,
thereby enabling a prompt consideration of an appro
priate reduction in the retail rates in each case.l®
A somewhat similar case was developed a short time
later in which the Commission again brought about a reduction
15 Loc. cit.
16 Loc. cit.
272
in wholesale rates and again expressed concern about who
17
would benefit. A list of 45 distributors was presented
with indications of the savings to be realized by each of
them as a result of the rate order. In a concurring opin
ion, one Commissioner pointed out that because of the cor
porate affiliation of certain distributors with the inter
state company, it was possible that the reduction in rates
might represent merely a shifting of profits between com
panies of the same holding company system; that Is, this re
sult would occur if the distributors failed to pass on the
savings in rates to the ultimate consumers.
Actually, of course, this problem is inherent in any
case of wholesale rate reduction. By the same token, an in
crease in a wholesale gas rate would be a matter of concern
to local distributors and local regulatory authorities,
since It might be necessary to raise local rates. As a
matter of fact, Increases In wholesale rates have been very
uncommon since federal regulation was instituted in 1938.
The need for integration of rate regulation is apparent in
any case.
The problem of integrating wholesale and retail rate
regulation is clearly revealed in several important cases
that came before the courts in recent years. According to
17 Re United Gas Pipe Line Company, et al., 3 P. P.
C. 402 {1943) .
273
the Natural Gas Act, the Federal Power Commission may be
temporarily restrained by a court from requiring suspension
18
of a wholesale rate. That is, where a natural gas company
files a rate increase with the Commission, that agency may
not necessarily prevent the rate from going into effect dur
ing a period in which a court determines the reasonableness
of the rates. If a court order is obtained permitting the
higher rates to go into effect during this interim, the rev
enues represented by the difference between the two rates
must be paid into a special fund for possible future refund.
Actually, the funds may be retained by the company and a
bond given for an amount equal to the fund.
One of the complicated cases involving this procedure
was carried to the United States Supreme Court. The Federal
Power Commission ordered a reduction in wholesale rates
19
charged by the Natural Gas Pipeline Gompany of America.
Subsequently, in 1942, the order was upheld by the Supreme
20
Court In a leading decision. Meanwhile the company had
accumulated a substantial fund based upon the difference be
tween the old rates and the rates ordered by the Commission.
The disposition of this fund became an Important issue. The
18 Sec. 4 ( e).
19 Re Natural Gas Pipe Line Company of America, 2 F.
P. C. 218 TT9WTI
20 Federa1 Power Commission v. Natural Gas Pipe Line
Company of America^ 315 U"I ST 51 ?5 (1942).
274
Supreme Court refused to deal with the issue at the time it
approved the rate fixed by the Commission, but did observe
that the company officials
. . . argue that the purpose of the rate regulation is
the protection of consumers, and that the purposes of
the Act will not be effectuated by the refunds to whole
salers. They insist that such refunds being the whole
salers1 profits from past business, cannot be resorted
to for reducing future rates to the consumers.21
Thus the company sought to have the amount returned to it
rather than to either wholesalers or ultimate consumers.
Disposing of the impounded funds became a very diffi
cult problem. Three groups claimed a right to the amount:
(1) The pipe-line company officials; (2) the distributing
companies; and (3) the ultimate consumers. In view of the
22
express language of the Natural Gas Act, the claim of the
pipe-line company had no foundation unless the statutory
provision itself were unconstitutional. The real contro
versy centered around the claims of the other groups. Since
the Supreme Court, in the decision of 1942, did not adjudi
cate rights to the impounded funds, further proceedings were
forthcoming. A contest arose between one distributor and
its customers as to rightful claims to the impounded funds.
21 Loc.~cit.
22 Authority Is given , ! . . . to order such natural-
gas company to refund, with interest, the portion of such
Increased rates or charges as its decision found not justi
fied." Sec. 4 (e).
275
23
The case ultimately came before the Supreme Court. Spe
cifically, the Court had to determine the proper jurisdic
tion of a lower federal court to decide the rights of the
parties. It was held that the lower court had no authority
to adjudicate the question of consumers1 rights in this
case, since that was a local matter in which the lower
court should conduct its affairs in closing the case. Es
sentially, the funds were to be held for a reasonable period
during which litigation of claimants according to state law
might take place and following which any remainder was to be
turned over to the distributor company.
The Supreme Court members found it impossible to
reach a unanimous agreement in this case, four justices dis
senting from the majority opinion. One of the members at
tempted to explain why ultimate consumers should receive the
full amount of the impound. Ke based his position on the as
assertion that the retail rates were reasonable and that its
receipt of a portion of the fund would be simply a ^wind-
fall." Criticising the majority decision, he said it would
mean that
So long as litigation can be kept pending in the
courts as to the validity of a Federal Power Commission
rate reduction order, the benefits of the Natural Gas
Act will be suspended as to ultimate consumers, and will
23 Central States Electric Company v. City of Musca-
tlne et a 1., 324 U. S. 138 (194;5T.
276
be largely, If not exclusively, restricted to retail
distributors.24
Two other justices joined in this expression. In a third
opinion, a dissenter maintained that the whole question
should be removed from the federal courts and the rights
settled according to state law.
Here was a case involving questions partly legal and
partly economic in character. The problem of deciding
whether claims should be determined according to state law
or federal law was one thing. An economic question related
to the reasonableness of the distributor's return based upon
local rates in effect prior to the reduction in wholesale
rates. If the return was adequate, all of the reduction
should have been passed on to consumers; but if it was less
than reasonable, a portion of the impounded fund should have
been allotted to the distributor.
Another case involving somewhat the same basie prob
lem, but distinguishable from the Central States Electric
Company case, appeared before the Supreme Court in 1949.
The Federal Power Commission ordered the Interstate Natural
Gas Company to reduce its wholesale rates to certain pipe-
25
line companies. A stay was obtained by the company from
24 Loc.~cit.
25 Re Interstate Natural Gas Company, 3 F. P. C. 416
(1943) .
277
a federal court and impounds accumulated until the lower
26
rates were finally upheld. In contrast to the Centra 1
Sta tes Electric Company case, this case could be determined
solely with reference to federal law (Natural Gas Act),
since ultimate consumers were not party to the contest. The
Federal Power Commission attempted to carry out the direc
tive of the Act by requiring1 Interstate Natural Gas Company
to refund the impounds to the pipe-line customers. The
problem then arose: Who should ultimately benefit?
A majority of the Supreme Court directed a lower
court to dispose of this fund as it saw fit, using local
law, if any, as a guide in this task. The high count also
expressed its views as to who should ultimately benefit from
the refund:
When a federal court of equity grants relief by
way of injunction, it has a responsibility to protect
all of the interests whom its injunction may effect.27
More specifically, it declared:
The aim of the Act was to protect ultimate con
sumers of natural gas from excessive charges. They were
the intended beneficiaries of rate reductions ordered by
the federal commission, though state machinery might
have to be Invoked to obtain lower rates at the consumer
level. The rates charged a wholesaler are part of its
costs, reflected in its rate base. Reduction of those
costs normally will lead in due course to reduction in
26 Federal Power Commission v. Interstate Natural Gas
Company, et al., 336 U. S. 577 (194§).
27 Loc. cit.
278
Its resale rates, unless we are to assume that the pas
sage of the Natural G-as Act was an exercise in futil
ity. 28
The problem of distributing the funds was recognized
to be a very difficult one. For instance, the customers of
the distributors were located in eight states, and the
rights of consumers would thus be conditioned by varying
state laws. Moreover, there was the question as to whether
the distributing companies would have reduced rates to in
dustrial consumers had the wholesale rates been reduced im
mediately. This point was important because the Federal
Power Commission had no jurisdiction over rates for direct
industrial sales, and states may or may not have had such
authority. The practical problem of computing the amount of
refund specifically allocable to particular consumers was
not the least of the difficulties facing the court.
Without being very specific in its recommendations as
to an alternative plan of procedure, three justices dis
sented in part from the majority opinion. These were the
same dissenters as in the Central States Electric Company
case. They said that the task assigned the lower court was
virtually an impossible one which would result in'much con-
*
fusion and litigation. The dissenting justices also took
occasion to chastise the lower court for interfering in the
28 Loc. cit.
279
in the rate regulation process:
. . . The normal consequences of the valid federal rate
reduction were not allowed to take place. The injunc
tion placed an insuperable obstacle to state reduction
of . . . retail rates on the basis of the federal rates
reduction order. Thus the court’s stay blocked the Con
gressional mechanism intended to produce lower consumer
ra tes.29
That the issue of distributing impounded funds was
regarded by state commissions as being important is indi
cated by the discussion of the problem at the annual conven
tions of the National Association of Railroad and Utilities
Commissioners in recent years.The Solicitor General
sounded a timely warning in 1946 that the state commissions
should be alert to the rate investigations of the Federal
Power Commission and be prepared to take advantage of whole-
31
sale rate reductions. He suggested that state commissions
lacking power to order reparations should promptly obtain
agreements from distributing companies to the effect that
they would pass on to consumers reductions in wholesale
rates. If such voluntary agreement could not be obtained,
it was suggested that a rate investigation be started at
29 Loc. cit.
29 .. oc
30 National Association of Railroad and Utilities
Commissioners, Proceedings of the 57th Annual Convention,
1945, p. 293; Proceedings of the 58th Annua1 Convention,
1946, pp. 287-293; Proceedings of the 61st Annual Conven-
TTbh, 1949, pp. 483-4901
31 National Association of Railroad and Utilities
Commissioners, Proceedings of the 58th Annual Convention,
1946, p. 289.
280
once and held open until the Commission had acted in order
to avoid a lag in passing on the benefits of wholesale rate
reduction to consumers..
.The Solicitor General regarded the problem of inte
grating rate regulation of federal and state commissions asi
the most important problem brought before the 1946 conven
tion. He certainly could not be accused of unduly criti
cising state commission regulation in view of his many years'
service in defending and supporting it. Yet he felt that
there was such serious inability or unwillingness of some
state commissions to protect the rights of consumers follow
ing federal rate reduction orders, that Congress might ” . .
. legislate in such fashion that the Federal Commission can
effectively give to the public the relief to which it is en-
32
titled.” He observed that this sort of action had been
taken with respect to railroad rates and that a similar step
could be taken with respect to gas rates. Referring to his
long experience in connection with commission regulation,
this important official stated to the Convention:
I have talked about this a long time because it
has been on my mind a long time. It is an important
matter. I was charged with the duty, when the Federal
Power Act and the Natural Gas Act were passed, of repre-
senting to Congress that the state commissions of the
United States could take care of the ultimate consumers;
if the wholesale rates were taken care of. I have be
lieved it. I know it can be done, and I know, also, that
52 Ibid., p. 290.
281
if the state commissions fail to do it, such failures
will make our dual system of government work badly where
it can be made to work well.^3
At the 1949 convention, the question of impounds re
lating to natural gas rate cases was again a leading iseure
34
sue. A commissioner from Missouri pointed out that his
commission had no authority to order reparation and had fol
lowed the Solicitor General’s advice of securing voluntary
agreements from distributing companies to the effect that
they would pass on any reduction that might result from a
Federal Power Commission rate order. With respect to repa
rations made per agreements, the Missouri commissioner ob
served, t ( As a practical matter, it is impossible to devise
a workable formula that will do complete equity between all
35
consumers.” Consequently, the amounts allocated to the
consumers were based upon estimates. The commissioner was
very insistent that industrial consumers had no right to
share in such reparations, since their rates were fixed ac
cording to general competitive forces in the fuel market.
This phase of rate regulation has been discussed at
considerable length because it reveals one of the important
Loc . cit.
34 National Association of Railroad and Utilities
Commissioners, Proceedings of the 61st Annual Convention,
1949, pp. 483-490.
35 Ibid., p. 489.
282
effects of a system of regulation involving dual responsi
bility of federal and state authorities. The economic wel
fare of consumers is vitally affected by the implementation
of the impound provision of the Natural Gas Act. Even if
the entire amount of an impound is distributed to ultimate
consumers, there is a social cost involved in the cumber
some, time-consuming legal process by which disposition is
made.36
While one may point to the confusion, delay, and ex
pense Involved in the impoundment system, it is difficult to
see a practical solution to the problem that is any more
satisfactory. Whether impounds are accumulated or not dur
ing a period of rate suspension, the problem of making repa
rations to distributors and consumers would be present.
Perhaps the most important need in this connection is for
the Federal Power Commission and interested state commis
sions to cooperate closely in rate cases. Specifically, the
state commission should institute proceedings coincident
with those.of the Federal Commission so that it may be pre
pared to make a coincident order adjusting consumer rates.
36 In one reparation case involving impounded funds
of approximately $25,000,000, the court declared, nThe ex
pense of distributing the Impounded fund to the ultimate
consumers of gas purchased from these distributors will be
large. It is estimated that it will exceed $1,000,000 and
conceivably may run into higher figures.”' Panhandle Eastern
Pipe Line Company, et al. v. Federal Power Commission, e€
ST77 I B F f . 2d ^09 TT91S). "
283
Fortunately, cooperation between federal and state
officials has greatly facilitated integration in this impor
tant area of rate regulation. Both the Federal Power Com
mission and the state commissions have regarded interagency
37
cooperation as vitally important to effective regulation.
Other authorities have also attached great importance to
38
this collaboration. Under any scheme of voluntary coop
eration, of course, participants may find it impossible to
agree on certain matters because of irreconcilable differ
ences in legal interpretation, adherence to different basic
principles, conflicting interests, or personality clashes.
Despite these limitations of cooperation as a means
of accomplishing objectives of rate regulation, the results,
by and large, have been fairly satisfactory. The Commission
37 The Federa 1 Power Commission stated in 1948, "The
Commission has long considered cooperation with State regu
latory agencies as one of the most important phases of all
its regulatory activities, and the Commission's procedures
reflect this attitude.” Annual Report of the Federal Power
Commission, 1948, op. cit., p.1111. Likewise, the associa
tion of state officials has adopted a resolution including
the statement, "Means and rules for fruitful cooperation are
being designed and, somewhat hesitatingly, tried and put in
to operation. The need for cooperation between state and
federal commissions . . . becomes clearly apparent in cases
where a federal commission reduces rates of interstate
wholesale utilities. . ." National Association of Railroad
and Utilities Commissioners, Proceedings of the 58th Annua1
Convention, 1946, p. 99.
38 Robert D. Baum, The Federal Power Commission and
State Utility Regulatlon (Washington, £)."C.: American Coun
cil on Public Affairs, 1942), p. 187.
284
stated in 1947 that, since 1938, ‘ 'almost all" of the inter
state gas rate reductions had been passed on to ultimate
consumers due, in large part, to cooperation of state com-
39
missions. Unfortunately, no specific data were given as
to the extent of exceptions. Furthermore, there appears to
have been no study of this important relationship in view of
a comment made by Commissioner Olds in 1940:
We can say generally there is an indication that
the consumers have paid very materially less for their
gas as a result of this regulation, but so far as speci
fic reductions being passed on in certain specific in
stances we do not know if State commissions have taken
advantage of the rate reductions.40
Wholesale rate reductions ordered or induced by the
Federal Power Commission from June, 1938, to June, 1949,
: 59 Annual Report of the Federal Power Commission,
1947 (Washington, D. C.: Government Printing Offlee, T947),
p. 66. The cooperation of the Commission with the states is
revealed in its comments regarding the Intersta te case im
pounds: “Upon affirmation of the Commission’s [rate] order,
and before the hearings in the Circuit Court upon the im
pounded funds, this Commission in January, 1948, sent let
ters to the Alabama, Arkansas, Missouri, Georgia, Illinois,
and Tennessee State Commissions, and to the municipally
owned gas distributing systems of Memphis, Tenn., and Vicks
burg, Miss., setting forth information concerning the im
pounded funds and the extent to which such funds appeared to
be applicable to the respective States. Several of those so
notified subsequently intervened in the proceedings before
the court to determine the distribution of the impounded
funds." Annua1 Report of the Federal Power Commission,
1949, op. cit., p. 114.
40 Hearings before a Subcommittee of the Committee on
Interstate and Foreign Commerce of the House of Represents-
tives on ri. R. 79, hT R. 1758, ancT H. R. 982, 8lst Congress,
1st Session, p. 246.
285
41
amounted to $48,000,000 a year. The cumulative effect of
these reductions was an aggregate saving of §294,000,000 in
gas rates. The savings realized in electric power rates
from 1935 to 1949 were only $25,000,000. Despite these sub
stantial gas rate savings to distributers, consumer rates do
not appear to have reflected these reductions adequately,
although interpretation is difficult to make. The National
Industrial Conference Board index of gas rates declined
4P
steadily from 99.8 in 1938 to 93.7 in 1947. While this is
a significant decline, it is less than that indicated for
43
electricity rates over which federal rate regulation had
much less influence. Thus there is a suggestion that whole
sale gas rate reductions have not been adequately passed on
to consumers.
One effective way to promote justifiable rate reduc
tions for consumers is to publicize prevailing rates so that
rough comparisons can be made between communities. This has
been done by the Federal Power Commission with respect to
electric rates but not for gas rates. A former member of th
the California commission and later of the Federal Power
4'1 Anhua 1 Report of the Federal Power Commission,
1949, op. cit., p“ 98.
42 Robert A. Sayre, Consumer Prices, 1914-1948 (New
York: National Industrial Conference Board, Inc., 1948),
pp. 45-8.
k 43 Cf. p. 241.
286
Commission, Richard Sachse, indicated the importance of this
device in relation to gas rates when he said:
These intrastate retail consumers may not even be
aware, in the absence of adequate information and pub
licity, of the wholesale reduction and the fact that in
equity and under the requirement of balance they are en-
vlt titled to the benefits of the lower rates made possible
by action of the federal commission. This unfortunate
and serious condition, once understood by the public,
must tend to discredit regulation and commissions.44
Regulation of production and gathering activities.
The Federal Power Commission has extended its authority into
the production and gathering phase of the natural gas indus
try because of the intimate relationship of this function to
the transmission and sale of gas. This is not to say that
the federal agency has claimed jurisdiction over the details
of the production and gathering activities. The influence o
of the Commission has not reached that far. But it has been
deemed necessary, under certain circumstances, to inquire
into the cost of producing and gathering gas that enters
into the facilities of a "natural-gas company.” Where such
a company produces and gathers its own gas or purchases it
from an affiliate, the costs involved are ascertained in or
der that no undue amounts be reflected in the wholesale
rates subject to federal jurisdiction.
44 National Association of Railroad and Utilities
Commissioners, Proceedings of the 58th Annual Convention,
1946, p. 317.
287
The propriety of applying a coat-of-service method of
rate-making to this phase of the gaa industry hss been a
4 5
subject of considerable controversy. The heart of the is
sue is whether the Commission should allow, for the produc
tion and gathering function, a figure representing the cost
of these operations, including a fair return on the net in
vestment in such operations, or simply allow the price pre
vailing in the field. The ramifications of this issue are
so far-reaching that no attempt can be made here to pursue
it in detail. Some aspects of the problem, however, have
particular pertinence to the theme of this study and deserve
some attention.
The states, in general, have had the responsibility of
regulating production and gathering of gas, and the language
4 6
of the Act attempted to preserve that field for them.
-There have been expressions of fear on the part of state of
ficials that the Federal Power Commission has invaded their
jurisdiction and that the penetration might become much
greater unless steps are taken to prevent such encroach-
45 The Supreme Court has been divided on the issue.
The State commissioners have discussed the problem at length
in their conventions. Extensive hearings have been held on
several bills introduced in Congress to solve the problem.
Even the Commission has been sharply divided on the issue.
Cf. pp. 323-330.
46 Section 1(b).
288
47
ment. Some of the expressions of this tenor are phrased
in very general terms and represent more of an emotional
outburst on the well-worn theme of ’ ’states rights” than a
calm, deliberate effort to explain how the states could do a
more effective job of regulation regarding specific matters.
Nevertheless, the emotion itself is at least symptomatic
that problems exist in working out a more harmonious system
of regulation.
Among the effects charged to rate regulation activi
ties of the Commission as respecifs production and gathering,
48
is that conservation of natural gas has been impeded.
Since conservation is one of the primary elements of state
regulation, the question arises as to whether federal and
state authorities are working at cross purposes. It has
been argued that the depressing effect of the Commission's
net investment cost method of rate-making has, in turn,
49
caused large quantities of gas to be flared. The conten
tion is that the Commission's policy allows an integrated
47 The Crenera 1 Solicitor of the NARUC discussed such
encroachment at length in a recent convention. National As
sociation of Railroad and Utilities Commissioners, Proceed
ings of the 61st Annua1 Convention, 1949, pp. 211-221.
48 See for example comment by the president of NARUC
in 1946. National Association of Railroad and Utilities
Commissioners, Proceedings of the 58th Annual Convention,
1946, pp. 10-12.
49 Loc. cit.
289
pipe line company such a small amount for gas it produces,
or buys from an affiliate, that there is little inducement
to pay much higher prices for gas sold by independent pro
ducers. Thus the general level of field prices tends to be
depressed and gas is flared rather than sold.
It is undoubtedly true that a higher price in the
field would promote more diligent efforts to sell the gas to
pipe line companies. Apparently, however, even some of
those who favor discontinuance of the cost method of treat
ing production and gathering do not believe the field price
50
is the key factor in the conservation problem. The basic
causes of low prices in the field and thus of the tendency
to waste gas are not found in the Commission's rate-making
practice but elsewhere:
Without any question, the fundamental reason for
low field prices in the Southwest has been the fact that
abundant natural-gas supplies have for many years
flooded available market outlets from the flush produc
ing fields. Aggravating this price situation has been
the very strong bargaining position of the major produc
ers of gas, who were able to take advantage of the un
balanced conditions existing as between supply and de
mand. A related factor has been that natural gas has
usually been sold under rather long-term purchase con
tracts, many of which were made years ago when ther.mar-
ket prospects for natural gas were largely undeveloped.5]-
50 Federal Power Commission, Report of Commissioner
HeIson Lee Smith and Commissioner Harrington Wimberly, 1§48,
Natural Gas Investigation, Docket Ho. G-580 (Washington, D.
C.: Government Printing Office, 1948), p. 232.
51 Loc. cit.
290
Despite these low prices, the producers, particularly
the large producers, have realized very substantial net pro-
52
fits. This is revealed in Table IX, which presents the
earnings of representative oil and gas producers making par
ticularly large sales to interstate pipe lines. The impli
cation of this fact, in the light of lo?/ field prices for
gas, is that the cost of the gas properties, in ma$ycesses,
must have been nominal. Here appears to be one good argu
ment that there is no need to introduce, In the interest of
conservation, a rate-making formula which would have the ef-
53
feet of raising the level of field prices. It has been
proposed that the Commission be required to recognize, in
its wholesale rate determinations, the market prices paid by
54
pipe line companies to producers.
Among the effects charged to rate regulation activi
ties of the Commission as respects production and gathering,
is that some producers of gas refuse to sell to interstate
pipe lines for fear that they may become subject to compre
hensive federal control. Dual regulation in this regard,
allegedly, has been such that avoidance of actual or antici-
55 Hearings before _a Subcommittee of the Committee on
Interstate and Foreign Commerce of the United States Senate,
op. cit.rpT-go-:-----------------------------------
53 The conservation issue is discussed in greater de
tail elsewhere In this chapter. Cf. pp. 297-317.
54 Cf. p. 323.
291
TABLE IX
INCOME AVAILABLE FOR COMMON STOCK
AS A PERCENTAGE OF COMMON STOCK AND SURPLUS
U OF OIL AND GAS COMPANIES
SELLING LARGE VOLUMES OF NATURAL GAS
IN INTERSTATE COMMERCE, 1948*
COMPANY PER CENT
Barnsdall Oil Company 31.6#
Continental Oil Company 25.8
Gulf Oil Corporation 20.0
Humble Oil and Refining Company 27.7
Ohio Oil Company 28.4
Phillips Petroleum Company 18.7
Plymouth Oil Company 37.9
Pure Oil Company 23.6
^-Hearings before _ a Subcommittee of the Committee on
Interstate and Foreign Commerce of the United States SenaTe,
op. cit., pT ” 20.
292
pa ted federal regulation has been attractive to some produc
ers of gas. In a report on the Natural Gas Investigation, a
statement was made bearing on this problem:
Commissioner Thompson of Texas . . . in response
to the question whether there were any large amounts of
casinghead gas now being taken by pipe lines, . . . re
plied that--nWe could have had a bigger list hsd it not
been for the fear of the producers of this casinghead
gas that, if they hooked onto a pipe line, they could be
declared a public utility and limited to 6§- percent on
their total earnings., , He said he was referring parti
cularly to the Humble Oil Co.
Commissioner Thompson, whose views carry considerable
weight because of the enormous amount of gas produced in his
state, again referred to this problem when he testified be
fore a Senate subcommittee in 1949:
People who do not have' pipe lines, many of them,
partlcularly large companies [emphasis supplied] , are
hesitant to come and sell gas to interstate pipe lines
■jpecause they fear they will come under the regulation of
the Natural Gas Act.^o
A similar view has been taken by certain other government
57
and industry representatives..
55 Federal Power Commission, Report of Commissioner
Leland 0Ids and Commissioner'Claude L. Draper, 1948, Natural
Gas Investigation, Docket No. 6-58(1 "["Washington, D. C.:
Government Printing Office, 1948), p. 127.
56 Hearings before a_ Subcommittee of the Committee on
Interstate and Foreign Commerce of the ' United States Senate
on " “S'. 1495, op . cit., P~* 66.
57 National Association of Railroad and Utilities
Commissioners, Proceedings of the. 58th Annual Convention,
1946, pp. 10-121 r r Gas Producers Fighting FPC Control,1 1 Pub
lic Utilities Fortnightly, 43:560, April 28, 1949; 1 1 &n Imme
diate Challenge,” Oil and Gas Journal, 45:35, March 8, 1947;
293
Testifying before a House of Representatives commit
tee, an attorney for an independent producer in Louisiana
stat ed:
There is no way to estimate the loss of gas that
has'occurred through extension of Federal Power Commis
sion jurisdiction into the field of independent produc
tion and gathering. I do know that the situation of
Southern Minerals Corp. is typical, that practically
without exception other lawyers advising independent
producers and gatherers in answer to this question have
advised these companies just as I have advised Southern
Minerals Corp., and that as a result gas fields are shut
in, drainage is occurring and casinghead gas produced in
oil fields is being flared into the air when in a great
many cases it would otherwise be sold to interstate
pipe-line companies.58
Commissioners Smith and Wimberly of the Federal Power
Commlsslonsstated in their report on the Natural Gas Inves
tigation that:
As a result of this feeling of uncertainty re
garding the status of sales by producers and gatherers,
there have been indications that producers of gas and
associated oil may be unwilling in the present situation
to contract for the sale of gas intended for interstate
movement, for fesr that they may thereby become subject
to regulation as natural-gas companies under the act.
The oil industry which produces large amounts of natural
gas, has been particularly apprehensive of this possi
bility. Those who operate processing and cycling plants
have given expression to the same uncertainty and
, 1 ! Unsolved Problems in Gas Conservation,” Public Utilities
Fortnightly, 44:594-7, October 27, 1949.
58 Hearings before s _ Subcomm 111ee of the Committee on
Interstate and Foreign Commerce of the House of Represents-
tives on~H. R. ?9, E. R. 1758, and H. R. 982, 81st Congress,
1st Session, p. 267. A former conservation commissioner in
Louisiana testified that 2© trillion cubic feet of gas were
being withheld in that state for the same reason. Ibid.,
p. 40.
294
fears.59
Reference was made to various testimony to substantiate this
a s sertion.
Another type of escape from the influence of the
rate-making formula of the Federal Power Commission has been
employed. The Panhandle Eastern Pipe Line Company disposed
of a portion of its gas acreage by selling it to a newly
formed subsidiary. By so doing it hoped to remove these re
serves from federal control. The Commission was unsuccessful
ful in preventing this sale. The United States Supreme
Court held that this agency had no jurisdiction over the
transaction, since disposition of gas reserves and transfer
of gas leases was intimately related to production and gath-
60
ering, and thus exempt from federal regulation. Appar
ently, the company officials believed that they could pro
cure gas elsewhere on terms more favorable than the results
of original cost determinations relating to integrated pro
duction and gathering activities. Since the advantages of
sbme degree of integrated production and transportation op-
61
erations appear to be substantial, this sort of escape
59 Federal Power Commission, Report of Commissloner
Hel3on Lee Smith and Commiss ioner Harrington Wimberly, op.
cit., p. 17UT
60 Federal Power Commission v. Panhandle Eastern Pipe
Line Company, et al., 337 U. S. 498 (194-9) .
61 The stability of service achieved as a result of
an assured gas supply has been regarded as an advantage of
295
mechanism seems to be unfortunate.
Other evidence of attempts by producers to avoid fed
eral regulation is seen in the trend toward the inclusion of
special escape clauses in certain certificates issued by the
y
62
Federal Power Commission. Where a natural gas company
purchases gas from an independent producer, that producer
may require that the contract be automatically cancelled in
the event that the Federal Power Commission attempts to as
sume jurisdiction over the producer. The Commission has is
sued several certificates which recognize the validity of
63
such contracts. Apparently, an attempt on the part of the
Commission to exercise jurisdiction permitted by the Supreme
Court in the Interstate Natural Gas Company case would re
sult in cancellation of all of these contracts. Certain
pipe lines would perhaps be stranded.
It is important to consider the reasons why certain
ihtegratdd operation. Federal Power Commission, Report of
Commissioner Nelson Lee Smith and Harrington Wimberly, op.
crt. , p. 213 .
62 Hearings before. £ Subcommittee of the Committee on
Intersta te and Foreign Commerce of the House of Representa-
tives on H. R. 79, H. R. 1758, and H. R. 982, op. cit., pp.
¥55^5.
63 Five pipe line companies have been issued such
certificates in recent years: El Paso Natural Gas Company,
Texas Eastern Transmission Corporation, Trans-Continental
Gas Pipe Line Corporation, Trunkline Gas Supply Company, and
Tennessee Gas Transmission Company. Numerous suppliers were
involved. Loc. cit.
296
companies have sought to avoid federal control. Essential
ly, they seek to elude the financial disadvantages of the
cost standard as applied to production and gathering. In
sufficient allowances by the Commission for exploration and
drilling expenses has been a subject of criticism by the in-
64
dustry. Another criticism has been the failure of the
federal agency to allow an adequate "value” for gas reserves
which may have been purchased at an extremely low cost, but
which represent very large prospective revenue at "fair
, ««65
prices."
While the exact extent to which natural gas producers
have avoided federal regulation by refusing'Jto connect with
interstate pipe lines is unknown, there have been expres
sions of authoritative opinion sufficient to indicate that
the problem is somewhat serious. The adverse economic con
sequences of this situation is not so much an inadequate
supply of gas currently available to pipe lines, but rather
the waste or uneconomic utilization of the gas withheld.
Thus the difficulties of state 'conservation officials are
enhanced.
Conceivably, this problem could be solved by extend
ing federal control to include the production and gathering
64 Federal Power Commission, Report of Commissioner
Nelson Lee Smith and Commissioner Harrington Wimberly, op.
cit., p. 229.
65 Ibid., p. 233.
297
activities of all producers so that the disposition of all
natural gas would be a subject of federal regulation. Such
a solution would be rather drastic. While it might accom
plish the objective here considered, other problems probably
would arise to offset the gain. The administrative burden
of supervising and evaluating* the disposition of all gas
produced would call for greatly expanded personnel and funds
for the Commission.
Another possible solution would be to strengthen
state regulation in such a way as to prevent undue waste and
inferior use of gas. Since the chief adverse effect of
avoidance of federal control is uneconomic utilization and
waste of this exhaustible resource, the logical corrective
seems to be a strengthening of state conservation programs.
Conservation of natural gas♦ The Federal Power Com
mission has a major responsibility under the Federal Power
Act to aid in the conservation of the nation’s more or less
permanent water power resources. In contrast, control over
the conservation of the exhaustible natural gas resources
was not apparently intended to be more than an incidental
matter. The primary responsibility for these problems was
66
to rest with the various state governments.
66 Physical waste is more likely to occur in the pro
duction phase of the industry which is exempt from Commis
sion control by Section 1 (b).
298
State conservation activities with respect to natural
gas vary considerably between the several gas producing
states. Fundamentally, the adequacy of a state's conserva
tion laws determines, in large part, the success of its-'con-
servation program. The character of laws of this type in
67
effect in 1946 is well summarized in a recent report. The
major advances in these statutes have been made generally
within the past 15 years. Attention is here directed par
ticularly to the conservation laws of those states repre-
68
senting large reserves and output.
The leading natural gas producing state, Texas, has a
commission with authority to require that owners in a common
pool produce in proportion to their common interest (prora
tion) . It also may require that purchasers of gas shall
take proportionately from all producers in the field (rate
able take) . Moreover, it may fix a limitation on the amount
of gas which may be produced per barrel of oil produced (gas-
ooil ratio). No authority exists, however, to establish mini
mum drilling units and to require joint operation by several
67 Federal Power Commission, Report of Commissioner
Nelson Lee Smith and Commissioner Harrington Wimberly, op.
cit., pp. 126-131.
68 The Interstate Oil Compact Commission", comprised
of representatives of the chief natural gas producing states,
has fostered development of conservation laws. It is a fact
finding and deliberative body which studies problems related
to oil and gas conservation and makes recommendations to the
states. Ibid., pp. 147-9;.
299
owners (unit operation). Manufacture of carbon black could
not be prohibited. No control was granted to require spac
ing of wells, to require re-injection of gas for condensate
or oil recovery, nor to fix the well price of gas.
The Kansas commission had less comprehensive powers
than those of Texas with respect to conservation. It had
proration and well-spacing authority, but no control over
rateable take, gas-oil ratios, unit operation, carbon black
manufacture, cycling, or repressuring. Nei,ther did it have
specific authority to fix well prices. Among the major gas
producing states, Oklahoma had granted its commission the
most elaborate powers. It had authority over each of the
factors mentioned above except those relating to carbon
black manufacture and well-prlce fixing. The laws of Loui
siana were also quite comprehensive. In West Virginia, Mis
sissippi, and California the statutory powers for their res
pective commissions were very limited as compared with the
foregoing states.
Only one state, Oklahoma, has enacted a law requiring
unit operation in the field. Yet this type of regulation
has been regarded as the most satisfactory to accomplish the
general objectives of production control. A survey of con
servation practice led to the conclusion that
There can no longer be any doubt that completely
unitized operation of the underground reservoir, rather
than separate operation of individual leases, is the
300
most efficient method. Scientific production for the
greatest ultimate recovery--involving pressure mainte
nance, repressuring, water drive, and other advanced
production methods--can usually he applied only when
the reservoir is treated as a unit, for gas is migra
tory and its energy laws do not follow surface property
lines.69
This view has been supported by industry spokesman as well
70
as government officials.
The success of state conservation programs appears to
be remarkable if comparisons are made between waste occur
ring during the early 1930’s and that of the early 1940’s.
It has been observed that between 1935 and 1944 the amount
of gas vented into the air in Texas declined from 380 bil
lion cubic feet, or 37 per cent of total production, to 111
71
billion cubic feet, or only 4.57 per cent of production.
Flaring of dry-gas has been practically eliminated in all
72
producing states.
While’ the achievements appear to have been great in
f 6§ Ibid., p. 130.
70 Ibid., p. 120. A vice-president of a major gas
producting firm--the Phillips Petroleum Gompany--indicated
his approval of unit operations under state control.
71 Federal Power Commission, Report of Commissioner
Leland Olds and Commissioner Claude L. Draper, 1948, Natural
Gas Investigation, Docket No. G-580,"{Washington, D. C.:
Government Printing Office, 1948), p. 124. Testimony of
Professor Fancher of the University of Texas was cited.
72 Federal Power.Commission, Report of Commissloner
Nfelson Lee Smith and Commissioner Harrington Wimberly, op.
cit. p. 116.
301
terms of a declining trend of wasted gas, the amount of
flared gas is still substantial. It has been observed that
in 1945 waste of gas in the Southwest area
, . . may have exceeded . . . more than 730,000,000,000
cubic feet--an amount not far from the total natural gas
moving in interstate commerce and nearly 20 percent of
all marketed production in the entire United States.
Certainly one cannot conclude, in view of such figures, that
state conservation programs hsve been entirely successful.
It has been argued that the chief deterrent to utili-
74
zation of oil-well gas is the very low field prices. ’ 'hi 1
While there seems to be some support for the assertion that
higher field prices would stimulate attempts to sell gas
rather than waste it, there is reason to doubt whether this
method is necessary to achieve the purpose. More adequate
state conservation programs, particularly unitized operation
control in the Southwest, would undoubtedly aid greatly in
curtailing waste of oil-well gas. Increase of field prices
has.also been a factor encouraging sales of gas in the field.
It was stated in 1946 by Col. E. 0. Thompson, head of the
Texas commission and an authority on conservation, that
Owing to improving prices in the field . . .,
flare gas is worth saving and ”in my opinion we can now
75 Ibi<3T, p. 116. The term Mmay have exceeded'* is
used because a considerable amount of gas is flared but un
reported. Statistics are incomplete.
74 Ibid., pp. 190-1.
302
legally compel its full conservation, except as noted in
in isolated cases of small amounts of flare gas.75
The rapid growth of pipe lines is largely responsible for
the rise in field prices.
In the course of regulation under the Natural Gas
Act, the Commission soon discovered that it was impracti
cable to treat matters of conservation in a casual and in
cidental manner. Frequently, intervention of coal, rail
road, and labor interests brought Into view the issue of
economic utilization and conservation of gas. Although
these groups have been primarily concerned with protecting
their own interests, the Commission has found the issue in
escapable when considering the economic feasibility of a'
proposed pipe line which would bring natural gas into an
area already served by coal.
In a certificate case which came before the Commis
sion in 1943, intervenors argued that the Appalachian area
was adequately served by coal and that introduction of large
quantities of cheap gas would not only mean ruinous competi
tion for the coal industry, but would occasion dissipation
of natural gas for uneconomic industrial and space-heating
76 *
uses. The Commission disclaimed authority to act as the
75 Ibid., p. 117.
76 Re Tennessee Gas and Transmission Company, 3 F. P.
C. 574 (1943).
303
arbiter of the end-uses of gas. In granting the certificate
over the intervenor’s protests, the Commission stated:
We recognize the force of these arguments and are
not unmindful of the economic and social aspects of the
problem posed by these intervenors. We are not author
ized, however, to regulate rates for natural gas sold
directly to industrial consumers, which class of gas
sales furnishes the keenest competition to the coal in
dustry. Nor does our power to suspend rates extend to„
indirect sales of natural gas for industrial purposes.
The arguments presented in favor of the proposed pipe lines,
which were based largely on needs of industries for war pro
duction, were more persuasive than those of the coal inter
ests .
Intervenors again argued vigorously against issuance
of a certificate for a large gas pipe line in 1944, indicat-
*78
ing particular concern over industrial use of gas. The
Commission did not believe the differential in price between
natural gas and coal was so great as to seriously affect the
coal Industry. An important consideration also was the in
tention of the pipe line company to use large local storage
facilities, thus permitting operations at high load factors.
As a consequence, it would not be necessary to resort to ex
tensive off-peak or interruptible sales to industrial con
sumers .
77 Loc> clt-
78 Re Hope Natural Gas Company, et si., 4 P. P. C. 59
(*1944).
304
A rather significant step was taken by the Commission
in 1946 when it ruled out large direct sales by an inter-
79
state pipe line to an industrial consumer. Panhandle
Eastern Pipe Line Company attempted to sell substantial
amounts of gas to the Ford Motor Company. The city of De
troit and the Michigan Public Service Commission tried to
prevent such sales but to no avail. Complaint was made to
the Federal Power Commission to the effect that consumers’
service was threatened, since Panhandle also supplied gas to
Michigan Consolidated Gas Company which served the Detroit
area. The distribution company joined with the city and
state officials in protesting the industrial sales made by
the interstate pipe line.
The Commission stated, in an opinion, that the indus
trial sales here in question were violative of an existing
order. It was maintained that the company1s/capacity had
been fixed previously upon the basis of certain representa
tions as to what customers would be served. It appeared noe
necessary in this case to protect the adequacy of service to
existing customers. The Commission noted in its opinion
that ” ... action in this matter is not to be construed as
an attempt to assert jurisdiction over a direct sale of gas
79 Re i^anhandle Eastern Pipe Line Company and Michi
gan Consolidated Gas Company, 4 F. P. C. 43 (1946).
305
RO
as such.’ There is no denying, however, that this action
comes very close to control over end-use of gas. The Com
mission felt justified in ordering a curtailment of sales
directed to an inferior use. The basis for the order was
not found in any explicit statutory authority to regulate
sales to industrial consumers.
A committee of the National Association of Railroad
and Utilities Commissioners in 1945 regarded this issue to
81
be serious. The Panhandle incident had not yet occurred
at this time, but other problems had come to the commit
tee’s attention. Particular consideration was devoted to
the direct sales made by interstate pipe lines to industrial
customers of local distributing companies. The consequences
of this encroachment were stated as follows:
Unless this can be prevented, the loss of profit
able industrial business by such local utilities could
become so serious that their entire [ratej structures-
would have to be redesigned with a heavier burden on the
domestic customer.
Recognizing that the Federal Power Commission and most of
the states had no authority to regulate such sales, it was
recommended that either a state or national body be granted
80 LocT~~cit.
81 National Association of Railroad and Utilities
Commissioners, Proceedings of the 57th Annua 1 Convention,
1945, p. 183.
82 Loc. cit.
306
power to regulate the rates and that certificates of conven
ience and necessity he required.
What this committee regarded as a "no man’s land" the
Supreme Court stated in 1947 to be a proper field in which
the states might regulate. The Public Service Commission of
Indiana was upheld in its right to regulate sales by an in
terstate pipe-line directly to industrial consumers in In-
83
dian8. But while the constitutional right was upheld,
there is no assurance that regulation will, in fact, be es
tablished. At least two state commissions, those of Illi
nois and Missouri, have found themselves in the position of
being unable to regulate such sales due to lack of statutory
authority
There may be no immediate adverse effect on the con
sumer as a result of failure to regulate direct sales to in
dustries. In fact, he may be benefited by lower rates made
possible by high load factor operations where interruptible
sales to industrial consumers are made. Dissipation of this
exhaustible fuel may ultimately, however, seriously reduce
85 Panhstndle Eastern Pipe Line Company v. The Public
Service Commission of Indiana, et al., 552' U. 49'B TT5WT.
84 National Association of Railroad and Utilities
Commissioners, Proceedings of the 61st Annua1 Convention,
1949, p. 162. The Committee on Progress in the Regulation
of Fublic Utilities commented, "Seemingly, therefore, some
thing of a ’no man's land' in the field of regulation still
remains."
307
the supply available to individual consumers and consequent
ly occasion an increase in the price of the product.
With respect to industrial sales, it is evident that
both the Federal Power Commission and certain states have
attempted to exercise some degree of control. Neither level
has apparently recognized the problem to be of sufficient
importance to warrant comprehensive state regulation or fed
eral regulation. Fears that little-regulated industrial
sales would greatly expand as wholesale and residential
rates declined, have not been borne out by any trend. The
quantity of gss sold by "natural-gas companies" to indus
trial consumers represented approximately the same percent
age of total sales in 1948 as in 1939--64$ and 63^ respec-
85
tively. Nevertheless, in either year the quantity of
sales is large and, in view of the limited supply of this
resource, there is reason to question whether it is econo
mically sound to permit almost unlimited sales for inferior
uses such as boiler fuel.
Certain cases involving conservation Issues have seen
state commissions in disagreement with the federal agency.
For instance, in 1944 the Public Service Commission and De-
partment of Conservation of Louisiana intervened in a certi
ficate case to oppose construction of a pipe line which
85 ^taHTstics of Natural Gas Companies, 1948 (Wash
ington, D. C.: 'Government Printing 6ffice, 194$), p. xv.
308
00
would have transported natural gas to Tennessee. The of
ficials from Louisiana attempted to show why gas in their
state should not be moved out in large volume. The future
needs of the state and its limited gas supply were cited.
The Railroad Commissions of Texas also intervened in the
case, but took the position that no federal restriction on
interstate movement should be introduced. The certificate
was issued by the Federal Power Commission despite opposi
tion from Louisiana officials.
While Texas officials argued, in the above case, that
no restriction be imposed by the? Commission, they took an
inconsistent position in another case in which Texas gas was
87
involved. State officials contended here that natural gas
should not be exported to Mexico because of the inadequate
supply within the state to meet both its own future needs
and the amount proposed to be exported. A certificate was
issued for the exportation of gas despite protest from the
Texas commission.
As the problem of conservation and economic utiliza
tion of natural gas became more pressing, the Commission
realized the need for an inquiry into the whole question.
66 Re Memphis Natural Gas Company, 5 F. P. C. 197
(1944). ------ ----------------------
87 Re Reynosa Pipe Line Company, 5 F. P. C. 130
(1946).
309
Accordingly, in 1944 an investigation was instituted which 1
involved taking testimony from numerous witnesses, and ul-
88
timately culminated in two major reports. During the same
year the United States Supreme Court declared in a leading
case that ” ... considerations of conservation are mater-
ial to the issuance of certificates of public convenience
89
and necessity.” An investigation of the industry became
more urgent as a result of this ruling of the high court.
During the course of the Commission’s broad study of
natural gas, a great volume of testimony was taken relating
to the wisdom of moving large quantities of gas from the
southwest to the northeastern states. Through its authority
to grant certificates for new pipe line construction, the
Commission has an opportunity to exercise some degree of
control over the extent of this movement. It can, for in
stance, determine the adequacy of natural gas reserves
90
available to a naturel-ga3 company, and thus decide
whether the pipe line is able to render the service proposed
91
for some future period. Since the Commission may thus
Order Instituting Investigation, 5 F. P. C. 725
(1944).
89 Federal Power Commission v. Hope Natural Ga3 Com-
pany, 320 U. S. 591 (19447":
90 Sec. 14 (b).
91 Sec. 7 (e).
310
exercise some degree of control over the disposition of lim
ited gas supplies, it may be said to concern itself with
conservation, a matter which Is generally regarded as a
concern of the states.
The problem of inadequate supplies of natural gas has
not been a serious one as yet for the nation, and thus con
flict at this point between policies of federal and state
agencies has not been of large proportions. In one case,
however, the Commission took occasion to severely criticize
92
the lack of adequate state conservation laws. A pipe line
subject to federal jurisdiction sought to abandon a line
which had served thousands of customers, indirectly, for
several years. Criticism by the Commission was directed to
the state of New York, which had failed to enact proper con
servation laws. As a result of this dereliction, the state
commission was unable to deny a certificate to the proposed
pipe line. The Commission referred to the
. . .absence of any statutes or regulations limiting
daily production, or allowable withdrawals from gas
wells . . . and in the absence of statutes providing for
methods of conserving natural gas, operators of produc
ing acreage have produced the maximum amount of gas from
their acreage within a minimum period of time, without
consideration as to the life of the fields involved and
without consideration as to the total amount of gas that
"could Have "been produced If such operations had proc-
ceeded in an orderly fashion.93
1 92 Re Cabot Gas Corporation and Godfrey L. Cabot,
Inc., 3 F.*T. C. 35£7~58£ 11943)."
93 Re Cabot Gas Corporation, 3 F. P. C. 75 (1948).
311
It was charged that large quantities of gas had been dissi
pated in low-grade fuel uses contrary to sound conservation
practice.
This latter problem has been a matter of considerable
concern to the Federal Power Commission. It expressed a
94
"great Interest" in the leading case involving state jur
risdiction over sales of natural gas to industrial consum-
95
ers. Moreover, two commissioners expressed their view in
1948 that increased federal responsibility was needed to
strengthen conservation control. They Indicated that there
was need for
. • . definite but flexible consideration of the end-
uses to which natural gas imported from the Southwest
may be put and correlative study of the storage possi
bilities of the nearly depleted gas fields of the North
eastern States, to assure high load factor pipe-line
operation and dependable winter supplies of natural gas
without large sales of summer gas to industries on an
interruptible basis.96
In the broad sense, conservation includes moreothan
merely the prevention of physical waste. Inefficient utili
zation of gas may also constitute waste. The use of gas for
manufacturing carbon black and as fuel under large boilers
~ 94 Annual Report of the Federal Power Commission,
1948, op. cit., p. 10?.
95 Panhandle Eastern Pipe Line Company v. The Public
Service Commission of Indiana, et""al., 352 U. 3. 495 (194*7).
96 Federal Power Commission, Report of Commissioner
Leland Olds and Commissioner Claude L . Draper,"op ♦ ' cit .,
p T I 137
312
has been deemed by some to constitute undersirable economic
use, particularly where large quantities of coal are avail
able. That manufacture of carbon black is regarded as an
inferior use Is amply demonstrated by the fact that the
states of Alabama, Arkansas, and Wyoming prohibit this type
of use, while Texas has restricted carbon black production
97
in substantial degree. With regard to boiler fuel use,
the Federal Power Commission denied a certificate to an ap
plicant on the basis that " it is not in the public
Interest to authorize a pipeline which would be so largely
98
devoted to the supply of boiler fuel gas. . .”
Commissioners Olds and Draper expressed the view in
1948 that
. . . conservation is the outstanding problem involved
In regulation of the natural gas industry. All parties
acknowledge this in one way or another. The only ques
tions run to appropriate conservation measures and the
agency or agencies to be Entrusted with their adminis
tration.^
These officials were particularly concerned about the stead
ily increasing volumes of natural gas being moved from the
1 97 Federal Power Commission, Report of Commissloner
Nelson Lee Smith and Commissioner Harrington Wimberly, op.
cIF. r'pT~T2^------------------■ -----------— ; ---------* ~
98 Federal Power Commission Release No. 4778, May 5,
1950. Similar expressions of state officials have been evi
denced. See Federal Power Commission, Report of Commissioner
Leland Olds. - and Commissioner Claude L. Draper, op. clt♦, p.
99 Ibid., p. 75
313
southwest region to the northern industrial region. They
believed that it was wasteful to transport this fuel in such
large quantities to an area having an abundance of coal.
The position was taken that the gas should serve as a basis
for industrialization in the southwest region.
Certain state officials have maintained that they
could not only control the end-use of gas sold within their
own respective states, but that they could also regulate the
utilization of gas in out-of-state markets. Conservation
officials of both Oklahoma and Texas made such assertions in
the Commission's natural gas investigation hearings
When pressed to explain how this objective could be realize^
one of them maintained that hearings could be held by the
state commission and a limitation imposed, if necessary, on
movement of gas to prevent wasteful use. The Texas official
admitted, that reprisals from sister states might result, but
that restrictions on interstate movements for purposes of
conservation were legal and feasible. The governor of Loui
siana; however, representing another important producing
state, was emphatic in his view that a state had no legal
101
right to prevent exportation of gas to other states.
One type of state regulation has been attempted which
100 Ibid., p. 71.
101 Loc. cit.
314
is somewhat related to embargoes on gas. Two states, Kansas
and Oklahoma, have established well prices for gas on the
basis of their general rule-making powers. The Oklahoma
Corporation Commission fixed a minimum price for gas to be
applied at the wellhead as a condition of the taking. This
102
action was upheld by the Supreme Court of that state.
The Court considered this regulation only an incidental bur
den on interstate commerce:
We do not perceive that the commerce clause of
The Federal Constitution precludes the state in the pro
tection of local interests from fixing a uniform minimum
price consideration as a condition of the taking of nat
ural gas from a common reservoir. . .
The Court was referring to seites in interstate commerce.
The Kansas Corporation Commission also fixed a mini
mum wellhead price for gas. In commenting on the results of
this action, Commissioner Olds testified in 1949 that
The order of the Kansas commission, directing an
increase to 8 cents per thousand cubic feet in the well
mouth price of gas in the Hugoton field, has already had
repercussions affecting the rates charged consumers in
other states. This has come to the attention of the
Federal Power Commission through complaints from con
sumers in Nebraska, forwarded to us by Senator Wherry,
Senator Butler, and Congressman Miller of that State.
The complaints Indicate that the Kansas-Nebraska Natural
Gas Co. has advanced rates to direct industrial cusom-
ers by 5§ cents, with the explanation that 3^ cents of
Cities Service Gas Company v. Peerless Oil and
Gas Company, et al., Oklahoma Supreme Court, January 15,
1950, Utilities Law Reports, p. 19073.
103 Loc. cit.
315
this advance is due to the above-mentioned order of the
Kansas commission.104
Commissioner Olds pointed out that his agency could do noth
ing about the problem, since it has no control over either
industrial sales or field prices.
This illustration reveals clearly the attempt of a
producing state to realize a gain at the cost of higher
rates for consumers in other states. While the justifica
tion for this price control was the need for conservation,
it has already been indicated that other means of fostering
conservation are more appropriate. This situation is indi
cative of the potentialities for contests between sectional
interests.
To further substantiate the proposition that the in
terests of producing states and consuming states are, to a
considerable extent, in opposition, one may review the re
ports on the natural gas investigation conducted by the Fed
eral Power Commission. The producing states vigorously pre
sented their case for modification of Commission policy in
rate cases so as to allow higher values for gas sold to or
105
produced by interstate pipe line companies. Arguing in
104 Hearings before ja Subcommittee of the Committee
on Interstate and Foreign Commerce of the United States 5en-
ate on S. 1498, 81st Congress, 1st Session, p. 34TT
105 See the chapter on "Field Prices for Natural Gas”
in the Federal Power Commission’s Report of Commissioner
Nelson Lee Smith and Commissioner Harrington Wimberly, op.
cit., pp. 175-237•
316
opposition to these views were representatives of large con
suming states which relied upon out-of-state sources of sup-
. 106
ply*
Illustrative of the latter argument is the reported
testimony of the chairman of the. Missouri Public Service
Commission who spoke for a consuming state adjacent to a
107
producing state. He said that his state was opposed to
the transportation of gas through the state for use beyond
its borders, if that use will have the effect of curtailing
the supply available for use in the state. Commenting on
this testimony, Olds and Draper stated that
This statement illustrates one of the strongest
indirect arguments presented by the record for the ne
cessity of Federal rather than State responsibility for
the broader aspects of conservation. For it shows how
each State looks out for its own interest, irrespective
of the interest of other states. This attitude runs
through the presentations of all of the States. . .108
There seems to be an important role for the federal
government to play in the conservation of natural gas.
While the major responsibilities for prevention of physical
waste and local uneconomic utilization should remain with
106 These views are well summarized in the chapter on
’ ’Public Interest of the Consuming Areas— Load Considera
tions” of the following report: Federal Power Commission,
Report of Commissioner Leland Olds and Commissioner Claude
L. Draper, op. cit., pp. 85-116.
107'Ibid., p. 87.
108 Loc. cit.
317
the states, there are evident forces at work which preclude
satisfactory results from exclusive state regulation in this
field. There are indications that producing states may be
able to realize gains by legal devices such as price control
at the expense of consuming states. A federal agency should
have sufficient authority to prevent any undue advantage in
such a situation. Moreover, there apparently is need for
the Commission to give increased consideration to economic
utilization of gas when it evaluates the merits of applica
tions for certificates relating to proposed pipe line con
struction.
Regulation of accounts and other matters. Varying
systems of accounts and differing interpretations of ac
counting data have caused some degree of disharmony in regu
lation of natural gas company accounts as between state and
federal commissions. Frequently, companies are subject to
both federal and state accounting regulation. Whether this
practice is in the public interest is a pertinent matter for
consideration.
The leading case involving this sort of dual regula
tion is the East Ohio Gas Company case which has been thor
oughly discussed by the Commission, the courts, and many
109
others. As previously indicated, the Federal Power
109 Of . “ pp. 122-4.
318
Commission asserted jurisdiction over the company despite
the fact that all of Its facilities were located within the
state of Ohio and no gas was sold by it at wholesale. It
did, however, purchase gas from an interstate pipe line at
the state line and transported it at high pressure to its
distribution system. The Commission ordered the company to
adopt its uniform system of accounts for natural-gas com
panies .
The East Ohio Gas Company stated among its objections
to federal regulation that the change-over to the Commis
sion's accounting system would involve a cost of $1,500,000
110
to $2,000,000. Neither the Commission nor the Supreme
Court regarded the cost of complying as sufficient reason
for exempting the company from the order.111 A United
States Senator and former member of the Ohio commission,
however, stated his view of the cost in these terms:
The Federal Power Commission described this esti
mate as "considerably exaggerated," although it offered
no testimony to the contrary. The fact is that almost
every local gas distributing company in Ohio and else
where will be put to tremendous cost if it must maintain
two different accounting systems. Gas consumers will
pay higher prices. Naturally, they will demand an end
to this expensive overlapping.11^
110 Re East Ohio Gas Company, et al., 6 F. P. C. 176
(1947).
111 Cf. p. 146.
112 John W. Bricker, "The Significance of the East
Ohio Gas Case," Public Utilities Fortnightly, 45:201-8,
February 16, 1950.
The senator feared that there were potentialities of
several types of conflict between the Ohio Public Utilities
Commission and the Federal Power Commission. He referred
specifically to such matters as allocation of gas in times
of emergency, extension or construction of new facilities,
abandonment of facilities, and determination of adequacy or
inadequacy of gas reserves. Actually, the Commission has
not attempted to extend its control to these matters, al-
t
though there is no doubt that it could do so under Supreme©
113
Court decision. Moreover, the state commission would
have no.jurisdiction in such event, since federal authority
would supercede that of the state. Properly speaking, there
m
is no "conflict” between the two commissions when one has
paramount authority with respect to matters of regulation.
The specter of burdensome costs on the consumer as a conse
quence of duplication of requirements would not appear if
there were a clear conception of jurisdictional limits.
II. PROPOSED CHANGES IN JURISDICTION
The success with which the Federal Power Commission
implemented its powers and extended its reach within the
doubtful areas of regulation produced inevitable criticism
from those adversely affected in one way or another. The
320
moat vociferous critics have been representatives of the in
dustry subject to regulation. In addition, many state of
ficials have sought to prevent erosion of their authority.
The result has been that numerous proposals have been of
fered purporting to improve the system of regulation in this
field. More particularly, they represent attempts to con
fine the regulatory activities of the Federal Power Commis
sion to a narrower scope of jurisdiction.
Proposals relating to issuance of certificates. With
regard to the certificate powers of the Federal Power Com
mission under the Natural Gas Act, not only was a change
proposed, but an amendment to the Act was actually consum- ,
mated. The Commission discovered during the first few years
of regulatory experience with section 7 of the Act that
114
there was need for amendment. It found great difficulty
in ascertaining the extent of its jurisdiction due to the
language of the section. The Act originally had confined
the certificate-granting powers to pipe lines which were to
be constructed ”to a market in which natural gas is already
XX5
being served by another natural-gss company.” Since the
statute defined neither the term “market” nor ”ln which
114 Annual Report of the Federal Power Commission,
1959 (Washington, D. C.: Government Printing Office, 1§40),
p. &1.
115 Sec. 7 (c). (Repealed in 1942.)
321
natural gas is already being served,” the Commission found
its task extremely difficult and time-consuming.
The Commission proposed and Congress adopted an amend
ment which broadened the authority of the Commission, per
mitting it to determine the service area for each authoriza-
116
tion. Certificates were to be issued for all proposed
construction which was to be used for transportation or sale
of natural gas in interstate commerce as elsewhere defined
in the Act. ”Grandfather certificates” were to be issued to
companies which were in operation on February 7, 1942. The
Commission was explicitly given authority to grant certifi
cates for service of an area already served by another nat
ure 1-gas company.
Another amendment to section 7 of the Act was enacted
in 1947 permitting a holder of a Federal Power Commission
certificate to exercise the right of eminent domain where
117
necessary to secure right-of-way for its facilities.
This amendment was relatively non-controverslal.
At the conclusion of the comprehensive Natural Gas
Investigation, two Commissioners recommended amendatory isc—
116 Amendment to the Natural Gas Act of 1938, 56
Stat. 83.
117 Amendment to the Natural Gas Act of 1938, 61
Stat. 459.
322
118
legislation with respect to section 7. The principal aim
of the recommendations was to relieve pipe line companies of
" . . . unnecessarily burdensome certificate requirements,
while keeping necessary controls over major enlargements or
119
extensions of facilities and markets." It was intended
that costly and time-consuming hearings be eliminated, gen
erally, where proposed extensions were of minor importance.
Several minor amendments were also suggested to permit more
efficient amd effective administration through clarification
of Congressional purpose.
Hie various amendments and proposed amendments to the
certificate provisions have not been opposed by state offi
cials except insofar as minor changes have been urged in or
der to prevent an$y apparent adverse effect on state author
ity. The only point of issue in the hearings on the Commis
sion-sponsored bill of 1941 was the need for a provision to
explicitly safeguard state authority over gas produced and
sold within a given state. Such a provision was recommended
by the National Association of Railroad and Utilities Com-
116 Federal Power Commission, Report of Commissioners
Nelson Lee Smith and Commissioner Harrington~!flmberly, op.
cit., pp. 27-68. Two other members of the Commission de
sired no amendment of this kind. Federal Power Commission,
Report of Commissioner Leland Olds and Commissioner Claude
L. Draper, op. cit., p. 12.
119 Loc. cit.
323
120
missioners but did not become part of the law.
Proposals relating to producers anid gatherers. Sev
eral bills designed to restrict Commission jurisdiction over
production and gathering were introduced in Congress during
the 80th Congress and referred to Committee for hearings.
During both sessions of Congress extensive hearings were
held by committees of both the House of Representatives and
the Senate. Hone of the bills relating to this subject was,
however, enacted into law. Some of the bills attempted to
accomplish much more than merely that of restricting Commis
sion jurisdiction with reference to production and gather
ing.
These several bills may be referred to by the use of
the names of the Congressmen who introduced them. The Riz-
ley bill sought to rework the Act in a major way by not only
aiming to exclude Commission consideration or control of
production and gathering, but also to revise the whole rate-
making process, the certificate provisions, and other parts
121
of the Act. Specifically, with reference to production
l^Q Hearings before the Committee on inters tate and
Foreign Commerce of the house oT^Representatlves on HT R.
5249, 77th Congress, 1st Session, pp. 48-2.
121 Hearings before the Committee on Interstate and
Foreign Commerce of the house of Representatives on H. R.
2185, H. R. 2235, H. R. 2292, H. R.2569, and H. R. 2956,
80th Congress, 1st Session, pp. 1-3.
324
and gatheringsand Commission rate regulation, the bill pro
vided that
It shall allow to a natural-gas company as an op
erating expense an amount determined as follows: (1)
The actual prices paid for gas purchased if the purchase
is made by a natural-gas company from nonaffiliates and
nonsubsidiaries; (2) if the gas is produced by a natu
ral-gas company or purchased from a subsidiary or affil
iate, the prevailing current market price in the field .
• * or if there is no prevailing current market price
for such natural gas in said field or fields in which
produced, the fair and reasonable value of such gas . .
. and (3) reasonable compensation for gathering all of
such gas produced by such natural-gas company or pur
chased by a subsidiary or affiliate . . .122
Obviously, this is an attempt to cast out the cost-of-serv-
ice method of rate determination and substitute a "fair
field price" method wherever possible.
The Carson bill also proposed a major reworking of
123
the original Act of 1938. It contained a section on pro
duction and gathering and rat© regulation almost indentical
to that in the Rizley bill. This phrasing was likewise vir-
124
tually reproduced in the Davis bill. In contrast to
these proposals, the Dolliver bill simply attempted to es-
125
tablish a policy for the administration of the Act. It
would have required the federal agency to " . . . avoid con
trol over, or regulation of, rates, returns, or practices
1^2 Loc. cit.
123 Ibid., pp. 4-6.
2.24 Ibid., pp. 6-8.
125 Ibid., p. 9.
325
incident to the production and gathering of natural gas.”126
All of the foregoing bills were introduced in the
House of Representatives. In responding to a request to
submit its views on these bills, the Federal Power Commis
sion declared that the bills relating to rate regulation
were ’ ’premature” and declined to give a detailed analysis
127
nor to pass judgment upon them. Instead it stated:
. . . prior to completion and filing with the Congress
of our report on the Natural Gas Investigation, an ade
quate basis for sound evaluation of the various propos
als contained in these bills will be lacking.128
Extensive hearings were held in 1948 by a Senate sub
committee on a bill which had passed the House in essential-
129
ly the form of the Rizley bill. The Bureau of Rates of
the Federal Power Commission submitted to the Committee a
detailed analysis of the bill as to its effect, if enacted,
with respect to consumers served by eleven interstate pipe-
130
line companies. It concluded that
The impact of . . . several sections . . . on the
1^6 LocT cit.
127 Ibid., pp. 10-12.
128 Loc. cit.
129 Hearings before a Subcommittee of the Committee o
on Intersta te and Foreign Commerce of the United States Sen-
ITEe on S. 4051, 80th Congress, 2nd Sess., pp. 4-6.
1^0 Ibid., pp. 291-318. No analysis of this bill wss
submitted by'the Commission as such in report form, although
the members testified before the subcommittee.
526
Commission’s rate-making policies and principles is tre
mendous. If the bill should become law, the way will be
clear for the addition of many millions of dollars to
the bills of the consumers of natural gas in almost
every State now obtaining natural gas from outside its
borders.131
An official of the Commission’s staff testified that the in
crease to consumers would be approximately $41,000,000 a
The National Association of Railroad and Utilities
Commissioners favored the principal objectives of the bill,
133
but they desired certain modifications. In particular,
it was feared that the bill would exempt from state juris
diction as well as federal jurisdiction authority to regu
late rates for gas sold in the production and gathering
stage. It was therefore urged that the following amendment
be added:
It Is hereby declared to be in the public inter
est that the business of production and gathering of
natural gas and of the transportation and sale thereof
for ultimate public consumption.shall be subject to pub
lic regulation, and, to the extent that such a business
is not subject to the jurisdiction of the Commission un
der the act, the same is declared to be local in charac
ter, and subject to regulation by State authority.134
131 ibid., p. 292. This conclusion was based primar
ily on the anticipated rise In price all along the line due
to monopolistic price fixing in the field.
132 Ibid., p. 338.
133 Ibid., p. 41.
134 Loc. cit.
This amendment would have transferred any jurisdiction that
the Commission might have had over production and gathering
to the states, thus permitting state commissions tcK^exercise
control if given that authority by legislation in their res
pective states.
During the 81st Congress a virtual flood of bills
135
swept into the House of Representatives and Senate. The
principal objective was, as in the bills before the 80th
Congress, to limit Federal Power Commission authority with
respect to production and gathering. Both the House and the
Senate committees which considered these bills reported fa-
vorably on one proposed amendment to the Act. The two
137
bills were essentially the same. Lengthy hearings were
held on these bills prior to their consideration by the Sen
ate andrHouse of Representatives.
The Kerr bill, considered in the Senate, was much
138
milder than previously proposed amendments. Its prlnci-
135 The Federal Power Commission in 1949 commented bn
10 bills introduced in the first session to amend the Natu
ral Gas Act. Annua 1 Report of the Federal Power Commission,
1949, op. cit., p. 136.
136 Loc. cit.
137 Only the Senate bill is therefore discussed here.
138 Hearings before jo Subcommittee of the Committee
on Interstate and Foreign Commerce of the United States Sen-
aTe on S. 1498', Slst Congress, Ist Sess., pp. T^2. In view
of the fate of previous bills of a much broader scope, the
industry apparently favored a bill that did not try to ac
complish so much. "Natural Gas in Congress," Public Utili
ties Fortnightly, 45:299, March 2, 1950.
328
pal Intent was to remove application of the Natural Gas Act
. . . to any sale of natural gas at arm’s length made at
or prior to the point of delivery into or reception in
interstate transmission facilities during or at the con
clusion of production or gathering. . .139
Other exemptions were also provided for In this bill to fur
ther limit Commission jurisdiction.
Because of the cleavage of opinion among the members
of the Commission, it was necessary for that body to submit
two reports on the Kerr bill.^4^ A majority report con
cluded that
. . . The effect of the proposed amendments . . . would
be In one way or another to restore Interfuel competi
tion as the final determinant of the rates at which nat
ural gas would be sold to ultimate consumers. . . The
proposed amendments forbode a change of the situation
which would afford dominant producers of natural gas an
opportunity to increase prices practically at will, sub
ject only to the ceilings Imposed by prices of other
fuels. We do not believe this would be in the public
interest.141
The majority defended the Supreme Court’s decision on the
142
jurisdictional issue in the Interstate case. Signifi
cantly, the comment was made that M . . . The Commission
159 Loc. cit.
140 Reference has already been made to the sharp dif
ference of opinion among members of the Commission as to the
proper method of rate-making. Cf. p. 287.
141 Hearings before a _ Subcommittee of the Committee
on Interstate and Foreign Commerceodf the United States Sen
ate on S. 1498, 81st Congress, 1st Session, p. 10.
142 Ibid., pp. 4-5.
329
feela that no occasion would ever arise to regulate the
143
small producer.” The large producers, however, were con
sidered to be in a position to raise the price of gas in the
field at will. It was pointed out that, in 1947, of the ap
proximately 600 independent producers, two-thirds of the
total gas sold was accounted for by the 25 largest vendors
144
and nearly one-half of the total was sold by 10 producers.
A Commission minority expressed its view in a sepa
rate report that ” ... action should be taken by the Con
gress to make clear the exempt status under the Act of inde-
145
pendent producers and gatherers. . .” It was felt, how
ever, that a slight modification of the Kerr bill was needed
so as to narrow its application somewhat.
The National Association of Railroad and Utilities
Commissioners did not present its views In the 1949 hear
ings, probably because its position had previously been out
lined in considerable detail before the committee.
A bill was ultimately passed by both houses of Con
gress and referred to the President. Essentially, the bill
was designed to eliminate the effect of the Interstate case
by prohibiting Commission regulation of the rates charged by
145 ibid., p. 10.
144 Ibid., p. 8.
3.45 Ibid., p. 29.
330
independent producers to pipe line companies, where such ga3
wa3 sold immediately at the conclusion of the production and
gathering activities. President Truman vetoed the bill, and
in his message to the House of Representatives indicated his
146
reasons.
One of the reasons for the veto was the belief that
the advancing field prices, due in large part to pipe line
extensions, precluded any necessity to stimulate a price in
crease in the field. He did not believe the cost standard,
as applied by the Commission, allowed inadequate allowances
for exploration and development such as to discourage sales
in interstate commerce. A particularly strong point was
made that field prices were tending to advance and that in
dications pointed to continuing rise. He recognized that
the Commission had found little occasion to regulate prices
charged by independent producers, ” ... but the authority
to deal with them in the future clearly should not be dls3i-
4 . ^ n147
pa ted."
The veto appears to have been in the public interest,
since the bill was founded more upon sectional interest than
need for conservation. The Commission still has the full
authority permitted it by the Supreme Court in the Inter-
146 "Text of President’s Veto of Natural Gas
The New York Time a, April 16, 1959,/
147 Loc. cit.
331
state case. Whether such authority will he exercised will
probably depend largely upon how rapidly field prices in
crease .
Miscellaneous proposals. As previously indicated,
some of the bills Introduced in the Congress included, In
addition to major provisions on production and gathering,
other provisions aimed at restricting Federal Power Commis
sion authority. One of these bills sought to prevent the
exercise of federal jurisdiction with respect to a company,
the facilities of which are located entirely within one
state, but which receives gas from an interstate pipe line
148
at the state line and sells gas at wholesale.
This feature of the bill was carefully scrutinized by
the advisory counsel of the National Association of Railroad
and Utilities Commissioners. In referring to the sales of a
company of this character, he stated:
While all the plant and all the transactions of
such a company are wholly within one State, nevertheless
sales of that character, as a matter of law, are sales
in interstate commerce. Under the Natural Gas Act, as
it stands, they are subject to Federal Power Commission
regulation. . . There Is, however, nothing in the act
fproposed amendment) to evidence an intent on the part
of Congress that these rates withdrawn from Federal
Power Commission regulation may hereafter be regulated
by state authority. We believe the decisions of the
United States Supreme Court make it clear that such
148 He airings before £ Subcommittee of the Committee
on Interstate and Foreign Commerce of the TTnltecj States Sen-
a~fce on S. 403l, 6Qth Congress, 2nd Session, p. 5.
332
149
intent should be clearly expressed.
Thus did the Association's representative caution the com
mittee not to create as regulatory gap wherein neither fed
eral nor state commissions would be permitted to take ac
tion .
One of the most recent proposals relating to Commis
sion jurisdiction is of a positive nature in the sense that
it would augment the agency's jurisdiction. A bill was con
sidered in Congress to amend the Natural Gas Act so as to
provide authority to regulate securities of natural gas com-
150
panies. The chairman of the Federal Power Commission
testified in favor of the bill, declaring that securities of
the interstate pipe line companies were not effectively reg-
151
ulated by the state commissions. He referred to the
growing dangers of heavy debt ratios and concentrated indus
try control of a few equity holders. Fear was expressed t
that the situation might get out of hand. He was careful to
note, In proposing adoption of an amendment, that state reg
ulation was not to be usurped.
*
Another attempt to restrict federal jurisdiction over
the natural gas industry was made by Senator Bricker of
----- IWTETci., p. 42.
150 "Arguments for Natural Gas Security Regulation,"
Public Utilities Fortnightly, 45:376-377, March 16, 1950.
151 Loc. cit.
333
Ohio, whose action stemmed chiefly from the decision of the
Commission and the Supreme Court of the United States in the
152
East Ohio Gas Company case. He introduced a bill which
would have exempt from Commission jurisdiction transporta
tion and sale of natural gas within a single state by a com
pany engaged in the local distribution of gas in that
s ta te •
Vociferously attacking both the Commission and the
Supreme Court for perpetrating an unwarranted extension of
authority, Brlcker asserted:
If present trends continue, we shall soon have a
unitary form of government with the states and local
governments serving merely as subordinate administrative
units.154
He recommended that a broad investigation be undertaken of
the whole federal system with a view to making appropriate
allocations of functions and tax sources as between state
and federal levels of government. The conclusion to which
he arrived was that
If our Federal system is to be altered, the al
teration- should be the result of intelligent choice.
State and local governments are now losing their func
tions and powers by the processes of usurpation and at
trition.^-5®
152 Cf. p. 122.
155 Annua 1 Report of the Federal Power Commission,
1949, op. oiti., p. 136.
154 John ?/. Brlcker, loc. cit.
155 Loc. cit.
334
The wisdom of allocating responsibilities for regula
tion on the basis of intelligent choice is beyond reasonable
doubt. There would seem to be considerable merit, therefore,
in the suggestion that a comprehensive investigation be in
stituted so as to provide the basis for such choice. The
Natural Gas Investigation of the Federal Power Commission
was of a general scope, but no attempt was made to inquire
into the sources of revenue for financing regulatory activi
ties. Moreover, this investigation was conducted by a fed
eral agency exclusively, whereas a study of the broader
scope suggested would properly be a mattef* of joint’ respon
sibility of federal and state levels of government.
III. SUMMARY ■
The recency of federal regulation and the dynamic
character of the natural gas industry has occasioned a num
ber of difficult problems. With state commissions already
engaged in regulation of the industry at the time Congress
provided for federal control, it was to be expected that
difficulties would arise in the development of proper work
ing relationships between state and federal agencies. Yet
dual regulation has proved rather effective. The rapid
growth of the industry is indicative that the dual system of
control has not inhibited rapid industry development. Nev
ertheless, there are signs that interconnections between
335
distributors have been broken in order to avoid federal reg
ulation. Shortages of gas have called for emergency service
rules prescribed by the Federal Power Commission In which
allocations are made between consumers of various states.
This action has made it possible for consumers in particular
states to receive protection from curtailed gas supplies
furnished by interstate pipe lines.
In the field of rate regulation, achievements have
been notable as both wholesale and retail rates have declined
in a period when the general level of prices has risen. Yet
there are indications that local rates have not adequately
reflected wholesale rate reductions. The problems of pass
ing on interstate rate reductions to consumers have been
evidenced in the impoundment cases. While the benefits, for
the most part, have been passed on in these cases, the ex
pense and time involved have been adverse consequences.
The regulation of production and gathering activities
Is generally recognized to be a responsibility of the states
despite the fact that the Federal Power Commission has been
accorded jurisdiction over sales of gas by Independent pro
ducers and gatherers to interstate pipe lines. The applica
tion of the cost standard in rate cases before the Commis
sion has tended to cause lower prices in the field and, as
a result, interests in producing states have sought to mod
ify regulation so as to permit higher field prices. There
336
Is evidence that Independent producers refuse to sell gas to
Interstate pipe lines because of the fear of comprehensive
federal control.
Conservation has been regarded primarily as a respon
sibility of the states. Yet conservation control was of
little consequence until recent years. While the states are
mainly concerned with physical waste, there is an important
role for the Federal Commission in the broader aspects of
conservation, attributable to the inability of state agen
cies to control interstate gas and explained also by the
sectional interests of states.
The efforts to modify Commission jurisdiction by sta-
statutory amendment have been unsuccessful except for minor,
somewhat noncontroversial, changes. A major curtailment of
federal jurisdiction received the support of a majority In
Congress in 1950, but was defeated by presidential veto.
IV. CONCLUSION
Dual regulation has proved to be anfairly effective
instrument of public policy. The best indications that the
system has functioned In the public interest are seen In
three directions. In the first place, an ever Increasing
supply of natural gas has been made availabletto consumers
over a wide area. Secondly, retail rates have been signifi
cantly reduced during the period of dual control. Thirdly,
337
conservation of this exhaustible high-grade fuel has Im
proved, thus better protecting the public's interest against
physical waste and uneconomic utilization.
Despite these favorable indications, there are nega
tive aspects to consider. Simply because the system of reg
ulation has enhanced the welfare of the consumer is not suf
ficient reason to put the stamp of approval on it and agree
that all is well. Greater achievements may have been pos
sible had certain modifications been introduced. It is
therefore wise to recognize the frictions and disharmonies
in the regulatory system.
With respect to rates$ there appears to be need for
close coordination of federal and state commission activi
ties to insure that temporary or continuing windfalls do not
accrue to distributing companies. Of basic importance also
is the need for more general agreement on the manner of In
terpreting accounting data in connection with rate-making.
In the conservation field, the states have not yet
reduced physical waste to the extent that is required to
protect this superior fuel. Some states have done much more
than others. There is need for more stringent laws in all
major producing states, particularly to provide for unit op
eration of fields. There is a serious question as to wheth
er the producing states of the southwest will voluntarily
take the necessary conservation steps to Insure protection
338
of the national interest in this valuable resource.
There are indications that substantial quantities of
gas have been consumed by certain industries for inferior
uses. There is need for the Federal Power Commission to
give greater consideration, in certificate cases, to the
economic utilization of gas even though this will remove
some responsibilities from state commissions. To accomplish
this objective the federal agency should be permitted to
control, to the extent necessary, direct industrial sales
by interstate pipe line3.
CHAPTER VIII
SUMMARY AND CONCLUSIONS
I. SUMMARY
The natural gas and electric utility industries have
been subjected to elaborate regulation by both state and
federal regulatory commissions. Inasmuch as the primary
objective of regulation is to enhance economic welfare,
there is abundant reason to inquire into the economic ef
fects of this dual system of control. If the system Is to
make a maximum contribution, In terms of its essential pur
pose, it is necessary that its weaknesses be known so that
a sound basis may be provided for evaluating whatever modi
fication Is contemplated.
Since the nature and extent of authority conferred
upon the various commissions determine, in large part, the
effectiveness of regulation, the first consideration relates
to the basie statutes underlying the activities of the com
missions. A survey of statutory powers of the Federal Power
Commission and the state commissions reveals that there is a
substantial gap in fundamental law created by the failure of
many state legislatures to provide comprehensive statutes.
With respect to control of water power development, this de
ficiency is not so important because of the extremely broad
scope of federal authority. Inadequate state powers over
340
intrastate activities of electric utilities and natural gas
companies is of much greater significance due to the fact
that Federal Power Commission authority is more narrowly
circumscribed.
Economic conditions relating to the electric utility
and natural gas industries have had a 3trong determining in
fluence on the structure and functions of regulation. Wide
spread availability of energy resources in the United States
has been responsible for considerable geographic decentrali
zation of the electric utility industry. Certain forces,
however, have tended to broaden the scope of electricity
movement, i. e., the incentive to realize lower unit costs
through increase in the scale of operations, the incentive
to interconnect utility systems, and the efforts of the Se
curities and Exchange Commission to improve corporate struc
tures and foster technical integration.
The geographic concentration of the natural gas re
sources and their remote location from population centers
has occasioned the contructlon of numerous long-distance
transmission £Ipe lines. While lengthy electric transmis
sion lines have not proved feasible, extensive pipe line
systems are notably efficient. Thus much natural gas moves
across state lines.
While statutory powers have a fundamental signifi
cance, a matter of more immediate importance to those
341
affected by regulation is the actual jurisdiction exercised
by a commission. The Federal Power Gommission, through im
plementation of its authority under Part I of the Federal
Power Act, has extended its field of activity so as to in
clude virtually every privately developed hydroelectric
power site of any consequence in the nation. This broad
scope of jurisdiction has been achieved, with the aid of
the courts, by means of a liberal construction of what con
stitutes "navigable waters" and what so affects "navigabil
ity" as to require federal control.
The primary duty of the Commission under Part I is to
issue permits and licenses for the construction of water
power projects. In connection with this activity, due con
sideration must be given to the laws of individual states a
and the views of state commissions. While some officials
have contended that an applicant for a license must comply
with state laws, the Gommission,and the courts held in the
First ' Iowa Electric Cooperative case that no such compliance
is necessary. Nevertheless, the Commission has given atten
tion to the interests of particular states.
While the legal basis for federal jurisdiction over
water power resources has appeared at times to be rather
speculative, the economic advantages of federal control are’
greater than those resulting from state control. In order
to realize maximum benefits from a river basin which may
342
extend across several states, It is necessary that the en
tire watershed be treated as a regional unit. Even minor
non-navigable streams sometimes have an important relation
ship, in the aggregate, to the power potentialities of a
basin. Essentially, dual regulation has not been employed
here because of dominant national interests.
tinder Part II of the Federal Power Act, the Commis
sion has been faced with the difficult problem of ascertain
ing the proper limits to its jurisdiction so as not to in
fringe upon state jurisdiction over generation and distribu
tion facilities. Despite these general limitations on Com
mission authority, certain companies with facilities located
entirely within one state were declared to have "public
utility” status because some electricity generated or dis
tributed by them moved in interstate commerce over intercon
nected lines. Rate control was not introduced in all cases,
although such authority prevailed with respect to sales at
wholesale in Interstate commerce. 1516 Important type of
control immediately put into effect in each case was the
requirement that accounts be kept in accordance with the
Commission’s uniform system.
Much of the Commission’s work load relating to elec
tric utilities has been In the area of accounting regula
tion. An enormous task was undertaken to analyze utility
accounts and to require their reclassification. One of the
343
jurisdictional issues that arose in the course of these ac
tivities was whether the state commissions or the Federal
Power Commission had exclusive control over the fundamental
corporate books of account. In the Arkansas Power and Light
case an attempt was made by a public utility, with the sup
port of a state commission, to have such authority secured
to the state commission, but the effort was defeated by the
United States Supreme Court.
Another important aspect of regulation by the Federal
Power Commission relates to the interconnection of utility
systems. It is significant that the three leading cases in
which Commission jurisdiction under Part II was challenged
Involved Interconnections of facilities. As a result of the
rapid growth of the interconnection movement, increasing
numbers of_utility companies have come under federal juris
diction, either because they sell electric energy at whole
sale In interstate commerce, or because they simply transmit
electricity in^interstate commerce. Even where the amount
of electricity moving across a state line has been extremely
small; federal jurisdiction has been'asserted and upheld by
the Supreme Court.
The most important specific functions of the Commis
sion in regulating electric utilities have been the promo
tion and encouragement of Interconnections between electric
systems, suspension of new rate schedules, determination of
344
the reasonableness of rates, approval of mergers and consol
idations, approval of security issues, regulation of ac
counts, and investigations of one sort or another. State
commissions, in general, have similar responsibilities with
respect to intrastate operations; but their powers, person
nel, and funds are generally much more limited.
One of the consequences of dual control is the reluc
tance of some intrastate electric utilities to establish or
maintain interconnections with out-of-state companies be
cause of a desire to avoid federal regulation. Data on in
tersystem sales Indicate that the percentage of total kilo
watt-hour sales represented by sales for resale actually de
clined between 1938 and 1948. An analysis of rate regula
tion Indicates that retail rates in several states having no
commission regulation are higher than those in neighboring
states which have commissions. In general, however, rates
have declined substantially. Some difficulty has been ex
perienced in bringing about a sound general rate structure,
due to divergent opinions as to interpretation of accounts.
There have been no successful attempts to amend the Federal
Power Act.
Under the Natural Gas Act the Federal Power Commis
sion has attempted to define the scope of its jurisdiction
in a field that has expanded with great rapidity. Much dif
ficulty was experienced in determining the precise limits of
345
that phase of the industry which Congress apparently in
tended to place under federal regulation. In the face of
considerable opposition from industry leaders and certain
state officials, the Commission proceeded to inquire into
the cost of producing and gathering gas where there was no
"arm1s-length" bargaining between producer and pipe line
*
company. This procedure was considered necessary in order
to ascertain the proper allowance to make for gas when de
termining reasonable wholesale rates of a natural^gas com
pany. Ultimately, the Supreme Court, by a unanimous deci
sion, even sanctioned Commission control over the rates
charged by an independent producer for gas sold to an inter
state pipe line. Significantly, the federal agency was re
luctant to venture as far as the court would permit, al
though the Commission was divided on how far it should go
in this direction.
While the Federal Power Commission confronted the
opposition of state conservation authorities at the produc
tion stage of the natural gas industry, it also met resist
ance of state agencies at the distribution stage. The
latter problem arose where federal jurisdiction was asserted
over a gas company, the facilities of which were located en
tirely within one state and which made no sales at wholesale
but did purchase gas at the'state line and transported it at
high pressure to various distribution systems. A number of
346
companies reflecting this pattern of operations have been
declared ”natural-gas companies” and ordered to maintain
accounts in conformity with the Commission’s uniform system.
State officials have regarded this extension of federal ju
risdiction as an unwarranted encroachment on the right of
the state to regulate local distribution and Intrastate com
merce. The Supreme Court has ruled against the states on
this issue.
The functions of the Commission relative to the natu
ral gas industry have been largely centered on the issuance
of certificates of convenience and necessity and the deter
mination of reasonable wholesale rates of natural gas com
panies. In addition, it approves requests for abandonment
of service, authorizes interconnections of facilities, au
thorizes exportation of gas, prescribes a uniform system of
accounts, and conducts investigations of various types. At
the state level, conservation authorities of the chief pro
ducing states have endeavored, to prevent undue waste of gas,
while public utilities commissions of consuming states, in
general, exercise extensive jurisdiction over distributing
companies.
The trend of wholesale and retail gas rates has been
downward during the period of dual control. Yet there have
been indications that wholesale rate reductions may not have
been passed on sufficiently to ultimate consumers.
347
Impoundment case3 reveal the difficulties of harmonizing
federal and state rate regulation. The expense and time
consumed in these cases have been quite substantial.
As a result of a feeling of uncertainty and fear re
garding the possibility of federal regulation, a number of
independent producers have been unwilling to sell natural
gas to interstate pipe line companies. While no serious
shortage has occurred as'a consequence of this policy, there
has been unfortunate waste in the producing areas due to
this cause.
Conservation of natural gas is primarily a responsi
bility of the states. Notable progress has been made in re
ducing physical waste of gas, but this problem continues to
be serious. The efforts of two state commissions to fix
minimum well prices have been explained by officials in
these states as being prompted by conservation needs. These
actions have been followed by complaints in consuming areas
outside the states that retail prices for gas have been in
creased as a result of this price control. The Federal
Power Commission has recognized a responsibility to consider
broad aspects of conservation in connection with its regula
tory activities.
Direct sales of natural gas to industrial consumers
are exempt from Commission control. A vigorous attempt on
the part of an interstate pipe line company to avoid state
348
regulation failed, as the Supreme Court ruled that the state
had such authority in the absence of Congressional intent to
regulate that subject of interstate commerce. In the inter
est of end-use conservation, there is reason to regulate
such sales, but at least two of the state commissions have
found it impossible to do so because of insufficient statu
tory authority.
Regulation of natural gas company accounts by federal
and state commissions has resulted in difficulties similar
to those reflected in electric utility regulation. Varying
systems of accounts and divergent views on interpretation
of accounting data have handicapped efforts to employ com
parative analysis as a tool of regulation. It has been
argued that the cost of changing over from a state system to
the Commission system of accounts would Involve a very heavy
cost burden for the company concerned. Neither the Commis
sion nor the Supreme Court has recognized this reason as
adequate to deny federal jurisdiction.
Strenuous efforts have been made to modify the powers
of the Commission, particularly to limit its authority over
the production and gathering phase of the industry. While
considerable support for amendment has been evidenced, no
attempt to restrict federal jurisdiction in this way has
been successful.
II. CONCLUSIONS
349
Dual regulation of electrics utility and natural gas
industries has contributed much to the public interest. No
basis has been found to sustain a conclusion that either
exclusive federal or state control would be able to make a
greater contribution. Yet while favorable effects of the
dual system are impressive, there is evidence which shows
that additional benefits might have been realized except for
certa in conflicts and disharmonies.
An analysis of the statutory powers of the commissions
revealed wide differences among these agencies as to funda
mental authority to regulate. Even ignoring factors such as
inadequate funds and personnel, some commissions appear to
be quite incompetent. Although it might be argued that few
powers for a commission, or no commission at all, is indica
tive of insufficient need for specific types of regulation,
the regulatory problems do not appear to vary from one state
to another enough to explain the variations in powers. It
is recognized, of course, that the more appropriate evalua
tion concerns the effects of regulation rather than statu
tory powers.
In the field of water power control, dual regulation,
essentially, does not exist. The Federal Power Commission
has been given virtually complete control over private water
power development. Steady and substantial progress in this
350
connection indicates that the basic objective of regulation
has been achieved. Vitally important is the fact that the
federal agency has given much consideration to the need for
integrating power units throughout each watershed.
With respect to electric public utilities, dual regu
lation is more feasible. The impracticability of burdening
a federal agency with the numerous details of regulation of
retail distribution is aimost self-evident. Yet the inter
state transmission of electricity is clearly outside the
effective range of state regulation, both legally and eco
nomically.
Although electric rate regulation by the Federal "cr. v
Power Commission has not been very active, there have been
some notable rate adjustments. At the state level there ap
pear to be certain rate distortions due to the varying ef
fectiveness of regulation among the states. There is need
for closer agreement among regulatory officials on account
ing interpretation in order to prevent unwarranted inconsis
tencies in rate regulation. There is also great need for
cooperation between federal and state commissions to obtain
maximum benefits from regulation.
The economic advantages of interconnection do not ap
pear to have been fully realized because of the desire of
certain electric utilities to avoid federal regulation.
Even within the jurisdiction of the better state commis
351
sions, avoidance of federal regulation has been evidenced.
If such avoidance la attractive to firms in states with
superior regulation, it would seem that the incentive to do
so should be greater in states with less competent commis
sions .
Regulation of the natural gas industry has been par
ticularly concerned with rate control. Because of the em
phasis upon this vital aspect, there has been need for close
coordination of state and federal agencies to insure that
adjustments of wholesale and retail rates are closely re
lated. There have been indications that this relationship
has not been sufficiently intimate and that consequently
the ultimate consumer may not have benefited adequately from
wholesale rate reductions.
Since natural gas is a superior fuel with a low price
and is limited in supply, the need to conserve it is beyond
reasonable doubt. Primary responsibility for control of
physical waste in the producing areas should rest with the
state conservation authorities, but there is need for more
stringent control. Waste is still very serious.
Another important aspect of conservation is the pre
vention of uneconomic utilization of natural gas. To some
extent this is a problem for the states to control. In
large part, however, this responsibility should also rest
with the Federal Power Commission. There is need for the
352
Commission to give considerable weight in certificate cases
to the economic utilization of gas. In order to accomplish
this objective it seems desirable that the Commission be
permitted to control direct industrial sales made by inter
state pipe lines.
The efforts of producing states to bring about in
creased prices for natural gas indicate that the Commission
may have to serve as an arbiter, to some degree, of the
• prices desired by producing states of the southwest and
prices desired by consuming states in the north and east.
It may become necessary, in the public Interest, to exercise
control over prices for gas sold by independent producers to
Interstate pipe lines--a type of control the Commission has
thu3 far been reluctant to put into effect.
In evaluating the relative effectiveness of state and
federal agencies of regulation, consideration has been given
to political problems. There is a danger in overcentraliza
tion of political power at the national level of government.
The desirability of having government agencies close to the
people is recognized. Certainly the dangers of stifling
private Initiative and endeavor cannot be considered lightly.
The efficiency with which an administrative agency conducts
its affairs is also a very pertinent factor. These problems
have been weighed, in so far as possible, when passing judg
ment on the proper allocation of administrative powers.
III. RECOMMENDATIONS
353
The principal weaknesses in the dual system of regu
lation are found in (1) deficiencies of laws and regulation
of a substantial number of states, and (2) the Inadequacy of
integration between stste and federal commissions. In order
to Improve the effectiveness of the system, it is recom
mended that steps be taken to raise the quality of state
regulation and to facilitate integration between commissions
at the two levels.
In specific terms, it is suggested that Congress un
dertake the task of determining what constitutes an adequate
program of state regulation. Extensive hearings might be
held to assemble facts and authoritative opinion. Congress
could thereafter define minimum standards of state regula
tion. As an Inducement to secure widespread adoption of
such standards, financial aid could be extended to the
states to assist them in meeting the cost of administration.
Such an arrangement would seem to be a practical and
fruitful application of a principle that has been adopted
in other areas of federal-state relationships. It would
permit a fairly wide latitude of administrative freedom on
the part of the state commission and yet assure that there
would be no lack of the essential features of effective
regulation. Avoidance of federal control might lose its
appeal where the quality of regulation at the two levels
354
was comparable. Integration of federal and state regulatory
activities would undoubtedly improve as policies of regula
tion became the subject of more universal agreement and con
sistent application.
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✓
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45:52, January 5, 1950.
, - C. CASES.
Re Alabama Power Company, 2 F. P. C. 312 (1940).
Alabama Power Company v. Federal Power Commission. 128 F. 2d
253-TIS35)“— ~ -------------------------
Alabama Power Company v. Federal Power Commission. 317 U. S.'
---555 TT$ZS)~ -------------------------------
Alabama Power Company v. Gulf Power Company, et al,, 283 F.
5 3 “ 6 0 S ( 1 9 5 5 7 . :
Re Anchor Hocking Glass Corpora tlon, 2 F. P. C. 930 (1941).
Re Appalachian Electric Power Company, 1 F. P. G. 5 (1931).
358
Re Arkansas-Louisiana Electric Cooperative, Inc., et al., 6
F. P. C. 1637 (1947J7 '
Arkansas-Louisiana Gas Company v. Department of Public Util-
ltiesT^et al., 3U¥ U. S. 61 (1938}.
Arkansas Power and Light Company v. Federal Power Commis-
sion,60 F. Supp. 907 (1945).
Arkansas Power and Light Company v. Federal Power Commis-
sTon, 156 FT"l?a 821 (1947).
Re Bellows Falls Hydro-Electric Corporation, 5 F. P. C. 271
(1946 ) .
1 * 2 . Billings Gas Company, 2 F. P. C. 288 (1940).
Re Broad River Power Company, 1 F. P.’C. 363 (1937).
Re Buffalo Niagara Electric Corporation, New York Public
Service Commission Case No. 1&733, May 5, 1948.
Re Cabot Gas Corporation and Godfrey L. Cabot, Inc., 3 F. P.
C. 35^7 582 (1943).
Re California Electric Power Company, 4 F. P. C. 601 (1944).
Re CaIlfornla Electric Power Company, 6 F. P. C. 676 (1947).
Re California Electric Power Company, 6 F. P. C. 812 (1947).
Re Calif0rnia-Oregon Power Company, 4 F. P. C. 1116 (1945).
Californla-Oregon Power Company v. Federal Power Commission,
“ 150 F. 2d 25 (13457.
California-Oregon Power Company v. Federal Power Commission,
3<26 U.~ S. 781 (1946) .
Re Canadian River Gas Company, et al., 3F. P. C. 32 (1942).
Re Carolina Aluminum Company, 1 F. P. C. 495 (1937).
Re Central New York Power Corporation, Federal Power Commis-
sion Release No. 4518, November 25, 1949.
Central States Electric Company v. City of Muscatine, et al.,
3^4 U. S. 138 (1345).
Re Cities Service Gas Company, 2 F. P. C. 563 (1939).
359
Re Cities Service Gas Company, 3 F» P. C. 459 (I943).
Cities Service Gas Company v. Peerless Oil and Ga3 Company,
nE al., Oklahoma Supreme Court, January 15,—l95?XJ Com-
merce Clearing House. Utilities Law Reports— State,
p. 19073..
Re Cities Service Transportation and Chemical Company, 3 F.
p t u t 55s CI943T:— ------------------------------------------------------------
Re Clarion River Power Company, 1 F. P. C. 357 (1937) .
Colorado Interstate Gas Company v. Federal Power Commission,
eTTl./'l^-F. 2c l 543 ( 1 M 3 ) 7 --------------------------
Colorado winterstate Gas Company v. Federal Power Commission,
324 U. S. 581 (lM5).
Colorado-Wyoming Gas Company v. Federal Power Commission,
3^T*U. S. 626 Tl94"5T. ~ ------------------- ----------
Re Columbian Fuel Corporation, 2 F. P. C. 200 (1940).
Re Columbus and Southern Ohio Electric Compsny, 6 F. P. C.
— lOMl 19177.------------ : ------------------
Re Commercial Gas Pipeline Company, 3 F. p. C. 821 (1942).
Re Commonwealth and Southern Corporation, 84 F. Supp. 809
(IMS):---------------------- ----------
Re Connecticut Light and Power Company, 3 F. P. G. 132
U M 2).
Connecticut' Light and Power Company v. Federal Power Commis-
si'on'7 l4T^P7~2TT4"'qgg4T: : -
Connecticut Light and Power Company v. Federal Power Commis-
sIon, 324 U. S. 5l5~TT9457r
Re Connecticut Light and Power Company, 5 F. P. C. 7636
(1946).
Re Connecticut Light and Power Company, 6 F. P. C. 104 . -
(1547).
Re Coiineotiout Power Company, 6 F. • Pi- C.- 451 (1947).
■ . - • ' > ' . e
Re Consolidated- Gas Utilities Corporation, 3 F. P. C. 927
(1943).
360
Re Dairyland Power Company, Federal Power Commission Release
No.4517, November 23, 1949.
Department of Conservation of Louisiana v. Federal Power
CommfssTon" 148 F. 2d 74$ (1§45).
Department of Conservation of Louisiana v. Federal Power
Commls'sTon, 526 U. £. 7T7 (1946) .
Re Duke Power Company, 4 F. P. C. 436 (1943).
Re East Bay Municipal Utility District, 1 F. P. C. 12
(193^17
Re Ea s t Ohio Gas Company, 1 F. P. G. 586 (1939).
Re East Ohio Gas Company, 4 F. P. C. 15 (1943).
Re East Ohio Gas Company, 4 F. P. C. 497 (1944).
Re East Ohio Gas Company, 5 F. P. c. 639 (1945).
Re East Ohio Gas Company, 6 F. P. c. 176 (1947).
East Ohio Gas Company v. Federal Power Commission, 173 F. 2d
4S5TlS33)“— -
East Ohio Gas Company v. Tax Commission, 283 U. S. 465
(1531)":
Economy Light and Power Company v. United States, 256 U. S.
— ^FI3 ('1920)”-----------------------------------
Re El Paso Natural ©as Company, et al., 3 F. P. C. 851
— cimr. ---------------------------- ----------------------------
El Paso Natural Gas Company, 6 F. P. C. 1005 (1947).
Re Empire District Electric Company, et al., 4 F. P. C. 665
(1944).
Federal Power Commission v. Arkansas Power and Li^ht Company.
33T5 U. S. §02 (1947).
Federal Power Commission v. East Ohio Gas Company, 18 U. S.
L. W. (1956).
Federal Power Commission v. Hope Natural Gas Company, 320 U.
£7“5 S n T 9 W T -------- ----------------------------
361
Federal Power Commission v. Interstate Natural Gas Company,
eTTal., 336 TJ. S. 577 (1949) .
Federal Power Commission v. Natural Gas Pipe Line Company of
ISerlca, 315 U. S. 57~5 (1942).
Federal Power Commission v. Panhandle Pipe Line Company, 172
F7~2<3 57 (1949).
Federal Power Commission v. Panhandle Pipe Line Company, 337
“ UT~S. 498 (19497.
Federal Power Commission v. Safe Harbor Water Power Corpora -
TTon, 316 U. S. 663 (1945).
Re FIn-Ker Oil and Gas Producing Company, 6 F. P. C. 92
— m mmmmmm h im — — — ■ *» rnamm m mm mM *
(1947).
Re First Iowa Hydro-Electric Cooperative, 4 F. P. C. 27
CT3I4t:------------ --------------------------- ----------------------------------------“ “
First Iowa Hydro-Electric Cooperative v. Federal Power Com-
mission, 151 F. 2d 20 (1945).
First Iowa Hydro-Electric Cooperative v. Federal Power Com
mission, 328 U. S. 152 (1946).
Re First Iowa Hydro-Electric Cooperative, 6 F. P. C. 227
(1947T
Re Gasconade River Power Company, I F. P. C. 424 (1937).
Re Georgia Power Company, 4 F. P. C. 33 (1944).
Georgia Power Company v. Federal Power Commission, 152 F. 2d
' §08 TT945)“ “ ------— ---------------- *-
Gibbons v. Ogden, 9 Wheat 1 (1824).
Grand River Dam Authority v. Going, et al., 29 F. Supp. 316
T 1 9 3 9 ) .
Re Granville Electric Company, 4 F. P. C. 550 (1944).
Re Hartford Electric Light Company, 2 F. P. C. 359 (1941).
Hartford Electric Light Company v. Federal Power Commission.
13l“F. 2d 953 (1942).
362
Hartford Electric Light Company v.' Federal Power Commission,
3T9"U. S. 74l TI M S ) .
Re Hope Ha tural Gas Company, et al., 4 F. P. C. 59 (1944).
Houston, East and West Texas Railway Company v. United S
— — stitei, "54511 .•^T"3i^TT9i4y: - ---
Illinois Natural Gas Company v. -Central Illinois Public
Service Company, et al. 7 314 tJ. S. 493 (1942) ,
Re Indiana General Service Company, 4 F. P. C. 783 (1944).
Re Interna tlonal Power Company, St. Croix Electric Company,
and Canadian Cottons, Ltd., € > " “F. P. C. 392 (1947).
Re Interstate Natural Gas Company, Inc., 3 F. P. C. 417
("19431:-------- ' ---- : ---------------
Interstate Natural Gas Company v. Federal Power Commission,
— 2 r"3i r " ( T M 6T r ^ ™ ^ -------------------------------
Interstate Natural Gas Company v. Federal Power Commission,
“ 331 U. 3. 682 (T9477:
Re Jersey Central Power and Light Company, 2 F. P. C. 541
(1939).
Jersey Central Power and Light Company v. Federal Power Com-
mission, 129 F. 2d 183 (194SD~T ”
Jersey Central Power and Light Company v. Federal Power Com-
mission, 319 U. ST~61 (194377“^ “
Re Kansas Pipe Line and Gas Company, et al., 2 F. P. C. 29
(1939). ' '-------------- -----
Re Kentucky Natural Gas Company, 4 F. P. C. 702 (1944).
Re Kentucky Natural Gas Corporation, 4 F. P. C. 1043 (1945).
Kentucky Natural Gas Corporation v. Federal Power Commis
sion, 159 F. 2d 215 (1947).
Re Kln|^s^County Lighting Company, 71 P. U. R. (N. S.) 363
Re Lone Star Gas Corporation, 12 S. E. C. 286 (1942).
LouP River Public Power District, 1 F. P. C. 628 (1933).
363
Re Memphis Natural Ga3 Company, 3 F. P. C. 812 (1942).
Re Memphis Natural Gas Company, 4 F. P. C. 197, 608 (1944).
Re Memphis Natura1 Gas Company, 5 F. P. C. 197 (1944).
Memphis Natural Gas Company v. McCanless, 329 U. S. 670
Ti^4Fn ------------------------------------------------- “ --------------------------
Re Metropolitan Edison Company, 6 F. P. C. 189 (1947).
Metropolitan Edison Company v. Federal Power Commission, 169
~ — f . saPTisTra?)"— * --------------------------------
Michigan Consolidated Gas Company v. Panhandle Eastern Pipe
HgTne Company7"et 'aT77 T7TT7^2H 7M"TT5l4j.-----------
Re Michigan-Wlsconsln Pipe Line Company, 6 F. P. C. 58
(19177'.
Missouri ex rel Barrett v. Kansas Natural Gas Company, 265
ur~3.-29S~Tiwrr:---- -------------------------------
Re Montana-Dakota Utilities Company, 2 F. P. C. 766 (1944).
Re Montana Power Company, 4 F. P. C. 213 (1945).
Re Montana Power Company, 4 F. P. C. 275 (1945).
Re Nantahala Power and Light Company, Federal Power Commis-
slon Release IJo. 44167 September 13, 1949.
Re Natural Gas Pipe Line Company of America, , 2 F. P. C. 218
{1940') .------ ----------- ----------------
Re Na tura1 Gas Pipe Line Company, 5>F. P. C. 85 (1946).
Re New York State Gas Corporation, 3 F. P. C. 734 (1942).
Re Niagara Falls Power Company, Licensee, 2 F. P. C. 461
(1’ 94'17.“--------------- ---------------
Niagara Falls Power Company v. Maltbie, et al., 41 Ni Y. S.
“ ^ d T W ( M 3 7 . ---------------- ~ --------------------------------------
Re North American Company, 11 S. E. C. 194 (1942).
;h American Coi
1>6 S. Ct. 785
North American Company v. Securities and Exchange Commission,
_ • * - ! = X9467.
364
Re Northern Natural Gas Company, 3. F. P. C. 377 (1943).
Re Northern Natural Gas Company, 4 F. P. C. 1099 (1945).
Re Northern Natural Gas Company, S. E. C. Holding Company
Act Release No. 5657, March, 1945.
Re Northern States Power Company, 5 F. P. C. 158 (1946).
Northern States Power Company v. Federal Power Commission,
— I15-F. ga i 4 r m 4 i ) :-------------------------------- -
Re Northwestern Electric Company, 2 F. P. C. 327 (1940).
Re Northwestern Electric Company, et al., 5 F. P. C. 312
{T9467"-------------------------- ----------
Northwestern Electric Company v. Federal Power Commission,
321 tr r s ♦ 119 r 1544): ~ ----------------------------
Order Instituting Investigation, 5 F. P. C. 725 (1944).
Re Otter Tall Power Company, 4 F. P. C. 699 (1944).
Re Pacific Ga3 and Electric Company, 2 F. P. C. 300 (1940).
Re Pacific Gas and Electric Company, 2 F. p. C. 516 (1941).
Re Panhandle Eastern Pipe Line Company, 5 F. P. C. 472
(1946).
Panhandle Eastern Pipe Line Company, et al. v. Federal Power
Commission, et al., 154 F. 2d 909~Tl?%6).
Panhandle Eastern Pipe Line Company v. Federal Power Commis-
sion, 324 U. S. 635TT5?45T7
Re Panhandle Eastern Pipe Line Company and Michigan Consoli
dated Gas Company, 4 F. P. C. ' 43 (1946)•
Re Panhandle Eastern Pipe Line Company and Michigan Consoli
dated Cas Company, 5 F. P. C. 43 (1946).
Panhandle Eastern Pipe Line Company v. The Public Service
Commission of Indiana, et a 1. ,""*532 U. S . 495 (1947).
Pennsylvania Gas Company v. Publio Service Commission, 252
U . S . 23 T T ^ 2 0 ) .
365
Pennsylvania Public Utility Commission y. Pennsylvania Water
and Power~Dompany, et al,, Pennsylvania Public Utilities
fiommlsslon“ September 127, 1948, Commerce Clearing House:
Utilities Law Reporter--State, p. 15529.05.
Pennsylvania Water and Power Company v. Federal Power Com-
mission, Tsrrr-sa t f ^ i m i t . - -----------------------------------------------------
Pennsylvania Water and Power Company v. Federal Power Com
mission, 315 U. S. 806 (1942).
People’s Natural Gas Company v. Federal Power Commission,
T^F7T5a~I53“Tl94gT.--------------------------------------
People’s Natural Gas Company v* Federal Power Commission,
3lF”U. s . Y0oTl9l^Tt
People’s Natural Gas Company v. Pennsylvania Public Service
Commission, 2frO"U. S. 550 (1§26).
Public Utilities Commission v. Landon, 249 U . S. 236.(1919).
Public Utilities Commission of Ohio v. United Fuel Gas Com-
pany, 517 U. S. 456 (19437.
Public Utilities Commission of Rhode Island v. Attleboro
’ Sleam and Electric Company, 273 U. 5. 83 (1^27).
Re Puget Sound Power and Light Company, 6 F. P. C. 340
U M 7 T T - ----------------------
Recommendstion for the Maximum Coordination of Electric
“ Facilities in the Interest of Gonserving“7Toa 1, ST7 P .
c. 3i2:-iig47T.------ : ---------, — : ----- ----
Re Repollo Oil Company, 2 F. P. C. 1004 (1941).
Re Reynosa Pipe Line Company, 4 F. P. C. 283 (1945).
Re Reynosa Pipe Line Company, 5 F.P. C. 130 (1946).
Re Safe Harbor-Water Power Corporation, Licensee, 2 F. P. C.
(1940).
Safe Harbor Water Power Corporation v. Federal Power Commis-
alon7"~l24”F7~2d 800 (1941).
Re Saife Harbor Water Power Corporation, 5 F. P. C. 221
“ : ---
366
Safe Harbor Water Power Corporation v. Federal Power Commis-
3ion, 179 F. 2d 179 (1950).
Re Sinclair Prairie Oil Company, 2 F. P. C. 1009 (1941).
Re Southern Natural Gas Company, 4 F. P. C. 717 (1944).
State of Missouri ex rel and To Use of Camden County, Mo.,
et al. v. Union Electric Light and Power Company, et
aT., 42 F. 2d 692(1930).
Re Tennessee Gas and Transmission Company. 3 F. P. C. 574
(i§43j:---------------------------- *■— 4
Re Texas Eastern Transmission Corporation, 6 F. P. C. 1058
r n & r . ---------
Re Texas Electric Service Company, 6 F. P. C. 859 (1947)•
The Daniel Ball, 10 Wall., 557 (1871).
The Genesee Chief, 12 How. 443 (1852).
Re The North American Company, 11 S. E. C. 194 (1942).
Re The United Gas Improvement Company, 9 S. E. C. 52 (1941).
Re Uniform System of Accounts for Natural Gas Companies, 2
F. P. C. 675 (T§4577
Re United Gas P1pe Line Company, 3 F. P. C. 741 (1942).
Re United Gas Pipe Line Company, et al., 3 F. P. C. 402
(1943)T
Re United Gas Pipe Line Company, 5 F. P. C. 553 (1946).
United States v. Appalachian Electric Power Company, 311 U.
ST 3*77 (1940) .
United States v. Rio Grande Dam and Irrigation Company, 174
U7 S. 690 T18997.
Re Utah Power and Light Company, 3 F. P. C. 532 (1943).
Re Western Colorado Power Company, 4 F. P. C. 44 (1944).
Re Western Natural Gas Company, 2 F. P. C. 910 (1941).
367
Re Wlsconsin-Mlchlgan Power Company, 3 P. P. C. 449 (1943).
Wisconsin Public Service Corporation, et al. v. Federal
Power Commission, I?7 P. 2d 743 (l'SisTT
Re Wisconsin Southern Gas Company, 4 F. P. C. 188 (1944).
Re Wisconsin Southern Gas Company, 4 F. P. C. 329 (1945).
D. GOVERNMENT PUBLICATIONS
Act of 1906, 34 Stat. 386.
Act Of 1910, 36 Stat. 593.
Amendment to Federal Water Power Act of 1920, 46 Stat. 797
(1930).
Amendment to the Natural Gas Act of 1938, 61 Stat. 459
(1947).
Amendment to the Natural Gas Act of 1938, 56 Stat. 83
(1942).
Annua1 Report of the Federal Power Commission, 1957. Wash-
ington, D.“IT.: Government Printing Office, 1938.
69 pp.
Annua1 Report of the Federal Power Commission, 1958. Wash-
Ington, D . " " " (J.: Government Printing Office, 1939.
74 pp.
Annua1 Report of the Federal Power Commission, 1940. Wash-
Ington, D. C.: Government Printing Office, 1941.
148 pp.
Annua1 Report of the Federal Power Commission, 1946. Wash
ington, D. C.: Government Printing Office, 1947.
148 pp.
Annua1 Report of the Federal Power Commission, 1947. Wash-
Ington, I). C.: Government Printing Office, 1948.
158 pp.
Annual Report of the Federal Power Commission, 1948. Wash
ington, S.~C.: Government Printing Office, 1949.
192 pp.
368
Annua1 Report of the Federal Power Commission, 1949. Wash
ington, D. C.: Government Printing Office, 1950.
192 pp•
Congressional Record, 80th Congress, 1st Session.
Federal Water Power Act of 1920, 41 Stst. 1062.
Federal Power Act of 1935, 49 Stat. 838, Title II.
Federal Power Commission, Bulletin on Consumption of Fuel
for Production of Electric Energy, 194^. Washington, D.
C.: Federal Power Commission. 13 pp.
Federal Power Commission, Movement of Electric Energy across
State Lines and Internatlonal~~Boun'5'aries, 1540. Wash-
Ington, 0. C.: Eederal Power Commission, 1941. 13 pp.
Federal Power Commission Release No. 4235, Docket No. DI-177,
Opinion 172, April 20, 1949.
Federal Power Commission Release No. 4320, June 30, 1949.
Federal Power Commission Release No. 4382, August 13, 1949.
Federal Power Commission Release No. 4385, August 24, 1949.
Federal Power Commission Release No. 4414, September 13,
1949.
Federal Power Commission Release No. 4466, October 20, 1949.
Federal Power Commission Release No. 4482, October 31, 1949.
Federal Power Commission Release No. 4484, October 31, 1949.
Federal Power Commission Release No. 4491, November 4, 1949.
Federal Power Commission Release No. 4492, November 4, 1949
Federal Power Commission, Report of Commissioner Leland Olds
and Commissioner Claude L. Draper, 1948, Natural Gas In
vestigation, Docket No. TJ-58C. Washington, D. C.: Gov*'
eminent Printing Office, 1948. 158 pp.
Federal Power Commission, Report of Commissioner Nelson Lee
Smith and Commissioner harrlngfton Wimberly, 1948, Eiatura 1
Cas Investigation, Docket No. G— &BTT. Washington, D. C.:
Government Printing Office, 1948. 498 pp.
369
Federal Power Commission, State Commission Jurisdiction and
Regulation of Electric and ‘ Gas Utilities"! Washington,
D. C .: Government Printing Office, 1948. 33 pp.
Federal Trade Commission, Utility Corporations, Senate Docu
ment No. 92, Part 71-A^ 70th Congress, 1st: Session.
Hearings before £ Subcommittee of the Committee on Inter-
" state and Foreign Commerce on H. "R. 2937, House of Rep
resentatives, 80th Congress, 2nd Session.
Hearings before a Subcommittee of the Committee on Inter-
3tate~~and Foreign Commerce of the United States Senate
on S. 1498, Sist Congress, 1st Session. 522 pp.
Hearings before a Subcommittee of the Committee on Inter-
8^a te and Foreign Commerce o7 the House of Representa
tives on H. R. 7§, H. f t 1755, and JT. H. 98&, 81st Con-
gressi 1st Session* 377 pp.
Hearings before £ Subcommittee of the Committee on Inter-
state and Foreign Commerce of the tJnited States Senate,
- ,on S. 4051“ 80th Congress, "2nd Session. 5b2 pp.
Hearings before the^Commltteeon Interstate and Foreign Com
merce of the house of Representatives on H. R. 2185.
H. ft. VZZSrH. R. 2^2, H. R. 2569, and H. R. 2956, 80th
Congress, 1st Session. 737 pp.
Hearings before the Committee on Interstate and Foreign Com
merce of the House of Representatives on H7 ft. 5249, 77t
TTOTCongressTTsT Session’ W p p * —
Hearings before the Committee on Interstate and Foreign Com
merce oh ft. R. 5423, *74th Congress, 1st Session. 5320 pp.
Hearings before the Securities,Subcomm111ee of the Committee
on Intersta te and Foreign Commerce on Study of Opera
tions Pursuant to the Publie Utility Act of 1935, 79th
Congress, 2nd Session. 1353 pp.
Ministry of Transport, Report of the Committee on Electric
ity Distribution. London: His Ma.1esty*s Stationery
Office, 1936. 103 pp.
National Resources Planning Board, National Resources Divi
sion Report for 1943, Part I. Washington, D.C.: Gov
ernment Printing Office, 1943. 640 pp.
370
Natural Gas Act of 1938, 52 Stat. 833.
Public Utility Act of 1935, 48 Stat. 881, Title I.
Report of the Hquse Committee on Interstate and Foreign Com
merce on the Natural Gas Bill, 75th Congress, 1st Ses-
sion, Heport No. 709.
Securities and Exchange Commission Release No. 5657, March,
1945.
Senate Bill 3869. 71st Congress, 2nd Session, 1930.
Statistics of Electric Utilities, 1939. Washington, D. C.:
FederaiTower Commission, T5»40.
Statistics of Electric Utilities, 1948. Washington, D. C.:
Federal-Fower Commission, H549.
Securities and Exchange Commission Release No. 9771, March
30, 1950.
Statistics of Natural Gas Companies, 1947. Washington, D.
C.: Federal Power Commission, 1948.
Summary Report of the Federal Trade Commission on.Utility
Corporations, Senate Document No. 92, 70th Congress, 1st
Session, Part 72-A.
U. S. Bureau of Census, Statistical Abstract of the United
States, 1948, Washington, D. C.l Government Printing
Office, 1949. 1054 pp.
U. S. Bureau of Mines, Minerals Yearbook, 1945. Washington,
D. C.: Government Printing Office. 1689 pp.
E. ASSOCIATION PROCEEDINGS
National Association of Railroad and Utilities Commissioners
Proceedings of the 55th Annua 1 Convention, 1943. 494 pp.
National Association of Railroad and Utilities Commission
ers, Proceedings of the 56th Annual Convention, 1944.
599 pp.
National Association of Railroad and Utilities Commission
ers, Proceedings of the 57th Annual Convention, 1945.
572 pp.
371
National Association of Railroad and Utilities Commission
ers, Proceedings of the 58th Annua 1 Convention, 1946.
485 pp.
National Association of Railroad and Utilities Commission-
ers, Proceedings of the 59th Annual Convention, 1947.
560 pp.
National Association of Railroad and Utilities Commission-
ers, Proceedings of the 60th Annua1 Convention, 1948.
495 pp.
National Association of Railroad and Utilities Commission-
ers, Proceedings of the 6l3t Annua1 Convention, 1949.
524 pp.
F. -TRADE ASSOCIATION PUBLICATIONS
American Gas Association, Gas Facts, 1947. New York: Amer
ican Gas Association, 1948. 195 pp.
Edison Electric Institute, "The Electric Light and Power In
dustry in 1932,” Statistlcal Bulletin No. 9. New York:
Edison Electric Institute, 1933. ST "pp.
Edison Electric Institute, Statistical Bulletin. , ;1946, ,No;-'
14. New York: Edison Electric Institute, 1947. 3"§~pp.
National Electric Light Association, "Interstate Transfer of
Electric Power in 1928,” Statis tlcal Bulletin No. 4.
New York: National Electric Light Association, 19^9.
8 pp.
G. NEWSPAPERS
"Text of President’s Veto of Natural Gas Bill,” The New York
Times, April 16, 1950.
Wall Street Journa1, January 23, 1947

Asset Metadata

Creator Clare, Kenneth G. (author)

Core Title An analysis of dual regulation of electric utility and natural gas industries

Contributor Digitized by ProQuest (provenance)

Degree Doctor of Philosophy

Degree Program Philosophy

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,Energy,OAI-PMH Harvest

Language English

Advisor Leonard, Joy L. (committee chair), Anderson, William H. (committee member), Guild, Lawrence R. (committee member), Neuner, Edward, Jr. (committee member), Phelps, Clyde William (committee member), Phillips, E. Bryant (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-257492

Unique identifier UC11255658

Identifier DP23239.pdf (filename),usctheses-c20-257492 (legacy record id)

Legacy Identifier DP23239.pdf

Dmrecord 257492

Document Type Dissertation

Rights Clare, Kenneth G.

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA