Mr. Moss. That is my understanding, Mr. Chairman, that they have now divested.

Mr. PICKLE. If there are no other questions, Mr. Moss, we thank you again. Your request of this information and the GAO report are forceful statements and must be looked into by this committee with great diligence, and we thank you very much.

Mr. Moss. Thank you, Mr. Chairman.

Mr. PICKLE. The Chair would observe that the next two witnesses were to be representatives from the General Accounting Office. We are also to hear from Hon. John Nassikas of the Federal Power Commission.

I will proceed in the order listed unless there is some urgency on the part of the chairman to proceed first.

We will let you hear the testimony, Mr. Chairman, so you will be better prepared to answer the questions.

The Chair would now ask Mr. Victor L. Lowe, Director of the General Government Division, and Mr. Robert A. Peterson, Assistant Director, General Government Division, to come to the table.

In accordance with the rules of this committee, we will ask you be sworn in.

Do you swear or affirm the testimony you are about to present to this committee is the truth, the whole truth, and nothing but the truth, so help you God?

Would you identify yourself, Mr. Lowe, and then the other two gentleman accompanying you.

TESTIMONY OF VICTOR L. LOWE, DIRECTOR, GENERAL GOVERNMENT DIVISION, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY ROBERT A. PETERSON, ASSISTANT DIRECTOR, GENERAL GOVERNMENT DIVISION; RALPH L. LOTKIN, OFFICE OF GENERAL COUNSEL; AND T. VINCENT GRIFFITH, OFFICE OF CONGRESSIONAL RELATIONS

Mr. Lowe. Mr. Chairman and members of the subcommittee, my name is Victor L. Lowe, Director of the General Government Divi on of GAO.

My division is responsible for carrying out GAO's audit activities at independent regulatory agencies, including the Federal Power Commission, and conducted the study undertaken at the request of Congressman John E. Moss that resulted in our September 13, 1974, report entitled "Need for Improving the Regulation of the Natural Gas Industry and Management of Internal Operations, Federal Power Commission."

Accompanying me today are Mr. Robert A. Peterson, Assistant Director, General Government Division: Mr. Ralph L. Lotkin, Attorney-Advisor, Office of General Counsel; and Mr. T. Vincent Griffith, Office of Congressional Relations.

Our report discusses a wide range of topics and our purpose in appearing here today is to summarize the principal findings and conclusions; discuss recent actions taken by FPC in response to the report; and respond to any questions the subcommittee may have.

Initially I would like to focus on the one area where there is a fundamental difference of opinion between GAO and FPC. Namely the

46-411-752

propriety of the extensions granted by FPC to producers selling gas in the interstate market pursuant to FPC's emergency regulations. Background:

In 1970 FPC issued a number of emergency orders designed to deal with perceived gas shortages. Two of these orders-orders Nos. 402 and 402A issued in May and June of 1970-permitted intrastate pipelines and distribution companies to make sales to interstate pipelines without prior approval of FPC for up to 60 days at unregulated rates. The orders also provided that if the emergency was expected to persist for longer than 60 days, the seller could obtain prior authorization from FPC to continue the sale for longer periods.

In December 1970, FPC issued order No. 418. Order No. 418 added a new dimension to FPC's efforts to deal with the gas shortage by authorizing independent natural gas producers to make emergency sales to interstate pipelines for 60 days without prior FPC approval.

We believe it significant that whereas orders Nos. 402 and 402A clearly permitted sales for periods longer than 60 days, if approved in advance, the Commission explicitly rejected unregulated producer sales beyond the 60-day period specified in order No. 418.

Several parties suggested prior to issuance of order No. 418 that the 60-day period be extended to periods ranging from 3 to 6 months.

FPC rejected these suggestions and deferred disposition of the longer term emergency sales issue "until such time as we may propose additional rules applicable to emergency transactions on a more extended basis."

Despite this assurance, we found that as of December 31, 1973, FPC had approved 96 extensions to producers making 60-day emergency sales pursuant to order No. 418, without issuing regulations authorizing such extensions as required by the Natural Gas Act.

In our view, FPC's actions were improper because the extensions were not authorized by FPC regulations, and because they run counter to FPC's stated intentions and clear commitment to limit emergency producer sales to 60 days until additional regulations were issued.

Let's examine the nature and purpose of the extensions. Most extensions-86 of 96-were granted to prevent interruptions in gas deliveries by producers who had been selling under order No. 418 and who had also applied to FPC for a limited-term certificate.

A program of granting limited-term certificates enabling producers to sell gas in the interstate market for a limited duration-usually less than 3 years-was initiated by FPC in April 1971. Unlike the emergency programs discussed previously, issuance of a certificate was predicated on a finding that the rate to be charged by the producer was just and reasonable.

Extensions granted to companies applying for limited-term certificates:

On June 20, 1973, the Commission authorized the Secretary of FPC to grant 60-day extensions to those producers who were making 60-day emergency sales under order No. 418 and who also had a pending application for a limited-term certificate.

The purpose of the extensions was to prevent a forced interruption of service when action could not be taken on the application for limited-term certificate before expiration of the 60-day emergency sale In June 1973, the FPC General Counsel and the Chief, BNG, rec

ommended that the extensions include a refund provision in case the producer withdrew his application or the FPC arrived at a lower price for sales under the limited-term certificate.

Only 1 of the 86 extensions granted contained such a refund provision. Twenty-six producers did in fact withdraw their certificate applications after obtaining the extensions.

Eight of the twenty-six producers immediately took advantage of FPC's 180-day emergency sales program (initiated by order 491 in September 1973) and effectively sold gas for up to 300 days at unregulated rates (60 days plus 60 days plus 180 days).

The remaining 18 producers terminated the sales at the expiration of the extension. Thus sales at unregulated rates were made for more than 60 days, and the intended benefits of the extensions-uninterrupted gas supplies-were not realized.

A second group of extensions were granted for an entirely different purpose-to cope with a court-imposed stay of FPC's regulations implementing 180-day emergency sales. These extensions are particularly troublesome to GAO.

Extensions granted to cope with court stay of order 491: In September 1973, the FPC issued order 491 which extended from 60 to 180 days the period in which emergency sales could be made under orders 402, 402A, and 418.

On September 21, 1973, a suit was filed in Federal court by the Consumer Federation of America, and others, in opposition to order 401, claiming that such action was de facto deregulation of the natural gas industry and that FPC's procedures in issuing order 491 failed to comply with the requirements of the Administrative Procedure Act. On September 26, 1973, FPC responded to the motion for stay of order 491 filed with the court by the Consumer Federation of America, and others.

In its response, the FPC presented data indicating what it believed to be an impending nationwide shortage of natural gas during the 1973-74 winter season.

FPC advised the court that FPC's action in meeting this emergency represented a clear case in which the fulfillment of FPC's statutory duties required the interest of private litigants to give way to the realization of public purposes and requested the court to deny the motion for stay.

On October 3, 1973, the court stayed implementation of order 491 pending final FPC action on a motion for reconsideration made by the Consumer Federation of America. FPC did not appeal this ruling.

About 1 month later-November 2, 1973-FPC, after considering the opposition of the Consumer Federation of America and others, issued order 491-B reaffirming order 491.

From October 3 to November 2, 1973, FPC approved extensions to 21 emergency sales entered into pursuant to order 418. As noted previously extensions were not authorized by order 418. Furthermore, eight of the extensions granted were to companies that had no applications pending for limited-term certificates which was the only basis for an extension in the written delegation of authority given by the Commission to the Secretary.

We asked the Secretary, FPC, why extensions were granted to companies engaged in 60-day emergency sales when there were no pending applications for limited-term certificates. The Secretary said the Commission orally authorized him to grant extensions, even when limited-term certificate applications were not pending. The Secretary could not tell us exactly when this oral delegation of authority was made.

Order 491 provided that producers making 60-day sales could begin a new 180-day sale when the 60-day sale expired. The Chief, BNG, told us that, when the court stayed implementation of order 491, FPC was faced with the problem of either forcing interruptions in the flow of gas or granting extensions under the 60-day order.

According to the Chief, FPC was anticipating a severe gas shortage for the 1973-74 winter and stated that extending the 60-day sales was the only way it could get the gas.

It should be noted that the dilemma FPC found itself in was of its own doing. Had FPC issued the appropriate regulations when it first began to grant extensions to producers making 60-day emergency sales, the issues involved could have been settled by the time of the court imposed stay of order 491 in September 1973.

In any event, when the court was not swayed by FPC's argument that the public interest required immediate authorization of emergency sales for longer than 60 days, it was incumbent on FPC to either appeal the court ruling imposing a stay of order 491 or issue regulations permitting extensions of 60 day emergency producer sales. The granting of the eight extensions without exhausting other remedies, raises serious questions as to the propriety of FPC's actions. There is no question that the granting of extensions negated the effect of the court stay.

FPC disagrees with GAO claiming it has the authority to waive any regulation in appropriate circumstances and that its action in this instance was a legal and necessary step in the public interest.

When considering order 418, the Commission specifically rejected the proposal that emergency producer sales be authorized for periods exceeding 60 days, deferring the question until additional regulations could be proposed. These additional regulations were embodied in order 491, which the court saw fit to stay.

If the Commission has plenary authority to accomplish through the waiver of regulations what could not be accomplished through the issuance of formal regulations, then litigation by dissenting parties is futile and the regulatory process made a sham. We believe strongly that this issue needs to be resolved by the Congress and the courts.

RECENT ACTIONS TAKEN BY FPC

To bring this discussion up to date, between March and June of 1974, the emergency programs to encourage interstate sales by gas producers were terminated. On September 9, 1974, FPC reinstated 60-day emergency sales and the limited term certificate program.

In so doing the Commission made it clear that: "It is in the public interest to strictly construe the provision limiting such operations to a single period of not more than 60 days.“

Under the new regulations, a producer desiring to sell gas for a period in excess of 60 days must obtain a certificate authorizing such sales. In the event that certificate applications are not acted upon within 60 days, deliveries may be continued subject to refund of any amount collected in excess of the rate finally determined to be appropriate. We believe that these provisions have corrected the defects in the Commission's previous orders and practices.

A cloud remains, however, as to whether FPC has authority to waive these regulations, and if so, in what circumstances.

For our part, we believe FPC has not been conferred such authority by the Congress, nor do we see a need for such authority.

The Natural Gas Act provided ample flexibility for the Commission to deal with unforseen situations through regulations.

The major benefit of requiring FPC to act through regulations is that the public is kept informed. Thus, while corrective action has been taken to correct the previous situation, the issue of FPC's plenary authority still needs to be put to rest by the Congress to prevent future problems.

EMERGENCY GAS SALES: NEED FOR COMPLETE AND ACCURATE DATA

Turning to a different subject, our examination disclosed a need for FPC to obtain more complete and accurate data on the volume and price of gas brought into the interstate market by its emergency sales programs. In its decisionmaking processes, FPC relied on incomplete data and estimates because it did not enforce the reporting requirements in orders 402 and 402A, did not include an appropriate reporting requirement in order 418, and did not use all of the data in its possession.

Moreover, the limited available information suggests that the estimates received by FPC were greater than the actual gas sales by a wide margin.

FPC agreed that actual price and volume data on emergency gas sales were needed. In this connection, when reinstating 60-day emergency producer sales in September 1974. FPC included a requirement that the buyer notify the Commission of the price and estimated volume to be delivered when the sale begins and, upon completion of the sale, advise the Commission of the actual volumes delivered and the price paid.

Collection of this type of data should greatly enhance FPC's ability to assess the efficacy of the emergency sales programs.

NEED FOR TIMELY ACTION ON OPTIONAL CERTIFICATE APPLICATIONS

Our examination also disclosed a need for improving FPC's optional certificate procedures to insure that gas customers are charged prices that are just and reasonable.

In August 1972, FPC adopted the optional certificate procedure authorizing natural gas sales by producers at prices exceeding area. ceiling rates, if found by FPC to be in the public interest. The procedure allows the delivery of gas to begin before final FPC action on the application, as long as the deliveries are made at rates no higher than the prevailing area ceiling rate for 6 months.