clouded by contingent refund obligations so large as to make it difficult to appraise the financial status of the companies. Pipeline securities can now be valued on a firm financial basis in the light of the industry growth to supply the ever-increasing demand for natural gas by both industrial and domestic consumers. The lower rates are big factors in enabling the industry to meet the stiffening competition from other energy sources.

To my mind, the Commission's pipeline rate settlement program is a demonstration of the administrative process at its best. To rely entirely on formal rate cases, with all their procedural inelasticity and complexities, as the sole tool of regulation, invites backlogs and a breakdown of regulation, but settlements carried on without adequate information and safeguards can be equally dangerous by failing to assure consumer protection. It is only an administrative agency such as the Federal Power Commission, with a competent staff to make the elaborate studies required as a foundation for settlement negotiations, participate in the negotiations, and carry to litigation those cases in which settlement negotiations do not proceed satisfactorily, that can utilize the settlement procedure with full basis for confidence that the results are in the public interest. We are not asking for any increase in our staff for pipeline rate work because we believe that with our new procedures and emphasis on increased productivity we can keep current. To do so will require a maximum effort from the full number of positions now available for this activity.

When I speak of keeping current in our pipeline rate work, I refer particularly to the company-by-company investigations which constitute our major workload at present and not to formal rate increase cases. The number of formal pipeline rate cases estimated for 1965 represents only a small measure of the projected workload of the pipeline rate staff. It is necessary to scrutinize the earnings level of the major pipeline systems each year to insure that their rates remain just and reasonable under changing circumstances. The recently enacted reduction in Federal income taxes is an illustration. It represents a reduction in the expenses of the pipeline companies and requires studies of each company to insure that excess earnings resulting from the tax reduction are passed along to consumers. With the stabilization of producer prices, these and other large reductions in pipeline unit costs such as may result from increased sales at higher load factor operation, should be reflected in lower rates. I am happy to be able to advise the committee that the pipeline industry is rapidly putting such reductions into effect. Our staff is heavily involved in investigations and negotiations to pass along these cost reductions.

Since January 1, 1964, 30 pipeline companies, including 10 companies which are operaing on cost of service tariffs, have reduced their rates as a result of this program of the Commission by amounts which total $28 million annually. These are reductions which consumers will receive every year. The staff is engaged in conferences with other companies, and 10 other pipelines have already agreed to file reductions. A table listing all of these rate reductions is attached as appendix B. The staff work required in such investigations is comparable to the effort required to prepare for a rate case, although this effort does not show up in our rate case statistics.

We believe that settlements rather than formal hearings are the most expeditious and effective means of implementing the results of these investigations. Our estimate of a reduced number of rate cases in 1965 reflects our belief that many of our investigations will result in voluntary settlements rather than formal rate cases.

Let me turn now to a fuller discussion of our pipeline certificate work. The growth of the pipeline industry is entirely dependent upon prompt handling of certificate applications by the Federal Power Commission. I have already stated that in 1963 the Commission issued certificates for $812.6 million of new construction. These projects made natural gas available to many new communities and provided as well the additional facilities needed for the growing needs of existing pipeline customers.

The normal volume of certificate applications pending before the Commission represents a huge amount of proposed investment. As of April 1, 1964, certificate applications for $1.15 billion of pipeline construction were pending before the Commission. Not all of these projects will be approved-some are in conflict with each other and a few may prove to be lacking in merit—but it is very much in the public interest that all should be decided promptly; that the good be separated from the bad and permitted to go forward; and that the applicants for the projects which do not meet the public interest test be advised of this conclusion as soon as possible so that they and their consumers will

no longer be burdened with the heavy standby costs of these projects, the financial commitments, the commitments for gas reserves, the legal, engineering, and witness fees, and so forth.

The Commission has taken several important steps toward insuring more speedy handling of pipeline certificate cases. We have adopted regulations similar to our new regulations in rate cases to require a pipeline to file sufficient information with its application so that the hearing can be set promptly and proceed with expedition.

As I previously mentioned noncontested cases are now handled swiftly and applications, whether involving small amounts or hundreds of millions of dollars, it found satisfactory upon close scrutiny are approved in a matter of months after filing. Contested cases require a formal hearing, but these hearings are now conducted under procedures that minimize delay and insure a conclusion as soon as is consistent with affording due process to all parties.

One aspect of the Commission's pipeline certificate work, often overlooked, is its importance to gas consumers from the rate as well as the service standpoint. Certification of an uneconomic project, or even an economic project which does not afford the cheapest means of bringing gas to market, can cost consumers many millions of dollars each year for the entire life of the project. The Commission in the past 2 years has emphasized economics as the determinative factor in pipeline certificate cases.

Another measure which the Commission has adopted to speed the processing of pipeline certificate applications is a rule designed to remove the controversy over pipeline gas reserves. In the past much of the trial time has been devoted to examination and cross-examination of geology experts as to the extent of available reserves. The new rule requires the pipelines to report to the Commission annually the amount of their gas reserves so that the Commission's staff can review and record the information reported and maintain a current picture of each pipeline company's reserves. We thus expect to avoid the protracted trial in each certificate case of the question whether the pipeline's reserves are adequate. We shall also be in position to determine the reserve position of pipelines which have no certificate applications pending and thus to insure that no pipeline's reserves will fall below a prudent level. The small increase in staff we are requesting for certificate work is needed primarily for the analysis of pipeline gas reserve data.

NATURAL GAS PRODUCER REGULATION

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We have made significant progress in our producer certificate work. The backlog was cut down by over 1,100 cases in 1963. On April 1, 1964, the backlog was 1,616 cases, little more than half of the 2,927 cases pending on June 30, 1961. Approximately 1,700 producer certificate applications are filed each year. normal working inventory of certificate cases is 600. Hearings are underway in which hundreds of the remaining certificate applications are being tried under new procedures and pursuant to Commission guidelines which eliminate the need for elaborate cost showings.

Noncontested producer certificate applications are now being disposed of in 6 to 7 weeks from the date they are filed. Our new procedures have completely eliminated the hearing before the examiner in noncontested cases. The applications, after staff screening and notice to the public, are brought directly to the Commission for prompt approval.

Although on the whole the producer certificate cases which remain to be tried are the more difficult, we believe that we can continue our progress in becoming current in this work without any increase in staff. The number of positions for this activity is therefore projected to remain at the 1964 level.

Coming now to the most difficult of the Commission's problems in the natural gas field, we are requesting 13 additional positions for producer rate regulation to push forward with our area rate program to fix just and reasonable prices for natural gas in all of the producing areas throughout the country. The Commission believes that its area rate program provides a workable administrative mechanism by which the rates for all the producers in an entire area can be fixed in a single hearing. We are making progress in implementing the area rate program but we are greatly hampered by the lack of sufficient FPC staff. The modest increase we are requesting is the minimum we need to move ahead promptly with this program which involves rates totaling hundreds of millions of dollars annually.

The Commission's settlement program has enabled us to dispose of many producer rate cases while our area rate proceedings are getting underway. Between July 1, 1961, and April 17, 1964, we disposed of 1,011 producer rate cases and ordered producers to refund over $57 million. This is in addition to the $550 million of pipeline refunds. These settlements provided for moratoriums for future rate filings and thus build an additional element of stability into the natural gas pricing structure. The central solution to producer pricing however lies not in settlements but in the area rate proceedings.

We are greatly encouraged by the opinion of the Supreme Court in the Phillips case handed down on May 20, 1963, in which the Court gave judicial approval for proceeding with our area rate program. The Court said:

"We recognize the unusual difficulties inherent in regulating the price of a commodity such as natural gas. 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 hope that the area approach may prove to be the ultimate solution" (p. 16).

The hearing in the lead case involving the Permian Basin area, which lasted 23 months, was concluded in September 1963. The parties all filed their briefs in December and the examiner is now preparing his initial decision which is expected soon. The case should be ripe for decision by the Commission by the end of the year.

The south Louisiana proceeding which has been delayed because of manpower limitations is now moving expeditiously under revised procedures for trying the area rate cases based on our experience in the Permian case. In south Louisiana, we eliminated the trial by stages which prolonged the Permian hearing. All parties were required to file their entire case-in-chief simultaneously in December 1963 and their rebuttal testimony in March 1964. The remaining steps in the case have also been put on an accelerated schedule and the hearing for complete cross-examination of all testimony is now underway. With the experience gained in Permian, I have every reason to believe that the hearing in the South Louisiana case will be completed within 1964, which would cut in half the hearing time as compared with the Permian Basin proceeding.

The South Louisiana and Permian cases combined account for over 40 percent of the gas moving in interstate commerce, so you can see that we are making progress.

The Commission, by order of November 27, 1963, initiated two additional area proceedings, one in the Hugoton-Anadarko area and the other in the Texas gulf coast area. Completion of these proceedings, coupled with those in the Permian Basin and south Louisiana, will result in the establishment of effective rate regulation for approximately 75 percent of the sales of natural gas made in interstate commerce. We have moved first in the areas of greatest production, and all four of the key production areas are now covered by an area proceeding in some stage of progress.

The following table gives the basic facts on the four pending area rate proceedings:

1 Decision in this proceeding should be helpful in disposing also of 322 additional dockets involving approximately $60,000,000 of amounts subject to refund. These are cases filed after the area proceeding was started and not consolidated into the proceeding.

Our ability to move forward with these area rate proceedings depends on obtaining the funds we are requesting in 1965. We must devote more manpower to this program so that all four of these complex proceedings, each of which involves the rates of hundreds of producers, as well as proceedings for the remaining areas, can proceed simultaneously. Producers in all areas, and the con

sumers they serve, are entitled to the earliest feasible determinations of the just and reasonable rates for the gas they sell or buy.

NATIONAL POWER SURVEY

The Commission has made progress in its electric power work in the past year. The most important of our activities have been the national power survey and the Commission's program for regulating rates for the sales of electricity at wholesale in interstate commerce.

The Commission's survey report is well along toward completion in this fiscal year. The survey is a major Commission activity to encourage all segments of the industry, on a voluntary basis, to coordinate their power systems for maximum efficiency. The survey has been conducted in cooperation with advisory committees from all segments of the industry. Twenty-four advisory committee reports have been completed and made available to the public.

In the survey report we expect to point up the opportunities for utilizing our new technology in generation and transmission in meeting the growing demand for electricity in the 1970's and to suggest paths of further study. The Commission's report will not pinpoint generating sites or detail the transmission grids of the future but we do expect to suggest region by region the general mix and sizes of nuclear, hydro, and conventional steam capacity, the possibilities for extra high voltage interties between regions, and the potential savings in higher load factor operation, reduced reserves, larger unit sizes, better plant efficiency, and reduced transportation costs. In summary we expect to suggest some rough measure of all of the cost savings inherent in a fully integrated power supply system for this country. We hope also to suggest how much these savings could mean in terms of reduced rates to consumers. Our proposal is to stimulate definitive studies along the same lines by the industry itself.

One of the most important benefits which the national power survey has already achieved is that it has focused attention on the need for greater research and development in the electric power industry. The industry will be investing in the neighborhood of $140 billion in the next 20 years, yet is has been spending in recent years only about 1 percent of its revenues on research and development, and most of this research money is spent on nuclear reactor research.

The Commission is attempting to stimulate a reappraisal by the industry of the adequacy of its research efforts. A select 11-member Ad Hoc Research Organizing Committee, representing all segments of the electric industry, the manufacturers, and the research community, has been formed to study and make recommendations on the possible formation of a permanent industrywide organization to encourage and coordinate research and development activities. This Committee which is headed by Erwin Will, president of Virginia Electric & Power Co., is expected to announce its report soon. The Commission has high hopes for permanent research progress as a result of the work of this Committee. Its report may well set in motion a greatly expanded research program by all segments of the electric power industry. Both the industry and its consumers stand to benefit.

Our studies in the national power survey to date indicate that, if full advantage is taken of the new technology in the coming decades, large savings can be made in the cost of generating and transmitting electricity and that all power systems both publicly and privately owned-can share in these savings. I believe the electric power industry can meet the challenge of bringing low-cost electricity to all of America and I trust the Commission's national power survey will lead the way.

We expect to continue our power survey advisory committees, perhaps in revised form, so that our statutory duty to encourage interconnections can be continued in cooperation with the industry. The survey is a major program in promoting closer coordination between power systems throughout the country and a followup program is essential if the potential benefits are to be realized. A staff of 10 positions will be needed in 1965 to work with the industry to follow through on the survey's suggestions in shaping a system of power supply for this country which will minimize power costs. The technology is changing so rapidly in this dynamic industry that the survey recommendations must be continuously reviewed to keep abreast of changing conditions.

The working relations which have been established between the Commission and the industry and between the various segments of the industry should not be allowed to lapse. They are among the most valuable products of the survey. A small staff will pay great dividends by continuing this important job of providing

the catalyst that is stimulating all segments of the industry to make the most of their opportunities.

A continuation of the national power survey's close analysis of growing power pools is necessary to support an expanded rate regulation activity. Effective regulation of the wholesale rates of power companies must be built on a thorough working knowledge of how power pools can best be operated in the public interest. Many of the survey benefits will not be realized by the smaller private, municipal, and cooperative systems without such a followthrough effort.

WHOLESALE ELECTRIC RATE REGULATION

The Commission's program for wholesale electric rate regulation has been resurrected from a dormant state to an activity which holds promise to wholesale customers throughout the Nation. Additional staff for rate regulation is vital to insure that the cost reductions stimulated by the national power survey will be translated into rate reductions for power consumers.

Vigorous action by the Commission over the past 2 years to exercise its responsibility for the regulation of wholesale electric rates has resulted in a rapid expansion in rate workload and operations. The Commission received 1,882 wholesale rate filings in the past fiscal year, a record number, and we are continuing our efforts to obtain compliance with the filing requirements of the Federal Power Act by writing the companies and where necessary by the issuance of show-cause orders.

In the recent opinion of the Supreme Court in the Colton case handed down on March 2, 1964, the Court gave judicial approval to the Commission's jurisdiction over all sales of electricity at wholesale in interstate commerce. The Court said:

"*** We hold that section 201(b) grants the FPC jurisdiction of all sales of electric energy at wholesale in interstate commerce not expressly exempted by the act itself, and that the FPC properly asserted jurisdiction of the EdisonColton sale."

As a result of this ruling, there will be a significant increase in filings of rate schedules for approval by the Commission. Many companies have been withholding rate filings pending the Supreme Court decision and it is expected that compliance by the industry now will place a heavy processing burden on the staff.

A thoroughgoing review of all electric schedules presently on file is being made with a view toward eliminating excessive or discriminatory rates and unreasonable provisions in these rate schedules. This work is being delayed because of insufficient manpower but formal rate cases have already been initiated by the Commission dealing with failures to file, restrictive provisions, dual rates, refusals to serve, and unlawful rate levels. These cases are now in various states of completion. Additional staff will help move them along at a faster pace.

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We have revised our regulations to ensure that staff work is kept to a miniThe new regulations require electric utilities to support rate filings with cost information that will facilitate meaningful Commission review without the need for a detailed field investigation of a company's books in connection with each rate case.

A failure to provide adequate staff for the Commission could have a serious impact on the efficient operation of the electric power industry and on the consuming public. The United States has entered an era in which the cost of electric power can be substantially reduced through interconnected power pools covering many States. The lower cost power from these pools should be made available at reasonable rates to the many small utilities, public and private, whose operations are not large enough to enable them to generate their own power economically. The present staff for electric power rates must be increased to achieve this goal and to keep pace with the dynamic growth of interstate sales of electric power as the industry moves closer to a completely interstate operation.

We propose an increase of 25 positions for electric power rate regulation which results in a total of 223 in the electric power industry activity.

LICENSING OF HYDROELECTRIC PROJECTS

The Commission is proposing new ways to improve its oldest program-the licensing of hydroelectric projects. The licensing activity, as you know, is selfsupporting under the terms of the Federal Power Act and as I have mentioned,