Wisconsin v. Federal Power Commission

373 U.S. 294, 83 S. Ct. 1266, 10 L. Ed. 2d 357, 1963 U.S. LEXIS 2391, 18 Oil & Gas Rep. 541

• Court: Supreme Court of the United States
• Decided: May 20, 1963
• Docket: 72
• Status: Published

Opinions

Mr. Justice Harlan

delivered the opinion of the Court.

Almost nine years have passed since this Court’s decision in Phillips Petroleum Co. v. Wisconsin, 347 U. S. 672, holding that the Federal Power Commission has jurisdiction over the rates charged by an independent producer of natural gas. The present case, involving the same independent producer, Phillips Petroleum (Phillips),¹ is a sequel to that earlier decision and strikingly illustrates the unique problems confronting the Commission in its efforts to achieve the goal of effective regulation.

T.

Following the remand in the Phillips case, the Commission, proceeding under § 5 (a) of the Natural Gas Act-,² reinstituted its general- investigation of the lawfulness of Phillips’ rates'with respect to its sales of natural gas in interstate commerce. Later, it consolidated with that-invéstigation 12 proceedings under § 4 (e) of the Act³ which involved the lawfulness of certain specific rate increases filed by Phillips under § 4 (d) between June 1954 and May 1956. All of these rate increases had been suspended by the Commission for the maximum five-month period permitted by the statute (§.4 (e)) and had subsequently gone into effect subject to refund of any portion that might ultimately be found excessive (ibid.). With one minor exception, each of these increases had beén superseded by a subsequent increase,⁴ all of which were in turn suspended and are the subject of separate § 4 (e) proceedings not now before us.⁵

Hearings in these consolidated proceedings did not begin until June 1956 and extended over a period of almost 18 months. All parties proceeded on the assumption that the lawfulness of Phillips’ rates was to be determined on the basis of its jurisdictional cost of service for the test year. 1954,⁶ and four full-scale cost-of-service studies were presented. A Commission Examiner in April 1959 issued a comprehensive decision (24 F. P. C. 590) comprising over 200 pages, in which he found that Phillips’ jurisdictional cost of service for the test year was $57,280,218. He then ordered Phillips to calculate a rate which, when applied to 1954 volumes, would produce revenues substantially equal to its test year cost of service. This rate, with appropriate adjustments for quality, pressure, etc., was to be applied to all of the company’s rate schedules on file with the Commission at the time of Commission approval.

Over pne year later, in September 1960, the Commission issued the opinion that is the subject of the present litigation. 24 F. P. C. 537. Its basic conclusion was that the individual company cost-of-service method, based on theories of original cost and prudent investment, was not a workable or desirable method for determining the rates of independent producers and that the “ultimate solution” lay in what has come to be known as the area rate approach: “the determination of fair prices for gas, based on reasonable financial requirements of the industry” for each of the various producing areas of the country. 24 F. P. C., at 547. This means that rates would be established on an area basis, rather than on an individual company basis. As initial steps toward this end, the Commission did two things at the same time it issued the opinion 'in these proceedings. First, it .promulgated a Statement of General Policy (S. G. P: 61-1), since amended on several occasions, in which it set forth area-by-area “price levels” for initial and increased rate filings by producers, and stated that in the absence of compelling evidence it would not certificate initial rates, and would suspend increased rates, which exceeded these price levels.⁷ Second, the Commission announced that it would begin a series of hearings, each designed to cover a major producing area. (At least one of these hearings, involving the Permian Basin, is now well under way.)

The Commission, in its opinion here, gave several reasons for rejecting as unsuitable the individual company cost-of-service method. 24 F. P. C., at 542-548. In particular it emphasized that, unlike the business of a typical public utility, the business of producing natural gas involved no fixed, determinable relationship between investment and service to the public. A huge investment might yield only a trickle of gas, while a small investment might lead to a bonanza. Thus the concept of an individual company’s “prudent investment,” as a basis for calculating rates that would call forth the necessary capital and also, protect consumers from excessive charges, seemed wholly out of place. Further, the Commission noted that the individual company cost-of-service method gave rise to staggering cost allocation problems,, could result in such anomalies as widely varying prices for gas coming from a single field and even from a single jointly owned well, and would create an intolerable administrative burden in requiring a separate rate determination for each of the several thousand independent producers.

Returning to the proceedings before'it, the Commisssion decided that, despite its disapproval of the cost-of-service method, the whole case having been tried on that basis, a final administrative determination of cost of sérvice for the test year should be made. It then proceeded to resolve a number of difficult questions, including those relating to allocation of production and exploration costs, allocation of costs between natural gas and extracted' liquids, and rate 9f return, and arrived at a system-wide jurisdictional cost of service for the test year of $55,548,054 — a figure which substantially exceeded jurisdictional revenues ($45,568,291) for that year.⁸

With this determination in hand, the Commission turned to the consolidated § 4 (e) proceedings, involving specific rate increases filed through May 1956, and found that those increases had produced increased revenues of only about $5,250,000 annually, or considerably less than the total deficit for the test year. It also stated that there was nothing in the record to show that any of the increased-rates were “unduly discriminatory or preferential.” It then concluded that since it could not order refunds of any portion of these increases-, in view , of the continuing deficit, and since all increases had been superseded, there would be no purpose in continuing the § 4 (e) proceedings and, with two exceptions, they were terminated.

The two exceptions concerned rate increases under “spiral escalation” clauses in Phillips’ contracts,⁹ and these two proceedings were kept open because the proper-amount of the particular increases depended on the amount of increases, if' any, allowed to certain pipeline customers of Phillips in their own rate proceedings then pending before the Commission. The Commission refused- to hold such spiral clauses void ab initio, and in fact a rate increase in one of the 10 terminated § 4 (e) proceedings had resulted from the operation of a spiral escalation clause.

The Commission recognized that there remained almost 100 other § 4 (e) proceedings, involving increases filed by Phillips, that had not been consolidated in this case. It said that since the present record indicated that Phillips’ costs exceeded revenues at least through 1958 it was inviting Phillips to file motions to terminate all § 4 (e) proceedings relating to increases filed prior to 1959, thus limiting future consideration of Phillips' rates to 1959 and after. Whether this invitation has been accepted by Phillips is not disclosed, but in any event none of these other § 4 (e) proceedings is before us now.

Turning to the § 5 (a) investigation of the lawfulness of Phillips’ existing rates, the Commission first noted that there was considerable disagreement over how these rates should be set. — whether they should be approximately uniform throughout the country or should vary from area to area. It then said that it was aware that both costs and prices had greatly increased sinee 1954 (and especially after 1958) and it therefore did not “deem it appropriate to prescribe or require that Phillips file rates for the future based upon the present record.” 24 F. P. C., at 575-576. Concluding that the public would be adequately protected by Phillips’ potential refund obligations under § 4 (e), by the area pricing standards announced in the Statement of General Policy, and by the area rate proceedings to be initiated, the Commission ordered the termination of the present § 5 (a) investigation.

On application for rehearing, the Commission rejected the suggestion that it should reopen the case for submission of 1959 cost data. 24 F. P. C. 1008. It said that the “interest of consumers and the exigencies of regulation will be better- served in rate proceedings brought on an area basis rather than on an individual company basis,” and that the area method would lead to “more effective and -expeditious regulation of the producer sales.” . 24 F. P. C., at 1009. It also rejected the claim that it had erred in terminating the § 4 (e) proceedings because some of the increased rates were in excess of the average unit cost of service, reiterating that there had been no showing of undue discrimination or' preference and that the total revenue resulting from the increases did not make up the deficit shown by the test year determination.

On' review, the Court of Appeals, in a thorough and informative opinion, affirmed the decision of the Commission. 112 U. S. App. D. C. 369, 303 F. 2d 380. Judge Fahy, dissenting in part, argued that whether or not the area rate method of rate regulation was the ultimate solution, the Commission having gone so far in this proceeding should have finished it by deciding on a cost-of-service basis the justness and reasonableness of Phillips’ past increases and of its present rates. To have failed to do so, he believed, was a clear abuse of discretion. We granted certiorari because of the importance of this case in the administration and future operation of the Natural Gas Act. 369 U. S. 870.

The arguments of the parties, both in their briefs and at the bench, have covered a broad range of subjects, including a number of other administrative actions and proceedings — past, present, and future — that are not before us today. We lay these collateral subjects to one side and focus on the three precise questions that have been brought here for review: whether the Commission erred (1) in refusing to reject certain increased rates because they were baséd on spiral escalation clauses; (2) in terminating the 10 consolidated § 4 (e) proceedings involving increases now superseded and in leaving two such proceedings open only for a limited purpose; or (3) in discontinuing the § 5 (a) investigation of the lawfulness of Phillips’ current rates. Of these three questions, which will be considered in the order stated, the third is the only one vigorously pressed by all petitioners and is clearly the principal issue in the case.

II.

California, alone among the petitioners, challenges the Commission’s refusal to declare void ab initio the spiral escalation clauses in Phillips’ contracts on which rate increases in three of the 12 § 4 (e) dockets were based'.¹⁰ Such clauses, California contends, are manifestly inconsistent with the public interest, because they constitute a price mechanism by which “[cjonsumers of natural gas are caught in a maelstrom.”

.. But we have at least grave doubts that this question may be raised by California at this time. As to two of the three dockets, the claim would appear premature, since the dockets are still pending, and the increases there involved may eventually be disallowed if the pipeline increases on which they depend are themselves disallowed by the Commission. As to the third docket, the particular increase has been made fully effective by termination of the § 4 (e) proceeding, but since the sale in question, is to the Michigan-Wisconsin pipeline and appears to affect no California interests, no one whom California may properly represent is “aggrieved” (§ 19 (b)) ¹¹ by the Commission’s order.

Further, we see no merit in California’s contention. It is true that the Commission has announced prospectively that it would not accept for filing contracts containing such clauses,¹² but it would have been' quite a different matter for the Commission to have declared that past rate increases were ineffective simply because they were based on spiral provisions. The ’ effect of a contract clause of this type,- of course, is only to permit the producer to resort to the filing provisions of § 4 (d) of the Act. If the increase is challenged, the producer must still establish its lawfulness wholly apart from the terms of the contract. Thus , we have sustained the right of a seller to file an increase under a contract which, in effect, authorized him to do so at any time. United Gas Pipe Line Co. v. Memphis Light, Gas and Water Division, 358 U. S. 103. The spiral clauses here are far more limited in scope, depending as they do on the occurrence of external events.

III.

The claim that the Commission erred in terminating 10- § 4 (e) dockets, and leaving two others open only for a limited purpose, is pressed primarily by Wisconsin and New York. In considering their contentions, it should be notéd again that all of .the rate increases involved were filed prior to the end of 1956, and have since been superseded or “locked in” by subsequent increases¹³ which, with one exception, have been suspended and made the subject of separate § 4 (e) proceedings.

The Commission’s termination of these § 4 (e) dockets was a decision on the merits. It was based on the finding that the annual increase in revenue produced by these increased rates was substantially less than the deficit, for the test year 1954. Petitioners’ principal objection appears to be that-Phillips’ overall, and unit (per Mcf.), revenues increased so substantially that they may have exceeded costs during the 1955-1959 period for which the increases were allowed. But the fact is that Phillips’ average unit revenues during this period never rose significantly above its test year unit revenue requirements as determined by the Commission.¹⁴ Moreover, petitioners do not claim, nor could they on this record, that the test year cost of service was higher per unit than in subsequent years. And assuming that unit costs did not decline, it is clear that the increases here did not even bring unit revenues up to those unit costs. Whether other subsequent increases involved in separate proceedings, not before us resulted in revenues exceeding cost of service in later years-has no effect on the propriety of terminating. these § 4(e) dockets. Thus the factors that may have made the record stale for purposes of determining in the § 5 (a)-investigation whether Phillips’ present rates are unjust or unreasonable do not make the record stale for purposes of determining the lawfulness of these past increases.

Petitioners also claim that the Commission terminated the § 4 (e) proceedings improperly because it failed to make any finding that the increased rates in question were just and reasonable. But this contention goes to the form and not the substance of what the Commission did. Since these increased rates were “locked in,” their validity for the future was not at issue; the sole question was whether all or any part of the increases had to be refunded by Phillips. Having decided on the basis of substantial evidence'that the increases did not bring revenues up to cost of service, the Commission properly concluded, on the only matter before it with respect to these dockets, that no refund obligation could be imposed.

It was urged on rehearing before the Commission, and in the court'below, that some of the increased rates were above average cost of service and that at most the Commission should have terminated only those § 4 (e) dockets in which the increased rates did not exceed the average unit cost of service. .The Commission rejected this contention, stating that Phillips’ rates would normally vary greatly because sales were made, at widely separated points and under differeñt conditions, and that there was little or nothing to be gained by entering a protracted investigation of allocation of costs.to particular past rates “when it is already known that Phillips was not earning its whole cost of service.” 24 F. P. C., at 1009.

We believe this conclusion was justified,¹⁵ and.petitioners appear to have all but abandoned the theory that some of the § 4 (e) dockets were improperly terminated merely because the particular increased rates in those dockets exceeded average cost. Rather, they now urge that the variation, in the increased rates was so great as to compel the conclusion that they were “discriminatory and preferential per se.” The Commission noted that there was nothing in the record to show unlawful discrimination, and it is clear that mere differences in rates under this Act are not per se unlawful. But in any event, we need not reach the merits of the claim of discrimination because it is not .properly before us. It was not presented to the cou-rt below, nor was it adequately raised on application to the Commission for rehearing, a step required by § 19 (b) of the Act in order to preserve a point for judicial review. See, e. g., Sunray Mid-Continent Oil Co. v. Federal Power Comm’n, 364 U. S. 137, 167.

IV.

The final question is whether the Commission was justified in terminating the § 5 (a) investigation of the reasonableness of.Phillips’ current rates. Preliminarily, it is important to observe that the Commission’s accomplishments since the original Phillips case, the validity of the Statement of General Policy 61-1, the actions taken pursuant to it, and the lawfulness of the area pricing method are not themselves before the Court for review. To a limited extent, however, these matters do bear upon the propriety of the Commission’s decision to terminate this § 5 (a) proceeding.

As the petitioners recognize^ the issue is whether the .termination constituted an abuse of discretion, a discretion which in general is broad but which the petitioners urge is a good deal narrower in a proceeding that has gone this far than in the case of a decision whether or not to initiate an inquiry. See Minneapolis Gas Co. v. Federal Power Comm’n, 111 U. S. App. D. C. 16, 294 F. 2d 212. Underlying petitioners’ position are their claims that the result of the termination is little or no effective regulation in the interim- period before the development of area rate regulation, that such regulation may take many years to evolve, and that the method may eventually be held invalid.

1. The petitioners are not of one mind as to the feasibility and lawfulness of the area rate method of regulation, although no one questions the Commission’s right to undertake the experiment. California appears to come closest to the view that the individual company cost-of-service Method is the only lawful basis for rate regulation and that the invalidity of the area approach is therefore predictable. If we believed that such a departure from present concepts had little, if any, chance of being sustained, we would be hard pressed to say that the Commission had not abused its discretion in terminating this § 5 (a) proceeding while undertaking the area experiment. For if area regulation were almost sure to fail, and if the individual company cost-of-service method of determining. the reasonableness of rates had been abandoned, then there would be virtually no foreseeable prospect of effective regulation. Difficult as the problems of cost-of-service regulation may be, they would not warrant a breakdown of the administrative process.

But to declare that a particular method of rate regulation is so sanctified as to maké it highly unlikely that any other method could be sustained would be wholly out of keeping with this Court’s consistent and clearly articulated approach to the question of the Commission’s power to regulate rates. It has repeatedly been stated that no single method need be followed by the Commission in considering the justness and reasonableness of rates, Federal Power Comm’n v. Natural Gas Pipeline Co., 315 U. S. 575; Federal Power Comm’n v. Hope Natural Gas Co., 320 U. S. 591; Colorado Interstate Gas Co. v. Federal Power Comm’n, 324 U. S. 581, and we reaffirm that principle today. As the Court said in Hope:

“We held in Federal Power Commission v. Natural Gas Pipeline. Co., supra, that the Commission was not bound to the use of any single formula or combination of formulae in determining rates. Its rate-making function, moreover, involves the making of ‘pragmatic adjustments.’’ . Id., p. 586. And when the Commission’s order is challenged in the courts, the question is whether that order ‘viewed in its entirety’ meets the requirements of the Act. Id., p. 586. Under the statutory standard of ‘just and reasonable’ it is the result reached not the method employed which is controlling.” 320 U. S., at 602.

More specifically, the Court has never held that the individual company cost-of-service method is a sine qua non of natural gas rate regulation. Indeed the prudent investment, original cost, rate base method which we are now told is lawful, established, and effective is the very one the Court was asked to declare impermissible in. the Hope case, less than'20 years ago.

To whatever extent ■ the matter, of costs may be a requisite element in rate regulation, we have no indication that the area method will fall short of statutory or constitutional standards. The Commission has stated in its opinion in this proceeding that the goal is' to have rates based on the “reasonable financial requirements of the industry” in each production .area, 24 F. P. C., at 547, and we were advised at oral argument that composite cost-of-service data will be considered in the area rate proceedings. Surely, we cannot say that the rates to be developed in these proceedings will in all likelihood be so high as to deprive consumers, or so low as to deprive producers, of their right to a just and reasonable rate.¹⁶

We recognize the unusual difficulties inherent in regulating the price of a commodity such as natural gas.¹⁷ We respect the Commission’s considered judgment, backed by sound and persuasive reasoning, that the individual company cost-of-service method is not a feasible or suitable one for regulating the rates of independent producers. We share the Commission’s hopes that the area approach may prove to be the ultimate solution.

2. This is not a case in which the Commission has walked right up to the line and then refused to cross it— a case, in other words, in which, all the evidence necessary to a determination had been received but the determination was not made. Here, the Commission concluded that the record, relating to the test year 1954, was too stale in 1960 to permit a finding as to the justness and reasonableness of Phillips’ current rates. In view of this inadequacy, and since the Commission must establish the unlawfulness of present rates before taking further action in a § 5 (a) proceeding, continuation of the proceeding would have required remanding the case for the receipt of evidence as to costs in at least one subsequent test year. None of the petitioners specifically challenges the Commission’s conclusion that, for § 5 (a) purposes, the record was stale in I960; a fortiori it is stale today.¹⁸

Thus the question whether the Commission abused its discretion in terminating the proceeding must be measured against the only alternative: remanding for additional evidence. Such a remand undoubtedly would have consumed considerable time and energy, including that of the Commission and its staff, and would almost certainly have involved another decision by a hearing exam-' iner, another appeal to the Commission, another petition for rehearing and further judicial review of qomplex and difficult issues. In short, the alternative rejected by the Commission would not have resulted in definitive regulation of Phillips’ rates immediately or in the riéar future. Indeed, several years might have elapsed before even.the method of regulation which the Commission regards as unsuitable would have become effective as to even this one producer.

3. It is contended that, as a result of the decision to terminate this'§ 5 (a) proceeding, the public will receive significantly less protection against the charging of excessive prices by Phillips (and others) in the interim period before the area method sees the light- of day. Were this the case, it would bear importantly on our review of the Commission’s exercise of its discretion. But in this connection several factors should be-noted. First, the record before us does pot paint a picture of the public interest sacrificed on the'altar of private profit. Indications are that at least unt.il 1959 Phillips’ jurisdictional revenues did not catch up to its cost of service. Although revenues increased substantially after that -time, the Commission observed that costs have also risen dramatically, and we .have no basis for assuming that current rates are grossly unreasonable.

Second, most of Phillips’ increased rates now in effect are the subject of pending §.4 (e) proceedings and are thus being collected subject to refund. Refund obligations, it is true, do not provide as much protection as the elimination of unreasonable rates, see Federal Power Comm’n v. Tennessee Gas Transmission Co., 371 U. S. 145, 154-155, but they are undoubtedly significant and cannot be ignored, as some of the petitioners would have us do.

Third, it is clear that since the Commission’s decision in this proceeding, the upward trend in producer prices has been substantially arrested, and in at least, one important area the trend has actually been downward.¹⁹ Although the Statement of General. Policy did not purport to establish just and reasonable rates, see note 7, supra, the price levels' declared in that statement, along with implementation of the program there announced, appear to. have played a significant role in accomplishing this result.

Fourth, it must be remembered that the problem of this transitional period would still exist if. the present § 5 (a) proceeding were reopened for the taking of new evidence; there is no way of predicting how much time would be required for a final decision to be rendered, but it would inevitably be substantial. It is therefore evident that the choice is not between protection or no protection. There will in either event be some protection, though doubtless with room for improvement, for. several years.

Petitioners claim that forcing the Commission to reopen this § 5 (a) investigation will not unduly delay area rate proceedings and will in fact provide useful information for area rate-making purposes. The Commission, with equal vigor, states that it does not have the facilities to reopen this case (and all others that have reached approximately the same stage) and at the same time to proceed expeditiously with its area investigations. It estimates that the Permian Basin area proceedings, a case involving some 35% of Phillips’ jurisdictional sales and roughly 10% of sales by all producers, will be completed in about the same time that would be required to complete a remanded § 5 (a) proceeding relating to Phillips alone. It warns that if it is required to reopen this and similar proceedings, the result may be to delay unduly the area investigations, while compelling adherence to a method the Commission deems unworkable, thus providing significantly less protection for the public both in the long and the short run.

The Court cannot resolve this dispute against the Commission and tell it that it has made an error of law— abused its discretion — in deciding how best to allocate its resources. The case might be different if the area approach had little or no chance of being sustained; if the present record were now ripe for determination of reasonable rates for Phillips on an individual company cost-of-service basis; or if it were manifest that the public would receive significantly less protection in the interim period than if the proceeding had not been terminated. But as we have already concluded, none of these conditions exists, and in their absence a reversal of the Commission would be a sheer act of interference in the details of the administrative process. Indeed, it might well have the effect of postponing even further the time when effective regulation will be realized.

Finally, the fact that the Commission in this case terminated the § 5 (a) proceedings, rather than merely holding them in abeyance as it did in Hunt Oil Co., 28 F. P. C. 623,²⁰ is a circumstance of no significance. At the oral argument general counsel for the Commission assured us .that the Commission remains free to reactivate the investigation of Phillips’ individual rates if the area proceedings are unduly delayed or if circumstances should otherwise warrant. The distinction between termination and suspension of the § 5 (a) proceedings is thus one of form and not of substance. In either event the Commission retains the flexibility it must have at this still formative period in a difficult area of rate regulation.

Affirmed.

1 Phillips is a large integrated oil company which is also a producer' of .natural gas. It is known as an “independent” in that it does not engage in the interstate gas pipeline business and is not affiliated with any interstate gas pipeline company.

2 Section 5 (a) of the Natural Gas Act, 52 Stat. 823, 15 U. S'. C. § 717d (a), provides:

“Whenever the Commission, after a hearing had upon its own motion or upon complaint- of any State, municipality, State commission, or gas distributing company, shall find that any rate, charge, or classification demanded, observed, charged, or collected by any natural-gas company in connection with any. transportation or sale of natural gas, subject' to the jurisdiction of the Commission, or that any rule, regulation, practice, or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory, or preferential, the Commission shall determine the just-and reasonable rate, charge, classification, rule, regulation, practice,- or contract to be.thereafter observed and in force, and shall fix the same by order: Provided, however, That the Commission shall have no power to order any increase in any rate .contained in the currently effective schedule of such natural gas company on file with the Commission,unless such increase is in accordance with a new schedule filed by such natural gas company; but the Commission may order a decrease where existing rates are unjust, unduly discriminatory, preferential, otherwise unlawful, or' are not the lowest reasonable rates.”

3 Section 4 (e) of the Natural Gas Act, 52 Stat. 823, as amended, 76 Stat. 72, 15 U. S. C. (Supp. IV) § 717c (e), provides:

. “Whenever any such new schedule is filed the Commission shall have authority ... to enter upon a hearing concerning the lawfulness of such rate, charge, classification, or service; and, pending such hearing and the decision thereon, the Commission', upon filing with such- schedules and delivering to the natural-gas company affected thereby a statement in writing of its reasons for such suspension, may suspend the operation of such schedule and defer the use of such rate, charge, classification, or service, but not for a longer period than five months beyond the time when it would - otherwise go into effect; and after full hearings, either completed before or after the rate, charge, classification, or service goes into effect, the Commission may make such orders with reference thereto as would be proper, in a proceeding initiated after it had become effective. If the proceeding has not been concluded and an order made at the expiration of the suspension period, on motion of the natural-gas company making the filing, the proposed change of rate,‘charge, classification, or service shall go into effect.. Where increased rates or charges are thus made effective, the Commission may, by order,, require the natural-gas company to furnish a bond, to be approved by the Commission, to refund- any amounts ordered by the Commission, to keep accurate accounts in detail of all amounts received by reason of such increase, specifying by whom and in whose behalf such amounts were paid, and, upon completion of the hearing and decision, to order such natural-gas company to refund,'with interest, the. portion of such increased rates or charges by its decision found not justified. .At any hearing involving a rate or charge sought, to be .increased, the burden of proof to show that the increased rate or charge is just and reasonable shall be upon the natural-gas company, and the Commission shall give to- the hearing and decision of such questions preference over other questions pending before it and decide the same as speedily as possible."

4 The exception involves 'an annual increase of $21,234, and we are advised by Phillips that this increase has since been superseded by' a later filing, not suspended by the Commission.

5 An increased rate which is later superseded by a further increase is thus effective only for the limited intervening period, called the “locked-in” period, and retains significance iri § 4 (e) proceedings only in respect of its refundability if found unlawful. See, infra, pp. 304-305. ■

6 The phrase “jurisdictional cost of service” as used' here means the producer’s system-wide cost of service (z. e.,. all operating expenses, including depreciation, depletion, and taxes, plus a fair return on the rate.base) for its sales of natural gas subject to the Commission’s jurisdiction. The “test year 1954” means the calendar year 1954, with adjustments for certain changes in costs and increases in revenues through 1956. No challenge is here, made- by either side to any aspect of the Commission’s determination of Phillips’ jurisdictional cost of service for the test year.

7 The Statement of General Policy, as originally issued, appears at 25 Fed-. Reg. 9578. It was issued without notice or hearing, and the Commission expressly stated that the price levels were “for the purpose of guidance and initial action-by the Commission and their use will not deprive any party of substantive rights or fix the ultimate justness and reasonableness of any rate level.”

8 On rehearing, the cost of service was redetermined to be $54,525,315, or 11.10090 per Mcf, subject to certain neceásary adjustments for purchased gas- costs, gathering taxes, and royalties. These adjustments would increase the average unit- cost to about 12.160 per Mcf.

9 These clauses’’ provided that when a specified commodity price index increased by more than a certain number of points and a general increase in a Phillips pipeline customer’s resale rates had gone into effect, then Phillips’ rates to that customer could be proportionally increased.

10 See note 9, swpra.

11 52 Stat. 831, as amended, 15 U. S. C. § 717r (b).

12 By Order Nos. 232, 26 Fed. Reg. 1983, and 232A, 26 Fed. Reg. 2850, the Commission announced that spiral escalation clauses contained in contracts executed on or after April 3, 1961, would be inoperative and without effect. By Order No. 242, 27 Fed. Reg. 1356, the Commission announced that contracts containing such clauses would be unacceptable for filing on or after April 2, 1962.

13 See note 5, supra.

14 Phillips’ test year unit revenue requirements, on the basis of the Commission’s determinations, were about 12.160 per Mcf. See note 8, supra. Data from Phillips’ annual reports, filed with the Commission, show average jurisdictional revenues as follows: 8.9$ (1955); 9.4$ (1956); 9.9$ (1957); 11.1$ (1958); 12.3$ (1959).

15 We find no necessary inconsistency between this determination and the Commission’s recent decision in Hunt Oil Co., 28 F. P. C. 623, in which the Commission remanded § 4 (e) proceedings for the taking of additional evidence and stated:

“Our examination of the record in this case convinces us that increased rates for specific sales cannot always be found to be just and reasonable solely on the basis of a comparison of individual company-wide costs with that company’s revenues in a test year.” 28 F. P. C., at 626.

The record in the Hunt chse is not before us, but it is evident from the Commission’s opinion that, unlike the present case, certain increased rates there involved were not “locked in” and were higher than the currently prevailing rates in the production area. ' Thus the factors' that may have merited limited supplementation of the record in that ease with respect to the § 4 (e) proceedings were not present here. It should also be noted that in Hunt, as here, the Commission decided not to pursue the broad § 5 (a) inquiry into the lawfulness of all of the producer’s present rates. See p. 314, infra.

16 We do not interpret the decision of the Court of Appeals in Detroit v. Federal Power Comm’n, 97 U. S. App. D. C. 260, 230 F. 2d 810, to suggest that, in the view of that court, individual company cost of service is the method required to be used in independent natural gas producer rate regulation. The court did express the view that, in considering the price'which a pipeline could charge for gas produced from its own wells, cost of service must be used “at least as a point of departure.” 97 U. S. App. D. C., at 268, 230 F. 2d, at 818. Whatever the court may have meant in that context, it is clear that it did not have before it any questions relating to the area rate method, and it is interesting to note that Judge Fahy, the author of the Detroit opinion, said in his opinion below in this case: “We should not seek to deter the Commission from pursuing such a method [the area method] in future proceedings, or from using it in any proceedings already initiated along those lines.” 112 U. S. App. D. C., at 379, 303 F. 2d, at 390. See also Panhandle Eastern Pipe Line Co. v. Federal Power Comm’n, 113 U. S. App. D. C. 94, 305 F. 2d 763.

17 See the discussion in the opinions of Mr. Justice Jackson in Federal Power Comm’n v. Hope Natural Gas Co., 320 U. S. 591, 628-660, and in Colorado Interstate Gas Co. v. Federal Power Comm’n, 324 U. S. 581, 608-615.

18 The fact that this record may have been stale by the time the Commission rendered its decision certainly does not mean that no rate proceeding can be decided before the record becomes out of date. This pilot proceeding was one of unusual length and complexity, and the Commission noted that both costs and revenues “increased greatly” between the test year and the year of decision. The Commission has presumably learned a great deal in this case which will be of use to it in the area proceedings, and there is no reason to suppose that those proceedings will be rendered incapable of decision by the march of time.

19 The area is South Louisiana, and' the downward trend is due in part to settlement of certain rate cases and the ordering of substantial refunds.

20 In Hunt, the Commission said: “It is our hope that area proceedings will result in a timely determination of Hunt’s rates'for the future. However, in order to assure adequate protection to consumers against any unreasonably high rates of Hunt which may not be subject to an early determination on an area basis we will hold in abeyance further action on the 5 (a) aspects of the case pending area rate determinations, with the understanding that 5 (a) proceedings on some or all of Hunt’s rates may be subject to reactivation if future circumstances should so dictate.” 28 F. P. C., at 626.